TEXAS GUARANTEED TUITION PLAN ACTUARY S REPORT ON PROGRAM SOUNDNESS

TEXAS GUARANTEED TUITION PLAN ACTUARY S REPORT ON PROGRAM SOUNDNESS AUGUST 31, 2009 December 2009

Texas Guaranteed Tuition Plan Actuary s Report on Program Soundness August 31, 2009 Contents Page Section I Executive Summary 1 Section II Summary of Contract Data and Current Assets 4 Section III Plan Description 7 Section IV Actuarial Methods and Assumptions 9 Section V Soundness of the Plan as of August 31, 2009 12 Section VI Sensitivity Testing 17 Section VII Changes in Surplus 18 Appendix A Active Contract Counts 20 Appendix B Matriculation Information 22

Section I Executive Summary Adequacy of the Fund As of August 31, 2009, the Plan had an unfunded liability of $605,557,909. The unfunded liability represents the difference between the sum of the market value of the assets and the present value of the expected future contract payments and the sum of the present value of the expected future tuition and required fees, refunds and expenses. The unfunded liability is $399,237,653 higher than last year s unfunded liability of $206,320,256. The two primary sources of change are: a) Investment asset performance of (7.77%), 14.57% below the assumed investment return of 6.80%. The result was an asset loss of $244.7 million. This estimate may vary from the actual asset performance as determined by the investment consultant. b) Assumption Changes. Changes to the investment return assumption resulted in a $116.7 million increase in the unfunded liability. The table below summarizes current balances: Assets Investments $ 1,502,072,962 Future Contract Collections 141,395,979 Total Assets 1,643,468,941 Liabilities and Surplus Future Contract Benefits and Expenses $ 2,249,026,850 Deficit of Assets over Liabilities (605,557,909) Total Liabilities and Surplus (Deficit) 1,643,468,941 The program s funded ratio is 73.1%. The assumptions used to measure the adequacy of the Plan, which were approved by the Board, are stated in Section III. The most important assumptions are: The investment yield; The rate of increase in tuition/fees; Withdrawal rates; Future new entrants; and Expense. 1

Investment Yield The investment yield is the expected long-term net earnings rate of return on the assets. The actuarial valuation of the Plan was determined using the schedule of interest rates found in Section IV. We also assumed the Plan is exempt from federal income tax. It is important to highlight the sensitivity of this analysis to this assumption. As pointed out subsequently, a 25- basis points shortfall in such a goal would place the Plan in a much less favorable position. Additionally, the nature of this type of program involves payment of benefits at fixed future points in time, subjecting the Plan to greater than average investment risk due to short-term fluctuation and in matching investment maturities with expected outlays. Rate of Increase in Tuition/Fees Under statutory changes approved in 2003 by the Texas Legislature, the amount of tuition and required fees paid for each beneficiary who uses a Public Senior College contract to attend a Public Senior College will be the lesser of: 1) actual tuition and required fees; or 2) the weighted average tuition and required fees of all Texas public colleges and universities. Under this formula, Texas colleges and universities must accept this amount as payment in full for a beneficiary who attends a Public Senior College using plan benefits. After careful analysis, the Board selected tuition and fee increase assumptions above an expected rate of inflation. The assumed annual increases were 6.3% for Public Senior Colleges, 5.2% for Junior Colleges and 7.3% for Private Universities. Future New Entrants New contracts in future years would serve: a) to expand the base for spreading fixed expenses; b) to increase the likelihood that the Plan average tuition cost will not exceed Weighted Average Tuition (WAT) by a significant amount; and c) to ensure a large enough fund balance to invest profitably. In 2003 the Board suspended new enrollment in the Plan. For purpose of the actuarial analysis in this report, it is assumed that no future contracts will be sold. Expense In our analysis we provide an expense provision for records administration charges and for general expenses. The provision for fiscal year 2010 is $32 per contract that we assumed will increase 3.5% per year for inflation. 2

Bias Against the Program by Purchasers and Beneficiaries Bias is the result of rational decisions by purchasers and beneficiaries. Bias against the Plan is expected and is intrinsic to the purpose of a prepaid tuition program. A basic reason for establishing the Texas Guaranteed Tuition Plan is that the purchase of a contract will increase the commitment of the purchaser to a belief the beneficiary will become qualified to enter college and that the ownership of a contract will cause the beneficiary to be comfortable with a commitment to academic achievement. Bias against the Plan causes the amount the Plan pays to exceed the WAT. WAT is the average tuition/fees weighted by the number of full-time equivalent students. Bias refers to the degree to which the Texas Guaranteed Tuition Plan beneficiaries choose to attend the higher priced school and so cause the Plan to pay out more tuition/fee benefits. According to the amendments to state law, under statutory changes approved in 2003 by the Texas Legislature, the amount of tuition and required fees paid for each beneficiary who uses a Public Senior College contract to attend a Public Senior College will be the lesser of: 1) actual tuition and required fees; or 2) the weighted average tuition and required fees of all Texas public colleges and universities. Under this formula, Texas public colleges and universities must accept this amount as payment in full for a beneficiary who attends a Public Senior College using plan benefits. The statutory change removes the bias against the Plan by the Plan beneficiaries choosing to attend the higher priced school, because the maximum tuition/fees payout is limited by the WAT. However, these amendments do not apply to community colleges. The assumed bias load was 10.0% for community colleges. Use of Report This report is prepared solely to assist the Board of the Texas Guaranteed Tuition Plan in evaluating the actuarial soundness of the Plan each year. The report is not intended and is not suitable for any other purpose. Accordingly, Buck Consultants does not intend this report or the data contained therein to be used as personal financial advice. Other readers of this report should consult with their own financial advisors regarding the application of this report to their particular circumstances. 3

