Lawmakers asked to give ‘full faith and credit’ to College Illinois savings plan

Lawmakers asked to give ‘full faith and credit’ to College Illinois savings plan

State official urges move to restore public confidence in College Illinois


Capitol News Illinois

SPRINGFIELD – Faced with a large funding shortfall and a shortage of new participants, the director of a state-run college savings program urged Illinois lawmakers on Tuesday, Jan. 29, to back the program with the “full faith and credit” of the state to guarantee that future bills will be paid.

Eric Zarnikow, executive director of the Illinois Student Assistance Committee, an agency that administers the program known as College Illinois, told a State Senate panel that a full faith and credit guarantee – which would give the program’s debt obligations the same status as those of general obligation bonds – may be the only way to restore public confidence in the program, which is currently backed only by what is called a “moral obligation” of the state.

“When I explain the moral obligation and how it works (to prospective new participants), they’re not entirely comforted by that,” Zarnikow told a joint meeting of the Senate Higher Education Committee and the Appropriations II Committee.

Illinois operates two kinds of college savings programs. One is a traditional plan organized under Section 529 of the federal tax code that allows families to set up tax-sheltered accounts that can later be used to pay for higher education expenses.

College Illinois, on the other hand, is a kind of “prepaid” tuition program that allows families to lock in tuition and fees at their current rates, regardless of what happens to those costs by the time their child goes to college, while still providing the same kind of tax advantages that a traditional 529 plan offers.

Established in 1997, the idea was that money deposited into the program by families would be invested in a fund managed by third-party administrators so the account would earn dividends and interest. That way, by the time the child was ready for college, there would be enough in the account to pay the tuition and fees, even though those costs would likely be higher than at the time the account was opened.

Built into the law at that time, Zarnikow said, was the idea that even if there was a shortfall of funds, the state would assume a “moral obligation” to live up to the promises of the program.

All that was predicated, however, on the idea that tuition and fees would grow at moderate and predictable rates.

Beginning in the early 2000s, Zarnikow said, the program ran into a “perfect storm” of difficulties. From 2000 through 2010, he said, average tuition costs at state universities rose on average about 10 percent a year, far above the rate of inflation.

Then came the financial crisis of 2008-2009, which he said had a devastating impact on the fund’s investment portfolio.

By 2011, Zarnikow said, the program had a $536 million “unfunded liability” – the difference between its assets and expected earnings on the one hand, and the anticipated cost of all its current obligations on the other.

The most recent estimate, as of June 30, 2018, showed the unfunded liability had fallen to an estimated $302 million, but Zarnikow said that even with the improved performance, officials expect that by 2026, the program will need an infusion of about $81 million from the state in order to meet its “moral obligation.”

Sen. Dan McConchie (R-Hawthorn Woods), the minority spokesman on the appropriations committee, suggested there may not be a long-term solution to College Illinois’ funding problems without some commitment on the part of universities to hold down future tuition and fee hikes.

But Sen. Thomas McGuire (D-Joliet), who chairs the appropriations panel, argued that tuition and fee increases are often the result of state funding not keeping pace with the rising cost of higher education, and he suggested the General Assembly itself has a role to play in holding down future costs.

Zarnikow’s appearance before the two committees was intended only as an informational briefing. So far, no specific legislation has been introduced.

Peter Hancock

Peter HancockPeter Hancock

Peter was one of the founding reporters with Capitol News Illinois. A native of the Kansas City area, he has degrees in political science and education from the University of Kansas.

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