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Hafer ends negotiations with Mellon

| Tuesday, Oct. 16, 2001, 12:00 p.m.

At least for the time being, State Treasurer Barbara Hafer is bouncing Mellon Financial Corp. like a bad check.

Upset over Mellon's agreement to sell its 345 branches to Citizens Financial Group, Hafer has suspended negotiations with Mellon to start a new facet of the state's college savings program.

'Until we explore other options, we don't know if Mellon will continue to be the best option,' said Kathleen McGrath, bureau director of the state's Tuition Account Program.

Hafer's decision means Pennsylvania residents planning to open a college saving account under the new program this fall, when it was originally intended to open, may have to wait until next year.

'The treasurer is committed to bringing Pennsylvania as quickly as possible the very best program that can be designed,' McGrath said. 'We would hope and expect the program could be available in 2002.'

On April 30, Hafer announced plans to partner with Mellon and its Dreyfus family of mutual funds to create a new Section 529 college investment plan.

Named after a section in the Internal Revenue Service Code, the plan allows families to save for college by investing in mutual funds with various degrees of risk. Similar options in other states have been popular because the earnings, once tax-deferred, are now tax-free.

The plan is intended to complement TAP, which guarantees residents that they can buy future tuition at today's prices.

'One of the key factors in choosing them is their huge presence in Pennsylvania,' McGrath said of Mellon.

'The Mellon name is virtually a household word,' she continued. 'You take that away, and it's no longer the same circumstances.'

McGrath said the state may still be willing to work with Mellon, but it also is talking to other financial service companies.

She declined to identify them. But the other firms that responded to the state's request for proposal were Vanguard, Delaware Investments, Morgan Stanley Dean Witter and Strong Capital Management of Menomonee Falls, Wis., which submitted a joint proposal with American Express.

In a prepared statement, Mellon officials expressed hope that the company still will be able to offer the Section 529 plan. They said that Citizens has made a commitment to offer the plans and Dreyfus mutual funds through the branches it is buying from Mellon.

The financial firm the state eventually chooses would make money by charging investors an administrative fee.

'This is a very significant piece of business for us,' said Mellon spokesman Ken Herz in an e-mail. 'We believe that many Pennsylvanians would sign up with us.

'We are confident that our product and distribution capability are superior to other offers that might be submitted.'

Bill Zlatos can be reached at bzlatos@tribweb.com or (412) 320-7828.

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