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Long-Term Obligations and the Texas Legacy Fund The Texas Guaranteed Tuition Plan
Published October 2018
The Texas Guaranteed Tuition Plan (TGTP), 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.34
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 reimbursement rate per semester hour for each contract type.
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. As of Aug. 31, 2017, it had 52,755 active contracts remaining.35
Of all contracts sold, 84.4 percent were “senior college plan” contracts, which pay an hourly reimbursement rate based on the weighted average amount of tuition (WAT) and schoolwide required fees for a semester hour at all Texas public four-year colleges and universities. Texas institutions charging above the WAT must waive the difference between the amount paid by the plan and the actual tuition and required fees, if greater.
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 nearly tripled, even after adjustment for inflation, since the program began (Exhibit 6).36
EXHIBIT 6: AVERAGE ANNUAL TUITION AND FEES AT TEXAS PUBLIC FOUR-YEAR COLLEGES AND UNIVERSITIES, FISCAL 1996 to 2017
| Year | Average Annual Tuition |
|---|---|
| 1996 | $3,278 |
| 1997 | $3,610 |
| 1998 | $3,735 |
| 1999 | $3,875 |
| 2000 | $4,027 |
| 2001 | $4,139 |
| 2002 | $4,549 |
| 2003 | $5,086 |
| 2004 | $5,935 |
| 2005 | $6,152 |
| 2006 | $6,597 |
| 2007 | $6,994 |
| 2008 | $7,105 |
| 2009 | $7,560 |
| 2010 | $7,913 |
| 2011 | $7,992 |
| 2012 | $8,224 |
| 2013 | $8,327 |
| 2014 | $8,486 |
| 2015 | $8,787 |
| 2016 | $8,954 |
| 2017 | $9,043 |
Source: Texas Higher Education Coordinating Board and Texas Comptroller of Public Accounts
Looming Shortfall
The TGTP’s contract payments and investment earnings have failed to keep pace with the cost of tuition. By Aug. 31, 2017, the plan had an estimated unfunded liability of $613.8 million. According to actuarial projections, it could experience a cash shortfall as early as 2020.37 Since the program has a constitutional funding guarantee, any shortfall automatically triggers a draw on the state’s general revenue.
Several 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. In fiscal 2017, earnings paid on these refunds totaled $26.4 million.
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.38 Numerous contract owners expressed concern over this potential rule change to their legislative representatives, however, and it never took effect.39
Prepaid Plans in Other States
Texas isn’t the only state to experience difficulties with prepaid tuition plans. Most states with such plans initially overestimated investment gains while underestimating tuition increases, just as Texas did. Of 22 states that once offered prepaid tuition plans, only 11 still have such plans open for new enrollment today. Of these, only four (Florida, Massachusetts, Michigan and Washington) guarantee their plans with the full faith and credit of the state.40 The Private College 529 Plan, an independent prepaid tuition plan offered by nearly 300 private colleges and universities nationwide, also remains open for new enrollment.
Most states that closed their prepaid tuition plans now administer other education savings plans instead. In Texas, the TGTP was replaced by a new prepaid plan, the Texas Tuition Promise Fund™.
Texas Tuition Promise Fund
In 2008, Texas opened a new prepaid tuition plan, the Texas Tuition Promise Fund, that differs from its predecessor in important ways. It’s structured so it will never pay institutions or purchasers more in benefits than the amount purchasers contribute for tuition units, plus or minus net earnings or losses. Furthermore, 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.
Policy Options
Texas could save as much as $49 million in general revenue by fully resolving the Texas Tomorrow Fund’s unfunded liability before the end of fiscal 2019.41
In 2017, Sherman Actuarial Services, LLC, analyzed the TGTP at the request of the Legislative Budget Board. The company estimates the current TGTP shortfall at $642 million and projects that the plan’s available cash for benefits will be depleted in March 2020, requiring annual general revenue appropriations until 2039, when all contracts are expected to be fulfilled.
In all, funding the plan on this “pay as you go” basis is estimated to cost the state $691 million beyond the plan’s own earnings through 2039. A more substantial upfront investment in the next legislative session, however, could reduce the state’s total costs substantially by generating additional investment earnings for the program (Exhibit 7). Paying the full current shortfall of $642 million in 2019, for instance, ultimately would decrease future costs to general revenue by $49 million.
EXHIBIT 7: TEXAS GUARANTEED TUITION PLAN — IMMEDIATE INVESTMENTS PRODUCE GREATER SAVINGS: FIVE SCENARIOS (IN MILLIONS)
| Scenario | General Revenue Investment by September 2019 | Total Cost to State After September 2019 | Total Estimated Savings to State |
|---|---|---|---|
| 1 | $0.0 | $691.0 | $0.0 |
| 2 | $100.0 | $587.6 | $3.4 |
| 3 | $321.0 | $357.7 | $12.3 |
| 4 | $400.0 | $270.6 | $20.4 |
| 5 | $642.0 | $0.0 | $49.0 |
Source: Sherman Actuarial Services, LLC