TEXAS GUARANTEED TUITION PLAN ACTUARY S REPORT ON PROGRAM SOUNDNESS

TEXAS GUARANTEED TUITION PLAN ACTUARY S REPORT ON PROGRAM SOUNDNESS AUGUST 31, 2014 October 2014

Texas Guaranteed Tuition Plan Actuary s Report on Program Soundness August 31, 2014 Contents Page Section I Executive Summary 1 Section II Summary of Contract Data and Current Assets 4 Section III Plan Description 7 Section IV Actuarial Methods and Assumptions 9 Section V Soundness of the Plan as of August 31, 2014 12 Section VI Sensitivity Testing 17 Section VII Changes in Surplus 18 Appendix A Active Contract Counts 20 Appendix B Matriculation Information 22

Section I Executive Summary Adequacy of the Fund As of August 31, 2014, the Plan had an unfunded liability of $568,170,794. The unfunded liability represents the difference between the sum of the market value of the assets and the present value of the expected future contract payments and the sum of the present value of the expected future tuition and required fees, refunds and expenses. The unfunded liability is $44,325,655 lower than last year s unfunded liability of $612,496,449, and $72,500,492 less than the expected unfunded liability of $640,671,286. The three primary sources of change are: a) Investment asset performance of 8.44%, higher than the assumed investment return of 4.60%. The result was an asset gain of $41.23 million. This estimate may vary from the actual asset performance as determined by the investment consultant. b) Tuition Increases: Increases in tuition were less than expected and resulted in a $15.33 million decrease in the unfunded liability. c) Changing the investment return assumptions for future years resulted in a $21.82 million gain. The table below summarizes current balances: Assets Investments $ 1,073,660,332 Future Contract Collections 34,596,202 Total Assets 1,108,256,534 Liabilities and Surplus Future Contract Benefits and Expenses $ 1,676,427,328 Deficit of Assets over Liabilities (568,170,794) Total Liabilities and Surplus (Deficit) 1,108,256,534 The program s funded ratio is 66.1%. This represents a reduction of 0.3% from last year s ratio of 66.4%. The assumptions used to measure the adequacy of the Plan, which were approved by the Board, are stated in Section III. The most important assumptions are: The investment yield; The rate of increase in tuition/fees; Withdrawal rates; Future new entrants; and Expenses. 1

Investment Yield The investment yield is the expected long-term net earnings rate of return on the assets. The actuarial valuation of the Plan was determined using the schedule of interest rates found in Section IV. We also assumed the Plan is exempt from federal income tax. It is important to highlight the sensitivity of this analysis to this assumption. As pointed out subsequently, a 25- basis points shortfall in such a goal would place the Plan in a much less favorable position. Additionally, the nature of this type of program involves payment of benefits at fixed future points in time, subjecting the Plan to greater than average investment risk due to short-term fluctuation and in matching investment maturities with expected outlays. Rate of Increase in Tuition/Fees Under statutory changes approved in 2003 by the Texas Legislature, the amount of tuition and required fees paid for each beneficiary who uses a Public Senior College contract to attend a Public Senior College will be the lesser of: 1) actual tuition and required fees or 2) the weighted average tuition and required fees of all Texas public 4-year colleges and universities. Under this formula, Texas colleges and universities must accept this amount as payment in full for a beneficiary who attends a Public Senior College using plan benefits. After careful analysis, the Texas Prepaid Higher Education Tuition Board (Board) selected tuition and fee increase assumptions above an expected rate of inflation. The assumed annual increases were 6.3% for Public Senior Colleges, 5.2% for Junior Colleges and 7.3% for Private Universities. This assumption was unchanged from the prior valuation. Future New Entrants New contracts in future years would serve: a) to expand the base for spreading fixed expenses; b) to increase the likelihood that the Plan average tuition cost will not exceed Weighted Average Tuition (WAT) by a significant amount; and c) to ensure a large enough fund balance to invest profitably. However, adding new entrants could also expose the Plan to increased unfunded liabilities if either tuition inflation exceeds the assumption or investment returns are less than the assumption used to price the contracts. In 2003 the Board suspended new enrollment in the Plan. For purpose of the actuarial analysis in this report, it is assumed that no future contracts will be sold. Expense In our analysis we provide an expense provision for records administration charges and for general expenses. The provision for fiscal year 2014 is $32 per contract that we assumed will increase 3.5% per year for inflation. This assumption was unchanged from the prior valuation. Bias Against the Program by Purchasers and Beneficiaries Bias is the result of rational decisions by purchasers and beneficiaries. Bias against the Plan is expected and is intrinsic to the purpose of a prepaid tuition program. A basic reason for establishing the Texas Guaranteed Tuition Plan is that the purchase of a contract will increase the commitment of the purchaser to a belief the beneficiary will become qualified to enter college and that the ownership of a contract will cause the beneficiary to be comfortable with a 2

commitment to academic achievement. Bias against the Plan causes the amount the Plan pays to exceed the WAT. WAT is the average tuition/fees weighted by the number of full-time equivalent students. Bias refers to the degree to which the Texas Guaranteed Tuition Plan beneficiaries choose to attend the higher priced schools and so cause the Plan to pay out more tuition/fee benefits. According to the amendments to state law, under statutory changes approved in 2003 by the Texas Legislature, the amount of tuition and required fees paid for each beneficiary who uses a Public Senior College contract to attend a Public Senior College will be the lesser of: 1) actual tuition and required fees or 2) the weighted average tuition and required fees of all Texas public 4-year colleges and universities. Under this formula, Texas public colleges and universities must accept this amount as payment in full for a beneficiary who attends a Public Senior College using plan benefits. The statutory change removes the bias against the Plan by the Plan beneficiaries choosing to attend the higher priced school, because the maximum tuition/fees payout is limited by the WAT. However, these amendments do not apply to community colleges. The assumed bias load was 10.0% for community colleges. This assumption was unchanged from the prior valuation. Use of Report This report is prepared solely to assist the Board of the Texas Guaranteed Tuition Plan in evaluating the actuarial soundness of the Plan each year. The report is not intended and is not suitable for any other purpose. Accordingly, Sherman Actuarial Services does not intend this report or the data contained therein to be used as personal financial advice. Other readers of this report should consult with their own financial advisors regarding the application of this report to their particular circumstances. Qualifications Daniel Sherman is an Associate of the Society of Actuaries, and a Member of the American Academy of Actuaries. He is the actuary for the Texas prepaid tuition plans, and is the current actuary for three other state prepaid tuition plans. He meets the Qualification Standards of the Academy to render the actuarial opinions contained herein. This report has been prepared in accordance with all applicable Actuarial Standards of Practice, and we are available to answer questions concerning it. All assumptions were approved by the Board and in my opinion are reasonable. SHERMAN ACTUARIAL SERVICES, LLC Daniel Sherman, ASA, MAAA, EA CEO and Consulting Actuary 3