SECTION II Summary of Contract Data and Current Assets Contract Data A contract inventory report as of August 31, 2009 was extracted from Plan data. The contract inventory report presents the number of credit hours issued net of cancellations by contract type, number of years of tuition, grade or age of beneficiary and payment option. The contracts issued in 1996 were for 30 credit hours. The contracts issued after 1996 were for 32 credit hours. The credit inventory (number of hours) as of August 31, 2009 is summarized in the following table. Plans Lump Sum Five-Year Monthly Ten-Year Monthly Payment Options Extended Five-Year Monthly Annually Ten-Year Annually Extended Annually 1996 Enrollment Sr. College 393,999 284,466 362,310 440,884 - - 213 Jr. College 5,144 6,168 8,620 17,606 - - - Jr. & Sr. College 26,340 31,114 45,263 85,814 - - 96 Private College 3,757 4,303 3,505 4,418 - - - Total 1996 429,240 326,051 419,698 548,722 - - 309 1997 Enrollment Sr. College 376,157 210,346 264,447 250,992 - - 318 Jr. College 3,154 4,277 4,164 7,488 - - - Jr. & Sr. College 17,786 21,766 28,805 34,946 - - 92 Private College 17,859 4,799 2,815 3,513 - - - Total 1997 414,956 241,188 300,231 296,939 - - 410 1998 Enrollment Sr. College 296,260 88,486 157,125 142,890 79,204 33,598 19,745 Jr. College 2,182 1,130 1,958 2,608 386 288 179 Jr. & Sr. College 11,517 7,319 13,274 18,052 4,137 1,678 1,682 Private College 7,519 2,001 736 1,623 1,953 1,040 277 Total 1998 317,478 98,936 173,093 165,173 85,680 36,604 21,883 1999 Enrollment Sr. Coll ege 203,789 60,361 124,101 124,379 60,776 24,255 15,582 Jr. College 1,174 765 2,048 1,927 703 128 100 Jr. & Sr. College 10,333 6,176 11,605 14,130 2,889 1,514 574 Private College 5,022 655 1,152 1,412 3,308 640 464 Total 1999 220,318 67,957 138,906 141,848 67,676 26,537 16,720 2000 Enrollment Sr. College 259,370 106,613 156,675 165,155 76,876 31,632 24,043 Jr. College 2,064 2,150 1,887 2,478 671 96 408 Jr. & Sr. College 11,908 12,016 17,165 17,530 3,187 2,547 1,517 Private College 4,351 840 1,185 1,110 2,917 768 202 Total 2000 277,693 121,619 176,912 186,273 83,651 35,043 26,170 4

Plans Lump Sum Five-Year Monthly Ten-Year Monthly Payment Options Extended Monthly Five-Year Annually Ten-Year Annually Extended Annually 2001 Enrollment Sr. College 273,681 126,809 132,287 224,736 114,532 45,895 38,727 Jr. College 3,375 2,813 2,724 8,319 693 713 571 Jr. & Sr. College 21,047 15,911 21,015 42,748 8,188 4,129 6,120 Private College 7,696 1,610 1,005 3,404 2,745 1,521 858 Total 2001 305,799 147,143 157,031 279,207 126,158 52,258 46,276 2002 Enrollment Sr. College 339,436 128,703 117,214 184,290 141,113 52,558 40,479 Jr. College 5,259 4,507 3,295 7,013 563 760 745 Jr. & Sr. College 19,004 15,814 21,017 31,320 10,286 6,011 5,017 Private College 9,019 856 1,485 3,100 3,181 1,280 805 Total 2002 372,718 149,880 143,011 225,723 155,143 60,609 47,046 2003 Enrollment Sr. College 814,412 134,223 129,334 286,298 264,381 91,584 91,712 Jr. College 10,897 3,974 2,351 6,697 1,641 591 852 Jr. & Sr. College 41,790 16,165 16,546 41,482 16,211 8,055 9,235 Private College 28,078 3,075 1,193 4,144 9,478 1,143 1,788 Total 2003 895,177 157,437 149,424 338,621 291,711 101,373 103,587 Total Enrollment Sr. College 2,957,104 1,140,007 1,443,493 1,819,624 736,882 279,522 230,819 Jr. College 33,249 25,784 27,047 54,136 4,657 2,576 2,855 Jr. & Sr. College 159,725 126,281 174,690 286,022 44,898 23,934 24,333 Private College 83,301 18,139 13,076 22,724 23,582 6,392 4,394 Total Enrollment 3,233,379 1,310,211 1,658,306 2,182,506 810,019 312,424 262,401 The number of active contract counts (for all enrollment years combined) by plan type and projected year of matriculation is included in Appendix A. 5

Current Assets The assets are administered by the State Treasury and invested by external managers with whom the Board contracts. The value of the assets as of August 31, 2009 is $1,502,072,962. Asset totals shown below do not include securities lending collateral, investment transfers receivable, tuition contracts receivable or the related obligations for those assets. Assets held as of August 31, 2009: Cash in State Treasury $4,275,704 Investments 1,490,638,357 Interest & Dividends Receivable 12,007,319 Furniture and equipment net of depreciation 9,409 Less Accounts Payable (4,857,827) Total Assets $1,502,072,962 It is assumed that this mix will produce a net annual investment return of 6.30% in fiscal year 2010. 6

SECTION III Plan Description Overview The Texas Guaranteed Tuition Plan (Plan) is an Internal Revenue Code Section 529 prepaid tuition plan. It allows the contract holder to lock in the cost of undergraduate college tuition and required fees, thus providing protection against future tuition inflation. At matriculation the Plan will pay, based on the number of credit hours purchased, either 1) the weighted average or actual cost of college tuition and required fees at Texas public colleges and universities, whichever is less, or 2) the estimated average private tuition and required fees at Texas private colleges and universities. The contract holder buys credit hours representing a fixed amount of resident tuition and required fees. When the beneficiary is ready for college, all or a portion of the tuition and required fees will be covered at all four- or two-year public colleges and universities in Texas. The portion of the fees covered will vary based on the type of contract purchased. The contract can also be used to help pay for tuition at all private colleges in Texas and out-of-state institutions. Texas public colleges and universities are required by statute to accept the benefit payments as payment in full for the hours purchased. Eligibility At the time of enrollment, the beneficiary must be a Texas resident or his/her parent must be both the purchaser and a Texas resident. Contract Types The fund will pay the maximum number of credit hours listed below for the type of plan purchased: Junior College Plan Purchaser can prepay up to 64 credit hours of tuition and required fees at any public junior or community college in the state. Senior College Plan Purchaser can prepay up to 160 credit hours of tuition and required fees at any public senior college or university in the state. Junior-senior College Plan Purchaser can prepay up to 64 credit hours of tuition and required fees at any public, community or technical college in the state. In addition, the purchaser can prepay up to 64 credit hours of tuition and required fees for any public senior college or university in the state. Thus, a total of 128 credit hours can be purchased. Private College Plan Provides an estimated average private tuition and required fees, as determined by the board each year. This amount is applied toward any of Texas private or independent colleges for up to 160 credit hours. If tuition and required fees at the private college chosen exceed the estimated average, the beneficiary is responsible for the remaining balance. If the college charges are less than the estimated average, the purchaser can 7

