Texas State Government and Long-Term Obligations The Texas Guaranteed Tuition Plan

The Texas Guaranteed Tuition Plan, formerly called the Texas Tomorrow Fund, is a prepaid tuition plan created in May 1995 and opened for enrollment in 1996. Texas voters approved a constitutional amendment in 1997 that guarantees the plan’s benefits with the full faith and credit of the state.³⁵

Fund participants could select contracts for public junior colleges, public universities or private colleges and universities and purchase them in a lump sum or through installments to lock in current tuition rates for the beneficiary’s later use. The plan pays a different hourly reimbursement rate for each contract type.³⁶

The plan stopped accepting new contracts when the Texas Legislature deregulated tuition in 2003, in anticipation of significantly higher tuition rates. In all, the plan sold 158,442 contracts prior to closure. Today, it has about 60,000 active contracts.

Of all contracts sold, 94 percent were public university or “senior” contracts. Since 2003, these have paid an hourly reimbursement rate based on the weighted average amount of tuition (WAT) and school-wide required fees for a semester hour at all Texas public four-year colleges and universities. Texas institutions above the WAT must waive the difference between the amount paid by the plan and the actual tuition and required fees, if greater. (Large universities such as the University of Texas and Texas A&M waive millions of these dollars each semester.)

The Texas Prepaid Higher Education Tuition Board invests contract payments and uses the payments and interest earnings to pay college tuition and required fees for enrollees. The program has proven to be a significant benefit for participating students and their families, as the average cost of tuition and fees at Texas public colleges and universities has more than doubled since the program began.³⁷

Current Status

The Texas Guaranteed Tuition Plan’s contract payments and earnings have failed to keep pace with tuition inflation. The plan had a projected unfunded liability of $617.2 million as of August 31, 2016, a 15.3 percent increase from the previous year. An actuary hired by the Texas Prepaid Higher Education Tuition Board projected that the plan would experience a cash shortfall as early as fiscal 2019; an additional $87.7 million in general revenue funding provided in 2015 pushed the projected shortfall date into fiscal 2020.³⁸

Since the program has a constitutional funding guarantee, any shortfall automatically triggers a draw on general revenue. Texas could save as much as $58 million by taking action to fully resolve the Texas Tomorrow Fund’s unfunded liability before the end of fiscal 2017.

Plan Challenges

Several of the actuarial assumptions used in setting prices for the plan’s contracts didn’t pan out. Tuition rose more than expected, while the fund’s investments returned less than expected.

Furthermore, a provision of the program allows contract owners to cancel mature, paid-in-full contracts for a refund — when, for instance, a beneficiary did not attend college as expected, or received scholarships or other financial assistance that made the contract unnecessary — based on the current hourly reimbursement rate for their contract type, including earnings based on tuition inflation over the life of the contract. As of Dec. 31, 2016, refunds for cancelled contracts included nearly $227 million in earnings in addition to the amount originally paid for the hours.³⁹

In 2009, the Texas Prepaid Higher Education Tuition Board considered a rule change to limit refunds to the amount contract holders paid in, less administrative fees, rather than basing them on the hourly reimbursement rate in effect at the time of cancellation.⁴⁰ Numerous contract owners expressed concern over this potential rule change to their legislative representatives, however, and it never took effect.⁴¹

Other States

Texas isn’t the only state to experience difficulties with prepaid tuition plans. Although 20 states once offered such plans, only 12 states have plans still open for new enrollment today — Alaska, Florida, Illinois, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas (through a new prepaid tuition plan, the Texas Tuition Promise Plan, discussed below), Virginia and Washington. The Private College 529 Plan, an independent prepaid tuition plan, is also open for new enrollment.⁴²

Most state prepaid tuition plans, like Texas’, overestimated investment gains while underestimating tuition increases. These plans suffered during the Great Recession, and 12 states closed plans to new enrollment — Alabama, Colorado, Kentucky, Michigan (its first plan), New Mexico, Ohio, South Carolina, Tennessee, Texas (its first plan), West Virginia, Wisconsin and Wyoming. Alabama’s plan closed to new enrollment in 2009, leaving contract holders with partial payments. Colorado’s plan shuttered in 2013, offering contract holders a 5.5 percent return on their payments. West Virginia’s plan closed to new enrollment in 2003 and is backed by the state’s Unclaimed Property Fund.⁴³

Policy Options

In October 2016, Sherman Actuarial Services, LLC, analyzed the Texas Guaranteed Tuition Plan at the request of the Legislative Budget Board, offering the following estimates and funding options (Exhibit 4).⁴⁴ Note that potential savings increase with the amounts the 2017 Legislature appropriates to cover the plan’s expected needs.

Exhibit 4: Texas Guaranteed Tuition Plan Funding Options

(Amounts in Millions of Dollars)

Cash Infusion, 2017	$0	$100.0	$317.7	$400.0	$635.5
Pay-As-You-Go Benefit Payments and Expenses	$693.9	$588.0	$354.0	$264.0	$0
Savings	$0	$6.2	$21.9	$29.6	$58.4

Source: Sherman Actuarial Services, LLC

• In the absence of additional appropriations, the actuary estimates the plan’s available cash for benefits will be depleted in March 2020, requiring an annual general revenue draw for plan benefits and expenses (“pay as you go”) until 2038, when all contracts are expected to be fulfilled, for a total projected cost of $693.9 million.
• If the Legislature appropriates $100 million to the fund in September 2017, the actuary expects the plan to remain funded until September 2020, requiring pay-as-you-go general revenue thereafter, for a total cost to the state of $687.7 million and a projected savings of nearly $6.2 million.
• If the Legislature appropriates half of the total liability, $317.7 million, in September 2017, the plan will remain funded until March 2022, requiring a total cost to the state of $672 million and producing a projected savings of $21.9 million.
• If the Legislature appropriates $400 million in September 2017, the plan will remain funded until March 2023, for a total cost to the state of $664.3 million in general revenue and producing a projected savings of nearly $29.6 million.
• If the Legislature appropriates the total liability of $635.5 million in September 2017, the plan will remain funded until the estimated end of the plan in 2038, for an estimated savings of $58.4 million.

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Texas Tuition Promise Fund

In 2008, Texas opened a new prepaid tuition plan, the Texas Tuition Promise Fund. This plan differs from its predecessor in important ways: it is structured so it will never pay institutions more in benefits than the amount contributed by purchasers for tuition units, plus or minus net earnings or losses on those contributions; and it isn’t guaranteed by the full faith and credit of the state, although Texas public colleges and universities must accept the amount transferred by the plan as payment in full for tuition and required fees for the hours covered by the units.

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