Alabama’s Prepaid Affordable College Tuition program, created by the Legislature in 1989 and managed by the state treasurer, almost collapsed during Gov. Kay Ivey’s tenure in that office, a period marked by steep stock market declines and sharp tuition increases.

Ivey said factors outside her control caused the problems and that she alerted PACT contract holders that the program was in trouble.

State Treasurer Young Boozer, who succeeded Ivey and helped save the program, said it was a “perfect storm” of circumstances that caused the near demise, including weaknesses in how the program was designed from the beginning.

Patti Lambert of Decatur said she bought PACT contracts for six of her grandchildren after a reassurance from Ivey that the program was sound. She later helped organize and lead a grassroots group that helped preserve PACT benefits. She is now a member of the PACT board.

“I don’t think there is any doubt that there was poor decisions,” Lambert said. “I don’t think there is any doubt that, at least from the standpoint of a parent, that we were, as parents and PACT holders, completely left in the dark.”

Ivey, when asked about PACT on Friday, questioned why a reporter would bring up the subject less than two weeks before the election.

“This is what, 10 days before the election, 11 days, and you’re just now asking this question that happened years and years ago?” Ivey said. “That makes me wonder.”

The Republican governor faces Tuscaloosa Mayor Walt Maddox, the Democratic nominee, in the Nov. 6 election.

Maddox has not made the PACT program’s problems under Ivey a main focus of his campaign. But his campaign did produce an ad about the subject as one of the topics he’d like to cover in a debate with Ivey. The governor declined requests for a debate from Maddox and from the League of Women Voters of Alabama.

Huntsville Mayor Tommy Battle referred to PACT’s problems under Ivey in an online ad during his unsuccessful ran against Ivey in the Republican primary.

The PACT Program did not collapse and continues to pay college expenses for contract holders, although less than the full amount of tuition and mandatory fees initially promised. A lawsuit settlement fixed the payments at 2010 levels for tuition and fees. That leaves it to contract holders to pay the difference.

PACT’s financial prospects have brightened since the lawsuit settlement won final approval in 2013, allowing the board that oversees the program to raise the benefit level four times since 2015, by 3 percent, 6 percent, 8 percent and 7 percent.

PACT stopped selling new contracts a decade ago.

Lambert, who has a real estate business in Decatur, said the settlement and the rate increases have salvaged some meaningful value.

“I think the program is better than we thought it was going to be, and I think a lot of people have come to that conclusion that a little bit of the apple is worth more than no apple at all,” Lambert said. “And I think most people will find, with what they paid, they’re still in the plus.”

But Lambert, a founder and leader of the Save Alabama PACT movement that successfully lobbied for legislation to help save the program, said some who bought PACT contracts will probably always feel like they were misled.

“You’re going to have the group of parents that feel like they’ve been lied to till they’re buried,” Lambert said. “They will never change their minds. They feel like the state of Alabama sold them a product that guaranteed their student an education and didn’t guarantee their student an education at frozen 2010 tuition prices.”

Boozer was elected in 2010 to succeed Ivey and is nearing the end of his second four-year term. A career banker, Boozer said the PACT program was flawed from the start and that by the time Ivey became treasurer in 2003 it was at risk because of multiple factors.

Under the PACT plan, buyers paid lump sums or installments to receive credit for four years of college tuition and mandatory fees at a state university for a beneficiary, usually a child or grandchild. Paying years in advance saved thousands of dollars over what tuition and fees would cost by the time the children reached college age.

The contract payments went into a trust fund. The PACT Board was responsible for investing that money so that the fund would be sufficient to cover the benefits.

Boozer said two extended downturns in the stock market hammered the trust fund during Ivey’s time as treasurer. The first was the bear market that came after the dot.com bubble burst. The second came with the Great Recession.

In March 2009, officials revealed that the PACT trust fund had lost 45 percent of its value in about 15 months, dropping from $899 million to $484 million as of the end of 2008.

Alabama’s PACT program was more heavily invested in stocks than prepaid tuition plans in most other states when the downturn came, with about 70 percent of the fund in stocks.

Doyle Fuller, a lawyer who represented contract holders who sued Ivey and the other PACT board members in 2010, said he believes the fund should have been invested more conservatively. Fuller acknowledges that Ivey inherited a flawed program.

“I think Gov. Ivey, as the treasurer at the time, she was sort of like Harry Truman,” Fuller said. "The buck stopped there and she was in charge of it."

Ivey said the investment strategy was not risky.

“The whole program depended on relatively low tuition rate increases and a good, thriving market,” Ivey said. “Well, the market dropped significantly. And therefore, PACT was exposed or in dire needs. And so steps were taken to close enrollment. And I assure you that every contract that has been presented for payment has been paid.”

Ivey said she was the first to alert contract holders that the program was in trouble.

“And I caught a lot of flak for that. It was on my watch,” Ivey said. “I caused the bond market to fold? Wrong. I tried to alert our folks to the results of the changing market conditions and the double-digit tuition situation.”

Boozer, asked if the investments had been too risky, said he did not think the PACT board deviated from the standard portfolio for such a trust fund.