SECTION II Summary of Contract Data and Current Assets Contract Data A contract inventory report as of August 31, 2014 was extracted from Plan data. The contract inventory report presents the number of credit hours issued net of cancellations by contract type, number of years of tuition, grade or age of beneficiary and payment option. The contracts issued in 1996 are for 30 credit hours per year. The contracts issued after 1996 are for 32 credit hours per year. The credit inventory (number of hours) as of August 31, 2014 is summarized in the following table. Plans Lump Sum Five-Year Monthly Ten-Year Monthly Payment Options Extended Five-Year Monthly Annually Ten-Year Annually Extended Annually 1996 Enrollment Sr. College 139,285 111,874 159,618 180,203 - - 19 Jr. College 1,452 2,360 3,520 6,046 - - - Jr. & Sr. College 9,131 11,760 18,369 33,665 - - 48 Private College 1,220 1,681 1,706 2,185 - - - Total 1996 151,089 127,675 183,213 222,099 - - 67 1997 Enrollment Sr. College 167,965 102,540 143,462 124,960 - - 163 Jr. College 1,399 2,067 1,819 3,288 - - - Jr. & Sr. College 7,131 9,752 14,903 14,885 - - 128 Private College 8,459 1,823 1,274 1,313 - - - Total 1997 184,953 116,182 161,458 144,446 - - 291 1998 Enrollment Sr. College 157,148 48,665 105,069 93,244 47,353 20,327 10,046 Jr. College 1,279 793 1,141 1,778 132 171 34 Jr. & Sr. College 5,811 4,163 9,069 9,748 2,243 1,072 845 Private College 3,633 915 610 1,417 1,027 406 128 Total 1998 167,870 54,535 115,889 106,187 50,755 21,976 11,053 1999 Enrollment Sr. College 129,253 37,610 92,619 92,461 38,578 17,123 9,179 Jr. College 692 502 1,456 1,234 261-3 Jr. & Sr. College 4,644 3,466 8,143 9,292 1,213 931 248 Private College 2,648 288 970 1,287 2,119 179 393 Total 1999 137,238 41,866 103,188 104,274 42,171 18,233 9,824 2000 Enrollment Sr. College 168,585 67,052 136,462 131,508 53,627 23,409 16,507 Jr. College 1,159 1,077 1,469 2,047 415 78 293 Jr. & Sr. College 6,280 6,966 13,709 13,281 2,095 1,719 987 Private College 2,664 411 1,012 907 2,039 576 280 Total 2000 178,688 75,506 152,651 147,743 58,175 25,782 18,067 Sum of values may not match totals due to rounding. 4

Plans Lump Sum Five-Year Monthly Ten-Year Monthly Payment Options Extended Monthly Five-Year Annually Ten-Year Annually Extended Annually 2001 Enrollment Sr. College 179,711 79,826 135,115 182,927 79,324 42,025 27,139 Jr. College 2,416 1,675 1,774 5,752 228 585 113 Jr. & Sr. College 12,778 8,993 19,806 32,759 4,775 3,490 3,251 Private College 4,615 1,100 961 2,642 1,943 1,207 442 Total 2001 199,520 91,594 157,656 224,079 86,270 47,307 30,945 2002 Enrollment Sr. College 223,065 78,674 137,763 169,567 103,152 55,496 32,014 Jr. College 2,997 2,682 3,105 4,455 235 587 642 Jr. & Sr. College 12,108 8,477 22,334 22,062 6,386 5,773 3,238 Private College 5,709 448 1,831 2,828 2,139 1,182 700 Total 2002 243,879 90,281 165,033 198,913 111,912 63,038 36,594 2003 Enrollment Sr. College 556,666 91,713 179,276 277,113 196,565 110,192 75,347 Jr. College 7,068 2,064 2,890 5,202 1,065 610 691 Jr. & Sr. College 25,932 10,099 22,782 39,716 11,595 9,518 6,555 Private College 17,928 2,083 1,440 2,903 7,791 1,402 1,235 Total 2003 607,594 105,960 206,388 324,933 217,015 121,722 83,828 Total Enrollment Sr. College 1,721,678 617,954 1,089,384 1,251,982 518,599 268,572 170,414 Jr. College 18,463 13,220 17,175 29,801 2,336 2,031 1,776 Jr. & Sr. College 83,816 63,676 129,114 175,408 28,307 22,503 15,301 Private College 46,875 8,749 9,804 15,483 17,057 4,952 3,178 Total Enrollment 1,870,831 703,599 1,245,476 1,472,675 566,299 298,058 190,670 Sum of values may not match totals due to rounding. The number of active contract counts (for all enrollment years combined) by plan type and projected year of matriculation is included in Appendix A. 5

Current Assets The assets are administered by the Board and invested by external managers with whom the Board contracts. The value of the assets as of August 31, 2014 is $1,073,660,332. Asset totals shown below do not include securities lending collateral and tuition contracts receivable. Assets held as of August 31, 2014: Cash in State Treasury $ 5,405,525 Investments 1,065,537,883 Interest & Dividends Receivable 3,624,433 Less Accounts Payable (907,509) Total Assets $1,073,660,332 It is assumed that this mix will produce a net annual investment return of 4.50% in fiscal year 2015. 6

