Dear Fellow Pennsylvanians - PA529Dear Fellow Pennsylvanians: On behalf of the Tuition Account...

2018-2019 ANNUAL REPORT

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 and Career Savings Program (PA 529) for fiscal year 2018-19.

Since the program’s beginning it has helped more than 130,905 students and paid more than $3.7 billion in higher education expenses. 29,838 students used PA 529 accounts to pay $440.7 million for their higher education this year alone.

PA 529 continues to excel by virtually any metric. The total accounts of both the Guaranteed Savings Plan (GSP) and the Investment Plan (IP) grew to 238,741, which is a 4.47% increase from last year. Total account owner contributions grew by 3.54% to $588.2 million, bringing the total assets of PA 529 under management to $5.2 billion, — an increase of 9.6% from the previous year.

For the first time in the history of the program, the PA 529 IP was awarded the Morningstar Bronze RatingTM. This rating puts the PA 529 IP in the “Top 529 College Savings Plans” and among the elite 30 “Best in Class” plans. This rating recognizes the hard work of Treasury over the past few years to improve the IP through age-based investment options, portfolio diversification, fee reductions, and overall better oversight of the plan. This designation will help us continue to make improvements that will help Pennsylvania families save for higher education costs.

The IP was also able to lower fees again for account owners. The reduction of 0.01% was a result of an increase in assets under management. Treasury anticipates further reductions as assets continue to grow and meet new thresholds. This new reduction will save families approximately $310,000 across the IP.

For the seventh consecutive year, the PA 529 GSP is more than fully funded, at 127.35%. Recently, the actuarial assumed rate of return was reduced to 5.5% from 6%. This rate reduction allows more assets to be allocated with lower-risk investments and the ability to manage the plan more prudently.

While the PA 529 program continues to grow, the addition of Keystone Scholars is making a significant impact across the Commonwealth, and helping families start saving as early as possible. The program, which offers a $100 starter deposit into a PA 529 GSP account for every baby born or adopted by a Pennsylvania family, started statewide in 2019, following the passage of legislation in 2018.

Keystone Scholars started in 2018 with a demonstration project in six counties. Researchers have helped us conclude that the availability of Keystone Scholars has a positive impact on families opening PA 529 accounts during the first year of their child’s life. Families in pilot counties were twice as likely to open a PA 529 account during their child’s first year than those in other counties—this was true across all demographics.

This promising finding shows the power of Keystone Scholars and the impact it can have on every new Pennsylvanian. The program helps jump-start savings for every child without using any taxpayer funds. Keystone Scholars is funded by existing earnings dollars by the GSP and philanthropic donations.

We are excited by these accomplishments, but even more so by the bright future for the PA 529 College and Career Savings Program. Helping families save for postsecondary education is important not only for their individual goals, but for the well-being of the commonwealth’s economy, workforce, and next generation.

Sincerely,

Joe TorsellaPennsylvania State Treasurer

INTRODUCTION 1. Brief Program Overview.

2. Program Administration.

3. Advisory Board Members.

PROGRAM ACCOMPLISHMENTS 7. PA 529 IP Awarded Morningstar Bronze RatingTM

9. Keystone Scholars Program.

9. Record Number of Families Saving at Record Levels.

13. $440.7 Million to Help Make Higher Education Possible for 29,838 Students.

PA 529 GUARANTEED SAVINGS PLAN17. How the PA 529 Guaranteed Savings Plan Works.

19. PA 529 GSP Fund Exceeded a 100 Percent Funded Actuarial Status.

19. PA 529 GSP Contributions Held Steady While Assets Continue to Grow.

20. The PA 529 GSP Remains a Successful, Lower-risk College and Career Savings Plan.

PA 529 INVESTMENT PLAN25. PA 529 IP Investment Options Described.

25. PA 529 IP Contributions and Assets Grew.

27. Investment Performance was Positive.

SUBSEQUENT CHANGES35. PA 529 GSP Actuarial Assumptions Reduced.

37. PA 529 IP Fees Reduced Again.

FINDINGS AND RECOMMENDATIONS41. Findings and Recommendations.

TABLE OF CONTENTS

INTRODUCTION

Joseph M. Torsella, Pennsylvania State Treasurer

1

Brief Program Overview. The Pennsylvania 529 College and Career Savings Program provides one of the best ways to save for higher education. It is an easy and tax-efficient 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 lower-risk 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. It can be used at any college, university, or trade school that is eligible to participate in federal student aid programs as well as elementary and secondary school tuition expenses up to $10,000 per year. And, even if the account is not used for 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 17 different investment options during the period covered by this Annual Report, including three age-based options, provided by The Vanguard Group. These options include varying asset allocations, ranging from 100 percent equities to inflation-protected 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 $15,000 per beneficiary each year. For a married couple with two incomes of $15,000 or more each, the deduction could total $30,000 per child.

