ANNUAL REPORT

Transcription

1 ANNUAL REPORT

2 Dear Fellow Pennsylvanians: On behalf of the Tuition Account Program Advisory Board, I am pleased to present the annual report of the Pennsylvania 529 College Savings Program (PA 529) for fiscal year Since its inception, more than 96,000 students have utilized the PA 529 program to help pay their college bills. The program has paid over $2.8 billion to cover qualified higher education expenses, and of that amount, $747 million were earnings on contributions a gain of 36 percent. In the past fiscal year, PA 529 demonstrated strong results: the total number of accounts increased by 4.9 percent from the previous year, over 20,000 new accounts were opened a 17 percent increase over the previous year, and the assets under management grew to $4.3 billion. For the fifth consecutive year, the PA 529 Guaranteed Savings Plan (GSP) was more than fully funded, reaching percent at the end of the fiscal year. Because of the strong actuarial status, PA 529 was able to refund and waive fees for the fourth year in a row. Additionally, the strong financial status of the GSP Fund and the moderate rise in tuition inflation during the last few years allowed the premiums for the University of Pittsburgh, the Pennsylvania State University and the StateRelated University Average tuition levels to be retroactively eliminated for academic year While we are pleased with the program s success, recent reports have shown that Pennsylvania now ranks #1 in student debt per borrower. This is not a distinction we should be proud of, when working families are having to take on more and more debt to make it through Pennsylvania s institutions of higher learning. Without having some form of postsecondary education in the future, many Pennsylvanians simply won t be able to keep up, and it is vitally important to the Commonwealth s economy as a whole that we have a welleducated workforce. PA 529 is already assisting thousands of Pennsylvanians to pay for college, but there is much more we can do. So in the months ahead we will be taking further steps to strengthen the 529 program, and asking leaders and policymakers throughout the Commonwealth to join an important conversation about making higher education accessible and affordable for all. It is time to give all Pennsylvanians a fair shot at higher education. Sincerely, Joe Torsella Pennsylvania State Treasurer

3 TABLE OF CONTENTS INTRODUCTION 1. Brief program overview. 2. Authority for and purpose of the annual report. 2. Program administration. 3. Advisory board members. PROGRAM ACCOMPLISHMENTS 7. Record number of families saving at record levels. 10. $363 million to help make higher education possible for 25,069 students. PA 529 GUARANTEED SAVINGS PLAN 15. How the PA 529 Guaranteed Savings Plan works. 17. PA 529 GSP fund exceeded a 100 percent funded actuarial status. 17. PA 529 GSP contributions and assets held steady. 19. The PA 529 GSP remains a successful, lowerrisk college savings plan. PA 529 INVESTMENT PLAN 25. PA 529 IP investment options described. 27. PA 529 IP fees reduced. 27. PA 529 IP contributions and assets grew. 28. Investment performance was positive. SUBSEQUENT CHANGES 35. PA 529 GSP fees refunded and waived. FINDINGS AND RECOMMENDATIONS 39. Findings and recommendations.

4 INTRODUCTION

5 Joseph M. Torsella, Pennsylvania State Treasurer Brief program overview. The Pennsylvania 529 College Savings Program provides one of the best ways to save for higher education. It is an easy and taxefficient way to make higher education affordable. To meet the needs of nearly anyone who wishes to invest for higher education, Pennsylvania offers two distinct plans the Pennsylvania 529 Guaranteed Savings Plan (PA 529 GSP) and the Pennsylvania 529 Investment Plan (PA 529 IP). The PA 529 GSP is a lowerrisk way to save. When used for higher education, growth is based on college tuition inflation. For example, if a family has saved enough for one or 120 credits at a Pennsylvania State System of Higher Education university, they will have enough for that many credits at that university in the future no matter how much tuition has increased in the meantime. It can be used at any college, university, or trade school that is eligible to participate in federal student aid programs. And, even if the account is not used for higher education, the minimum amount refunded is the remaining principal, minus any fees. The Pennsylvania Treasury oversees the investments. The program s second plan, the PA 529 IP, offered 15 different investment options during the period covered by this Annual Report, including three agebased options, provided by The Vanguard Group. These options include varying asset allocations, ranging from 100 percent equities to inflationprotected securities. Both plans provide the same great advantages: Tax deferral and exemption. Earnings grow tax free and, when used for qualified higher education expenses, are tax exempt. Pennsylvania income tax deduction. Contributions to both plans are deductible from taxable state income up to $14,000 per beneficiary each year. For a married couple with two incomes of $14,000 or more each, the deduction could total $28,000 per child. Federal gift and estate tax advantages. Contributions up to $70,000 can be made in a single year ($140,000 for a married couple filing jointly) for each beneficiary and prorated over five years for federal gift and estate tax purposes. And, while contributions are considered completed gifts and are no longer part of the contributor s estate, the contributor (if the account owner) retains complete control including the ability to take back contributions at any time for use toward any other purpose (subject to applicable taxes and penalties). Pennsylvania inheritance tax exemption. Assets in a PA 529 account are not subject to Pennsylvania inheritance tax, which, depending on the heirs, could be a savings of up to 15 percent of the assets. No income restrictions. Unlike most other tax advantages for saving (like the American Opportunity Credits, formerly the Hope Credit or the Lifetime Learning Credit, and Roth IRAs), there are no income restrictions to limit who can benefit from a 529 plan s tax advantages. Federal bankruptcy protection. Assets in a PA 529 account are protected in federal bankruptcy proceedings, depending on when contributions were made and the value of the account. Protection from creditors. Assets in a PA 529 account are protected in state court proceedings from creditors of the account owner and/or the beneficiary. 1