SECTION III Plan Description Overview The Texas Guaranteed Tuition Plan (Plan) is an Internal Revenue Code Section 529 prepaid tuition plan. It allows the contract holder to lock in the cost of undergraduate college tuition and required fees, thus providing protection against future tuition inflation. At matriculation the Plan will pay, based on the number of credit hours purchased, either 1) the weighted average or actual cost of college tuition and required fees at Texas public colleges and universities, whichever is less, or 2) the estimated average private tuition and required fees at Texas private colleges and universities. The contract holder buys credit hours representing a fixed amount of resident tuition and required fees. When the beneficiary is ready for college, all or a portion of the tuition and required fees will be covered at all four- or two-year public colleges and universities in Texas. The portion of the fees covered will vary based on the type of contract purchased. The contract can also be used to help pay for tuition at all private colleges in Texas and out-of-state institutions. Texas public colleges and universities are required by statute to accept the benefit payments as payment in full for the hours purchased. Eligibility At the time of enrollment, the beneficiary must be a Texas resident or his/her parent must be both the purchaser and a Texas resident. Contract Types The fund will pay the maximum number of credit hours listed below for the type of plan purchased: Junior College Plan Purchaser can prepay up to 64 credit hours of tuition and required fees at any public junior or community college in the state. Senior College Plan Purchaser can prepay up to 160 credit hours of tuition and required fees at any public senior college or university in the state. Junior-Senior College Plan Purchaser can prepay up to 64 credit hours of tuition and required fees at any public, community or technical college in the state. In addition, the purchaser can prepay up to 64 credit hours of tuition and required fees for any public senior college or university in the state. Thus, a total of 128 credit hours can be purchased. Private College Plan Provides an estimated average private tuition and required fees, as determined by the Board each year. This amount is applied toward any of Texas private or independent colleges for up to 160 credit hours. If tuition and required fees at the private college chosen exceed the estimated average, the beneficiary is responsible for the remaining balance. If the college charges are less than the estimated average, the purchaser can 7

request a refund of the difference. Otherwise, only the hours necessary to pay the student s tuition and required fee charges will be deducted from his or her plan. Payment Plans The Plan offers two types of payment plans: Lump Sum and Installment: Lump Sum Entire purchase made in one lump sum payment. Installment Plan Pay every month or once a year. Payment period of 5 years, 10 years, or the number of years until the beneficiary s projected high school graduation date. Refunds The purchaser may receive a refund on the unused portion of the contract. 8

SECTION IV Actuarial Methods and Assumptions Actuarial Methods The actuarial method projects the expected future cash flows from contract payments, tuition and refund benefits and expense. These projected future cash flows are discounted to the present and compared to the market value of the assets to indicate the soundness of the Plan. The development of the measurement of soundness has seven stages: Develop base line average tuition and required fees from data provided by the Plan; Project average tuition and required fees through the expected term of the contracts, based on assumptions as to future tuition increases; Determine the nominal cost of expected future tuition and required fees, based on the contract inventory and assumptions as to mortality, disability, voluntary surrender and utilization of benefits; Determine the nominal cost of expected future administrative expenses, based on the contract inventory and the records administration fee schedule, as well as assumptions as to inflation and utilization of benefits; Project future contract payments based on the contracts and assumptions as to mortality, disability and voluntary surrender; Determine the present value of expected future benefits, expenses and contract payments, based on the discount rate assumption; and As the indication of soundness, measure the surplus or deficit, which is the difference between the sum of the market value of the assets and the present value of the expected future contract payments and the sum of the present values of the expected future tuition and required fees, refunds and expenses. Actuarial Assumptions Necessary adjustments to reflect new information were made to this year s assumptions. The assumptions were approved by the Board. The revisions to the assumptions, if any, are noted herein. Tuition/Fee Increase Assumed annual increases in future tuition and required fees remained unchanged from the prior valuation: Public Senior College Junior College Private University 6.3% 5.2% 7.3% 9

Investment Yield The assumed annual net investment yield is illustrated in the following table: Plan Year Beginning Current Valuation Prior Valuation 2014 4.50% 4.40% 2015 4.20% 4.10% 2016 4.10% 3.90% 2017 3.80% 3.60% 2018 3.50% 3.20% 2019 3.20% 2.60% 2020+ 3.00% 2.60% Expenses In our analysis we provide an expense provision for records administration charges and for general expense. The provision for fiscal year 2014 is $32 per contract, which we assume will increase 3.5% per year for inflation. This assumption remains unchanged from the prior valuation. Future Participation in the Program It is assumed that no new contracts will be issued in the future. Mortality and Disability Mortality rates for beneficiaries are assumed to follow the 1990 U.S. Life Tables. 10

Early Voluntary Surrender of Contract We assumed the following percentages of the public senior college contracts in effect at the beginning of the year would be surrendered during the year. We use similar estimates for the other college types, based on empirical evidence. This assumption remains unchanged from the prior valuation. Years From Purchase Lump Sum Five-Year Payments Ten-Year Payments Extended Payments 1 to 2 2.50% 6.30% 8.80% 13.70% 2 to 3 1.80% 3.60% 5.30% 6.00% 3 to 4 0.40% 1.50% 2.30% 3.00% 4 to 5 0.50% 1.00% 2.00% 3.00% 5 to 6 0.50% 0.50% 1.30% 2.00% After 6 Years 0.80% 1.30% 0.70% 2.30% Matriculation Percent We assumed the beneficiary of a contract not voluntarily surrendered matriculates at the date specified in the contract. This assumption remains unchanged from the prior valuation. Dropout Rate We assumed beneficiaries use the number of credits specified in the contract. Utilization of Credits We assumed beneficiaries use the credits specified according to the following schedule. This assumption remains unchanged from the prior valuation. Type of Contract First Year Second Year Third Year Fourth Year Fifth Year Sixth Year Five Year Contracts 20% 20% 20% 20% 15% 5% Four Year Contracts 25% 24% 23% 20% 8% 0% Three Year Contracts 30% 30% 30% 10% 0% 0% Two Year Contracts 50% 40% 10% 0% 0% 0% One Year Contracts 80% 20% 0% 0% 0% 0% Frequency of Beneficiary Replacement We assumed no replacement of beneficiaries. Bias We assumed no bias load for universities and a bias load of 10.0% for community colleges. This assumption remains unchanged from the prior valuation. 11

SECTION V Soundness of the Plan as of August 31, 2014 As a measure of the soundness of the Plan as of August 31, 2014, we determined the difference between the value of the assets and the actuarial present value of the future contract payments and the actuarial present value of future benefits and expenses. This measurement of soundness is summarized on the following pages. A projection of the status of the Plan at each future anniversary date through the life of these contracts is presented on page 15, labeled Present Value of Assets and Liabilities. The projections of future benefits and expenses and contract payments are presented on page 16, labeled Expected Annual Cash Flows. Our measurement of the present value and projections are based on asset and contract information provided and on the assumptions chosen by the Board. 12