request a refund of the difference. Otherwise, only the hours necessary to pay the student s tuition and required fee charges will be deducted from his or her plan. Payment Plans The Plan offers two types of payment plans: Lump Sum and Installment: Lump Sum Entire purchase made in one lump sum payment. Installment Plan Pay every month or once a year. Payment period of 5 years, 10 years, or the number of years until the beneficiary s projected high school graduation date. Refunds The purchaser may receive a refund on the unused portion of the contract. 8

SECTION IV Actuarial Methods and Assumptions Actuarial Methods The actuarial method projects the expected future cash flows from contract payments, tuition and refund benefits and expense. These projected future cash flows are discounted to the present and compared to the market value of the assets to indicate the soundness of the Plan. The development of the measurement of soundness has seven stages: Develop base line average tuition and required fees from data provided by the Plan; Project average tuition and required fees through the expected term of the contracts, based on assumptions as to future tuition increases; Determine the nominal cost of expected future tuition and required fees, based on the contract inventory and assumptions as to mortality, disability, voluntary surrender and utilization of benefits; Determine the nominal cost of expected future administrative expenses, based on the contract inventory and the records administration fee schedule, as well as assumptions as to inflation and utilization of benefits; Project future contract payments based on the contracts and assumptions as to mortality, disability and voluntary surrender; Determine the present value of expected future benefits, expenses and contract payments, based on the discount rate assumption; As the indication of soundness, measure the surplus or deficit, which is the difference between the sum of the market value of the assets and the present value of the expected future contract payments and the sum of the present values of the expected future tuition and required fees, refunds and expenses. Actuarial Assumptions Necessary adjustments to reflect new information were made to this year s assumptions. The assumptions were approved by the Board. The revisions to the assumptions, if any, are noted herein. 9

Federal Income Tax We assume the income of the Plan is exempt from Federal Income Tax. Tuition/Fee Increase Assumed annual increases in future tuition and required fees remained unchanged from August 31, 2008 report: Public Senior College Junior College Private University 6.3% 5.2% 7.3% Investment Yield The assumed annual net investment yield is illustrated in the following table: Investment Year Yield 2009 6.50% 2010 6.30% 2011 6.20% 2012 6.00% 2013 5.80% 2014 5.70% 2015 5.40% 2016 5.00% 2017 4.60% 2018+ 4.20% Expenses In our analysis we provide an expense provision for records administration charges and for general expense. The provision for fiscal year 2010 is $32 per contract, which we assume will increase 3.5% per year for inflation. Future Participation in the Program It is assumed that no new contracts will be issued in the future. Mortality and Disability Mortality rates for beneficiaries are assumed to follow the 1990 U.S. Life Tables. 10

Early Voluntary Surrender of Contract We assumed the following percentages of the public senior college contracts in effect at the beginning of the year would be surrendered during the year. We use similar estimates for the other college types, based on empirical evidence: Years From Purchase Lump Sum Five-Year Payments Ten-Year Payments Extended Payments 1 to 2 2.50% 6.30% 8.80% 13.70% 2 to 3 1.80% 3.60% 5.30% 6.00% 3 to 4 0.40% 1.50% 2.30% 3.00% 4 to 5 0.50% 1.00% 2.00% 3.00% 5 to 6 0.50% 0.50% 1.30% 2.00% After 6 Years 0.80% 1.30% 0.70% 2.30% Matriculation Percent We assumed the beneficiary of a contract not voluntarily surrendered matriculates at the date specified in the contract. Dropout Rate We assumed beneficiaries use the number of credits specified in the contract. Utilization of Credits We assumed beneficiaries use the credits specified according to the following schedule: Type of Contract First Year Second Year Third Year Fourth Year Fifth Year Sixth Year Five Year Contracts 20% 20% 20% 20% 15% 5% Four Year Contracts 25% 24% 23% 20% 8% 0% Three Year Contracts 30% 30% 30% 10% 0% 0% Two Year Contracts 50% 40% 10% 0% 0% 0% One- Year Contracts 80% 20% 0% 0% 0% 0% Frequency of Beneficiary Replacement We assumed no replacement of beneficiaries. Bias We assumed no bias load for universities and a bias load of 10.0% for community colleges. 11

SECTION V Soundness of the Plan as of August 31, 2009 As a measure of the soundness of the Plan as of August 31, 2009, we determined the difference between the value of the assets and the actuarial present value of the future contract payments and the actuarial present value of future benefits and expenses. This measurement of soundness is summarized on the following pages. A projection of the status of the Plan at each future anniversary date through the life of these contracts is presented on page 15, labeled Present Value of Assets and Liabilities. The projections of future benefits and expenses and contract payments are presented on page 16, labeled Expected Cash Flows. Our measurement of the present value and projection are based on asset and contract information provided and on the assumptions chosen by the Board. 12

Funded Status The liabilities of the trust fund exceed the value of assets as of August 31, 2009 (including the value of future payments by contract purchasers) by $605.56 million. The funded ratio, assets divided by liabilities, is equal to 73.1%. Asset totals shown below do not include securities lending collateral, investment transfers receivable or the related obligations for those assets. The assumptions used to perform the actuarial valuation of the fund were approved by the Board and are described in Section III. Total: $1,643.5 Million Total: $2,249.0 Million Future Contract Payments $141.4 Million Current Assets $1,502.1 Million Tuition/Fee Payments $2,249.0 Million Assets Liabilities 13

