State Audit Slams College Illinois Overseers
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CHICAGO (STMW) — An audit released Thursday of the College Illinois prepaid tuition program slammed the state agency overseeing the program for not following “sound business practices” or state law when hiring a politically connected financial services group to scrutinize investments.
San Francisco-based Grigsby & Associates was hired under the auspices of advising College Illinois on debt restructuring but gave only one opinion — to invest $12.8 million in ShoreBank Corp. in 2008 despite numerous red flags that the bank was on shaky ground, Thursday’s audit said.
The money was lost when the bank went under in 2010.
The College Illinois program had a deficit of $338 million on June 30, slightly less than the $342 million deficit it showed in 2009, the audit showed.
“Any time you have an analysis which raises potential red flags as to the soundness of the investment, you’d hope that the entity would pay attention to those things — that in this case, ISAC would be vigilant and prudent in their investments, particularly given the fact they have a $338 million deficit,” said Illinois Auditor General William Holland.
The audit said that Grigsby & Associates was hired under an unorthodox fee structure that did not guarantee objectivity because there was no way for Grigsby to be paid if the ShoreBank investment was not made. Grigsby & Associates was paid $255,600, or 2 percent of the $12.8 million invested in ShoreBank.
“When you place a contingency fee on their report it certainly calls into question their objectivity on whether or not the proposed money manager, in this case ShoreBank, was a proper entity to invest College Illinois money,” said state Rep. Jim Durkin (R-Western Springs).
According to its website, Grigsby & Associates has served as a financial adviser for the Metropolitan Pier & Expo Authority, Cook County and the City of Chicago with $1.7 billion in transactions with these three agencies alone. The firm, which claims it is one of the country’s oldest minority-owned banking firms, opened a satellite office in Chicago in 2010.
Founder Calvin Grigsby was indicted twice on federal bribery charges in Florida, and acquitted both times. He was also fined by a California ethics board in 1996 for campaign contribution violations. Grigsby did not return a call seeking comment.
Grigsby & Associates prepared its report suggesting the ShoreBank investment — and the Illinois Student Assistance Commission invested the $12.8 million in the troubled bank — before ISAC ever signed a contract with the California investment group, the audit said.
ISAC officials refused to release a copy of the Grigsby report, saying they were not sure if it was a public document.
John Samuels, College Illinois spokesman, declined to comment on the audit, referring to a statement the agency issued to the auditor saying future requests for proposals would be more precise.
Commission officials also told the state auditor that “unclear communication” was to blame for allowing Grigsby & Associates to do work before the contract was signed. ISAC’s statement said those procedures have been tightened as well.
College Illinois, the state’s prepaid tuition program, bills itself as offering Illinois families the chance to lock in today’s tuition prices for future students, guarding against rapidly rising college costs.
The program is not guaranteed by the state, however, so the Illinois families who currently hold 55,000 prepaid tuition contracts are not assured that the state will step up and bridge any funding gaps if the money runs out before their children are old enough to enroll in college.
ISAC and College Illinois have been under increased scrutiny since a Crain’s Chicago Business report in March showed the plan was 31 percent underfunded even when factoring in a nearly 9 percent assumed investment return, a projected return that is higher than other states’ prepaid tuition plans.
On April 2, the commission voted to prohibit direct private equity investments like the $12.8 million it invested in ShoreBank as well as contract with companies to provide outside reviews of investment policy and the program’s overall financial health.
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