Funded Status The liabilities of the trust fund exceed the value of assets as of August 31, 2014 (including the value of future payments by contract purchasers) by $568.2 million. The funded ratio, assets divided by liabilities, is equal to 66.1%. Asset totals shown below do not include securities lending collateral. The assumptions used to perform the actuarial valuation of the fund were approved by the Board and are described in Section IV. Total: $1,108,256,534 Total: $1,676,427,328 Future Contract Payments $34,596,202 Tuition/Fee Payments $1,676,427,328 Current Assets $1,073,660,332 Assets Liabilities 13

Cash Flow Projection The expected income and disbursements of the trust fund, based on the assumptions used in the actuarial valuation, and the current group of contract beneficiaries, are shown below. These amounts are cash amounts, not present value amounts. Millions 1,500 1,000 Assets at beginning of year Payments Out of Fund 500 Payments into Fund + Investment Income 0 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24 '25 '26 '27 '28 '29 '30 '31 '32 '33 '34 '35 500 1,000 1,500 14

Present Value of Assets and Liabilities 8/31 of Year Present Value of Future Benefit and Expenses Value of Assets and Present Value of Future Collections Deficit of Assets to Liabilities 2014 1,676,427,328 1,108,256,534 (568,170,794) 2015 1,479,474,039 885,735,560 (593,738,480) 2016 1,281,275,403 662,599,907 (618,675,496) 2017 1,079,711,470 435,670,278 (644,041,191) 2018 895,788,037 227,273,281 (668,514,756) 2019 713,145,728 21,232,956 (691,912,773) 2020 552,592,797 (161,461,184) (714,053,982) 2021 393,398,049 (342,077,552) (735,475,601) 2022 243,761,704 (513,778,165) (757,539,869) 2023 137,611,092 (642,654,974) (780,266,065) 2024 65,407,087 (738,266,960) (803,674,047) 2025 23,300,140 (804,484,128) (827,784,269) 2026 7,279,332 (845,338,465) (852,617,797) 2027 4,281,641 (873,914,690) (878,196,331) 2028 3,152,992 (901,389,228) (904,542,220) 2029 2,339,920 (929,338,568) (931,678,487) 2030 1,673,753 (957,955,089) (959,628,842) 2031 1,199,335 (987,218,372) (988,417,707) 2032 793,179 (1,017,277,059) (1,018,070,238) 2033 456,268 (1,048,156,077) (1,048,612,345) 2034 245,599 (1,079,825,117) (1,080,070,716) 2035 127,482 (1,112,345,356) (1,112,472,837) Sum of values may not match totals due to rounding. 15

Expected Annual Cash Flows Fiscal Year Ending Benefit Payments and Expenses Contract Payment Receipts Annual Cash Flow 2015 266,107,353 10,154,277 (255,953,076) 2016 254,393,235 8,520,202 (245,873,033) 2017 248,298,901 6,855,819 (241,443,082) 2018 219,823,006 5,214,363 (214,608,643) 2019 209,167,368 3,753,017 (205,414,352) 2020 179,198,859 2,397,012 (176,801,847) 2021 171,787,093 1,210,283 (170,576,809) 2022 157,768,870 15,197 (157,753,673) 2023 110,854,975 0 (110,854,975) 2024 74,571,600 0 (74,571,600) 2025 43,052,712 0 (43,052,712) 2026 16,334,305 0 (16,334,305) 2027 3,142,088 0 (3,142,088) 2028 1,228,304 0 (1,228,304) 2029 886,928 0 (886,928) 2030 719,577 0 (719,577) 2031 512,726 0 (512,726) 2032 432,130 0 (432,130) 2033 352,577 0 (352,577) 2034 219,370 0 (219,370) 2035 122,776 0 (122,776) Sum of values may not match totals due to rounding. Note: The amounts shown above are annual expected amounts for the year corresponding to the Fiscal Year Ending column. They are not cumulative amounts. In addition, Payment Receipts are frontloaded. Therefore, the Expected Annual Cash Flows project positive cash flows in the early years and negative in the later years. It is expected that positive cash flows prior to Fiscal Year Ending 2015 would be invested to cover the negative cash flows in future years. 16

SECTION VI Sensitivity Testing The Program operates under conditions of risk and uncertainty. For example, while it is assumed the assets of the fund will earn the annual net rate found in Section IV, we also expect actual returns to vary from year to year. To accept the reasonableness of the basis for the measurement of the soundness, it is useful to know how the status of the fund may be affected by the vagaries of the markets and other factors. We have rerun the valuation under the following alternative scenarios, and the deficit as of August 31, 2014 under each of these scenarios is presented in the following table: Scenarios Deficit Baseline 568,170,794 Tuition increases are 25 basis points higher in each future year than assumed 581,485,085 The investment return is 25 basis points lower than assumed 581,591,397 Tuition increases are 25 basis points higher in each future year and the investment return is 25 basis points lower than assumed 595,089,312 Tuition increases are 25 basis points lower in each future year than assumed 555,009,388 Tuition increases are 25 basis points lower in each future year and the investment return is 25 basis points lower than assumed 568,249,020 The investment return is 50 basis points lower than assumed 595,225,152 The investment return is 75 basis points lower than assumed 609,076,472 The investment return is 100 basis points lower than assumed 623,149,877 Tuition increases are 50 basis points higher in each future year than assumed 594,954,201 Tuition increases are 75 basis points higher in each future year than assumed 608,580,110 Tuition increases are 100 basis points higher in each future year than assumed 622,364,805 17