Cash Flow Projection The expected income and disbursements of the trust fund, based on the assumptions used in the actuarial valuation, and the current group of contract beneficiaries, are shown below. These amounts are cash amounts, not present value amounts. (thousands) 1,500,000 1,000,000 Assets Payments Out of Fund Payments into Fund + Investment Income 500,000 0-500,000 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24 '25 '26 '27 '28 '29 '30 '31-1,000,000-1,500,000-2,000,000 Fiscal Year End 14

Present Value of Assets and Liabilities 8/31 of Year Present Value of Future Benefit and Expenses Value of Assets and Present Value of Future Collections Deficit of Assets to Liabilities 2009 2,249,026,850 1,643,468,941 (605,557,909) 2010 2,173,570,057 1,537,699,546 (635,870,510) 2011 2,083,317,650 1,411,711,466 (671,606,184) 2012 1,998,392,837 1,287,119,329 (711,273,508) 2013 1,889,370,314 1,133,434,701 (755,935,613) 2014 1,752,890,479 948,003,518 (804,886,961) 2015 1,598,736,078 742,222,138 (856,513,940) 2016 1,434,207,827 523,397,703 (910,810,124) 2017 1,261,327,928 295,319,653 (966,008,275) 2018 1,085,089,405 65,472,400 (1,019,617,004) 2019 905,961,910 (163,145,071) (1,069,106,981) 2020 725,439,388 (388,769,915) (1,114,209,303) 2021 547,218,190 (608,119,667) (1,155,337,857) 2022 359,546,972 (832,017,833) (1,191,564,805) 2023 211,681,358 (1,016,792,843) (1,228,474,202) 2024 102,934,277 (1,165,067,963) (1,268,002,240) 2025 33,942,977 (1,278,231,252) (1,312,174,229) 2026 6,212,855 (1,356,920,697) (1,363,133,553) 2027 1,144,130 (1,418,404,607) (1,419,548,737) 2028 637,051 (1,478,444,984) (1,479,082,036) 2029 286,194 (1,540,850,193) (1,541,136,387) 2030 79,578 (1,605,741,497) (1,605,821,075) 2031 0 (1,673,247,742) (1,673,247,742) 15

Expected Annual Cash Flows Fiscal Year Ending Benefit Payments and Expenses Contract Payment Receipts Annual Cash Flow 2010 202,054,251 38,159,024 (163,895,227) 2011 212,486,766 32,033,809 (180,452,958) 2012 202,515,179 25,691,032 (176,824,147) 2013 220,812,710 18,684,803 (202,127,907) 2014 240,499,878 13,387,038 (227,112,840) 2015 248,901,055 11,300,018 (237,601,037) 2016 248,548,364 9,437,474 (239,110,890) 2017 244,750,512 7,602,332 (237,148,180) 2018 234,961,765 5,839,597 (229,122,168) 2019 223,911,664 4,174,591 (219,737,073) 2020 211,666,858 2,680,706 (208,986,152) 2021 196,427,433 1,385,623 (195,041,810) 2022 191,991,486 25,819 (191,965,667) 2023 145,023,642 0 (145,023,642) 2024 102,183,142 0 (102,183,142) 2025 62,169,984 0 (62,169,984) 2026 24,201,733 0 (24,201,733) 2027 4,349,247 0 (4,349,247) 2028 452,543 0 (452,543) 2029 300,708 0 (300,708) 2030 170,111 0 (170,111) 2031 63,160 0 (63,160) Note: The amounts shown above are annual expected amounts for the year corresponding to the Fiscal Year Ending column. They are not cumulative amounts. In addition, Payment Receipts are frontloaded. Therefore, the Expected Annual Cash Flows project positive cash flows in the early years and negative in the later years. It is expected that positive cash flows prior to Fiscal Year Ending 2010 would be invested to cover the negative cash flows in future years. 16

SECTION VI Sensitivity Testing The Program operates under conditions of risk and uncertainty. For example, while it is assumed the assets of the fund will earn the annual net rate found in Section IV, we also expect actual returns to vary from year to year. To accept the reasonableness of the basis for the measurement of the soundness, it is useful to know how the status of the fund may be affected by the vagaries of the markets and other factors. We have rerun the valuation under the following alternative scenarios, and the deficit as of August 31, 2009 under each of these scenarios is presented in the following table: Scenarios Deficit Baseline 605,557,909 Tuition increases are 25 basis points higher in each future year than assumed 636,708,870 The investment return is 25 basis points lower than assumed 633,699,907 Tuition increases are 25 basis points higher in each future year and the investment return is 25 basis points lower than assumed 665,473,634 Tuition increases are 25 basis points lower in each future year than assumed 574,979,663 Tuition increases are 25 basis points lower in each future year and the investment return is 25 basis points lower than assumed 602,512,628 The investment return is 50 basis points lower than assumed 662,481,139 The investment return is 75 basis points lower than assumed 691,919,535 The investment return is 100 basis points lower than assumed 722,033,605 Tuition increases are 50 basis points higher in each future year than assumed 668,444,166 Tuition increases are 75 basis points higher in each future year than assumed 700,775,656 Tuition increases are 100 basis points higher in each future year than assumed 733,715,443 17

