 During the past three months, families have withdrawn more than $12
million from College Illinois, according to documents obtained by
Illinois Statehouse News. Families pulled out just more than $2
million during the same period last year.
Panicked parents who have asked for their money back make up a small
percentage of the total contract holders, but a large contingency
now are debating whether to follow suit.
The huge increase in refunds comes after scathing articles in the
media, an Illinois auditor general's report, an Illinois secretary
of state investigation and an Illinois attorney general inquiry into
possible mismanagement of the program.
Ginnie and Dan Flynn decided to buy two semesters for their
7-year-old daughter after reading positive reviews of the program
and studying its details this past year.
Ginnie Flynn works in the health-care industry and Dan Flynn is a
Chicago firefighter. They said they make a decent living, but with
the increasing cost of higher education, they wanted to make sure
their daughter can attend college. The two haven't asked for a
refund, but they said that option is on the table.
"Before we went ahead and jumped in ... we did our research on it,
and they were rated pretty high, and these are people who watch the
markets who know these things much better than we do, and they
didn't see this coming," Dan Flynn said. "If they didn't see this
coming with a state plan that they ranked pretty highly, I don't
really know what the average Joe is supposed to do."
The Flynns said they're not ready to pull their money, since their
daughter is so young and not all of her future college funds are
tied up in College Illinois. They did say, however, that they are
following the ongoing investigation, the results of which will
heavily influence their decision about staying in the program.
"Do you want to be the last one holding the bag? Do you want to be
the first one out who doesn't have a good solution yet but maybe
didn't wait to see what the options truly were?" Ginnie Flynn asked.
"(These are) things that keep you up at night as a parent."
Created 12 years ago, College Illinois allows people to pay for
tuition and mandatory fees at universities and community colleges
years in advance at a lower cost. The money people contribute to the
program will be invested, and the return on these investments will
cover tuition and fee inflation over the next several years or
decades.
Most of the anxiety about College Illinois stems from its large
deficit. The fund is a defined benefits program in which a person
who pays in now is guaranteed a certain payout. The program went
from being 7 percent unfunded for future and current contracts in
2007 to 18 percent as of May.
Adding to the crisis of confidence is a decline in new enrollments,
which could dry up as soon as 2014 if recent trends continue,
according to projections by Illinois Statehouse News based on
Illinois Student Assistance Commission numbers.
"I don't think there's going to be very many people who are willing
to now subscribe to this program anymore, because it's like
investing in a bankrupt company," said George Pennacchi, professor of
finance at University of Illinois in Urbana Champaign.
Andrew Davis, executive director for the Illinois Student Assistance
Commission, said he is confident the fund is sustainable
and will honor all current and future contracts.
"We've paid all our current bills on time and in full. We have fully
accounted for with an aggressive view towards what future tuition
will be," Davis said. "The fund is significantly stronger than it
was two years ago."
ISAC is a state commission that administers College Illinois as
well as the state's college savings program.
College Illinois is administered by ISAC, but it isn't
legally backed by taxpayers' dollars. Instead, the Legislature can
be asked -- not compelled -- to cover any kind of deficit or default.
Illinois' ailing pension funds and the state's propensity to put off paying its
bills on time make people even more leery about the Legislature's
willingness to rescue the program. Illinois has up to $140 billion
in unfunded pension and post-retirement costs and about $3.9 billion
in overdue bills
State Rep. Jim Durkin, R-Western Springs, invested in the tuition program
for his children and has been the loudest voice in the Legislature
calling for serious changes to the system.
"This is not what parents signed up for. It was promoted as a
guarantee by the state and that the fund would not be subject to
market fluctuations. We found out that both of those are not true,"
Durkin said.
He added that the legal doctrine of promissory estoppel could make
the contracts binding because the promisor made a clear and definite
agreement to the investors, even if the agreement is not in writing.
The court system would need to determine if the state must pay for
contracts if the program becomes insolvent.
"I don't think we'll ever get there, but I don't think the state can
rely upon the contract if there is a problem (by) saying that this
is not backed by the full faith and credit (of Illinois), since it
was marketed otherwise. That, to me, is (a) tragic flaw with the
program," Durkin said.
While the global financial crisis has obvious ties to College
Illinois struggles, an equally big culprit is the state's ballooning
tuition costs. During the past decade, tuition and mandatory fees at public
universities have jumped by about 10 percent each year. At Northern Illinois
University, for
example, the cost of one semester in 2009 was $8,964. In 2010, one
semester at NIU cost $9,908.
"We have to match tuition, but we don't know what that tuition is
going to be, because the Legislature and governor have let the
schools here do what they need to do in terms of funding
themselves," Davis said.
Pennacchi said the program was flawed
from the start because of the trend in rising tuition costs.
"It is ill-designed," Pennacchi said. "There is probably no good
investment strategy that will, with a high probability, allow you to
invest at a rate that will cover tuition inflation."
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At the height of the fiscal crisis, the program was nearly $500
million in the hole. As of May of this year, the program cut its
deficit to $243 million.
Davis said this recent year has been the best the $1.1 billion fund
has seen. If trends continue, he said, the program eventually will
be fully funded, though he could not give a specific date because of
uncertainty in future tuition costs and investment returns.
To accomplish its goal of eliminating the deficit, the program added
a blend of hedge funds, real estate and private equity by shrinking
its commitment to traditional stocks and bonds, Davis said.
All of these investments generally offer a higher return than
conventional investments, but they also come with higher risks.
Davis insisted that spreading out the fund's money over different
areas lowered the risks of huge losses because of one rotten apple,
but any hiccup in any of the program's funds could have serious
repercussions.
College Illinois is predicting an 8.75 percent annual return on the
total fund in the foreseeable future, but a "one percent shortfall
in such a goal would place the fund in a more extreme deficit
position," a College Illinois report from December states.
Additionally, the available money the program had was
depleted and is now tied up in investments.
Burton Weisbrod, professor of economics at Northwestern University,
said many of these long-term investments make more money but take
longer to mature. That could make it difficult for College Illinois
to pay universities and colleges the $80 million it will owe to
cover tuition costs next year if other, more liquid funds are
severely underperforming.
"If you or your mom has some assets in the form of checking account,
you can get that money anytime you want in five minutes. If you have
your assets in the form of a limited partnership in standing timber,
you certainly cannot get your money out in five minutes," Weisbrod
said. "The only way you could get your money now is to sell at a
very big discount."
Davis said that while some available cash has been moved to more
long-term investments, that isn't a specific problem for College
Illinois because between 70 percent and 80 percent of its assets
could be turned into cash within a week.
This spring the General Assembly requested the auditor general to
follow up its April report on College Illinois with a further
investigation. That report is due by spring of 2012, when the
Legislature is back for its regular session.
"Our job moving forward is going to be to fix the problems (and)
ensure the parents have confidence that this will work," Durkin
said. "We're going to have to spend some time on this."
Shortly after news of College Illinois' troubles surfaced, Gov. Pat Quinn replaced the head of ISAC's board, Don McNeil, with Kym
Hubbard, former executive director of the Illinois Finance Authority, which
provides financing for businesses.
Durkin said that wasn't enough, and he criticized Quinn for a lack of
leadership in this matter.
"There needs to be wholesale changes on the board and also (for) the
management of College Illinois," Durkin said.
Durkin said that next spring he plans to bring some proposals to
address several areas, including qualifications for board members
and guidelines for investments.
Parents like Dan and Ginnie Flynn, meanwhile, are left to wait and
worry about their money in the program.
"Worst-case scenario, we withdraw it," Dan Flynn said.
[Illinois
Statehouse News; By ANDREW THOMASON]
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