• Federal gift and estate tax advantages. Contributions up to $75,000 can be made in a single year ($150,000 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.

• 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 2018-19, the average PA 529 account beneficiary received about $90 more in state grants because of this advantage. Over four years of undergraduate school, that would be nearly $360.

The Pennsylvania 529 College and Career Savings Program

2

• Tuition discounts at over 400 private colleges nationwide with 56 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 and Career Savings Program account. Discounts can be earned of up to one year of tuition (currently valued at $10,500 to $57,324 – 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, 2019, PA 529 account owners earned $19.05 million through Upromise Rewards.

Program Administration.Act 11 of 1992 also charged the Pennsylvania Treasury with establishing and administering the PA 529 College and Career 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 performs the record-keeping 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.


3

Barbara MattlemanEducation Advocate/Consultant

The Honorable Michael PeiferPennsylvania House of Representatives

Jeffrey S. Batoff, EsquireObermayer Rebmann Maxwell & Hippel LLP

Karen D. BeyerSenior Sales Executive

Razor Technology

Laurie A. Carter, J.D.President

Shippensburg University of Pennsylvania

Mark D. DiRocco, Ph.D.Executive Director

Pennsylvania Association of School Administrators

John R. EvansDirector, Office of Small Business Advocate

Pennsylvania Department of Community and Economic Development

The Honorable Andrew E. DinnimanSenate of Pennsylvania

Noe OrtegaDeputy Secretary

Pennsylvania Department of Education

John J. Sygielski, Ed.D.President

Harrisburg Area Community College

Dr. Jonathan PeriPresident, Manor College

Chairman, Council of Higher Education

The Honorable Joseph M. TorsellaState Treasurer

Chairman. Tuition Account Program Advisory Board

Dr. Daniel GreensteinChancellor

Pennsylvania State System of Higher Education

James L. HaddockSmall Business Owner

Dr. Brenda A. AllenPresident

Lincoln University

The Honorable Jason E. SalusTreasurer

Montgomery County

Advisory Board Members [as of June 30, 2019]

Dr. Richard E. McDowellPresident Emeritus

University of Pittsburgh at Bradford

PROGRAM ACCOMPLISHMENTS


7

PA 529 IP AWARDED MORNINGSTAR BRONZE RATINGTM For the first time in its nearly 20-year history, the PA 529 IP has received a Morningstar Bronze RatingTM in its review of the “Top 529 College Savings Plans” for 2019. The ranking puts the PA 529 IP among an elite group of 30 “Best in Class” plans, less than half of all plans rated by Morningstar, a highly respected and reliable source of independent investment analysis.

529 plans are rated based on five key pillars: Process, People, Parent, Price, and Performance. According to Morningstar, the PA 529 IP received a Morningstar Bronze RatingTM based on improvements made to the plan under Treasurer Torsella since 2017, including age-based investment options, portfolio diversification, fee reductions, and overall better oversight of the plan. In its review, Morningstar paid particular attention to the fact that these continuing improvements illustrate that Treasury has been a consistently diligent parent. Morningstar also highlighted some of PA 529’s unique benefits, including a rewards program and the Keystone Scholars program.

NEWS RELEASE

For Immediate ReleaseOctober 29, 2019

PA 529 COLLEGE AND CAREER SAVINGS PROGRAM RECEIVES FIRST-EVER MORNINGSTAR MEDALThe PA 529 Investment Plan awarded bronze rating, among nation’s 30 “Best in Class” plans

Harrisburg, PA – Pennsylvania State Treasurer Joe Torsella today announced that the PA 529 College and Career Savings Program Investment Plan (IP) has received, for the first time in its history, a Morningstar Bronze RatingTM in its review of the Top 529 College Savings Plans for 2019. The ranking puts the Pennsylvania plan among an elite group of 30 “Best in Class” plans, less than half of all the plans rated by Morningstar.

“Pennsylvania families are working hard to save for their child’s future postsecondary education, using the PA 529 College and Career Savings Program. At Treasury, we’re doing everything we can to offer a robust and secure savings plan to help them do that,” said Torsella. “Receiving a Morningstar Bronze RatingTM for the PA 529 IP shows how far the plan has come, and also gives us more opportunities to improve the plan for Pennsylvania families. While we are proud of the fee reductions and other improvements Morningstar cited, Pennsylvanians should know this: we are just getting started, and we’re going to keep on improving.”