SECTION VII Changes in Surplus Adequacy of the Fund As of August 31, 2014, the Plan had an unfunded liability of $568,170,794. The unfunded liability represents the difference between the sum of the market value of the assets and the present value of the expected future contract payments and the sum of the present value of the expected future tuition and required fees, refunds and expenses. The unfunded liability is $44,325,655 lower than last year s unfunded liability of $612,496,449, and $72,500,492 less than the expected unfunded liability of $640,671,286. The three primary sources of change are: a) Investment asset performance of 8.44%, higher than the assumed investment return of 4.60%. The result was an asset gain of $41.23 million. This estimate may vary from the actual asset performance as determined by the investment consultant. b) Tuition Increases: Increases in tuition were less than expected and resulted in a $15.33 million decrease in the unfunded liability. c) Changing the investment return assumptions for future years resulted in a $21.82 million gain. Following is a comparison of the assumed and the actual results for the year ended August 31, 2014. Investment Return Assets performed better than expected during the 2014 fiscal year, returning 8.44% versus the prior year assumption of 4.60%. The result was an asset gain of $41.23 million. The extent that investment experience exceeds the assumption will result in an actuarial gain. Tuition and Required Fee Increase The Weighted Average Tuition (WAT) for Senior College increased from $8,741 to $9,175, an increase of 4.97% compared to the assumed 6.30% increase. The Junior College WAT increased from $2,802 to $2,888, an increase of 3.06% compared to the assumed 5.20% increase. The Private College WAT increased from $23,673 to $24,502, an increase of 3.50% compared to the assumed 7.30% increase. The tuition experience resulted in an actuarial gain of approximately $15.33 million. Bias Against the Program by Purchasers and Beneficiaries The design of the program removed the bias relating to beneficiaries of Texas Guaranteed Tuition Plan contracts attending relatively higher priced universities. However, there was still a -1.71% bias for community colleges as calculated by comparing the actual tuition and fee payment for the contract beneficiaries who attend community colleges to the expected payout based on program assumptions. Therefore the bias was 11.71% less than the 10% expected by last year s valuation, resulting in an actuarial gain of $733,000. Expense The assumption for records administration charges and general expenses remains at $32 per contract for fiscal year 2014, with an increase of 3.5% per year in each future year for inflation. The actual expenses were greater resulting in a loss of $1,005,000. 18

Voluntary Withdrawal and Contract Reductions and Matriculation There were approximately 1,902 contracts surrendered during the year by contract holders on behalf of beneficiaries who have not yet graduated from an institution of higher learning. This is more than the 1,040 expected, creating a gain and decreasing the present value of expected payments by contract holders. Beneficiaries delayed entry into schools or took fewer hours than expected. Since the tuition increases exceeded the assumed investment return, this created an actuarial loss. Gain/Loss Summary During the last year, the plan experienced a $50.68 million actuarial gain. The sources of the (gain)/loss are as follows: (Gain) / Loss (millions) Asset Gain (8.44% return) $(41.23) Tuition Inflation Gain (15.33) Expense 1.00 Bias (0.73) Withdrawal and Matriculation 5.61 Total (Gain) / Loss $(50.68) Assumption Change Changes to the investment return assumption resulted in a $21.82 million decrease in the unfunded liability. When combined with the actuarial gain of $50.68 million, results in the total unexpected decrease in unfunded liability of $72.50 million. 19

TEXAS GUARANTEED TUITION PLAN Active Contract Counts for All Enrollment Periods As of August 31, 2014 Appendix A Matriculation Year 1 2 3 4 5 6 7 Plan 8 9 10 11 12 13 14 15 1997 1998 1999 1 2000 4 2001 3 2002 1 2 1 2 1 2003 3 6 1 3 1 2004 12 53 4 4 6 4 12 2005 134 906 22 69 20 26 5 13 2 1 67 21 2006 169 1321 40 112 50 30 5 25 1 1 2 113 25 2007 191 1675 54 121 42 40 12 31 5 1 2 139 30 2008 273 2052 65 151 57 55 6 47 2 4 3 175 32 2009 288 2500 80 231 76 78 16 46 1 3 1 1 253 28 2010 359 3405 103 255 117 92 20 52 1 4 1 2 304 44 2011 455 4225 125 329 106 110 17 70 1 2 3 4 311 66 2012 538 4350 172 472 162 115 18 93 7 9 11 1 338 64 2013 542 4464 155 491 210 149 40 70 3 8 7 5 349 60 2014 532 4431 167 467 217 165 50 78 1 4 5 1 346 30 1 2015 399 3677 118 347 179 135 29 65 3 11 5 457 4 2016 370 3375 123 329 138 111 22 57 8 9 5 1 518 2017 331 2975 86 268 144 109 26 54 5 5 495 2018 328 2750 100 285 166 97 25 37 1 6 2 474 2 2019 299 2364 76 234 133 68 18 39 1 5 1 426 1 2020 223 1899 74 196 132 55 11 33 2 5 4 1 353 2021 250 2261 86 213 144 65 14 29 2 3 14 463 2022 5 50 2 4 2 2 5 2023 2 27 4 5 2 1 1 3 2024 2 20 2 2 2 1 2 2025 1 15 1 3 4 1 1 2026 2 10 1 2 1 2027 1 7 1 1 2028 3 Total 5710 48830 1660 4592 2112 1508 338 840 33 86 66 24 5606 410 1 % of Total 7.92% 67.77% 2.30% 6.37% 2.93% 2.09% 0.47% 1.17% 0.05% 0.12% 0.09% 0.03% 7.78% 0.57% 0.00% Key to Plan Type: 1. Jr/Sr - 2/2 4. Sr - 2 Yr 7. Jr - 1 Yr 10. Pr - 2 Yr 13. Sr - 5 Yr 2. Sr - 4 Yr 5. Sr - 1 Yr 8. Pr - 4 Yr 11. Pr - 1 Yr 14. Sr - 4 Yr +8Hrs 3. Sr - 3 Yr 6. Jr - 2 Yr 9. Pr - 3 Yr 12. Jr/Sr - 2/2 + 4Hrs 15. Sr - 4 Yr + 6Hrs Sum of values may not match totals due to rounding. 20

