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SPRINGFIELD — Illinois’ prepaid tuition program is facing a crisis of confidence that threatens to push it toward insolvency.

By Andrew Thomason

SPRINGFIELD — Illinois’ prepaid tuition program is facing a crisis of confidence that threatens to push it toward insolvency.

During the past three months, families have withdrawn more than $12 million from College Illinois!, according to documents obtained by Illinois Statehouse News.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 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,” George Pennacchi, professor of finance at University of Illinois in Urbana Champaign.

Andrew Davis, executive director for the Illinois Student Assistance Commission, or ISAC, 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.

Though 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 propensity to put off paying its bills on time makes 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 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, or NIU, for example, the cost of one semester in 2009 was $8,964. In 2010, one semester cost $9,908 at NIU.

“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.”

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 their commitment to traditional stocks and bonds, said Davis.

All of these investments generally offer a higher return than conventional investments, but they also come with higher risks.

Davis insisted that by 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 on hand 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 more liquid other 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 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.”

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, shortly after news of College Illinois! troubles surfaced.

Durkin said that wasn’t enough, and 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.

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