Audits show College Opportunity Fund not working; PERA weathers storm

The Colorado Statesman

State lawmakers this week reviewed audits concerning state-backed stipends for college tuition, as well as an annual review of the Public Employees’ Retirement Association of Colorado.

Perhaps most controversial was the College Opportunity Fund audit, which indicated that the stipend program is not working as intended. College students are paying more for tuition because of a decrease in the tuition stipend program, according to the audit. In fact, over the six-year period since the program was implemented in 2006, stipend amounts declined from $80 to $62 per credit hour, or 23 percent. Costs for undergraduates receiving stipends at four-year state institutions increased about 57 percent over that time.

“Because of that decrease along with tuition increases, undergraduate students who receive stipends have paid an increasingly greater share of their higher education costs since the College Opportunity Fund Program was implemented,” said Jenny Atchley, spokeswoman for State Auditor Dianne Ray.

The program was backed by lawmakers in 2004 and took effect in 2006. It shifted state support for tuition stipends and fee-for-service contracts from funding institutions to funding students and educational services. Performance contracts with institutions were implemented to enhance accountability.

Lawmakers proposed the shift in funding to exempt higher education from spending constraints set forth under the Taxpayer’s Bill of Rights. Colorado law limits annual growth in state tax revenues, but those limits don’t apply to government agencies considered “enterprises,” or branches of government that receive less than 10 percent of their funding from the state. Higher education leaders at the time did not want to have tuition revenue count against them under TABOR, so lawmakers shifted support from funding institutions to funding students.

The audit, conducted on behalf of the state auditor by Sacramento, Calif.-based Sjoberg Evashenk Consulting, was released to the public on Monday by a majority vote of the Legislative Audit Committee.

The report states that the recession added to the decline in the stipend program, noting “economic conditions between Fiscal Years 2008 and 2011 created some barriers to implementing the COF Program as intended.”

The report notes that a decline in state revenues to support higher education limited the state’s ability to fund the COF program at the level originally anticipated when the measure passed in 2004. Lawmakers had hoped that the total amount of stipends would increase annually by enrollment and inflation, but the audit suggests that has not been the case.

The current funding approach for the program caused the Community College System and two higher education institutions, Colorado Mesa University and Fort Lewis College, to be penalized during Fiscal Year 2011, according to the audit. In those cases, the number of students enrolled at those institutions that were eligible for tuition stipends increased, but the institutions did not receive additional funding, and actually saw reduced contract funding.

The audit explains that such funding problems arise when the number of students who attend an institution in a given year is higher or lower than what administrators estimated in their annual budgets. If an institution has higher-than-estimated enrollment, their fee-for-service contract funding is reduced, and it becomes difficult to cover additional tuition stipends.

Also revealed through the audit is that the Department of Higher Education cannot be “reasonably assured” that COF stipends are paid only to eligible participants. A review of 50 sampled students found that three of them were actually ineligible to receive the $4,300 in stipends. To be eligible, students must be classified as Colorado residents.

Given the findings, auditors recommend that the Department of Higher Education submit budget requests that reflect stipend amounts that keep pace with inflation and enrollment, and devise a more precise method for determining fee-for-service contract funding amounts. The audit also recommends that the Department of Higher Education develop a risk-based monitoring process to ensure stipends are paid on behalf of eligible students, and that it updates policies and guidance for institutions to follow when issuing waivers of statutory stipend limits.

Auditors also said that higher education officials could improve performance contracts by creating “measurable and meaningful” goals, and monitoring institutional performance in a “timely manner.”

Lt. Gov. Joe Garcia, executive director of the Department of Higher Education, said the audit acknowledges funding challenges, but said there is room for improvement so that the state rewards performance and outcomes.

“We are pleased with the audit findings regarding improving the effectiveness of measuring college and university performance in Colorado, which is entirely in alignment with the work currently underway by the Colorado Commission on Higher Education and the institutions…” Garcia said in a statement. “This audit serves as a reminder that, as we work together with the college and universities in developing a performance based funding system, it is critical that we truly fund performance.”