“In the investment world, sort of the standard portfolio would be a mix of stocks and bonds where the stocks would be approximately 60 percent of the total amount and fixed income investments would be 40 percent,” Boozer said. “What a lot of people do is they change that ratio in order to be more aggressive or look for more growth in the portfolio. So, instead of 60-40, it could be a 70-30 or 65-35. I didn’t go back and look at all the records of the PACT plan beforehand. But I do not think they got overly aggressive on that mix between stocks and fixed income.”

Boozer said a key flaw in the PACT plan from the start is that the colleges, which set tuition and fees, were not parties to the PACT contracts.

“In most cases you would say if I’m going to have a contract I’m going to have all three parties involved,” Boozer said. “So that the person paying, the person managing the money and the person receiving the money all agree on Day One what the number is going to be.

“That doesn’t exist in these contracts. There are only two parties, and the most important party in the arrangement is not even in the contract.”

As it turned out, hefty tuition hikes helped cause the PACT shortfall. Over a 10-year period, tuition increased by an average of 9.5 percent a year while the investment portfolio grew by an average of 4.5 percent annually.

“For 10 years you fell behind by 5 percent a year,” Boozer said. “On an actuarial basis, that creates a hole you can’t get out of.”

In 2010, while Ivey was still treasurer, the Legislature passed a bill to pump $548 million into the PACT program over 13 years, beginning in 2015. That was intended to make sure PACT could continue to pay full benefits to the approximately 44,000 remaining beneficiaries.

The bill included a cap on tuition hikes for PACT students at state colleges. But the cap did not apply to the University of Alabama or Auburn University. And it was part of a law that would later be repealed to clear the way for the lawsuit settlement.

Boozer said he determined after taking office in January 2011 that the $548 million bail-out would not be enough. Efforts to get Alabama and Auburn to help by limiting tuition increases on PACT students failed.

"We went to the colleges and universities, the major ones, and said, ‘If you will assist us in this, we can make it work,’ " Boozer said. “They would not.”

Another factor compounded the double-whammy of investment losses and tuition hikes, Boozer said. About one-third of the 76,000 PACT contracts were bought during the first four years after the program’s establishment in 1989. That meant that 15 to 20 years later there was a surge in payments due as those beneficiaries reached college age.

It was, Boozer said, a “perfect storm.”

“You have a situation where your assets have declined,” Boozer said. “They’re not earning as much money as you had anticipated. Your liabilities have gone up dramatically because tuition has gone up. You have more students going to college. You had this lump in the snake, so you require more cash to go out.”

Boozer said similar plans started in other states about the same time as Alabama’s PACT plan have encountered problems. Only 11 of 19 are still paying tuition benefits, he said. Even fewer are still open for new accounts, he said.

“These plans were set up as a defined benefit plan and that is not the right structure for saving for college over a long period of time,” Boozer said.

Boozer said the best design is a defined contribution plan, like Alabama’s College Counts 529 Fund. It allows establishment of a savings account for college with tax advantages. Alabama’s plan is thriving, with about 90,000 accounts and about $1.7 billion in assets under management, he said. It was created in 2002 and caused participation in PACT to decline.

“When we opened it you could see the number of PACT accounts dropped and these increased,” Boozer said. “So, not only did PACT have other issues, it also had internal competition from the College 529 plan, which is an excellent way to save for college and has turned out to be the best way to save across the country.”

After it was determined that the legislative bailout would not be sufficient and that universities would not restrict tuition increases for PACT students, Boozer said the best path was to make sure every contract was paid, every contract holder received good value and a structure was put in place that would last to the end of the program in 2032.

“We’re going to take the assets that we’ve got,” Boozer said. "And we’re going to take the cash flow that we are going to get from the Legislature between 2015 and 2027. We are going to package that together. We’re going to take the number of accounts that we still have. We’re going to get our actuary in here and we’re going to calculate, on an actuarial basis, given reasonable, rational assumptions, how much can we pay and make this thing work so that those three things can be accomplished. And that’s exactly what we did and that’s exactly what’s happened in the PACT program. "

Attorney Fuller credits Boozer for salvaging the program. He said former state Supreme Court Justice Bernard Harwood mediated the settlement that preserved value for contract holders.

“Not what they bargained for, but a pretty good deal at the end of the day,” Fuller said.

Lambert said she has learned from her work with Save Alabama PACT that it was hard to overstate the impact the reduced benefits had on many families.

“We had kids that had to quit school," Lambert said "Parents that could not send their children to school. It completely turned people upside down. We started with like 49,000 kids affected. It was not a little problem.”

Lambert said the grassroots group had plenty of interaction with Ivey.

“We did invite her to all of our meetings,” Lambert said. “We were trying to be very up front with her. And she did come to a lot of them. And she did face a lot of angry parents that were very upset.”

SAVE Alabama PACT still has an active Facebook page with more than 2,800 members. Lambert said the group’s efforts are still making a difference.

"Every time I see a student graduate in the spring. And their pictures are posted on that site or on Facebook, it’s like a victory that they were able to get through school.

“The Save Alabama PACT group, we felt like we had the world on our shoulders. And it became less about our own kids and more about everyone’s kids.”