6 The Pennsylvania 529 College Savings Program State financial aid advantage. Assets in a PA 529 account are not counted in determining state financial aid eligibility. PA 529 savings will not disqualify otherwise eligible students from getting Pennsylvania grants or reduce the grant awarded. In academic year , the average PA 529 account beneficiary received about $168 more in state grants because of this advantage. Over four years of undergraduate school, that would be nearly $672. Tuition discounts at 375 private colleges nationwide with 54 in Pennsylvania. Through the program s arrangements with SAGE Scholars, tuition discounts, like frequent flyer miles for college tuition, are earned based on the value of the PA 529 College Savings Program account. Discounts can be earned of up to one year of tuition (currently valued at $10,500 to $53,505 depending on the school). To date, PA 529 account beneficiaries enrolled in SAGE have earned over $1 billion in potential tuition discounts. Cash back rewards. Account owners can link their PA 529 accounts to a Upromise Rewards program account, which allows families to earn cash back on qualified purchases from some of America s leading companies, including grocery stores, drug stores, gas stations, restaurants, retail stores, and online shopping sites. The cash back earned can be invested automatically in their PA 529 accounts on a quarterly basis. Through June 30, 2017, PA 529 account owners earned over $16 million through Upromise Rewards. Authority for and purpose of the annual report. Act 11 of 1992 established the PA 529 College Savings Program, created an advisory board to oversee the program, and required the board and the Pennsylvania Treasury to submit annual reports to the Governor and the General Assembly. Pursuant to those requirements, the advisory board and Pennsylvania State Treasurer Joseph M. Torsella have prepared this joint report for the period of July 1, 2016, through June 30, Adoption and submission of this report was approved by the advisory board at its November 15, 2017, meeting. Program administration. Act 11 of 1992 also charged the Pennsylvania Treasury with establishing and administering the PA 529 College Savings Program and required the department to create the Tuition Account Programs Bureau. Treasury s investment advisors and asset managers oversee assets in the PA 529 GSP. Contributions to a PA 529 IP account are invested in Vanguard mutual funds with oversight by Treasury. Ascensus College Savings Recordkeeping Services, LLC (formerly Upromise, Inc.) performs the recordkeeping and processing functions for both the PA 529 GSP and PA 529 IP, with close supervision by the program bureau. Treasury s Tuition Account Programs Bureau is responsible for customer service under both plans. 2

7 Joseph M. Torsella, Pennsylvania State Treasurer Advisory Board members [as of June 30, 2017] Dr. John M. Anderson President Millersville University James L. Haddock Small Business Owner Jeffrey S. Batoff, Esquire Obermayer Rebmann Maxwell & Hippel LLP Dr. Richard E. McDowell President Emeritus University of Pittsburgh at Bradford Karen D. Beyer Senior Sales Executive Conduent State & Local Government Solutions, Inc. The Honorable Michael Peifer Pennsylvania House of Representatives Frank T. Brogan Chancellor Pennsylvania State System of Higher Education Dr. Jonathan Peri President Manor College Gregory DeFeo President Pittsburgh Technical College Wil Del Pilar, Ph.D. Deputy Secretary Pennsylvania Department of Education The Honorable Andrew E. Dinniman Senate of Pennsylvania The Honorable Jason E. Salus Treasurer Montgomery County John R. Evans Director, Office of Small Business Advocate Pennsylvania Department of Community and Economic Development Dr. Peter W. Teague President Lancaster Bible College James Grandon Chairman Council of Higher Education The Honorable Joseph M. Torsella State Treasurer Chairman. Tuition Account Program Advisory Board 3

8 PROGRAM ACCOMPLISHMENTS

9 Joseph M. Torsella, Pennsylvania State Treasurer Record number of families saving at record levels. One of the most important goals for the PA 529 program is to increase awareness of the program. Each Pennsylvania family with higher education in its future needs to know about this great stateoffered program. Of course, increased awareness alone is not enough. Families need to be encouraged to open accounts and begin saving as early in their children s lives as possible. And those with accounts need to be encouraged to save more. These continue to be the three goals of the PA 529 program s outreach efforts. As in years past, in fiscal year , the program engaged in a variety of marketing avenues including direct mail, , online, television and radio advertisements, and webinars in addition to earned media. Additionally, the program continues to reach new individuals through partnerships with employers, financial planners, accountants, tax advisors, community organizations, and schools. More families opened accounts. For both plans combined, there were 20,458 new accounts in fiscal year , compared with 17,415 in the prior year, an increase of over 17 percent. The yearoveryear increase was greater in the PA 529 IP (21.22 percent) than in the PA 529 GSP (12.17 percent). In the PA 529 IP, 12,374 new accounts were opened compared to 10,208 in , while in the PA 529 GSP, 8,084 new accounts were opened compared to 7,207 opened last fiscal year. The following graph shows the history of new accounts over the last five years. 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 New Accounts by Fiscal Year and % YearOverYear Changes 0 FY FY Fy FY FY GSP 529 IP Total % 15.7% 2.1% 9.6% 11.1% 2.0% 5.1% 13.5% 10.2% 12.2% 21.2% 17.5% 7

10 The Pennsylvania 529 College Savings Program Total enrollment increased. Total enrollment for the PA 529 program increased to 218,018 accounts an increase of 4.86 percent over June 30, The PA 529 GSP increased only slightly from 106,917 to 107,620 an increase of almost one percent while the PA 529 IP increased from 100,986 to 110,398 an increase of 9.31 percent. The graph below provides the history of total net enrollment over the last five years. 220, , , , , , , , , , , , ,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Total Net Enrollment as of June 30 and % YearOverYear Changes GSP 529 IP Total % 10.1% 5.1% 3.2% 10.6% 6.5% 0.1% 8.0% 3.8% 0.7% 9.3% 4.9% 8

11 Joseph M. Torsella, Pennsylvania State Treasurer More than $516 million contributed. The total amount contributed into all PA 529 accounts was $516.6 million an increase of percent compared to last fiscal year ($ million) and the highest amount contributed in one year since the program s inception in The graph below shows the gross contributions made into all PA 529 accounts by fiscal year. $600,000,000 PA 529 Combined Gross Contributions by Fiscal Year and % YearOverYear Changes $500,000,000 $400,000,000 $300,000,000 $200,000,000 $100,000,000 $0 FY FY FY FY FY % Changes 10.08% 5.68% 0.39% 12.01% Families across the Commonwealth are served. The PA 529 serves families throughout the state. For each county, the following map shows the amount of contributions (not including growth) in current accounts and the percentage of the population under 18 years of age who have accounts. While families in every county have accounts, the level of coverage varies considerably. Not surprisingly, generally counties with higher average household income have a higher percentage of children with accounts. 9