SECTION VII Changes in Surplus Adequacy of the Fund As of August 31, 2009, the Plan had an unfunded liability of $605,557,909. The unfunded liability represents the difference between the sum of the market value of the assets and the present value of the expected future contract payments and the sum of the present value of the expected future tuition and required fees, refunds and expenses. The unfunded liability is $399,237,653 higher than last year s unfunded liability of $206,320,256. The two primary sources of change are: a) Investment asset performance of (7.77%), 14.57% below the assumed investment return of 6.80%. The result was an asset loss of $244.7 million. b) Assumption Changes. Changes to the investment return assumption resulted in a $116.7 million increase in the unfunded liability. Following is a comparison of the assumed and the actual results for the year ended August 31, 2009. Investment Return Assets performed worse than expected during the 2009 fiscal year, returning (7.77%) versus the prior year assumption of 6.80%. The result was an asset loss of $244.7 million. The extent that investment experience exceeds tuition increases will result in an actuarial gain. Tuition and Required Fee Increase The Weighted Average Tuition (WAT) for Senior College increased from $6,943 to $7,362, an increase of 6.34% compared to the assumed 6.30% increase. The Junior College WAT increased from $2,051 to $2,172, an increase of 5.90% compared to the assumed 5.20% increase. The Private College WAT increased from $18,082 to $19,088, an increase of 5.56% compared to the assumed 7.30% increase. The tuition experience resulted in an actuarial gain of approximately $6.5 million. Bias Against the Program by Purchasers and Beneficiaries The design of the program removed the bias relating to beneficiaries of Texas Guaranteed Tuition Plan contracts attending relatively higher priced universities. However, there was still an 8.1% bias for community colleges as calculated by comparing the actual tuition and fee payment for the contract beneficiaries who attend community colleges to the expected payout based on program assumptions. Therefore the bias was 1.9% less than the 10.0% expected by last year s valuation, resulting in an actuarial gain of $65,000. Expense The assumption for records administration charges and general expenses remains at $32 per contract for fiscal year 2009, with an increase of 3.5% per year in each future year for inflation. But the prior year s report assumed that expenses would increase to $33.12. This results in an actuarial gain of $0.6 million. 18

Voluntary Withdrawal and Contract Reductions There were approximately 917 contracts surrendered during the year. This is less than the 1,127 expected, creating a gain and reducing the present value of expected payments by contract holders. Gain/Loss Summary During the last year, the plan experienced a $268.5 million actuarial loss. The sources of the (gain)/loss are as follows: (Gain) / Loss (millions) Asset Loss (-7.77% return) $244.7 Tuition Inflation Gain (6.5) Expense (0.6) Bias (0.1) Withdrawal and Matriculation 31.0 Total Loss $268.5 Assumption Change There were no assumption changes other than the investment return. Changes to the investment return assumption resulted in a $116.7 million increase in the unfunded liability. Combined with the actuarial loss of $265.5 million, results in the total unexpected increase in unfunded liability of $385.2 million. 19

TEXAS GUARANTEED TUITION PLAN Active Contract Counts for All Enrollment Periods - Appendix A As of August 31, 2009 Matriculation Plan Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1997 0 2 0 0 0 0 0 0 0 0 0 0 0 0 0 1998 0 2 0 0 0 0 0 0 0 0 0 0 1 0 0 1999 2 3 0 0 0 2 0 0 0 0 0 0 0 0 0 2000 34 378 12 33 9 14 2 5 0 1 0 0 8 16 1 2001 81 657 26 47 16 24 2 11 0 1 1 1 12 23 0 2002 123 1,004 37 75 32 35 4 18 0 1 0 2 36 21 0 2003 207 1,484 46 126 55 38 7 24 1 1 1 3 113 41 0 2004 238 1,972 63 155 62 67 14 40 2 10 1 0 137 42 0 2005 368 3,296 100 255 92 71 14 59 1 8 3 4 172 68 0 2006 475 4,372 168 375 163 106 26 88 1 9 6 3 270 71 0 2007 575 4,652 186 508 151 143 35 89 5 13 11 5 274 69 0 2008 698 4,925 225 602 242 184 45 97 5 16 5 6 291 65 1 2009 577 4,790 193 598 271 250 43 101 2 11 9 3 332 71 0 2010 648 4,782 198 592 268 218 62 79 5 6 8 3 359 59 0 2011 622 4,669 146 507 213 210 35 87 1 3 6 4 363 71 0 2012 615 4,714 190 552 249 178 35 105 7 11 15 1 367 69 0 2013 608 4,756 164 523 234 198 53 75 3 10 7 5 385 69 0 2014 593 4,501 169 453 220 187 51 74 1 5 5 1 363 31 1 2015 425 3,790 119 348 186 134 32 68 2 10 5 0 481 3 0 2016 394 3,468 118 344 141 121 25 61 8 9 5 1 532 0 0 2017 358 3,080 84 269 144 117 29 58 0 4 5 0 519 0 0 2018 346 2,802 98 294 164 107 26 35 1 7 2 0 493 2 0 2019 322 2,434 75 236 137 72 18 39 1 6 1 0 447 1 0 2020 236 1,978 74 197 136 63 12 33 2 5 4 1 359 0 0 2021 264 2,349 89 224 149 70 16 31 2 3 14 0 486 0 0 2022 2 9 0 2 0 0 0 0 0 0 0 0 1 0 0 2023 0 6 3 2 0 0 1 0 0 0 0 0 1 0 0 2024 0 8 0 2 0 0 0 0 0 0 0 0 1 0 0 2025 0 4 0 1 2 0 0 0 0 0 0 0 0 0 0 2026 1 4 0 0 0 0 0 0 0 0 0 0 0 1 0 Total 8,812 70,891 2,583 7,320 3,336 2,609 587 1,277 50 150 114 43 6,803 793 3 % of Total 8.34% 67.06% 2.44% 6.92% 3.16% 2.47% 0.56% 1.21% 0.05% 0.14% 0.11% 0.04% 6.44% 0.75% 0.00% Key to Plan Type: 1. Jr/Sr - 2/2 4. Sr - 2 Yr 7. Jr - 1 Yr 10. Pr - 2 Yr 13. Sr - 5 Yr 2. Sr - 4 Yr 5. Sr - 1 Yr 8. Pr - 4 Yr 11. Pr - 1 Yr 14. Sr - 4 Yr +8Hrs 3. Sr - 3 Yr 6. Jr - 2 Yr 9. Pr - 3 Yr 12. Jr/Sr - 2/2 + 4Hrs 15. Sr - 4 Yr + 6Hrs 20

