Illinois Prepaid Tuition Problems Part I

Among the State of Illinois many stuctural defict problems is the example of the state's likely mismanagement of its prepaid college program.  Today we'll run an article from Crain's.  Tomorrow or Wednesday we'll see a report from the ABC Channel 7 news blog.  Excerpts with my highlights.

Crain’s investigation: Illinois’ prepaid tuition plan struggles.

Posted on March 7, 2011 {redirected from Montgomery Real Estate Info}

Illinois’ prepaid tuition program, a 12-year-old financial plan enabling children to attend state colleges at today’s prices when they have grown up, has the deepest shortfall of any such fund in the United States and is plowing money into unconventional — and some financial experts say high-risk — investments to close the gap.  The deficit of the College Illinois Prepaid Tuition Program also is far larger than the fund is declaring. Administrators recently adopted new calculations that mask its size.

The performance of the $1.1-billion fund is crucial to ensuring that the prepaid plan’s nearly 55,000 family participants get what they have paid for. That’s because, unlike in five other states, Illinois doesn’t promise to bail out the fund if it runs short of cash, contrary to what even some savvy investors and financial planners think. Instead, state law requires only that the governor ask the Legislature for help if the program can’t meet its commitments. Lawmakers are under no obligation to act......

The Illinois program was 20% underfunded as of June 30 when assessing its assets against liabilities over the long term, according to a year-end actuary’s report. That was a turn for the better from the 32% shortfall of a year earlier, but virtually all that improvement came from an accounting change that blunted the effect of recent investment losses by spreading them out over five years.

That figure....makes Illinois the worst-funded of these 12 state programs. Investment assumptions that outsiders say are overly optimistic suggest the hole is deeper than that. Even if the fund reaps the gains its administrators count on, the program wouldn’t be fully funded until 2022.

Illinois is vexed by the same financial trends that are sabotaging these plans across the country: Public universities over the past decade have jacked up tuition at an average of 5.6 percentage points over the inflation rate — tuition at the University of Illinois at Urbana-Champaign jumped 57% to $13,508 in 2010-11 from $8,624 in 2005-06 — while investments backing the programs generally are earning much less than that. Since its inception in 1999, Illinois’ prepaid plan has earned a little over 3% on average......

But Illinois is alone among states in choosing to radically revamp its investment fund and allocate nearly half the kitty to alternative investments that are seen as riskier than bonds and equities.......
....As a result, Illinois is assuming its fund will reap far higher yearly returns — 8.75% — than any of the other prepaid tuition programs.

The prepaid tuition program is the cousin of the more popular BrightStart college savings plan, which allows parents to reap tax-free returns in funds they choose. BrightStart exposes its 206,000 investors to the volatility of financial markets, potentially leaving families short of their needs if stocks plunge. But it permits them to more easily use the savings at schools all over the country.  ISAC markets its plan as a safer, more secure alternative to BrightStart, which is overseen by Illinois Treasurer Dan Rutherford.

“Your contract benefits are not dependent on the stock market’s performance because the College Illinois Prepaid Tuition Program’s actively managed fund insulates your investment from the market’s fluctuations,” reads the program’s enrollment kit. At the bottom of the page, participants are told that any shortfall in the fund would need an appropriation from state lawmakers, which is discretionary. In other words, there’s no guarantee that the fund will generate enough money to cover tuition payments.

{My comment:  There's much more to this article than I have the space to present here.  I post both it and the piece you'll see tomorrow because I think it is indicative of the pension obligation issues that most states are facing at all levels of government.  Restoring the fiscal sanity of government at all levels will be the last shoe that has to drop from the Great Recession of 2007-09.}

Link:  Illinois Prepaid Tuition Plan