529 plans are rated based on five key pillars: Process, People, Parents, Price, and Performance. According to Morningstar, the PA 529 IP received a Morningstar Bronze RatingTM based on improvements made to the plan under Treasurer Torsella since 2017, including age-based investment options, portfolio diversification, fee reductions, and overall better oversight of the plan. Morningstar also highlighted some of PA 529’s unique benefits, including a rewards program and the new Keystone Scholars program, which provides a $100 starter deposit to a PA 529 account for every baby born to or adopted by a Pennsylvania family, starting in 2019.

The PA 529 IP offers account owners 17 investment options with varying risk to choose from through Vanguard. The PA 529 College and Career Savings Program also offers the Guaranteed Savings Plan (GSP)—a lower-risk option allowing account holders to save for tomorrow’s tuition rates at today’s prices. IP investment returns are based on market performance, while GSP returns are based on tuition increases.


8

Pennsylvania families currently have $5.2 billion in assets invested in the IP and GSP plans combined, with $3.1 billion in the IP alone.

The PA 529 College and Career Savings Program has been helping Pennsylvania families save and pay for postsecondary expenses for more than 25 years. PA 529 account holders receive tax benefits including contributions that are deductible from PA state income taxes and account balances that are exempt from the state inheritance tax. Assets in a PA 529 do not count against families when determining state financial aid eligibility.

For more information about the PA 529 College and Career Savings Program visit www.pa529.com and follow all of the department’s news on Facebook and Twitter.

Media contact: Ashley Matthews, Treasury, 717-787-2991 or [email protected].

###

PENNSYLVANIA TREASURY DEPARTMENTJOE TORSELLA, STATE TREASURER

www.patreasury.gov | Facebook | Twitter

The Pennsylvania 529 College and Career Savings Program sponsors two plans – the PA 529 Guaranteed Savings Plan (GSP) and the PA 529 Investment Plan (IP). The guarantee of the PA 529 Guaranteed Savings Plan is an obligation of the GSP Fund, not the Commonwealth of Pennsylvania or any state agency. Before investing in either plan, please carefully read that plan’s disclosure statement (available at www.pa529.com or by calling 1-800-440-4000) to learn more about that plan, including investment objectives, risks, fees, and tax implications. Before you invest, consider whether your or the beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in that state’s qualified tuition program.

The Pennsylvania Treasury is an independent department of state government led by the state treasurer, who is elected every four years. The department’s primary duty is to safeguard and manage the state’s public funds. It invests state money to generate income on behalf of the citizens of Pennsylvania, reviews and processes payments for the state government, and serves as custodian of more than $100 billion in state funds. Key Treasury programs include Unclaimed Property, the PA 529 College and Career Savings Program and the Board of Finance and Revenue. To learn more, visit patreasury.gov.

© 2019 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

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https://twitter.com/PATreasurer

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9

Keystone Scholars Program. Studies show that a child with higher education savings is three times more likely to continue on to postsecondary education and four times more likely to graduate.1 Treasury has created a program to help kick-start savings for Pennsylvania children that is rapidly becoming a national model.

In February 2018, Treasury announced the launch of a pilot program through which children born to or adopted by residents of one of six counties (Delaware, Elk, Indiana, Luzerne, Mifflin, and Westmoreland) in 2018 would receive a $100 starter deposit, which will grow through investment in the PA 529 GSP, to be used for qualified higher education expenses. Parents were required to claim the grant through an online process.

As of November 16, 2019, 2,456 people or 18.41% claimed $100 grants for their children through the pilot program and 484 (19.71% of claimants) have opened their own PA 529 accounts.

Treasury partnered with Robert Nathenson, PhD MSc MSE at American Institutes for Research to examine claim patterns and measure the program’s influence on PA 529 account openings in the baby’s first year. Key findings from this research showed that in every pilot county, the proportion of PA 529 account openings within the first 12 months of a child’s life increased. Also, families in pilot counties were twice as likely to open a PA 529 account within the first 12 months of a child’s life than families in non-pilot counties. These findings held true across every demographic.

On June 22, 2018, legislation was enacted that made Keystone Scholars available to every child born in Pennsylvania. The statewide program, which took effect for babies born on January 1, 2019, and after is “opt-out,” meaning that all children born to or adopted by Pennsylvania residents are registered into the program without the need to claim their grant funds. Families are notified of this new program and encouraged to open an individual PA 529 account, while also being provided an opportunity to remove their children from participation. Initial funding for the program comes from the surplus gained through Treasury’s investment of the GSP Fund. Treasury will be vigorously engaging charitable entities across the Commonwealth to fund the program going forward.

As of November 16, 2019, 6,417 people or 10.01% had registered for their $100 grants through the statewide program and 1,152 (17.95% of registrants) had opened their own PA 529 accounts.