TEXAS GUARANTEED TUITION PLAN Active Contract Counts for All Enrollment Periods - Appendix A As of August 31, 2009 Matriculation Plan Year 16 18 21 23 24 31 34 35 Total % of Total 1996 0 0 0 0 0 0 0 0 2 0.00% 1997 0 0 0 0 0 0 0 0 3 0.00% 1998 0 0 0 0 0 0 0 0 7 0.01% 1999 1 0 1 1 2 0 2 0 520 0.49% 2000 0 0 1 0 0 0 2 0 905 0.86% 2001 1 1 0 0 1 0 1 0 1,392 1.32% 2002 1 0 2 0 0 0 2 3 2,155 2.04% 2003 0 0 1 0 2 0 3 1 2,810 2.66% 2004 1 0 0 2 1 0 3 5 4,523 4.28% 2005 2 2 2 2 2 0 7 4 6,154 5.82% 2006 0 0 4 1 2 0 4 10 6,737 6.37% 2007 2 2 3 3 0 0 8 12 7,437 7.04% 2008 1 1 1 1 4 0 5 7 7,271 6.88% 2009 0 0 2 1 2 0 5 18 7,315 6.92% 2010 0 1 3 1 3 2 3 10 6,960 6.58% 2011 0 0 2 2 2 0 7 14 7,135 6.75% 2012 0 1 6 2 3 2 7 9 7,120 6.74% 2013 1 0 1 1 1 0 11 6 6,676 6.32% 2014 0 0 0 0 0 0 5 9 5,617 5.31% 2015 0 0 0 0 0 0 2 7 5,236 4.95% 2016 0 0 0 0 0 0 0 12 4,679 4.43% 2017 0 0 0 0 0 0 0 14 4,391 4.15% 2018 0 0 1 0 0 0 0 8 3,798 3.59% 2019 0 0 0 0 0 0 0 10 3,110 2.94% 2020 0 0 0 0 0 0 0 12 3,709 3.51% 2021 0 0 0 0 0 0 0 0 14 0.01% 2022 0 0 0 0 0 0 0 0 13 0.01% 2023 0 0 0 0 0 0 0 0 11 0.01% 2024 0 0 0 0 0 0 0 0 7 0.01% 2025 0 0 0 0 0 0 0 0 6 0.01% Total 10 8 30 17 25 4 77 171 105,713 % of Total 0.01% 0.01% 0.03% 0.02% 0.02% 0.00% 0.07% 0.16% Key to Plan Type: 16. Sr - 4 Yr + 4Hrs 21. Sr - 2 Yr + 4Hrs 26. Pr - 4 Yr + 4Hrs 31. Pr - 2 Yr + 4Hrs 17. Sr - 4 Yr + 2Hrs 22. Sr - 2 Yr + 2Hrs 27. Pr - 4 Yr + 2Hrs 32. Pr - 2 Yr + 2Hrs 18. Sr - 3 Yr + 6Hrs 23. Sr - 1 Yr + 2Hrs 28. Pr - 3 Yr + 6Hrs 33. Pr - 1 Yr + 2Hrs 19. Sr - 3 Yr + 4Hrs 24. Pr - 4 Yr + 8Hrs 29. Pr - 3 Yr + 4Hrs 34. Sr Add'l Year 20. Sr - 3 Yr + 2Hrs 25. Pr - 4 Yr + 6Hrs 30. Pr - 3 Yr + 2Hrs 35. Pr - 5 Yr 21

Texas Guaranteed Tuition Plan Contracts Matriculation Information FY 2009 Payments to Community Colleges Appendix B Texas Community College Number of Semester Tuition and Average Paid Per Contracts Hours Fees Paid Semester Hour Alvin Community College 1 2 533 216.93 Amarillo College 63 440 61,187 139.21 Angelina College 21 126 13,582 107.66 Austin Community College 668 4,510 752,911 166.93 Blinn College 540 4,935 892,398 180.83 Brazosport College 20 234 21,216 90.58 Brookhaven College 89 440 66,013 150.11 Cedar Valley College 20 131 19,315 147.79 Central Texas College 38 196 24,731 126.31 Cisco College 37 347 55,918 161.17 Clarendon College 9 113 18,280 161.07 Coastal Bend College 26 330 50,170 151.87 College of the Mainland 18 69 11,055 159.96 Collin County Community College 216 1,528 149,014 97.51 Del Mar College 100 969 140,795 145.25 Eastfield College 66 513 47,492 92.56 El Centro College 22 110 11,503 104.17 El Paso Community College 69 560 69,005 123.13 Frank Phillips College 1 2 400 216.92 Galveston College 10 47 5,629 119.62 Grayson County College 38 454 39,105 86.07 Hill College 23 240 24,839 103.54 Houston Community College 108 548 91,528 167.07 Howard College 29 229 33,166 144.97 Kilgore College 52 621 82,075 132.16 Lamar State College Orange 19 147 33,632 228.21 Lamar State College Port Arthur 16 194 40,016 206.08 Laredo Community College 37 273 34,014 124.43 Lee College 27 275 29,134 106.08 Lone Star College System District 297 1,567 187,294 119.53 McLennan Community College 81 619 97,547 157.61 Midland College 38 200 31,901 159.19 Mountain View College 23 109 13,982 127.90 Navarro College 38 299 43,927 146.89 North Central Texas College 114 731 127,804 174.89 North Lake College 80 495 70,014 141.31 Northeast Texas Community College 10 63 10,013 159.53 Northwest Vista College 136 1,224 170,231 139.12 Odessa College 19 211 20,516 97.21 Palo Alto College 43 403 54,014 133.97 Panola College 14 114 13,528 118.42 Paris Junior College 36 278 42,991 154.70 Ranger College 1 16 1,172 73.25 Richland College 106 698 67,113 96.18 San Antonio College 178 1,173 181,133 154.45 San Jacinto College Central 62 175 24,778 141.68 San Jacinto Community College District 133 1,282 143,264 111.76 South Plains College 132 1,293 210,377 162.76 South Texas College 61 398 77,649 195.11 Southwest Texas Junior College 12 101 16,176 159.82 22