12 MERCER LAWRENCE BEAVER WASHINGTON GREENE ERIE POP 60,598 AVG $53,352 2,464 accts. $26,583, % CRAWFORD POP 22,901 AVG $55, accts. $6,374, % POP 17,798 AVG $54, accts. $4,793, % POP 33,153 AVG $62,876 1,585 accts. $14,065, % POP 18,362 AVG $54, accts. $6,559, % POP 41,143 AVG $77,824 3,463 accts. $46,670, % POP 7,221 AVG $56, accts. $1,888, % BUTLER ALLEGHENY VENANGO POP 10,717 AVG $50, accts. $3,202, % POP 38,426 AVG $87,207 3,601 accts. $43,179, % POP 233,675 AVG $75,064 21,121 accts. $308,244, % PA 529 GUARANTEED SAVINGS PLAN (GSP) & PA 529 INVESTMENT PLAN (IP) OPEN ACCOUNTS AND NET CONTRIBUTIONS BY COUNTY AS OF CLARION WARREN ARMSTRONG FOREST WESTMORELAND FAYETTE POP 26,019 AVG $49, accts. $7,429, % COLOR KEY LOW (UNDER 4.0%) BELOW AVERAGE (4.0% 5.9%) AVERAGE (6.0% 7.9%) ABOVE AVERAGE (8.0% 9.9%) FACT KEY POP 7,972 AVG $57, accts. $3,538, % POP 7,321 AVG $57,392 POP 463 AVG $44, accts. $149, % 227 accts. $1,694, % POP 13,037 AVG $55, accts. $4,097, % POP 67,000 AVG $67,694 5,119 accts. $58,455, % ERIE JEFFERSON POP 9,386 AVG $50, accts. $2,636, % INDIANA POP 15,860 AVG $60, accts. $8,265, % SOMERSET POP 13,718 AVG $56, accts. $3,584, % COUNTY NAME POP 60,598 TOTAL POPULATION UNDER 18 AS OF ,464 accts TOTAL ACCOUNTS ELK MCKEAN POP 8,517 AVG $47, accts. $2,354, % POP 6,030 AVG $60, accts. $4,283, % CLEARFIELD POP 14,976 AVG $51,233 CAMBRIA POP 26,377 AVG $56, accts. $5,641, % 1,219 accts. $12,347, % BLAIR BEDFORD CAMERON POP 25,939 AVG $56,293 1,226 accts. $12,326, % POP 9,922 AVG $55, accts. $2,179, % POP 816 AVG $46, accts. $423, % FULTON POTTER POP 3,643 AVG $51, accts. $2,224, % HUNTINGDON POP 8,598 AVG $51, accts. $2,739, % POP 3,083 AVG $56, accts. $273, % CLINTON POP 8,072 AVG $53, accts. $2,254, % CENTRE POP 24,411 AVG $78,372 2,549 accts. $31,899, % FRANKLIN MIFFLIN POP 10,461 AVG $47, accts. $2,244, % POP 34,945 AVG $63,325 1,367 accts. $13,599, % TIOGA POP 5,531 AVG $59,315 JUNIATA LYCOMING POP 23,833 AVG $59,995 PERRY CUMBERLAND ADAMS UNION POP 8,128 AVG $58, accts. $7,606, % SNYDER POP 8,809 AVG $54, accts. $4,144, % POP 9,948 AVG $64, accts. $4,622, % POP 50,023 AVG $78,306 6,097 accts. $81,366, % POP 21,070 AVG $70,483 1,187 accts. $12,010, % DAUPHIN POP 61,299 AVG $61,202 BRADFORD SULLIVAN POP 766 AVG $55, accts. $351, % 2 YORK COLUMBIA POP 11,840 AVG $59,422 LEBANON POP 31,439 AVG $62,192 POP 99,147 AVG $69,066 LUZERNE SCHUYLKILL LANCASTER SUSQUEHANNA POP 8,324 AVG $57,287 POP 13,427 AVG $57,738 POP 8,152 AVG $58, accts. $2,770, accts. $6,978, accts. $3,811, % 4.3% 4.6% 167 accts. $1,231, % $26,583,534 NET CONTRIBUTIONS 1,046 accts. $9,497, % LACKA WANNA NORTH UMBERLAND POP 18,418 AVG $53, accts. $7,107, % 5,248 accts. $62,726, accts. $5,942, % 8.6% 1,679 accts. $16,645, % 6,745 accts. $73,262, % 4.1% PERCENTAGE OF TARGET POPULATION WYOMING POP 5,635 AVG $60, accts. $2,897, % POP 62,459 AVG $54,837 3,479 accts. $40,604, % POP 28,231 AVG $58,904 1,327 accts. $11,611, % POP 128,793 AVG $67,530 6,936 accts. $73,332, % HIGH (10% and ABOVE) BERKS POP 42,598 AVG $59,742 CARBON POP 12,579 AVG $55, accts. $4,411, % POP 94,450 AVG $65,311 5,514 accts. $60,224, % 3,149 accts. $39,975, % LEHIGH POP 82,249 AVG $66,452 CHESTER POP 120,162 AVG $115,567 18,177 accts. $314,604, % WAYNE POP 8,884 AVG $59, accts. $5,653, % MONROE POP 34,257 AVG $65,592 1,741 accts. $15,553, % NORTHAMPTON 6,108 accts. $86,733, % POP 61,413 AVG $75,978 5,288 accts. $63,733, % MONTGOMERY POP 178,455 AVG $106,394 1 AVG is median income for families with children under 18. TOTAL POPULATION UNDER 18 AS OF 2015 : 2,690,274 TOTAL OPEN ACCOUNTS: 200,651* TOTAL NET CONTRIBUTIONS: $2,776,804,577* STATEWIDE PENETRATION AVERAGE AS OF 6/30/2017: 7.46% *Does Not Include Accounts with Nonspecified Counties or of NonResidents BUCKS POP 132,377 AVG $104,640 26,688 accts. $478,680, % 3 PIKE POP 10,788 AVG $68, accts. $5,248, % 18,054 accts. $282,314, % DELAWARE (1) POP 125,524 AVG $82,863 13,932 accts. $236,866, % MONTOUR (2) POP 3,774 AVG $68, accts. $4,015, % PHILADELPHIA (3) POP 346,932 AVG $37,838 9,219 accts. $104,060, %

