College Illinois! A Pension-like Problem

College Illinois! A Pension-like Problem
Special Contributor: Intern for State Rep. Joe Sosnowski, Amanda Taylor

College Illinois! was at one point a very promising pre-paid tuition program. It was established in 1997 under the Federal Section 529 plan that was designed to aid parents with inflating college tuition prices. College Illinois enables parents and other family members to contribute to a savings fund for their child’s future tuition. This pre-paid tuition program provides certain benefits that others do not. Enrolling in the College Illinois program provides locked tuition rates, exemption from paying income tax on the returns from monies given or invested in the child’s account, all while the investment return hopefully offsets future educational expenses. Unfortunately, College Illinois has poorly managed its investments and given unrealistic return forecasts. Therefore, the College Illinois program no longer offers a safe investment to families planning for the future.

In May of 2012, in the form of House Resolution 174, the Illinois House of Representatives directed the Illinois Auditor General to conduct a management audit and an asset allocation study of the College Illinois’ administrative operations and investments. The assessment found that the program is $11,565,072,807 short of its projected obligations. That horrifying number is a result of risky investment plans that did not correspond well with the recent economic downturn. In 2008, the Illinois Student Assistance Commission who oversees College Illinois, invested $12.7 million in ShoreBank, a privately held company. In 2010, that entire investment was lost due to the downturn. Similarly, in 2009, College Illinois’ assets were essentially all stocks and bonds. At the close of January 2011, however, the fund held $419 million, or 38-percent, in riskier alternative investments, like hedge funds, real estate, and private equity investments. These examples show something needed to be done about College Illinois’ inappropriate investment management.

To begin reforming the College Illinois Program, a Recovery task force was formed to work with the Illinois Student Assistance Commission to repair the program and begin to ensure sustainability. In addition to the task force the General Assembly passed other important legislation that should help to prevent anymore future calamities. One is House Bill 3923 which amends the Open Meetings Act. It requires that the College Illinois program be excluded from the Act, whereas their investment meetings of funds deposited into the Trust Fund must be open to the public. This change to the program will now allow public investors and families who own these contracts to see where their monies are being invested. The second, House Bill 4116, regulates the types of investments the board is allowed to divulge in. The bill says College Illinois’ funds are to be placed under the provisions of the Public Funds Investment Act, which covers monies that must be invested in low impact or safe fixed-income investments like federal bonds. These Important pieces of legislation are aimed to protect College Illinois investors from foul investments in the future.

As a result of the Recovery Task Force’s hard work, both bills passed in the General Assembly and were effective immediately. The task force is working to develop a solvent and stable plan to get the College Illinois program on track with the help of additional contributions from 2022 through 2036. This plan should help College Illinois create stability.

Other states with pre-paid tuition programs have experienced similar financial shortfalls. Like Illinois, these states have been forced to restructure the plan and cancel the program to future investors. While the task force hammers out a plan to salvage College Illinois, it is a good idea for the program to remain closed to investors. When the program began, it was designed to offer families preparing for college a safe economic investment. However, College Illinois’ economic history has proven to be just the opposite of safe.

The problems seen in College Illinois’ and other state’s plans point to perhaps a fundamental rule that the role of state government should be limited and should not be in the business of setting up defined benefit investment programs that the private sector does not. Private sector 529 plans do not guarantee investment returns because that guarantee doesn’t make any sense. No one can predict returns with absolute certainty and private 529 plans simply provide a structure in which the investor gets what the actual return is. But with all 529 plans no matter if it is through companies like Wells Fargo or through State led programs such as Bright Start, your return all depends on how risky of investments you are making and how the economy is holding up.

College Illinois will need to be bailed out by the taxpayers and the plan needs to be eliminated. The State of Illinois will be better served to be excellent in fewer services rather than poor in many service areas.