Texas Guaranteed Tuition Plan Contracts Matriculation Information FY 2009 Payments to Community Colleges Appendix B Texas Community College Number of Semester Tuition and Average Paid Per Contracts Hours Fees Paid Semester Hour St. Philips College 37 334 41,965 125.76 Tarrant County College Ft. Worth (NW) 62 451 49,362 109.50 Tarrant County College Hurst 130 665 87,459 131.48 Tarrant County College SE Campus 78 618 65,604 106.12 Tarrant County College South Campus 52 345 46,078 133.65 Temple College 48 477 71,670 150.40 Texarkana College 6 34 3,582 105.74 Texas State Technical College Harlingen 17 178 30,752 172.61 Texas State Technical College Marshall 3 37 7,928 216.97 Texas State Technical College Sweetwater 4 27 3,829 142.76 Texas State Technical College Waco 65 715 131,272 183.50 Trinity Valley Community College 27 200 17,675 88.49 Tyler Junior College 84 883 115,377 130.60 UTB & Texas Southmost College 43 633 128,768 203.53 Vernon College 25 230 35,973 156.21 Victoria College 54 461 46,156 100.13 Weatherford College 40 386 49,635 128.64 Western Texas College 38 170 26,307 155.10 Wharton County Junior College 72 898 121,542 135.39 Total 4,882 37,774.24 5,505,013.03 145.73 23

Texas Guaranteed Tuition Plan Contracts Matriculation Information FY 2009 Payments to Proprietary Institutions Appendix B Number of Semester Tuition and Average Paid Per Contracts Hours Fees Paid Semester Hour Texas Proprietary Institutions Academy of Health Care Professions NL 2 73 15,849 216.97 Academy of Health Care Professions-San Antonio 1 69 14,268 206.79 Alamo Community College Continuing Education 3 19 3,533 186.07 Allied Health Careers 2 75 8,412 111.96 American Intercontinental University - Houston 1 6 1,302 216.97 Art Institute of Austin 21 469 92,551 197.17 Art Institute of Dallas 22 680 156,228 229.75 Art Institute of Houston 26 604 128,516 212.77 ATI Career Training Center North Richland Hills 5 235 40,073 170.79 Austin Community College Continuing Education 4 29 4,524 156.42 Bradford School of Business 4 204 43,767 214.75 Center for Advanced Legal Studies 1 30 6,509 216.97 Central Texas College Aviation Division 2 53 11,330 212.84 Central Texas College Distance Learning 12 24 4,122 169.27 Collin County Special Billing 1 1 199 217.01 Commonwealth Institute of Funeral Service 1 28 6,240 221.16 Computer Career Center 1 11 841 76.43 Court Reporting Institute of Dallas 2 72 15,525 216.97 Court Reporting Institute of Houston 1 41 8,772 212.12 Dallas County Community College LeCroy Center 6 17 3,670 216.53 DeVry University Houston 2 44 9,406 213.78 DeVry University Irving 2 26 5,460 210.00 Eastfield College Continuing Education 1 3 750 216.95 Everest College Fort Worth 1 61 13,203 216.97 Hallmark Institute of Technology 2 69 15,008 216.97 International Academy of Design and Technology 2 72 15,779 219.15 ITT Technical Institute Arlington 1 48 10,415 216.97 ITT Technical Institute Austin 2 32 6,977 216.97 ITT Technical Institute Houston West 1 8 1,736 216.97 ITT Technical Institute Richardson 2 40 8,679 216.97 ITT Technical Institute San Antonio 3 148 26,000 176.05 KD Studio 1 23 5,087 216.97 Le Cordon Bleu-Dallas 5 218 47,375 216.97 Lincoln College of Technology 5 262 57,463 218.99 Remington College 1 12 2,608 216.97 Remington College Fort Worth 1 70 6,950 99.85 Sam Houston State University Correspondence Dept. 4 6 1,300 209.61 South Plains College Continuing Education 2 7 780 113.04 Texas A&M Commerce Correspondence Division 1 2 400 216.92 Texas A&M University Health Science Center 19 345 76,357 221.52 Texas A&M University Study Abroad Programs Ofc 10 127 27,555 216.97 Texas Culinary Academy 18 1,031 220,228 213.58 Texas Engineering Extension Service 1 19 4,250 226.05 24

Texas Guaranteed Tuition Plan Contracts Matriculation Information FY 2009 Payments to Proprietary Institutions Appendix B Number of Semester Tuition and Average Paid Per Contracts Hours Fees Paid Semester Hour Texas Proprietary Institutions Texas State University Office of Correspondence 41 162 34,768 214.65 Texas Tech Outreach & Extended Studies 46 140 30,335 217.40 Texas Tech Study Abroad 3 52 10,765 207.02 Texas Tech University-Rawls College of Business 3 12 2,604 216.97 Universal Technical Institute Houston 4 145 31,517 216.97 University Extension UT Austin 94 264 58,302 220.58 University of North Texas Health Science Center 5 53 11,846 224.17 University of Texas at Arlington On Line Courses 3 15 3,316 223.06 University of Texas at Austin Engineering Co-op Ofc 2 4 860 216.95 University of Texas Center for Lifelong Engineering Ed 1 1 285 216.97 University of Texas Health Science Center at Houston 16 243 52,715 216.97 University of Texas Health Science San Antonio 27 528 117,130 222.03 UT in DC 3 35 7,528 216.97 UT McCombs School of Business CIBER 9 35 8,015 229.33 UT Study Abroad Office / International Office 24 260 56,231 216.27 Virginia College @ Austin 3 60 10,020 167.00 Wade College 3 157 33,989 216.97 West Texas A&M University Continuing Education 2 6 1,380 216.98 Westwood College of Technology 1 14 2,929 216.97 Total 495 7,599 1,604,527 211.15 25

