RD387 - Virginia College Savings Plan Annual Report for the Period Ended June 30, 2012 and Actuarial Valuation of the Virginia Prepaid Education Program as of June 30, 2012

Executive Summary:
The Virginia College Savings Plan’s (Plan) annual report for the year ended June 30, 2012 contains the required financial statements and notes thereto prepared in accordance with generally accepted accounting principles, and management’s discussion and analysis, which is required supplemental information under the Governmental Accounting Standards Board reporting model. The financial statements and notes should be read in their entirety.

The Plan operates the Commonwealth’s Internal Revenue Code (IRC) Section 529 qualified tuition plan, which offers four programs, the Virginia Prepaid Education Program (VPEPSM), the Virginia Education Savings Trust (VESTSM), CollegeAmerica® and CollegeWealth®. VPEP is considered a defined benefit program which offers contracts, at actuarially determined prices, that provide the future payment of undergraduate tuition for the normal full-time course load for students enrolled in a general course of study at any Virginia public higher educational institution and all mandatory fees required as a condition of enrollment of all students and differing payouts at private or out-of-state institutions. Annually, the Plan’s actuary determines the actuarial soundness of VPEP. As of June 30, 2012, VPEP was 103.4% funded according to the actuarial report. Key factors used in the actuarial analysis include anticipated tuition increases (both short- and long-term) as well as anticipated long-term investment performance. VEST is a defined contribution savings program, which allows participants to make contributions into their selected investment portfolio(s). VEST accounts are subject to market investment risks, including the possible loss of principal.

CollegeAmerica and CollegeWealth are also defined contribution savings programs. CollegeAmerica, a broker-sold program, offers 31 different American Funds mutual fund products as investment options. CollegeAmerica participants bear all market risk for their investment, including the potential loss of principal. The American Funds acts as program manager for CollegeAmerica. CollegeWealth participants invest in FDIC-insured savings products offered through two participating banks BB&T and Union First Market Bank.

The Plan holds, invests and distributes monies held in trust for program participants. The Plan invests its funds pursuant to statute and Investment Policies and Guidelines under the direction of its Board and Investment Advisory Committee in a mix of equity, fixed income and alternative investments. During the fiscal year ended June 30, 2012, market movements, in aggregate, had an overall net positive effect on the performance of the VPEP, VEST and CollegeAmerica portfolios. VPEP’s actual return on investments for the fiscal year ended June 30, 2012 was 1.0 percent on a time-weighted basis.

The Plan continued to experience positive growth in accounts, particularly in VEST and CollegeWealth with 8.6 percent and 52 percent account growth, respectively. CollegeAmerica also experienced positive account growth in 2012 at 2.9 percent.

The Plan continues to remain optimistic that its asset allocation and investment strategies will result in the Plan’s VPEP portfolio meeting or exceeding performance expectations over the long-term. The Plan has assumed a long-term rate of return of 6.75 percent on the VPEP investments, having reduced the rate from 7 percent for the 2012 VPEP valuation report. As of June 30, 2012, the total return since inception was about 6.3 percent net of fees and reflected VPEP’s 1.0 percent performance during fiscal 2012. Global and domestic equity and fixed income markets experienced gains into fiscal 2013; and as of the month ended September 30, 2012, the return on the VPEP investments since inception had risen to 6.5 percent.

In assessing VPEP’s financial condition and in pricing VPEP contracts, the Plan has projected that tuition and fee increases at Virginia’s public higher education institutions will increase annually by approximately 7.5 percent for four-year and two-year institutions for fiscal years 2014 and thereafter. Tuition increases above the Plan’s projections would have an immediate, detrimental impact on the Plan’s outstanding long-term VPEP obligations. However, with the statutory requirement that institutions provide updated, long-term tuition projections, the Plan remains in a favorable position to prepare for future tuition and fee increases.