TEXAS GUARANTEED TUITION PLAN Active Contract Counts for All Enrollment Periods As of August 31, 2014 Appendix A Matriculation Plan Year 16 18 21 23 24 31 34 35 Total % of Total 1997 0 0.00% 1998 0 0.00% 1999 1 0.00% 2000 4 0.01% 2001 3 0.00% 2002 7 0.01% 2003 14 0.02% 2004 95 0.13% 2005 1 1 1 1289 1.79% 2006 1 2 1 2 2 1902 2.64% 2007 2 1 1 1 7 2355 3.27% 2008 1 1 5 10 2939 4.08% 2009 1 1 4 2 3610 5.01% 2010 1 1 5 12 4778 6.63% 2011 1 1 2 1 4 8 5841 8.11% 2012 1 2 2 5 14 6374 8.85% 2013 1 7 3 2 2 7 8 6583 9.14% 2014 1 1 1 11 6 6515 9.04% 2015 1 5 8 5443 7.55% 2016 2 7 5075 7.04% 2017 12 4510 6.26% 2018 14 4287 5.95% 2019 1 8 3674 5.10% 2020 1 10 2999 4.16% 2021 11 3555 4.93% 2022 70 0.10% 2023 45 0.06% 2024 31 0.04% 2025 1 27 0.04% 2026 16 0.02% 2027 10 0.01% 2028 3 0.00% Total 3 4 17 9 10 3 53 140 72,055 100.00% % of Total 0.00% 0.01% 0.02% 0.01% 0.01% 0.00% 0.07% 0.19% 100.00% Key to Plan Type: 16. Sr - 4 Yr + 4Hrs 23. Sr - 1 Yr + 2Hrs 34. Sr Add'l Year 18. Sr - 3 Yr + 6Hrs 24. Pr - 4 Yr + 8Hrs 35. Pr - 5 Yr 21. Sr - 2 Yr + 4Hrs 31. Pr - 2 Yr + 4Hrs Sum of values may not match totals due to rounding. 21

Texas Guaranteed Tuition Plan Contracts Matriculation Information FY 2014 Payments to Community Colleges Appendix B Number of Semester Tuition and Average Paid Per Contracts Hours Fees Paid Semester Hour Texas Community College Alamo Community College District 362 2,831 586,961 207.33 Alvin Community College 50 337 66,021 196.19 Amarillo College 43 390 59,224 151.92 Angelina College 16 87 19,217 220.74 Austin Community College 578 4,352 976,495 224.39 Blinn College 698 5,511 1,269,552 230.39 Brazosport College 19 175 25,177 144.10 Brookhaven College 51 196 42,676 218.22 Cedar Valley College 14 55 8,454 153.06 Central Texas College 24 208 25,949 124.53 Cisco College 13 97 21,659 222.81 Clarendon College 3 27 5,224 197.04 Coastal Bend College 20 211 42,346 200.80 College of the Mainland 33 240 39,646 165.53 Collin County Community College 212 1,279 158,405 123.88 Dallas County Community College LeCroy Center 15 33 8,784 262.85 Del Mar College 71 672 125,467 186.67 Eastfield College 62 364 44,796 123.19 El Centro College 14 45 7,631 169.82 El Paso Community College 56 391 66,319 169.49 Frank Phillips College 8 156 21,943 140.69 Galveston College 14 97 14,961 154.24 Grayson County College 19 188 27,402 145.45 Hill College 23 167 24,604 147.61 Houston Community College 197 1,079 231,543 214.61 Howard College 20 137 29,343 214.57 Kilgore College 37 388 76,259 196.41 Lamar Institute of Technology 23 216 56,832 262.72 Lamar State College Orange 16 177 46,448 261.83 Lamar State College Port Arthur 13 116 28,842 248.43 Laredo Community College 32 376 74,868 199.23 Lee College 23 287 34,908 121.66 Lone Star College System 348 1,988 337,546 169.78 McLennan Community College 88 914 185,649 203.05 Midland College 129 372 89,280 239.84 Mountain View College 22 77 12,859 165.98 Navarro College 52 349 63,166 181.08 North Central Texas College 105 667 136,272 204.40 North Lake College 45 207 37,466 181.20 Northeast Texas Community College 17 145 25,755 177.70 Odessa College 21 187 27,997 149.62 Panola College 9 68 18,007 266.06 Paris Junior College 29 226 27,480 121.85 Ranger College 10 98 19,542 198.50 Richland College 108 512 79,371 155.10 San Jacinto College Central 173 1,258 212,232 168.67 San Jacinto Community College District 3 9 2,548 272.02 South Plains College 118 964 209,489 217.29 South Texas College 64 467 107,038 229.06 Southwest Texas Junior College 23 184 33,758 183.18 Sum of values may not match totals due to rounding. 22

Texas Guaranteed Tuition Plan Contracts Matriculation Information FY 2014 Payments to Community Colleges Appendix B Number of Semester Tuition and Average Paid Per Contracts Hours Fees Paid Semester Hour Texas Community College Tarrant County College Ft. Worth (NW) 38 237 30,944 130.50 Tarrant County College NE Hurst 85 509 64,912 127.48 Tarrant County College SE Campus 56 289 42,069 145.51 Tarrant County College South Campus 32 206 27,030 131.11 Tarrant County College Trinity River Campus 33 230 24,287 105.71 Temple College 38 498 96,796 194.43 Texarkana College 6 77 12,470 161.67 Texas Southmost College 16 92 24,895 270.32 Texas State Technical College Harlingen 23 200 48,760 243.21 Texas State Technical College Marshall 4 21 5,713 273.14 Texas State Technical College Waco 65 809 197,783 244.40 Texas State Technical College West Texas 5 75 20,606 273.15 Trinity Valley Community College 36 313 52,488 167.81 Tyler Junior College 69 780 129,722 166.27 Vernon College 26 256 61,402 240.24 Victoria College 38 336 53,886 160.14 Weatherford College 39 253 49,275 194.58 Western Texas College 36 118 30,357 256.72 Wharton County Junior College 133 1,098 257,865 234.83 Total 4,921 35,976 7,124,671 198.04 Sum of values may not match totals due to rounding. 23

