Secret money in Augusta

The Finance Authority of Maine (FAME) and the Governor’s Office have a stash of revenues that they would rather you and the Legislature did not know about. Probably every legislator knows that for the privilege of providing Maine’s version of the federal Section 529 College Saving Program (known as NextGen) Merrill Lynch pays FAME. Probably no legislator, however, knows how much Merrill Lynch has paid FAME, or how little FAME has passed on in benefits to Mainers.

The arrangement with Merrill Lynch is clearly quite nice for the governor. In his State of the State addresses last month and in previous years, the governor was able to announce small new programs to benefit Mainers. And he did not even have to ask the Legislature for funding. The arrangement is also quite nice for FAME. FAME is required to answer only to its board of directors, and that board is appointed by the governor. It reminds one of the old saying “if you scratch my back, I’ll scratch yours.”

The NextGen programs announced by the governor and provided through FAME sound great. These programs are generally targeted toward low-income families. And they have not cost Maine taxpayers a dime. They don’t sound quite so generous, however, when one compares them with the NextGen revenues or the amount kept by FAME.

From its inception through the last fiscal year, FAME’s net revenues from Merrill Lynch were almost $11.4 million. FAME spent more than $4.2 million (37 percent of net revenues) on operating expenses. It retained just over $5.2 million (46 percent) in cash accrual. And it spent a little more than $1.9 million (17 percent) on programs to benefit Mainers. Moreover, if one of our elected officials is reading this, then it will be the first time he or she has seen these numbers.

Providing benefits to Maine families clearly has not been a priority for FAME. Encouraging Maine families to save for college clearly has not been a priority either. Last year Maine’s NextGen plan topped Kiplinger’s “529 Plan Hall of Shame” because of Merrill Lynch’s high fees and mediocre performance.

Not surprisingly, only about 2 percent of Maine youth have a NextGen account in their name. Officials from both FAME and the Governor’s Office, however, have made it clear that they “are very happy with our 529 program.” In fact, in a candid moment a senior adviser to the governor admitted that the administration was aware that it is probably best for most Maine residents to invest in other states’ 529 programs.

Indeed, when I expressed to the administration my concerns about FAME’s NextGen priorities and my intention to share my findings in the media, their response to me was “who is this (expletive)?” Hopefully this was not their official position. Although the Governor’s Office was concerned about the possibility of bad press, they were clearly unconcerned with FAME governance and priorities.

FAME is certainly not alone in being self-serving. Self-serving tendencies are endemic to all bureaucracies. What is different about FAME’s NextGen arrangement is the lack of accountability and effective oversight. FAME does not even have to ask for money or justify its expenditures like almost all other state agencies. Indeed when FAME voluntarily reports to the Legislature, it tells them what it is doing, as opposed to asking for funds for programs. Rolling Stone columnist P. J. O’Rourke once wrote that “giving money and power to government is like giving whiskey and car keys to teenage boys.” It seems especially appropriate in this instance.

Another problem with the NextGen arrangement is that it allows FAME to make policy decisions that are properly the responsibility of our elected representatives. For example, administering several small programs may serve FAME, but it might not serve Maine people as well as one large program. Accumulating cash reserves in excess of $5 million (and earning only about 2.5 percent in interest last fiscal year) may serve FAME, but it might not serve the state as well as other uses of those funds.

Perhaps receiving almost $4.3 million from Merrill Lynch in the last fiscal year is more important than having the most effective college- savings plan for Maine families. But these are the sort of decisions that we elect representatives to make. The choices made by FAME might reflect the preferences of Maine citizens, but there is no way of knowing because we never had the opportunity to weigh in on these decisions.

We cannot lay all the blame for Maine’s 529 arrangement on FAME and the Governor’s Office (although the choice of the Merrill Lynch alternative was FAME’s). Legislation created the structure to give FAME sole authority over Maine’s 529 program without effective oversight and accountability.

It is this structure, not the people within FAME or the Governor’s Office, that is inviting abuse. It is doubtful, though, that the Legislature envisioned how Maine’s 529 program would evolve. Now it is clear that the Legislature needs to change it.

Philip Trostel is a professor of economics and public policy at the University of Maine. The views expressed in this commentary do not necessarily reflect those of the university or any organization within it.