13 The Pennsylvania 529 College Savings Program $363 million to help make higher education possible for 25,069 students. The number of students who used their PA 529 accounts continued to grow. This fiscal year, 25,069 students benefited from $94.4 million in earnings. By plan, about the same number of students (15,816 versus 15,843) used their PA 529 GSP accounts, while percent more students (9,253 versus 8,406) used their PA 529 IP accounts in this fiscal year compared to fiscal year reflecting the relative maturity of the plans. The amount of payouts also increased about $363.3 million compared to $330.8 million in an increase of 9.82 percent. The yearoveryear increase in the PA 529 GSP was 5.68 percent, and for the PA 529 IP it was 16.6 percent. The chart below details the usage for qualified withdrawals this fiscal year and since each plan s inception. PA 529 Payments for Higher Education PA 529 GSP FY PA 529 IP FY Combined FY PA 529 GSP Since Inception (September 1, 1993) PA 529 IP Since Inception (July 17, 2002) Combined Since Inception No. of Payments 39,611 23,859 63, , , ,136 No. of Beneficiaries 15,816 9,253 25,069 70,523 26,304 96,287 No. of Schools Attended 1,155 1,155+ 2,403+ 2,403+ Negative Surrender 6, ,535 Value Payments 16.53% 47.77% Surrender Value* $23,007,192 $29,406,704 $ Amount of Payments $215,639,063 $147,707,647 $363,346,710 $2,039,749,004 $788,008,626 $2,827,757,630 Amount of Gain $60,732, %** $33,632, %** $94,364,771 $607,456, %** $139,692, %** $747,148,821 * Surrender value is the difference between a withdrawal s Market Value and its Tuition Inflation Value. **Average Aggregate Return. Most significantly, this year alone, families who used their PA 529 GSP accounts for higher education collectively gained $60.7 million in growth by saving through the plan; since inception, they have gained $607.5 million for an average cumulative growth of percent. Families taking withdrawals this year from the PA 529 IP for higher education expenses had collective gains of $33.6 million; since inception, they have gained $139.7 million for an average cumulative return of percent. 10

14 Joseph M. Torsella, Pennsylvania State Treasurer Once again this year, PA 529 GSP qualified withdrawals illustrated the value of the plan s guarantee. Of all the qualified payments made this year, percent were for amounts higher than the accounts market value (i.e., had negative surrender values). Out of 39,611 qualified payments, 6,548 benefited from the guarantee. From the perspective of the GSP Fund this is the seventh year of significant improvement and the fourth year in a row since fiscal year that the overall surrender value for the year was positive $23 million. However, from the inception of the PA 529 GSP through the end of fiscal year , the aggregate surrender value is still negative. Of 453,272 payments, 216,535 (47.77 percent) had negative surrender values and, therefore, benefited from the guarantee. The total shortfall amount for all qualified withdrawals through June 30, 2017, improved to $29.4 million on payments of $2.0 billion from $52.0 million on payments of $1.8 billion last year. 11

15 PA 529 GUARANTEED SAVINGS PLAN

16 Joseph M. Torsella, Pennsylvania State Treasurer How the PA 529 Guaranteed Savings Plan works. The PA 529 GSP provides a unique way to save for higher education. Growth is based on tuition inflation at one of a number of different Tuition Levels initially chosen by the account owner but ultimately determined, in most cases, by where the student attends school. Tuition Levels. The PA 529 GSP offers five average Tuition Levels at which families may save: Community College Average State System of Higher Education Average StateRelated University Average Private Fouryear College Average Ivy League Average Alternatively, families can save at any one of the statefunded schools the 14 community colleges, 14 State System of Higher Education universities, or four staterelated universities (University of Pittsburgh, Pennsylvania State University, Temple University, and Lincoln University). A Tuition Level can be changed by the account owner at any time and will be automatically changed by the plan if a student attends a statefunded school that is different than the previously designated Tuition Level. Whenever a change is made, the account is recalculated as if the new Tuition Level had been in effect when prior contributions were made. Most often the recalculation will change the dollar value of the account available to pay for qualified higher education expenses. PA 529 GSP Credit Rates. Each year the state Treasury Department sets a PA 529 Credit Rate ( GSP Credit Rate ) for each Tuition Level, which determines the number of GSP Credits attributable to a contribution. For example, if the GSP Credit Rate for a Tuition Level were $500, a contribution of $1,000 would be equal to two GSP Credits ($1,000/$500 = 2) at that Tuition Level. The GSP Credit Rate is based on the actual per credit price for the academic year set by schools comprising the Tuition Level. For most Tuition Levels, the GSP Credit Rate has been the same as the actual rate set by the school(s), but for some Tuition Levels in some years it has been higher (that is, included a premium ). Tuition Levels for which GSP Credit Rates include or have included premiums are those with past and projected future tuition inflation that exceed the average. Given tuition inflation history and projections, premiums help ensure the fiscal soundness of the PA 529 GSP. The Guarantee. The PA 529 GSP guarantees the growth on account contributions will be the rate tuition increases, at the appropriate school or Tuition Level, from when the contribution was made until when it is withdrawn for qualified higher education expenses, adjusted for any premiums and fees (an account s Tuition Inflation Growth ). It is important to note, however, that meeting the guarantee is the obligation of the PA 529 GSP Fund. The guarantee is not backed by the full faith and credit of the Commonwealth. Because of the guarantee, the investment return the fund actually earns on account contributions (an account s Market Value Returns ) is not the growth most account owners will see. Since the vast majority of accounts are used for qualified higher education expenses, they will get their Tuition Inflation Value. A small percentage of accounts are closed and are used for nonqualified purposes. Those accounts get the lesser of the Market Value or the Tuition Inflation Value, but, if that amount is less than the principal, they get the principal, minus any fees. 15

