The Truth About Alexi

Truth

The Bright Start College Savings Program is a more than $2.4 billion dollar program that allows Illinois families to invest money for their children's college education. Families can choose to invest in many portfolio options, and both earnings and qualified withdrawals are tax-free.

In April of 2009, Consumer Reports studied college savings programs across the country "to see how well they performed during last year's stock-market plunge." It "found five that are worthy of an A," and ranked Bright Start as one of the top five college savings programs in the nation.

Also, in its own independent analysis in March 2009, Money Magazine selected Bright Start as one of the "best low-risk 529 plans." And as recently as June 2009, Kiplinger's selected Bright Start as one of the best state 529 plans in the country, choosing it as the best plan for "low fees."

Morningstar, which had previously ranked Bright Start in its Top 5 in 2008, has acknowledged the issues relating to Core Plus but cited Illinois' swift action in dealing with the issue and reported in April 2009 that "the plan still holds plenty of appeal."

Meanwhile, Bright Start enjoyed strong returns in 2009. Year-to-date returns as of Dec. 31, 2009 show an investment growth range from 5.1 percent for a portfolio designed for 18-year-olds to 26.8 percent for a portfolio geared toward children up to age 6. The funds that replaced Core Plus have experienced year-to-date returns of 6 to 7 percent.

Truth

The Core Plus fund, at the time one of 21 underlying funds in Bright Start, lost 38 percent during the period, Jan 1. 2008 to Jan. 25, 2009. The settlement reduces that loss to 17 percent. The performance of the funds that replaced Core Plus in 2009 further reduces losses during the same time period to 13.6 percent.

According to the Wall Street Journal, of the 3,506 fund options that make up all of the 529 college savings funds nationwide, 93 percent lost value during 2008. This settlement makes the Core Plus/Core Bond fund the only one that actually puts money back in families' pockets.

The Core Plus settlement will divide the $77.23 million among an estimated 65,000 Bright Start families who had at least 10 percent of their portfolio exposed to Core Plus. The amount each accountholder receives will be determined by the net losses incurred in their account due to exposure to the fund. Participants who had losses of at least $20 from Jan. 1, 2008 to Jan. 25, 2009 will be eligible for their share of the proceeds.

The overwhelming majority of Bright Start accountholders eligible for the settlement were invested in portfolios with only partial exposure to Core Plus. All told, less than 15 percent of all Bright Start assets were invested in Core Plus. Just 2.5 percent of all Bright Start investors had their money in a portfolio with 100 percent exposure to Core Plus; only those investors lost 38 percent. As the Jan. 2010 Associated Press' "Factcheck" on Bright Start makes clear:

It's worth keeping in mind that very few families had all their money in Core Plus . . So whatever Core Plus lost, the average investor didn't suffer the full setback.

Truth

Other affected states where Oppenheimer served as program manager offered a Core Bond fund. By contrast, Illinois offered Core Plus, which had its own investment strategy and guidelines. The excessive losses were attributable to unauthorized leverage in the portfolio, which was not allowed by the investment guidelines.

As the Chicago Sun-Times reported in Jan. 2009, independent analyst Morningstar "said it couldn't find any disclosures in the funds' legal documents allowing them to use this kind of leverage."

As the Illinois Attorney General and Treasurer's Office have made clear, "the legal settlement resulted from losses that were attributed to impermissible investments."

The lack of transparency provided by Core Plus team, which is no longer with OppenheimerFunds, led the Treasurer's office to investigate. Through the subpoena power of the Attorney General's office, the state discovered that investments were made which were not allowed under the investment guidelines. Even GOP nominee Congressman Mark Kirk has acknowledged that it wasn't Giannoulias but OppenheimerFunds' manager who was responsible for the excessive losses.

Truth

Alexi was the first State Treasurer in the nation to notice problems with Core Plus and the first to take action.

As an Associated Press "Factcheck" on Bright Start reports:

Financial experts say he acted responsibly -- and actually responded better than officials in some other states using Oppenheimer.

"I think Illinois was out ahead of anybody else," said Andrea Feirstein, managing director of AKF Consulting, which specializes in college savings programs.

And Morningstar analyst Greg Brown said, "To Illinois' credit and Alexi's credit, they were the first to sound the alarm."

Independent advisors and expert analysts had recommended that current investments in Core Plus remain the same, despite plans by the Treasurer's Office to reallocate. At the time, Morningstar reported that "investors have a fair chance of making their money back and more...", "...we think now's the wrong time to give up on this fund," and "...the fund has plenty of long-term appeal."

But by December 2008, Morningstar uncovered more information, with one analyst stating the investment team at OppenheimerFunds managed the Core Plus/Core Bond program in such a way that: "I can't imagine that the average shareholder or advisor with a stake in these funds knew that they were leveraged in any way."

Truth

The period of time covered and the investor class chosen weighs heavily in determining loss calculations.

The Treasurer's Office stated that 2008 losses were "in excess of $85 million." This figure was based on the best available information at that time, calculated from April 1, 2008 through December 31, 2008.

During the State of Illinois' settlement negotiations with OppenheimerFunds, Illinois Attorney General Lisa Madigan and Treasurer Giannoulias expanded the time period covered and finalized the class of Bright Start families who were impacted by the impermissible investments. As a result, the time period for recovery was expanded to January 1, 2008 through January 25, 2009. The $136.5 million figure reflects the fact that more accountholders will be able to recover money for their losses over a longer period of time.

Truth

As the Attorney General's Office found in its investigation, the excessive losses "were attributed to impermissible investments by an investment manager and his team, all of whom have since left the firm."

With the new management team in place, the program is still ranked one of the best in the nation and the Core Plus replacement funds realized solid returns in 2009. In addition, this problem was isolated to one of the 21 Bright Start funds managed by an investment team that is no longer with the firm.

In its "Factcheck" on Bright Start, the Associated Press addressed the question of whether OppenheimerFunds should have been fired. The AP's independent expert "doesn't see a problem" with maintaining the state's contract with OppenheimerFunds, since it "is a reputable firm that has made a major commitment to college savings programs" that "has taken steps to fix the problems that led to Core Plus losses."

Truth

The Attorney General's Office has recommended investors accept settlement, which avoids costly and lengthy litigation that could take years to resolve would provide no guarantee of a successful outcome. Also, 100 percent all settlement proceeds negotiated by the state go directly to Bright Start participants, instead attorneys' fees and court costs.

A lawsuit would have been rolling the dice in terms of outcome, with the possibility that families would lose the suit and not recover any money whatsoever. The settlement reduces loss to 17 percent. This recovery is in addition to the gains accountholders realized as the financial markets improved in 2009.

Sources:

• Associated Press Fact Check, Jan. 11, 2010
• Chicago Sun-Times, Jan. 14, 2009.
• Morningstar, ""The Best and Worst College Savings Programs", Apr. 16, 2008
• Consumer Reports, "Savings Plans That Make The Grade", April 2009
• Money Magazine, "Best low-risk 529 Plans", April 2009
• Kiplinger, "2009 Best List: College - Smart choices for your tuition dollars", December 2009
• Morningstar, "The Best and Worst 529 College Savings Plans," Apr. 23, 2009
• Attorney General Release, "Illinois Reaches $77 Million Bright Start Settlement With Oppenheimer," Dec. 22, 2009