College Illinois managers say prepaid tuition fund is stable

Plan projected to have 31 percent shortfall, according to news report

By Jodi S. Cohen, Tribune reporter

Officials who manage the state's prepaid tuition program assured lawmakers Wednesday that the fund is stable despite past market losses and tuition increases that have been higher than anticipated.

The $1.12 billion fund is "healthy and in good shape," Andrew Davis, executive director of the Illinois Student Assistance Commission, said in a presentation to the House Higher Education Committee. The commission manages the College Illinois program.

About 33,000 families hold a total of 54,900 tuition contracts through the prepaid tuition program, which is advertised as a "worry-free way to pay for college." About 7,750 students this year are cashing in on their prepaid tuition benefits, with the fund paying out $47.7 million.

College Illinois officials were summoned to Springfield after a Crain's Chicago Business report that the plan is currently projected to have a 31 percent shortfall, and critics are questioning the agency's strategy to shift to more alternative, arguably riskier investments in hedge funds, real estate and private equity.

Davis was grilled at length Wednesday by Rep. Jim Durkin, R-Western Springs, who has submitted a bill calling for an audit of the fund. Durkin said he has a College Illinois contract.

"Last week I received a few phone calls from friends and an inquiry from my wife of whether we should pull the money out of the fund," Durkin said.

He told Davis he had "grave concerns" about the portfolio's increase in alternative investments and worried that families would pull their money out of the program.

Davis countered that the investments are not risky because more than 85 percent of the assets are liquid and can be turned into cash in less than one week.

But Davis acknowledged in an earlier Tribune interview that the plan's investment assumptions — based on a predicted rate of return and tuition increases — show that it could run out of cash a decade from now. If that should occur, the agency would have to ask the governor and General Assembly for a bailout, he said.

Like other investments, the plan's health can change quickly. The fund is dependent not only on market fluctuations, but also on how much Illinois' public universities raise tuition and therefore how much the fund will have to pay out as its beneficiaries attend college. The program currently predicts that University of Illinois tuition will go up 8.5 percent indefinitely — if it goes up less, the fund does better; if it goes up more, it does worse.

"We have come through a decade where tuition has gone up a lot, three times the rate of inflation," Davis said. "I don't think they can do that for another decade."

The plan was strong in 2007, when it was only 7 percent underfunded. Since then, the fund suffered market losses during the recession and as tuition went up more than predicted.

The fund's managers have changed their investment strategy, moving from having less than 2 percent in so-called alternative investments such as hedge funds to about 40 percent currently. The target is 47 percent.

Brian Battle, a director at Performance Trust Capital Partners, told the Tribune he questioned the investment strategy and doubted that the agency can get the long-term rate of return of 8.75 percent that it's predicting. The fund this fiscal year has a 14.1 percent return.

"They are underfunded and need to make up for it, so they are going to swing for the fence," Battle said. "It looks like Illinois is taking a lot of risk, and their assumptions are very aggressive."

Battle also has a personal stake, as he has a prepaid tuition contract for one of his children.

"I am concerned that the money won't be there when I need it," he said. "The other part is that I have the presumption that the state of Illinois will feel some moral obligation" to pay.

In addition to changing its investment strategy, the agency also has worked on other ways to strengthen the fund's solvency.

Families now pay significantly more for a contract, for example. An eight-semester contract for the U. of I. purchased today for a newborn costs $95,521. Five years ago, it was $41,493. Families pay different amounts depending on the age of their child and whether the contract is for the U. of I., another state four-year university or a community college.

If a student decides to attend a private university or go out of state, the plan pays a portion of the tuition based on the current mean-weighted average tuition at all Illinois public universities. Families can get their money back at any time, minus fees.

Davis said families shouldn't worry.

"In the context of what other solutions are available to people to pay for higher education … this is a safe and secure one," Davis said.

Tribune reporter Todd Wilson contributed.

jscohen@tribune.com

http://www.chicagotribune.com/news/education/ct-met-college-illinois-0317-20110316,0,1639505,print.story