17 The Pennsylvania 529 College Savings Program Actuarial assumptions. In order to be able to meet the guarantee, the PA 529 GSP Fund s investment returns must meet or exceed tuition inflation and program expenses over the long term. In any given year, the fund may outperform or underperform tuition inflation and expenses but, because the plan is designed to continue indefinitely, the longterm performance is most significant. In consultation with its investment advisors and actuary, Treasury annually projects investment returns, tuition inflation, and other actuarially relevant factors making adjustments from year to year, if warranted, based on actual experience and market factors. Some projections made in the actuarial report of June 30, 2017, were changed from the previous year. The investment return assumption was decreased from 7.00 percent net of fees to 6.00 percent net of fees tuition inflation projections remained the same as in 2016, ranging from 4.00 percent for Pennsylvania State University branch campuses and the University of Pittsburgh to 6.25 percent for the main campus of the Pennsylvania State University. The 2016 projection for overall tuition inflation weighted by the Tuition Level at which families were saving was 5.37 percent again, over the long term and as an average. In 2017, the weighted overall tuition inflation assumption decreased slightly to 5.04 percent. Asset allocations. To achieve the investment return goal of 7.0 percent net of fees, Treasury invested the PA 529 GSP assets in fixed income (including cash and cash equivalents), equities, and alternative investments. The allocation of assets as of June 30, 2017, is illustrated in the following chart. PA 529 GSP Actual Asset Allocation As Of June 30, 2017 Total Assets: $1,909,913,306 16% $314,458,210 36% $686,373,349 48% $909,081,747 Equities Fixed Income Alternatives 16

18 Joseph M. Torsella, Pennsylvania State Treasurer PA 529 GSP fund exceeded a 100 percent funded actuarial status. For a fifth consecutive year, the PA 529 GSP Fund was more than 100 percent funded. Based on the actuarial assumptions, as of June 30, 2017, the PA 529 GSP Fund was percent funded, almost three percent higher than June 30, 2016 ( percent funded). The actuarial status is a projection of the plan s ability to meet the obligations that existed on June 30 as they come due in the future and assumes no new contributions are received. The actuarial funded status has fully recovered since hitting a low on March 31, 2009, when it was 70.4 percent funded. Correspondingly, the projected actuarial reserve was $269 million on June 30, 2017 improved from $217 million on June 30, 2016, and its low point of $403.4 million on March 31, In addition to several years of relatively modest tuition inflation, the recovery is due, in large part, to several actions begun in early 2009 to improve investment returns while mitigating risk; cover administrative expenses with fairer, more realistic fees; and include premiums in credit rates to adjust for higher than average tuition increases in some Tuition Levels. PA 529 GSP contributions and assets held steady. Gross contributions into PA 529 GSP accounts totaled $208.8 million for fiscal year , which was percent greater than last year s contributions ($188.1 million). The graph below shows the gross contributions by fiscal year. PA 529 GSP Gross Contributions by Fiscal Year and % YearOverYear Changes $210,000,000 $205,000,000 $200,000,000 $195,000,000 $190,000,000 $185,000,000 $180,000,000 $175,000,000 $170,000,000 $165,000,000 FY FY FY FY FY % Changes 4.65% 0.47% 2.08% 10.99% Contributions included $789,504 earned through the Upromise Rewards program. Account owners with linked Upromise accounts earn higher education savings through their everyday spending on items such as gas, dining out, and online shopping. Since 2006, PA 529 GSP accounts have earned almost $8.8 million through Upromise Rewards. 17

19 The Pennsylvania 529 College Savings Program As of June 30, 2017, total assets equaled $1,909,913, percent higher than on June 30, 2016 ($1,759,617,667). The following graph illustrates the change in the PA 529 GSP Fund s assets as of the end of each fiscal year since the plan s inception. PA 529 GSP Assets Under Management as of June 30 $2,000,000,000 $1,800,000,000 $1,600,000,000 $1,400,000,000 $1,200,000,000 $1,000,000,000 $800,000,000 $600,000,000 $400,000,000 $200,000,000 $

20 Joseph M. Torsella, Pennsylvania State Treasurer The PA 529 GSP remains a successful, lowerrisk college savings plan. The PA 529 GSP s longterm investment success, actuarial status, fees, and credit pricing along with continued tuition increases mean the plan continues to be a lowerrisk, but not riskfree, way to save for higher education. It is simply one of the best ways that Pennsylvania families can save for higher education. Returns of the PA 529 GSP Fund were positive and growth seen by account owners was good. The investment performance of the PA 529 GSP Fund for the fiscal year was percent net of fees. The threeyear annualized return was 6.08 percent and the fiveyear annualized return was 8.25 percent. The graph below shows the oneyear returns since the plan s inception % 15.00% 10.00% 5.00% PA 529 GSP Fund Performance as of June % 1994* % 10.00% 15.00% 20.00% * Partial Year (September 1, 1993 June 30, 1994). Note: All returns are net of fees. 19

21 The Pennsylvania 529 College Savings Program The growth realized by most account owners is not based on the investment performance of the PA 529 GSP Fund. Rather, it is based on tuition inflation. The graph below shows the increase in actual percredit tuition costs for the five average Tuition Levels from the inception of the PA 529 GSP in through academic year It also provides the annualized and cumulative tuition inflation rates. $2,200 Tuition Inflation by Academic Year $2,000 $2, $1,800 $1,600 $1,400 $1, $1,200 $1,000 $ $800 $ $600 $400 $200 $312.17* $ Ivy League Colleges: 4.18% Annualized; % Compounded Private FourYear Colleges: 4.55% Annualized; % Compounded StateRelated: 4.84% Annualized; % Compounded State System: 3.79% Annualized; % Compounded Community Colleges: 3.67% Annualized; % Compounded *Excludes Millersville University, Indiana University of Pennsylvania, Shippensburg University, and Mansfield University. This graph approximates the growth that account owners realize depending on when contributions were made. Their growth may be somewhat less, however, depending on whether premiums were in place for the years in which contributions were made and whether account maintenance fees were paid or deducted separately from their accounts. 20

22 Joseph M. Torsella, Pennsylvania State Treasurer The following graph compares the growth of $1,000 at various Tuition Levels over five and ten years. $2,500 Comparison of Return on a $1,000 Investment in S&P 500, Dow Jones, and Select Tuition Levels $2,000 $1,500 $1,000 $500 S+P 500 Dow Jones StateRelated Avg. Penn State U. of Pittsburgh State System Avg. Community College Avg. Private FourYear Avg. Ivy League Avg. 5Year (6/30/2012 6/30/2017) 10Year (6/30/2007 6/30/2017) *Used for Fall 2017 semester. Additionally, looking at payments made for qualified withdrawals over the plan s lifetime, account owners who have used their accounts for higher education expenses achieved an average cumulative return of percent. 21