Texas Guaranteed Tuition Plan Contracts Matriculation Information FY 2014 Payments to Proprietary Institutions Appendix B Number of Semester Tuition and Average Paid Per Contracts Hours Fees Paid Semester Hour Texas Proprietary Institutions Alamo Community College Continuing Education 1 5 1,283 265.96 Alvin Community College Continuing Education 1 1 357 273.14 American Intercontinental University - Houston 1 38 10,308 271.26 Art Institute of Austin 23 387 90,931 234.88 Art Institute of Dallas 10 376 102,718 273.02 Art Institute of Fort Worth 1 51 13,931 273.15 Art Institute of Houston 16 271 75,975 280.69 Art Institute of Houston North Campus 3 63 17,288 273.15 Art Institute of San Antonio 7 246 67,046 272.56 Austin Community College Continuing Education 8 37 6,363 169.78 Blinn College Workforce Education 1 3 895 273.12 Brazosport College Continuing Education 1 3 750 273.12 Brookhaven College Continuing Education 2 9 1,420 156.61 Cedar Valley College Continuing Education 2 24 6,514 273.15 Central Texas College Distance Learning 2 25 2,863 114.24 Central Texas College Europe 1 9 2,250 255.39 College of Health Care Professions San Antonio 2 164 33,900 207.33 Collin County Continuing Education 7 78 10,233 130.49 Concorde Career College - Arlington/Grand Prairie 2 37 10,107 273.15 Concorde Career College - Dallas 1 71 7,498 105.71 Concorde Career College - San Antonio 2 95 25,839 273.15 Culinary Institute Alain and Marie LeNôtre (Houston) 1 37 10,090 273.15 Eastfield College Continuing Education 1 6 1,650 270.05 Embry-Riddle Aeronautical University San Antonio 1 33 9,014 273.15 Everest College Fort Worth North Campus 1 8 2,185 273.15 Everest College Fort Worth South Campus 1 15 4,170 273.14 Galen College - San Antonio 3 78 21,985 280.59 Hallmark College 3 158 34,862 220.36 Houston Community College-Cont Ed 2 2 605 273.14 ITT Technical Institute Houston North 1 36 9,833 273.15 ITT Technical Institute Houston West 1 8 2,049 273.15 ITT Technical Institute San Antonio 1 27 7,375 273.15 ITT Technical Institute Waco 1 32 8,853 273.15 Kaplan College Arlington 1 53 14,780 277.34 Kaplan University Dallas 3 73 19,865 271.09 Lamar University Grad & Academic Partnership 12 86 23,182 270.63 Le Cordon Bleu College of Culinary Arts Austin 5 158 43,130 272.88 Le Cordon Bleu College of Culinary Arts Dallas 3 200 42,652 213.66 Lincoln Technical Institute, TX 4 111 30,424 273.15 Lone Star College Continuing Education 1 2 466 273.15 Lone Star College Kingwood Continuing Education 1 10 2,809 273.17 Lone Star College Montgomery Continuing Education 2 17 3,486 209.50 National American University Lewisville Campus 1 35 9,504 271.30 Sum of values may not match totals due to rounding. 24

Texas Guaranteed Tuition Plan Contracts Matriculation Information FY 2014 Payments to Proprietary Institutions Appendix B Number of Semester Tuition and Average Paid Per Contracts Hours Fees Paid Semester Hour Texas Proprietary Institutions National American University Richardson 1 27 7,497 277.67 North Central Texas College Continuing Ed 1 20 1,711 87.58 Sam Houston State University Correspondence Dept. 2 4 1,146 273.12 Sanford Brown College Dallas 1 42 11,174 264.37 South University Austin Campus 2 41 11,199 272.31 Texas A&M Engineering Extension Service TEEX 2 37 10,600 286.70 Texas A&M Engineering Extension Service TEEX EMS 1 7 1,820 273.15 Texas A&M University Graduate Studies 8 119 56,954 477.14 Texas A&M University Health Science Center 36 833 233,706 280.52 Texas Southern University Graduate Students 4 38 18,139 480.32 Texas State Technical College Waco Aviation Division 6 53 14,500 273.15 Texas State University Continuing Education 1 10 2,695 273.16 Texas State University Extension Studies 13 46 12,652 273.15 Texas State University Office of Correspondence 69 294 78,238 266.32 Texas Tech University Grad 3 76 20,705 273.15 Texas Woman's University Graduate Studies 9 49 14,960 303.83 The Golf Academy of America-Dallas 1 40 10,608 267.47 Tyler Junior College Continuing Education 2 12 3,228 269.54 Universal Technical Institute Houston 8 334 97,662 292.07 Universal Technical Institute Irving 4 221 60,456 272.97 University Extension UT Austin 117 307 84,764 276.22 University of Houston Clear Lake Graduate Studies 1 33 9,057 272.62 University of Houston Continuing Education 1 13 3,500 273.16 University of Houston Graduate Studies 1 15 4,023 273.15 University of North Texas Health Science Center 20 328 101,216 308.22 University of Texas at Arlington Academic Partnership 22 221 58,561 265.54 University of Texas at Austin Engineering Co-op Ofc 2 3 860 273.19 University of Texas at Austin Grad Students 11 305 90,319 296.10 University of Texas at Austin in DC 3 49 13,370 273.16 University of Texas at Austin McCombs School of Business 6 167 45,489 271.82 University of Texas at Austin Study Abroad / Intl Office 14 82 22,398 273.15 University of Texas at San Antonio Study Abroad 1 14 4,097 286.70 University of Texas Austin Department of Eastern Studies 1 10 2,732 273.15 University of Texas Health Science Center at Houston 34 759 228,237 300.69 University of Texas Health Science San Antonio 42 750 238,180 317.71 UT in LA 1 12 3,415 286.71 Vet Tech Institute of Houston 5 296 60,722 205.16 Virginia College at Austin 2 21 5,866 273.16 Vista College Lubbock 1 60 16,389 273.15 Weatherford College Continuing Ed 4 62 10,295 165.62 West Texas A&M University Education on Demand 1 2 595 273.19 Total 608 8,992 2,465,171 274.14 Sum of values may not match totals due to rounding. 25

