The ‘Col­lege Illi­nois’ de­ba­cle

Chicago Tribune (Sunday) - - EDITORIALS -

Gov. J.B. Pritzker and many Demo­cratic leg­is­la­tors want to im­pose a grad­u­ated-rate in­come tax on flat-rate Illi­nois. One goal is to ex­tract more bil­lions of dol­lars from the body politic. An­other goal is “fair” tax­a­tion, with those bil­lions com­ing ex­clu­sively from the very rich; the other 97 per­cent of us are told we would get a teensy tax break.

But if Pritzker’s dream be­comes re­al­ity, the teensy tax breaks would only be a loss leader: Once a con­sti­tu­tional amend­ment lets law­mak­ers set dif­fer­ent rates for dif­fer­ent in­come co­horts, they can im­pose rates — as high as they wish — on mid­dle-class house­holds, too. Re­mem­ber Goal One? This is about rais­ing more bil­lions to spend.

The 3-per­centers wouldn’t pro­duce nearly enough rev­enue to buy Illi­nois out of the fi­nan­cial dis­as­ter law­mak­ers have cre­ated. Those law­mak­ers will yearn to squeeze the mid­dle class for the same rea­son rob­bers pa­tron­ize banks: That’s where the money is.

No Repub­li­cans are likely to sup­port Pritzker’s plan; they want to curb spend­ing. Pritzker wants more spend­ing. Which puts sub­ur­ban Demo­cratic leg­is­la­tors in the awk­ward po­si­tion of telling tax­pay­ers that Pritzker only has eyes for the wealthy: If you aren’t in the tar­geted 3 per­cent, what could pos­si­bly go wrong for you?

Note that the Democrats’ mar­ket­ing pitch — We’ll only soak the swells — doesn’t con­fess, let alone guar­an­tee, for how long. When do the rest of us get soaked? Year two? Year three? Years two, three and five?

Ask your­self, how has be­liev­ing Illi­nois law­mak­ers’ as­sur­ances worked for you in the past? Today we’ll take the first of sev­eral looks at that sorry record: When tax­pay­ers trust Spring­field … here’s what hap­pens.

Madi­gan’s pan­der to par­ents

Re­call law­mak­ers’ glow­ing as­sur­ances two decades ago that their Col­lege Illi­nois pre­paid tu­ition pro­gram would be self-sus­tain­ing — with no risk to tax­pay­ers. Ex­cept the un­funded li­a­bil­ity of this dead-bang loser is now a brac­ing $501 mil­lion. Let­ting Spring­field gam­ble on tu­ition fu­tures was mad­ness. Now those sup­pos­edly risk-free tax­pay­ers are likely to get gouged for the bailout.

Col­lege Illi­nois was all about law­mak­ers pan­der­ing to par­ents. Then-state Rep. Dan Burke, a Chicago Demo­crat, was a prime mover, and Gov. Jim Edgar, a Repub­li­can, signed it into law. But mean­ing­ful mojo came from House Speaker Michael Madi­gan. A Fe­bru­ary 1997 Tri­bune story ex­plained that Edgar pre­vi­ously had ve­toed a sim­i­lar pro­posal floated by then-Trea­surer Pat Quinn. This time, though, Madi­gan’s com­mit­ment was cru­cial to pass­ing pre­paid tu­ition: “It is a le­git­i­mate pur­pose of the state to help peo­ple go to col­lege,” Madi­gan pro­claimed.

To which Madi­gan might have added: No mat­ter how reck­lessly we go about it, or what sur­prise mega-debts we im­pose on tax­pay­ers.

Col­lege Illi­nois isn’t Spring­field’s big­gest fi­nan­cial de­ba­cle. But it’s an ex­am­ple of what can hap­pen when Illi­nois tax­pay­ers trust their law­mak­ers’ sooth­ing as­sur­ances.

All hail Judy Baar Topinka

This is the deal Col­lege Illi­nois of­fered: A fam­ily would pay a lump sum or in­stall­ments, with earnings ex­empt from state and fed­eral taxes. If you bought a con­tract, Col­lege Illi­nois even­tu­ally would pay your child’s tu­ition at an Illi­nois state univer­sity. Or the in­vest­ment could help cover tu­ition at pri­vate or out-of-state pub­lic schools.

