Illinois Prepaid Tuition Problems Part II

Today we continue our short series on the College Illinois Prepaid Tuition Program.  Today we'll see from ABC Channel 7 {via the associated press} how an investment in a local bank by the program turned sour and lead to losses of over 12 million dollars.  It also illustrates how other considerations sometimes get in the way of sound investment policies in public pension plans. {Excerpt with my highlights}.

April 8, 2011 (CHICAGO) -- The agency that oversees the College Illinois prepaid tuition program didn't follow sound business practices -- or state law -- when it hired San Francisco-based Grigsby & Associates for investment advice, according to a state audit released Thursday.

The Illinois Student Assistance Commission hired the firm to advise College Illinois on debt restructuring, but it gave only one opinion to ISAC: to invest $12.8 million in ShoreBank Corp. The investment was lost last year when ShoreBank collapsed.....

....Any time you have an analysis which raises potential red flags as to the soundness of the investment, you'd hope that the entity would pay attention to those things -- that in this case, ISAC would be vigilant and prudent in their investments, particularly given the fact that they have a $338 million deficit," Illinois Auditor General William Holland told the Chicago Sun-Times......

.....The audit found that Grigsby & Associates may not have been objective when giving the investment advice because there was no way the firm could be paid if the ShoreBank investment was not made.  Auditors contend that the firm prepared its report suggesting the ShoreBank investment before ISAC signed a contract with it. Grigsby & Associates was paid $255,600 after the investment was made.....

Its founder, Calvin Grigsby, was indicted twice on federal bribery charges in Florida and acquitted both times. He was also fined by a California ethics board in 1996 for campaign contribution violations....

My Comment:  Please note that I have no opinion about the investment in Shore Bank.  While it can be made to look suspicious in light of how it turned out, I was obviously not involved in any of the discussions into the investment.  Perhaps the calculations that went into making that investment made sense at the time and satisfied both aspects of good public policy.  These are situations where the public gets a good return on its investment while also fulfilling a communty need at the same time.   I'm just stating what's in the public record and using it to illustrate the point that sometimes other considerations can get in the way of good solid investment planning & principles. 

Illinois is not the only state being confronted with problems of lax investment management standards.  Check out this story out of Louisiana involving its police pension system.  That article also mentions similar problems in both California and New York.


Link:  ABC 7 Shore Bank.