RD513 - Virginia College Savings Plan Annual Report for the Period Ended June 30, 2018

Executive Summary:

The Virginia College Savings Plan’s (VA529) annual report for the year ended June 30, 2018 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 supplementary information under the Governmental Accounting Standards Board reporting model. The report also includes a letter of transmittal and should be read in its entirety.

VA529’s primary mission is twofold: first to assist families and others in achieving their higher education goals through three college savings programs, Prepaid529SM (Prepaid529), Invest529SM (Invest529), and CollegeAmerica®, as part of our statutory mandate to help make college more affordable and accessible; and second, to assist individuals with disabilities to save for qualified disability expenses without losing certain federal means-tested benefits through ABLEnow® and ABLEAmerica, both ABLE disability savings programs.

Prepaid529 is a defined benefit program which offers contracts at actuarially determined prices. Prepaid529 provides the future payment of undergraduate tuition for the normal full-time course load for all students enrolled in a general course of study at any Virginia public higher education institution and all mandatory fees required as a condition of enrollment of all students. Payouts differ at private or out-of-state institutions. Annually, VA529’s actuary determines the actuarial soundness of Prepaid529. As of June 30, 2018, Prepaid529 was 136.7 percent funded according to the actuarial report. Invest529 is a direct-sold defined contribution savings program, which allows participants to make contributions into their selected investment portfolio(s). Invest529 accounts are subject to market investment risks, including the possible loss of principal. CollegeAmerica, a broker-sold program, is also a defined contribution savings program and offers 43 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 Capital Group (American Funds) acts as program manager for CollegeAmerica. ABLEnow and ABLEAmerica are direct-sold and broker-sold defined contribution plans, respectively, and serve as Virginia’s tax-advantaged ABLE savings programs for people with disabilities.

VA529 holds, invests and distributes monies on behalf of program participants. VA529 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. VA529 continues to remain optimistic that its asset allocation and investment strategies will result in the Prepaid529 portfolio meeting or exceeding performance expectations over the long-term. VA529 has assumed a long-term rate of return for the Prepaid529 portfolio of 5.75 percent, having reduced the rate in 2018 from 6.25 percent reflecting the reductions in expected long-term global capital market returns. As of June 30, 2018, the total return since inception was about 6.24 percent net of fees and reflected Prepaid529’s lower than expected 5.18 percent overall performance during fiscal 2018.

VA529 continued to experience positive growth in accounts, particularly in Invest529, with approximately 17.6 percent gross account growth during 2018. CollegeAmerica experienced positive gross account growth in 2018 at 10.1 percent. ABLEnow also experienced 117 percent net account growth, ending 2018 with 3,299 open accounts.

In assessing Prepaid529’s financial condition and in pricing Prepaid529 contracts, VA529 has projected that tuition and fee increases at Virginia’s public higher education institutions will increase annually by approximately 6.0 percent for two-year institutions and 6.5 percent for four-year institutions beginning in the 2019-2020 academic year. Additional budget shortfalls and corresponding reductions in general fund support to Virginia’s public higher education institutions may result in higher tuition and fee increases in future academic years. Changes in public education funding or changes in tuition models that result in tuition increases above VA529’s projections would have an immediate, detrimental impact on VA529’s outstanding long-term Prepaid529 obligations. With the statutory requirement that institutions provide updated, long-term tuition projections, VA529 remains in a position to be informed of future tuition and fee increases. However, changes in tuition and fee models at Virginia public higher education institutions that impact Prepaid529 and unanticipated changes in program revenue or statutorily mandated changes on contract pricing may have a negative impact on program sustainability.