The cal­cu­lus was that gov­ern­ment could shrewdly es­ti­mate fu­ture tu­ition costs, as well as the pro­gram’s re­turn on in­vest­ments. Fam­i­lies then would buy con­tracts priced high enough to make that long-term math work. In other words, lots of variables for state of­fi­cials to get wrong.

Col­lege Illi­nois has sold more than 73,000 con­tracts, and for many stu­dents, the pro­gram has per­formed well. But nearly half of those con­tracts, some 35,000, are still out­stand­ing — and Col­lege Illi­nois isn’t on track to pay all the tu­ition money it will owe.

From the get-go, many Illi­noisans be­lieved what they were told: The pro­gram would be self-sus­tain­ing. ThenTrea­surer Judy Baar Topinka was skep­ti­cal. Tu­ition costs were ris­ing fast. Topinka warned that keep­ing up with that growth might tempt money man­agers to­ward risky, po­ten­tially high-growth in­vest­ments — only to have the in­vest­ments flop. Topinka wor­ried that tax­pay­ers would be stuck mak­ing Col­lege Illi­nois whole.

Sure enough, Illi­nois priced its con­tracts too low. Illi­nois didn’t achieve the overly am­bi­tious mar­ket re­turns it ex­pected. Illi­nois turned to riskier in­vest­ments. Each of those mis­takes played out be­cause law­mak­ers hadn’t built suf­fi­cient guardrails to keep the pro­gram safe from un­ex­pected twists and turns.

This year, Illi­nois law­mak­ers are mulling whether to com­mit fu­ture leg­is­la­tures to cover the very short­fall Topinka feared. Think about that: Law­mak­ers who sup­port a con­sti­tu­tional amend­ment al­low­ing a grad­u­ated-rate in­come tax may also hand Illi­nois tax­pay­ers that $501 mil­lion un­funded li­a­bil­ity. Sur­prise.

Any­body pay­ing at­ten­tion? Any­body?

Spring­field’s chronic ten­dency to let its de­ba­cles get worse rather than de­mand mid­course correction­s is es­pe­cially trou­bling. In this case, law­mak­ers didn’t prop­erly mon­i­tor the mis­lead­ing sales pitches from the Illi­nois Stu­dent As­sis­tance Com­mis­sion, which runs Col­lege Illi­nois.

In April 2011 we watched a Col­lege Illi­nois mar­ket­ing team hand out slick brochures that didn’t men­tion a state au­di­tor gen­eral’s re­port on the pro­gram the pre­vi­ous week — a re­port head­lined “Sound Business Prac­tices Not Fol­lowed.” In­stead, Col­lege Illi­nois in­vited fam­i­lies to “lock in fu­ture col­lege tu­ition and fee costs.” Rest as­sured, the pro­gram claimed, “The cost of col­lege will be lim­ited to a sin­gle, re­li­able and con­sis­tent num­ber.” Those pur­chas­ing pre­paid con­tracts, it said, would ob­tain “the peace of mind that comes with know­ing that tu­ition in­fla­tion is no longer a prob­lem.”

In truth, the state didn’t guar­an­tee that these con­tracts would cover the full cost of col­lege. The in­vest­ment fund back­ing them had fallen far short of the amount needed to make good on con­tracts al­ready sold. And any­one buy­ing new con­tracts would be charged an in­flated price to help pay down the obli­ga­tions to oth­ers who had in­vested at a dis­count in prior years.

The bot­tom line here: Illi­nois law­mak­ers cre­ated a pro­gram to help fam­i­lies sur­vive ris­ing tu­ition costs. Yet the pro­gram they de­signed couldn’t do that one job — ab­sorb ris­ing tu­ition costs. Then, as Col­lege Illi­nois slipped un­der­wa­ter, Spring­field didn’t en­gi­neer fixes. The un­funded li­a­bil­ity mush­roomed. Guess who’s likely to pay for these years of state­house in­com­pe­tence.

So, tax­pay­ers, do you trust Illi­nois law­mak­ers to de­ploy a grad­u­ated-rate in­come tax only against those other peo­ple, the rich ones?

Or be­fore you can say, “Fool me once,” would Spring­field come for you, too?


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