23 PA 529 INVESTMENT PLAN

24 Joseph M. Torsella, Pennsylvania State Treasurer PA 529 IP investment options described. As was discussed in last year s Annual Report, the PA 529 IP s investment options were expanded and enhanced in 2016 as detailed below. The PA 529 IP offers 15 different investment options through The Vanguard Group during the period covered by this Annual Report. Twelve are individual portfolios (including one socially responsible investment option) with different allocations of equities, fixed income, and shortterm reserves. These 12 portfolios are used to create three additional, agebased, options (Aggressive, Moderate, and Conservative), which automatically move assets from the more aggressive individual portfolios to more conservative individual portfolios as the beneficiary approaches college age. All 15 options are invested, in varying percentages, in six underlying Vanguard mutual funds. Money Market product replaced with a Stable Value product. Effective September 16, 2016, the Vanguard Money Market Fund was replaced by the Vanguard ShortTerm Reserves Account. That Fund is the underlying mutual fund that comprises 25% of the PA 529 IP Conservative Income Portfolio and 100% of the Money Market Portfolio. The replacement for the PA 529 IP Money Market Portfolio is called the Interest Accumulation Portfolio. The Vanguard ShortTerm Reserves Account is a Vanguard trust newly created for the PA 529 IP and a stable value product. Stable value products typically invest in a combination of cash and high quality fixed income securities. The fixed income investments are covered by contracts with financial institutions, typically insurance companies that guarantee a set or minimum interest rate. Stable value funds provide principal preservation like a money market, but typically with higher bondlike returns. Additionally, a portion of the funds in the Vanguard ShortTerm Reserves Account are held in the Vanguard Federal Money Market Fund. This provides the Fund with the ability to handle the daily liquidity needs of investors. This change was made for a number of reasons, including increased diversity, longer duration with little increase in risk, increased yield, and changes in federal rules regarding money markets that make them less attractive for institutional investors like the PA 529 IP. Longer term InflationProtected Securities replaced with ShortTerm Inflation Protected Securities. Effective October 14, 2016, the Vanguard InflationProtected Securities Index Fund (Broad TIPS) was replaced by the Vanguard ShortTerm InflationProtected Securities Fund (ShortTerm TIPS). That Fund is the underlying mutual fund that comprises 25% of the PA 529 IP Conservative Income Portfolio and 100% of the Inflation Protected Securities Portfolio. The primary difference between the two funds is the duration of investments. The Broad TIPS Fund duration is 7.9 years while that of the ShortTerm TIPS Fund is 2.6 years. This change was made because historical returns show that ShortTerm TIPS have less volatility and risk. Two new static investment options were added. Effective October 14, 2016, two new PA 529 IP Portfolios were added: the Total International Stock Index Portfolio and the Total Bond Market Index Portfolio. These additions were made to provide Account Owners the ability to customize asset allocations that best meet their needs, if they so desire. 25

25 The Pennsylvania 529 College Savings Program This structure along with the fees as of June 30, 2017, for each investment option are illustrated in the following table. PA 529 IP Investment Structure and Fees as of June 30, 2017 PA 529 IP Individual Portfolio Investment Option PA 529 IP Agebased Portfolio Investment Option Asset Allocation Underlying Vanguard Mutual Fund Aggressive Growth Portfolio (assetbased fee 0.35%) Aggressive: Ages 5 & younger 100% Stocks 70% Vanguard Institutional Total Stock Market Index Fund 30% Vanguard Total International Stock Index Fund Growth Portfolio (assetbased fee 0.34%) Aggressive: Ages 6 10 Moderate: Ages 5 & Younger 80% Stocks 20% Bonds 55% Vanguard Institutional Total Stock Market Index Fund 25% Vanguard Total International Stock Index Fund 20% Vanguard Total Bond Market II Index Fund Moderate Growth Portfolio (assetbased fee 0.34%) Aggressive: Ages Moderate: Ages 6 10 Conservative: Ages 5 & Younger 60% Stocks 40% Bonds 45% Vanguard Institutional Total Stock Market Index Fund 15% Vanguard Total International Stock Index Fund 40% Vanguard Total Bond Market II Index Fund Conservative Growth Portfolio (assetbased fee 0.34%) Aggressive: Ages Moderate: Ages Conservative: Ages % Stocks 65% Bonds 25% Vanguard Institutional Total Stock Market Index Fund 10% Vanguard Total International Stock Index Fund 65% Vanguard Total Bond Market II Index Fund Income Portfolio (assetbased fee 0.33%) Aggressive: Ages 19+ Moderate: Ages Conservative: Ages % Stocks 80% Bonds 20% Vanguard Institutional Total Stock Market Index Fund 80% Vanguard Total Bond Market II Index Fund Conservative Income Portfolio (assetbased fee 0.36%) Moderate: Ages 19+ Conservative: Ages % Bonds 25% Short Term Reserves 50% Vanguard Total Bond Market II Index Fund 25% Vanguard ShortTerm InflationProtected Securities Index Fund 25% Vanguard ShortTerm Reserves Account Interest Accumulation Portfolio (assetbased fee 0.39%) Conservative: Ages % Short Term Reserves 100% Vanguard ShortTerm Reserves Account Total Stock Market Index Portfolio (assetbased fee 0.33%) Blended in other Portfolios 100% Stocks 100% Vanguard Institutional Total Stock Market Index Fund Social Index Portfolio (assetbased fee 0.43%) Not Used 100% Stocks 100% Vanguard FTSE Social Index Fund ShortTerm InflationProtected Securities Portfolio (assetbased fee 0.35%) Blended in other Portfolios 100% Bonds 100% Vanguard ShortTerm InflationProtected Securities Index Fund Total International Stock Index Portfolio Not Used 100% Stocks 100% Vanguard Total International Stock Index Fund (assetbased fee 0.38%) Total Bond Market Index Portfolio (assetbased fee 0.35%) Not Used 100% Stocks 100% Vanguard Total Market Index Fund 26