PERA annual review

Also released by the Legislative Audit Committee on Monday was an annual audit of the Public Employees' Retirement Association of Colorado, or PERA.

The pension system includes about 483,467 members and covers state employees, including teachers, state troopers and local and state government employees, to name a few.

The audit, conducted by national audit firm KPMG, did not find any weaknesses in PERA’s internal controls or accounting policies and practices, and offered no significant recommendations moving forward.

“A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. We noted no instances involving the internal control over financial reporting and its operation that we consider to be a material weakness,” auditors state in their report.

The audit was released along with PERA’s annual financial report, which found that despite an uncertain future and troubling economic climate, PERA was able to weather the storm and show hope for the future.

The value of all funds administered by PERA declined about $1.2 billion, or 2.8 percent, to around $39.9 billion, according to PERA’s annual report. But in 2011, there was net investment income of $724.6 million compared with total member contributions of $855 million and employer contributions of more than $1 billion. PERA officials point out that investment portfolio income is a significant source of revenue for the system. Investment earnings account for nearly $3 out of every $5 in the PERA trust funds and reduce the amount that taxpayers and public employees pay to support PERA benefits.

But the KPMG audit noted that views differ on what rates of return will be over the next 30 years. “Based on all the data available, both optimistic and pessimistic, we believe the established rate of return is within a reasonable range of possible scenarios,” states the report.

PERA officials believe that based on the results of the 2011 valuations and the audit findings of no internal management issues, it is entirely possible to achieve the goal of 2010’s Senate Bill 1, which sought to bring the pension plan to fully funded status. The bill set up a plan for paying for PERA’s unfunded liabilities in 30 years or less.

“This year’s clean audit recognizes the high standards that we strive to meet each and every day at Colorado PERA,” said Greg Smith, interim executive director. “KPMG’s clean audit report of PERA reinforces our efforts to be the best run financial entity in the country.”

A sharp decline in PERA’s assets over the past several years has left the retirement fund in deep financial trouble, facing over $21 billion in unfunded liabilities.

As a result, not everyone is as optimistic as PERA officials, especially Republican lawmakers.

Several pieces of legislation put PERA in the spotlight again this year, including attempts to reduce employer contributions to PERA’s health care fund, which critics argued would have eliminated health care subsidies provided to retirees.

Other failed attempts at reforming PERA this year included proposals to modify how benefit amounts are calculated, and a separate bill that would have changed the composition of PERA’s Board of Trustees.

Rep. Jim Kerr, R-Littleton, had sponsored the bill that would have changed the PERA board’s composition. On Monday, Kerr, a member of the Legislative Audit Committee, continued to press PERA officials on their ability to bring solvency to the retirement fund.

Kerr pointed out that the state’s rate of return over the last decade is less than 6 percent. He asked Smith why PERA administrators are using a rate of 8 percent and haven’t modified their projections to reflect the current rate of return.

“Why does the board continue to use a number that hasn’t been sustained for 10 years?” asked Kerr. “I’m perplexed by a board who should be looking at the best interests of the trust and long-term returns from the trust, why would they continue using a number that hasn’t been achieved?”

Smith answered the question, pointing out that PERA board members have studied the issue closely and received extensive professional input from financial advisers. “The recommendations from the experts that have been brought before the board have supported the 8 percent,” he replied.

An inquisitive Kerr still continued the point, asking Smith, “Are these the same type of experts that run the city of San Bernardino?” The lawmaker was referring to the California city that is taking steps to declare bankruptcy.

“I don’t know who the actuaries or the investment consultants are for San Bernardino,” Smith again reluctantly replied.

For PERA officials, Republicans are hammering the point at a time when the system’s internal operations have proven to be clean. Carole Wright, chairwoman of PERA’s board, was sure to point out the successes of PERA’s management.

“I’m delighted that the auditors, through a rigorous and thorough process, have identified no material weaknesses in PERA’s financial reporting,” said Wright. “It isn’t a surprise because PERA has long been focused on excellence — whether it’s transparently reporting our finances, investing for our members’ retirements, or in delivering customer service.”