The Illinois Student Assistance Commission lowered its projected returns target in its $1.1 billion investment fund backing future tuition payments on behalf of student beneficiaries, but improved funding at the same time.
The investment fund turned in a 2.82% return in the year ending June 30, well off the 7.5% expected return for the fund. ISAC now is lowering the expected return to 7.25%.
The program remains 28.4% underfunded on a long-term basis as of June 30, according to a new actuarial report on the financial health of the program, released Monday. That's just slightly better than the 29.5% deficit the year before, when ISAC was projecting 8% annual tuition inflation indefinitely.
The long-term financial health of the fund has improved because ISAC lowered its expectations for tuition inflation at the University of Illinois at Urbana-Champaign to 7% through 2017, 6.5% inflation from 2018 to 2022 and 5% thereafter.
“Tuition and fees have moderated over the past two years,” an ISAC spokesman said in an e-mail. “Based on declining enrollments and the realization that no segment of an economy can increase at 8% plus forever, we've modified the tuition assumption to reduce in steps over time. This is consistent with what we've heard from the institutions.”
More than 50,000 current and future students have contracts funded by their parents or others to “prepay” for tuition at the state's institutions of higher learning. Rampant tuition inflation, along with disappointing investment returns, combined to raise questions about whether money will be there for future beneficiaries whose parents paid into the program.
Most of those parents were under the mistaken impression that the state had pledged to cover any shortfalls in the fund, but there is no such guarantee. A Crain's investigation in March 2011 spotlighted the funding shortfall, ISAC's misleading marketing in the past and an investment strategy to plow nearly half the fund's assets into private equity, hedge funds and other alternatives to stock and bonds in an effort to keep up with tuition inflation.
That led in 2011 to Gov. Pat Quinn's wholesale replacement of the ISAC board and the removal of executive director Andrew Davis.
Since then, the revamped commission has modestly lowered the fund's exposure to more alternative investments and reformed its procedures to make its decisions more transparent.
After a one-year moratorium on sales of new contracts, ISAC reopened College Illinois on Oct. 1. At the new projections of annual investment returns and tuition inflation, ISAC needs to sell at least 2,500 contracts a year to bring the program back to financial health eventually. If sales reach only 1,000 annually, College Illinois will run out of money in 2026. If there are no future sales, the fund would run out of money in 10 years.
A contract on behalf of a newborn to buy four years of tuition at the Urbana-Champaign campus costs more than $95,000. Four years at the school today is just over $68,000. Contract prices are slated to rise modestly on Jan. 1 despite ISAC's determination now that tuition won't rise as fast as it previously thought.
The ISAC spokesman said that negotiations continue with leaders at the state's colleges and universities on a way to control tuition inflation for College Illinois participants.
Steve Daniels is a writer for Crain's Chicago Business, a sister publication of Pensions & Investments.