26 Joseph M. Torsella, Pennsylvania State Treasurer PA 529 IP fees reduced. Effective August 1, 2016, the fee for each investment option was reduced by 2.5 basis points (0.025%). This reduction is a result of the assets under management in the IP reaching the $2 billion breakpoint set forth in the contracts between Treasury and Ascensus and Treasury and Vanguard. Additionally, in July 2016, there was a reduction in the fund expenses of the Vanguard Total Bond Market Index II Fund. That Fund, in different proportions, is one of the underlying investments for the following PA 529 IP investment Portfolios: Growth Portfolio Moderate Growth Portfolio Conservative Growth Portfolio Income Portfolio Conservative Income Portfolio These fee reductions mean that accounts will retain more growth to use for college expenses rather than losing them to fees. PA 529 IP contributions and assets grew. Contributions into PA 529 IP accounts increased to $307.9 million in fiscal year compared to $273.1 million in up 12.7 percent. This year s contributions exceeded those made in any previous fiscal year. The following chart shows the gross contributions by fiscal year since the inception of the PA 529 IP. PA 529 IP Gross Contributions by Fiscal Year and YearOverYear Changes $350,000,000 $300,000,000 $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 $0 FY FY FY FY FY % Changes 14.75% 9.77% 2.17% 12.72% Contributions included $789,508 earned through the Upromise Rewards program. Since 2006, contributions into PA 529 IP accounts earned through Upromise Rewards have totaled $7.1 million. 27

27 The Pennsylvania 529 College Savings Program Assets in the PA 529 IP as of June 30, 2017, were $2,401,843,633 compared with $2,040,418,937 as of June 30, 2016 a yearoveryear increase of 17.7 percent. The following graph shows the annual growth in assets since the plan s inception on July 17, $2,540,000,000 PA 529 IP Assets Under Management and % YearOverYear Increase as of June 30 $2,040,000,000 $1,540,000,000 $1,040,000,000 $540,000,000 $40,000, * ** % 68.7% 40.1% 33.6% 22.5% 2.4% 31.6% 35.1% 13.4% 21.3% 25.8% 11.3% 8.7% 17.7% * July 17, 2002 June 30, %** Investment Increasemanagement transferred to Vanguard November 2006 (Direct Plan) and April 2007 (Advisor Plan). Investment performance was positive. Overall PA 529 IP Fund investment performance. This fiscal year, the PA 529 IP Fund as a whole saw investment gains of percent. No individual account receives the returns of the PA 529 IP Fund as a whole; nonetheless, it is illustrative of how the accounts have performed collectively. The graph below shows the investment performance of the total PA 529 IP Fund since 2007, the year that the PA 529 IP began offering Vanguard mutual funds % 20.00% 15.00% 10.00% 5.00% Annual PA 529 IP Fund Investment Returns* as of June % % 10.00% 15.00% 28 *Weighted average of investment portfolios returns.

28 Joseph M. Torsella, Pennsylvania State Treasurer Assets and performance by investment options. The distribution of assets among the IP s 15 different investment options has remained fairly consistent over time. The agebased options have comprised around 60 percent of total plan assets while the static options have hovered around 40 percent. Among the agebased options, the Aggressive AgeBased Option has garnered the most assets (3541 percent), followed by the Moderate AgeBased Option (1821 percent), leaving just 13 percent in the Conservative AgeBased Option. Among the static options, the Aggressive Growth Option has consistently held the most assets about 912 percent while the Social Index Option has held the least at around 1.5 percent. The following chart illustrates the distribution of assets among the 15 options as of June 30, Distribution of Assets Among PA 529 IP Investment Options as of June 30, % 35% 30% 25% 20% 15% 10% 5% 0% Distribution %: 35.38% 20.67% 11.43% 7.42% 5.90% 4.81% 3.17% 3.01% 2.23% 1.72% 1.46% 1.31% 1.11% 0.22% 0.15% Aggressive AgeBased $849,762, Conservative Growth Portfolio $53,514, Moderate AgeBased $496,570, Income Portfolio $41,423, Aggressive Growth Portfolio $274,595, Social Index Portfolio $35,138, Total Stock Market Index Portfolio $178,194, Conservative Income Portfolio $31,450, Growth Portfolio $141,763, ShortTerm InflationProtected Securities Portfolio $26,665,954.42** Moderate Growth Portfolio $115,579, Total International Stock Index Portfolio $5,210,656.67*** Conservative AgeBased $76,128, Total Bond Market Index Portfolio $3,643,634.35*** Interest Accululation Portfolio $72,200,280.08* * Assets in the Interest Accumulation Portfolio were transferred from the Money Market Portfolio on September 16, ** Assets in the ShortTerm InflationProtected Securities Index Portfolio were transferred from the Inflation Protected Securities Portfolio on October 14, ***The Total Bond Market Index and Total International Stock Index Portfolios were added to the PA 529 IP s investment options on October 14, Returns in all but one of the investment options were positive. The Conservative Income Portfolio had a loss of 0.29 percent. It should be noted that the Interest Accumulation, InflationProtected Securities, Total Bond Market Index, and Total International Stock Index Portfolios were added to the PA 529 IP in 2016 and, as such, do not yet have one, three, and fiveyear returns. 29

29 The Pennsylvania 529 College Savings Program Because the vast majority of the PA 529 IP Fund s assets are invested in index funds, they have tracked their benchmarks fairly closely, but lagged slightly primarily because program fees are reflected in the plan s portfolio returns, but not in the benchmarks. The chart below provides the returns by investment options for one, three, and fiveyear returns, as well as the sinceconversion returns. It also gives the percentage of accounts that have at least some assets in that investment option. The total percentage of accounts exceeds 100 percent because some accounts have investments in more than one option. PA 529 IP Returns by Investment Option as of June 30, 2017 % of Accounts 1Year Returns 3Year Returns 5Year Returns Returns Since Inception AgeBased Options Aggressive Ages 5 or younger Ages 610 Ages 1115 Ages 1618 Ages % 28.25% 7.11% 8.14% 7.63% 2.97% 2.40% 18.65% 14.64% 10.53% 5.76% 2.82% 6.43% 5.64% 5.19% 3.87% 3.55% 12.17% 10.07% 8.31% 5.53% 4.25% 6.07% 5.87% 5.72% 4.95% 4.76% Moderate Ages 5 or younger Ages 610 Ages 1115 Ages 1618 Ages % 4.93% 5.83% 4.63% 2.06% 1.91% 14.64% 10.53% 5.76% 2.82% 0.29% 5.64% 5.19% 3.87% 3.55% 1.26% 10.07% 8.31% 5.53% 4.25% 0.88% 5.87% 5.72% 4.95% 4.76% 2.94% Conservative Ages 5 or younger Ages 610 Ages 1115 Ages 1618 Ages % 0.78% 1.43% 1.05% 0.59% 0.74% 10.53% 5.76% 2.82% 0.29% 5.19% 3.87% 3.55% 1.26% 8.31% 5.53% 4.25% 0.88% 5.72% 4.95% 4.76% 2.94% Individual Options Aggressive Growth Growth Moderate Growth Conservative Growth Income Conservative Income Total Stock Market Social Index ShortTerm InflationProtected Securities Portfolio Total Bond Market Index Portfolio Total International Stock Index Portfolio Interest Accumulation Portfolio 47.82% 11.01% 6.73% 5.19% 2.55% 2.83% 1.86% 8.76% 2.55% 2.50% 0.28% 0.60% 2.96% 18.65% 14.64% 10.53% 5.76% 2.82% 0.29% 18.12% 21.11% 6.43% 5.64% 5.19% 3.87% 3.55% 1.26% 8.74% 9.96% 12.17% 10.07% 8.31% 5.53% 4.25% 0.88% 14.17% 16.10% 6.07% 5.87% 5.72% 4.95% 4.76% 2.94% 7.42% 6.47% 30