Texas Guaranteed Tuition Plan Contracts Appendix B Matriculation Information FY 2014 Payments to Texas Four-Year Public Universities Number of Semester Tuition and Average Paid Per Contracts Hours Fees Paid Semester Hour Texas Four-Year Public University Angelo State University 146 3,690 912,048 247.19 Lamar University 99 2,133 555,003 260.19 Midwestern State University 89 1,941 471,515 242.95 Prairie View A&M University 30 783 210,627 268.88 Sam Houston State University 455 11,155 2,938,048 263.38 Stephen F. Austin State University 349 8,672 2,315,248 266.98 Sul Ross State University Alpine 26 669 143,940 215.21 Tarleton State University 248 6,169 1,362,036 220.80 Texas A&M International University 36 722 164,306 227.53 Texas A&M University Central Texas 7 93 22,295 239.73 Texas A&M University College Station 3,273 77,237 20,678,520 267.73 Texas A&M University Commerce 114 2,371 515,937 217.59 Texas A&M University Corpus Christi 283 7,129 1,690,215 237.10 Texas A&M University Galveston 114 2,929 756,282 258.17 Texas A&M University Kingsville 76 2,025 464,127 229.20 Texas A&M University San Antonio 34 525 117,163 223.18 Texas A&M University Texarkana 8 114 27,037 237.91 Texas Southern University 11 177 50,483 284.96 Texas State University San Marcos 1,605 37,519 10,019,948 267.07 Texas Tech University 1,680 44,362 11,979,333 270.03 Texas Tech University Health Sciences Center 52 1,293 299,786 231.79 Texas Woman's University 182 3,674 931,408 253.54 University of Houston 682 15,977 4,361,431 272.99 University of Houston Clear Lake 67 1,106 255,639 231.08 University of Houston Downtown 88 1,653 345,912 209.23 University of Houston Victoria 41 771 157,072 203.67 University of North Texas 1,002 23,246 6,241,344 268.49 University of North Texas at Dallas 18 257 56,438 219.78 University of Texas at Arlington 408 8,872 2,387,665 269.13 University of Texas at Austin 2,721 63,515 17,578,419 276.76 University of Texas at Brownsville 45 880 167,967 190.79 University of Texas at Dallas 472 11,134 3,031,311 272.25 University of Texas at El Paso 166 3,510 811,798 231.28 University of Texas at San Antonio 690 16,787 4,474,757 266.57 University of Texas at Tyler 147 3,546 731,679 206.36 University of Texas of the Permian Basin 29 680 143,033 210.40 University of Texas Pan American 176 3,938 811,658 206.13 West Texas A&M University 159 4,096 917,439 223.98 Total 15,828 375,348 99,098,867 264.02 Sum of values may not match totals due to rounding. 26

Texas Guaranteed Tuition Plan Contracts Matriculation Information FY 2014 Payments to Texas Private Institutions Appendix B Number of Semester Tuition and Average Paid Per Contracts Hours Fees Paid Semester Hour Texas Private Institutions Abilene Christian University 102 2,849 763,206 267.87 Amberton University 2 13 3,640 273.15 Arlington Baptist College 2 41 11,375 277.45 Austin College 56 1,819 499,544 274.63 Baptist Health System 2 25 6,692 273.15 Baylor College of Medicine 5 148 51,160 346.66 Baylor Law School 4 36 9,926 273.15 Baylor University 476 13,408 3,955,879 295.03 Concordia University Austin 30 732 206,554 282.07 Criswell College 3 78 21,306 273.15 Dallas Baptist University 40 986 270,977 274.94 Dallas Christian College 1 28 7,605 273.15 Dallas Theological Seminary 4 66 18,028 273.15 East Texas Baptist University 18 519 121,440 234.15 Grace School of Theology 1 7 1,801 269.41 Hardin-Simmons University 55 1,332 378,533 284.19 Houston Baptist University 28 603 152,447 252.82 Howard Payne University 18 551 163,598 296.91 Huston-Tillotson University 2 47 12,838 273.15 Jacksonville College 10 120 24,396 203.40 LeTourneau University 12 384 99,089 258.16 Lubbock Christian University 35 516 132,475 256.83 McMurry University 16 425 98,336 231.63 National American University Allen Campus 1 9 2,458 273.15 Northwestern University School of Law 2 36 10,015 276.26 Northwood University Texas 4 112 30,593 273.15 Our Lady of the Lake University 6 146 52,946 362.64 Parker University 4 155 30,387 196.39 Rice University 90 2,672 829,949 310.55 Schreiner University 27 680 199,773 293.70 South Texas College of Law 11 151 41,268 273.15 Southern Methodist University 131 3,828 1,199,582 313.37 Southwestern Assemblies of God University 10 283 69,780 246.57 Southwestern Baptist Theological Seminary 3 39 10,706 272.05 Southwestern Christian College 1 26 7,216 273.15 Southwestern University 76 2,090 548,856 262.67 St. Edwards University 128 3,366 989,961 294.14 St. Mary's University 40 1,038 361,336 348.26 Texas Christian University 250 7,036 2,151,329 305.76 Texas Lutheran University 37 1,043 261,712 250.91 Sum of values may not match totals due to rounding. 27

Texas Guaranteed Tuition Plan Contracts Matriculation Information FY 2014 Payments to Texas Private Institutions Appendix B Number of Semester Tuition and Average Paid Per Contracts Hours Fees Paid Semester Hour Texas Private Institutions Texas Wesleyan University 18 438 131,321 299.79 Trinity University 98 2,861 888,766 310.70 University of Dallas 27 796 231,940 291.32 University of Mary Hardin-Baylor 52 1,327 345,845 260.55 University of St. Thomas 21 516 153,934 298.48 University of Texas Medical Branch at Galveston 37 901 255,175 283.21 University of Texas Southwestern Medical Center at Dallas 13 247 78,476 317.80 University of the Incarnate Word 92 2,391 644,089 269.43 Wayland Baptist University 8 159 43,454 273.15 West Coast University Dallas 1 16 4,370 273.15 Wiley College 1 8 2,185 273.15 Total 2,111 57,101 16,588,269 290.51 Sum of values may not match totals due to rounding. 28

Texas Guaranteed Tuition Plan Contracts Matriculation Information Appendix B Number of Semester Tuition and verage Paid Per Contracts Hours Fees Paid Semester Hour Matriculation Information: Executive Summary Texas Universities and Colleges Texas Community Colleges 4,921 35,976 7,124,671 198.04 Texas Proprietary Institutions 608 8,992 2,465,171 274.14 Texas Four-Year Public Universities 15,828 375,348 99,098,867 264.02 Texas Private Institutions 2,111 57,101 16,588,269 290.51 Total Texas Institutions 23,468 477,418 125,276,979 262.41 Out-Of-State Institutions Out-of-State Community Colleges 175 1,790 382,015 213.46 Out-of-State Proprietary Institutions 37 911 242,753 266.33 Out-of-State Universities 2,313 59,569 16,363,708 274.70 Out-of-State Private Universities 1,227 34,695 10,432,264 300.69 Total Out-Of-State Institutions 3,752 96,964 27,420,740 282.79 Grand Total 27,220 574,382 152,697,719 265.85 * There are a total of 24,764 contracts in matriculation status on August 31, 2014. This is different than the total seen in the chart above due to 2,456 students attending multiple schools in the same semester. Sum of values may not match totals due to rounding. 29