Texas Guaranteed Tuition Plan Contracts Appendix B Matriculation Information FY 2009 Payments to Texas Four-Year Public Universities Number of Semester Tuition and Average Paid Per Contracts Hours Fees Paid Semester Hour Texas Four-Year Public University Angelo State University 157 3,893 702,030 180.35 Lamar Institute of Technology 23 424 56,101 132.31 Lamar University 131 3,063 601,002 196.20 Midwestern State University 112 2,729 505,960 185.39 Prairie View A&M University 35 820 172,975 210.95 Sam Houston State University 471 12,634 2,382,642 188.59 Stephen F. Austin State University 384 10,235 2,039,707 199.28 Sul Ross State University Alpine 27 660 100,684 152.60 Tarleton State University 217 5,289 939,919 177.70 Texas A&M International University 41 1,018 150,745 148.13 Texas A&M University College Station 3,259 83,781 18,032,882 215.24 Texas A&M University Commerce 81 1,800 298,126 165.62 Texas A&M University Corpus Christi 214 5,406 1,021,649 188.99 Texas A&M University Galveston 106 2,920 625,498 214.22 Texas A&M University Kingsville 80 1,862 324,625 174.39 Texas A&M University Texarkana 8 139 20,538 147.76 Texas Southern University 13 304 59,591 196.07 Texas State University San Marcos 1,387 33,394 7,024,729 210.36 Texas Tech University 1,753 44,427 9,475,150 213.27 Texas Tech University Health Sciences Center 52 1,078 199,403 184.95 Texas Woman's University 155 3,519 691,590 196.53 University of Houston 621 14,017 2,958,833 211.08 University of Houston Clear Lake 47 809 155,537 192.31 University of Houston Downtown 85 1,566 270,892 172.95 University of Houston Victoria 31 490 88,446 180.51 University of North Texas 1,121 26,653 5,559,792 208.60 University of Texas at Arlington 420 9,502 2,026,132 213.22 University of Texas at Austin 2,922 73,596 16,212,192 220.29 University of Texas at Brownsville 18 135 22,298 165.31 University of Texas at Dallas 287 6,835 1,503,288 219.93 University of Texas at El Paso 136 3,067 609,333 198.68 University of Texas at San Antonio 921 22,099 4,657,088 210.74 University of Texas at Tyler 132 2,956 562,359 190.26 University of Texas of the Permian Basin 43 782 134,019 171.39 University of Texas Pan American 142 3,262 556,312 170.52 West Texas A&M University 135 3,252 553,988 170.38 Total 15,767 388,415.02 81,296,056.08 209.30 26

Texas Guaranteed Tuition Plan Contracts Matriculation Information FY 2009 Payments to Texas Private Institutions Appendix B Number of Semester Tuition and Average Paid Per Contracts Hours Fees Paid Semester Hour Texas Private Institutions Abilene Christian University 98 2,430 613,508 252.50 Amberton University 1 9 1,953 216.97 Austin College 67 1,995 468,332 234.80 Baylor College of Dentistry 5 98 21,202 216.97 Baylor College of Medicine 4 68 20,871 306.93 Baylor Law School 1 6 1,302 216.97 Baylor University 509 13,926 3,353,522 240.80 Concordia University Austin 19 556 111,544 200.78 Criswell College 3 60 13,110 216.97 Dallas Baptist University 36 984 204,554 207.85 Dallas Christian College 1 37 8,028 216.97 Dallas Theological Seminary 2 8 1,736 216.97 East Texas Baptist University 18 458 95,156 207.76 Hardin-Simmons University 53 1,318 276,238 209.56 Houston Baptist University 31 808 172,236 213.16 Howard Payne University 27 752 162,709 216.37 Huston-Tillotson University 1 6 1,302 216.97 Jacksonville College 1 6 1,410 216.99 Jarvis Christian College 1 13 2,821 216.97 Le Tourneau University 15 349 67,576 193.62 Lon Morris College 3 65 10,208 157.78 Lubbock Christian University 33 920 205,953 223.92 McMurry University 15 372 76,366 205.26 Northwood University Texas 5 114 24,735 216.97 Our Lady of the Lake University 7 142 22,940 161.55 Rice University 74 2,280 543,077 238.19 Schreiner University 26 703 143,913 204.79 South Texas College of Law 11 173 49,023 283.37 Southern Methodist University 154 4,373 1,068,647 244.39 Southern Methodist University Continuing Studies 1 5 1,009 216.98 Southwestern Assemblies of God University 3 75 14,586 194.48 Southwestern Baptist Theological Seminary 3 59 12,126 205.41 Southwestern University 102 3,237 812,597 251.00 St. Edwards University 157 4,377 989,601 226.08 St. Mary's University 48 1,371 328,229 239.39 Texas Chiropractic College 2 62 13,443 216.97 Texas Christian University 312 8,789 2,109,000 239.97 Texas Lutheran University 51 1,345 283,496 210.78 Texas Wesleyan School of Law 5 66 20,243 308.34 Texas Wesleyan University 19 492 121,472 246.93 27

Texas Guaranteed Tuition Plan Contracts Matriculation Information Appendix B Number of Semester Tuition and Average Paid Per Contracts Hours Fees Paid Semester Hour Matriculation Information: Executive Summary Texas Universities Texas Community Colleges 4,882 37,774 5,505,013 145.73 Texas Proprietary Institutions 495 7,599 1,604,527 211.15 Texas Four-Year Public Universities 15,767 388,415 81,296,056 209.30 Texas Private Institutions 2,287 62,694 14,627,780 233.32 Total Texas Institutions 23,431 496,483 103,033,375 207.53 Out-Of-State Institutions Out-of-State Community Colleges 164 1,700 314,662 185.09 Out-of-State Proprietary Institutions 16 629 126,178 200.66 Out-of-State Universities 1,833 46,088 10,217,884 221.70 Out-of-State Private Universities 1,226 35,424 8,542,034 241.13 Total Out-Of-State Institutions 3,239 83,842 19,200,757 229.01 Grand Total* 26,670 580,324 122,234,133 210.63 * There are a total of 24,720 contracts in matriculation status on August 31, 2009. This is different than the total seen in the chart above due to 1,950 students attending multiple schools in the same semester. Total Enrollment Texas Community Colleges 8.58% 12.14% 18.31% 1.86% Texas Proprietary Institutions Texas Four-Year Universities Texas Private Universities 59.12% Total Out-Of-State Institutions Total Tuition and Fee Payments Texas Community Colleges 11.97% 15.71% 4.50% 1.31% 66.51% Texas Proprietary Institutions Texas Four-Year Universities Texas Private Universities Total Out-Of-State Institutions 29