30 Joseph M. Torsella, Pennsylvania State Treasurer Assets and investment performance by underlying Vanguard funds. Looking at the underlying Vanguard funds in which the PA 529 IP invests, the largest portion (44.4 percent) of assets were in the Total Stock Market Index, followed by the Total Bond Market II Index at 32.7 percent, with the remaining 22.9 percent distributed among the other four funds (14.4 percent in the Total International Stock Market Index, 4.7 percent in the Pennsylvania ShortTerm Reserves Account, 2.2 percent in the Vanguard ShortTerm Inflation Protected Securities Portfolio, and 1.5 percent in the FTSE Social Index) as of June 30, See the graph below. $1,150,000,000 PA 529 IP Assets and Investment Performance by Underlying Vanguard Mutual Funds as of June 30 $1,100,000,000 $1,050,000,000 $1,000,000,000 $950,000,000 $900,000,000 $850,000, Returns 2012 Returns 2013 Returns 2014 Returns 2015 Returns 2016 Returns 2017 Returns 32.02% 3.98% 21.58% 25.26% 7.25% 2.24% 18.49% 3.62% 7.50% 0.85% 4.19% 1.77% 6.08% 0.44% 31.05% 14.58% 13.63% 22.47% 4.55% 9.07% 20.10% 0.20% 0.10% 0.09% 0.06% 0.06% 0.31% 7.28% 11.95% 5.03% 4.47% 1.80% 4.73% 0.28% 26.57% 2.90% 24.69% 25.23% 10.74% 0.20% 21.47% $800,000,000 $750,000,000 $700,000,000 $650,000,000 $600,000,000 $550,000,000 $500,000,000 $450,000,000 $400,000,000 $350,000,000 $300,000,000 $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 $ Total Stock Market Index Total Bond Market Index Total International Stock Market Index Vanguard ShortTerm InflationProtected Securities** FTSE Social Index Total Bond Market Index Inst*** PA ShortTerm Reserves* * Assets in the Prime Money Market Portfolio were transferred September 16, ** Includes assets transferred from the InflationProtected Securities Portfolio on October 14, *** Added October 14, This fund is not displayed on the chart. The percentage shown above each bar in the graph provides the investment performance of the underlying Vanguard mutual funds for the years shown. 31

31 The Pennsylvania 529 College Savings Program Practical implications for PA 529 IP account owners. As with most investments, the PA 529 IP returns realized by an individual depend on the timing of the investment. The chart below illustrates the reallife impact of investing in the different PA 529 IP investment options using a $1,000 investment made over different time frames, giving the value on June 30, Total Return of a $1,000 IP Investment INVESTED ON 11/17/2006 INVESTED ON 6/30/2007 INVESTED ON 6/30/2008 INVESTED ON 6/30/2009 INVESTED ON 6/30/2010 INVESTED ON 6/30/2011 INVESTED ON 6/30/2012 INVESTED ON 6/30/2013 INVESTED ON 6/30/2014 INVESTED ON 6/30/2015 INVESTED ON 6/30/2016 Aggressive Growth Portfolio $1, $1, $1, $2, $2, $1, $1, $1, $1, $ $1, Growth Portfolio $1, $1, $1, $2, $1, $1, $1, $1, $ $ $1, Moderate Growth Portfolio $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, Conservative Growth Portfolio $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, Income Portfolio $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, Conservative Income Portfolio $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, Interest Accumulation Portfolio* $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, Total Stock Market Index Portfolio $1, $1, $1, $2, $2, $1, $1, $1, $1, $1, $1, ShortTerm InflationProtected $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, Securities Portfolio** Social Index Portfolio $1, $1, $1, $2, $2, $1, $1, $1, $1, $ $1, Total Bond Market Index Portfolio*** Total International Stock Index Portfolio * Assets in the Prime Money Market Portfolio were transferred September 16, ** Includes assets transferred from the InflationProtected Securities Portfolio on October 14, *** Added October 14, Note that funds invested on June 30, 2009 and 2010 outperformed those invested earlier because of the impact of the Great Recession. Funds invested before the recession experienced losses that occurred during the recession. While funds invested during the recession were purchased at a low point in market value and have benefited more from the recovery. Additionally, a look at the payments made for qualified withdrawals over the lifetime of the plan shows account owners who have used their accounts for higher education expenses, on average, achieved a cumulative return of approximately percent. 32

32 SUBSEQUENT CHANGES

33 Joseph M. Torsella, Pennsylvania State Treasurer PA 529 GSP fees refunded and waived. The strong financial status of the PA 529 GSP Fund enabled the plan to refund fees paid in fiscal year to account owners with edelivery and to waive the third quarter 2017 fees for all accounts. The refund was given to 86,518 green accounts and totaled $3,501, The refunds were posted to accounts as new contributions on October 12, 2016, and will grow like any other contribution. The waiver of third quarter 2017 fees saved account owners an estimated $1,343,

34 FINDINGS AND RECOMMENDATIONS