An Illinois college-tuition investment program was beset by shoddy management, including possible conflicts of interest by top officials, as it went underfunded and administrative costs tripled, according to an audit released Wednesday.
New managers of the College Illinois Prepaid Tuition Program who took over when Gov. Pat Quinn cleaned house last year were quick to embrace the findings by Auditor General William Holland and point out changes they've made to fix problems.
Holland referred some findings, including the undisclosed financial interests, to the state attorney general and the state's executive inspector general for further review.
The 15-year-old program allows families to buy contracts locking in future college costs -- about 54,000 students are enrolled. The Illinois Student Assistance Commission hires fund managers to invest assets of $1.3 billion. It stopped taking new applications last fall as management problems came to light.
The audit found that the commission circumvented rules for hiring investors and instead engaged in a process "that lacked consistency, transparency, independence, documentation and compliance" with state law.
Former executive director Andrew Davis had previous working relationships with two firms that got money, and he sat on the evaluation team for choosing one that got $20 million, according to the review. But he did not disclose the ties on ethics statements.
Portfolio manager George Egan invested $500,000 in one company while serving on the review team that recommended hiring it, the audit found. Another company, whose selection auditors said was made outside the rules, made Egan a partner after he left the commission.
When Egan resigned from the commission in July 2010, Davis gave him a lump-sum payment of $24,166, one of eight payouts to departing employees charged to College Illinois. Davis was put on paid administrative leave last summer before agreeing to step down with separation pay of $98,000, which came from other funds.
"What we found, particularly in those areas of potential conflicts of interest, is very troubling," Holland said. "You have people making personal investments with vendors who they were involved in selecting as the investment manager."
Messages left at phone numbers listed for Davis and Egan were not returned.
The audit looked at the program's operations from 2006 through June 2011. Lawmakers ordered the probe after Crain's Chicago Business reported the program's underfunding and questionable investments.
The audit called out the commission for granting one of the companies with ties to Davis $10 million more than authorized and plowing $14 million into a private equity firm that makes "luxury plug-in hybrid" vehicles despite investment risks outlined in paperwork.
During that period, annual administrative costs jumped from $6.4 million to $18.1 million in 2011 while the program's funding gap grew to $500 million. The account is currently liable for more than $1.8 billion in future college costs, but had only about 70 percent of that on hand in 2011. That's slightly better than the previous two years but down from 93 percent as recently as 2007.
A statement released by commission executive director Eric Zarnikow and board chairwoman Kym Hubbard ticked off a list of changes made since the end of the period the audit covered. They include putting professional investors and government experts on an investment advisory panel, forming an audit committee, and studying investments and looking for better ones.
"While we can't change the past, be assured that the new Illinois Student Assistance Commission board and staff are hard at work implementing the changes necessary to stabilize and mend the program," the statement said.
Holland found examples where finances were pinned on unrealistic hopes. While the fund has averaged a 3.5 percent return on investments since 1998, commission predictions during the five-year period ranged from 7.5 percent to more than 9 percent. It regularly forecast at least 5,000 new contracts each year, but contract sales hit just under 5,000 in 2006 and steadily declined to 999 last year. Contract revenues cover only 7 percent of the program's costs.
The commission halted sales of new contracts in October and said Wednesday it is in the process of hiring a consultant for advice and wants to resume sales "as soon as practical."