Record Number of Families Saving at Record Levels.One of the most important goals for the program is to increase awareness of PA 529. Each Pennsylvania family with higher education in its future needs to know about this great state-offered 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 2018-2019, the program engaged in a variety of marketing channels including direct mail, email, digital media advertisements, and webinars in addition to earned media. We continued to expand our presence in the digital arena, utilizing social media, paid search, and banner advertisements. Additionally, the program continues to reach new individuals through partnerships with employers, financial planners, accountants, tax advisors, community organizations, and schools.

1William Elliott, Hyun-a Song, and Ilsung Nam, Small Dollar Savings Accounts, Income and College Outcomes (St. Louis, MO: Center for Social Development, Washington University in St. Louis, 2013.) https://csd.wustl.edu/publications/documents/wp13-06.pdf


10

529 GSP

529 IP

Total 529

22,000

20,000

18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

-7.3%

12.1%

4.5%

FY 2017-18

N/A

N/A

N/A

FY 2014-15

-5.1%

-13.5%

-10.2%

FY 2015-16

1.2%

-5.6%

-3.2%

FY 2018-19

12.2%

21.2%

17.5%

FY 2016-17

Account Growth Remains Strong.

For both plans combined, there were 20,683 new accounts in fiscal year 2018-2019, compared with 21,371 in the prior year, a decrease of approximately 3 percent. There was a year-over-year increase in the PA 529 GSP (1.16 percent), while there was a decrease in the PA 529 IP (5.58 percent). In the PA 529 IP, 13,102 new accounts were opened compared to 13,877 in 2017-18, while in the PA 529 GSP, 7,581 new accounts were opened compared to 7,494 opened last fiscal year. It should be noted that while overall growth in similar prepaid plans in other states has slowed, the GSP continues to thrive. Nationwide, the average annual growth rate (2011-2018) of open prepaid accounts has actually decreased 1.5% while the rate of PA 529 GSP account growth for the same period has grown 1.8%. The following graph shows the history of new accounts over the last five years.

New Accounts by Fiscal Year and % Year-Over-Year Changes


11

Total Enrollment Increased.

Total enrollment for the PA 529 program increased to 238,741 accounts – an increase of 4.47 percent over June 30, 2018. The PA 529 GSP increased only slightly – from 107,691 to 108,252 – an increase of less than one percent – while the PA 529 IP increased from 120,842 to 130,489 – an increase of 7.98 percent. The graph below provides the history of total net enrollment over the last five years.

Total Net Enrollment as of June 30 and % Year-Over-Year Changes

0.1%

9.5%

4.8%

2018

0.5%

8.0%

4.5%

2019

N/A

N/A

N/A

2015

0.1%

8.0%

3.8%

2016

0.7%

9.3%

4.9%

2017

529 GSP

529 IP

Total 529

240,000

230,000

220,000

210,000

200,000

190,000

180,000

170,000

160,000

150,000

140,000

130,000

120,000

110,000

100,000

90,000

80,000

70,000

60,000

50,000

40,000

30,000

20,000


12

Pennsylvanians Continue to Make Record-Breaking Contributions to their Accounts.

The total amount contributed into all PA 529 accounts was $588.2 million – an increase of 3.54 percent compared to last fiscal year ($568.1 million) and the highest amount contributed in one year since the program’s inception in 1993. The graph below shows the gross contributions made into all PA 529 accounts by fiscal year.

PA 529 Combined Gross Contributions by Fiscal Year and % Year-Over-Year Changes

% Changes

$600,000,000

$500,000,000

$400,000,000

$300,000,000

$200,000,000

$100,000,000

$0FY 2016-17

12.01%

FY 2014-15

N/A

FY 2015-16

0.39%

FY 2017-18

9.97% 3.54%

FY 2018-19

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. One of the principal goals of Keystone Scholars (see next page) is to reach Pennsylvanians who do not typically save for higher education.

PA 529 GUARANTEED SAVINGS PLAN (GSP) & PA 529 INVESTMENT PLAN (IP)OPEN ACCOUNTS AND NET CONTRIBUTIONS BY COUNTY AS OF 6.30.2019 “AVG” is median income for families with children under 18.

TOTAL POPULATION UNDER 18 AS OF 2015: 2,690,274

TOTAL OPEN ACCOUNTS: 217,606*

TOTAL NET CONTRIBUTIONS: $3,182,620,999*

STATEWIDE PENETRATION AVERAGE AS OF 6/30/2019: 8.09% *Does Not Include Accounts with Non-specified Counties or of Non-Residents

COLOR KEY

FACT KEY ERIE - COUNTY NAME POP 60,598 - TOTAL POPULATION UNDER 18 AS OF 2015 2704 - TOTAL ACCOUNTS $53,352 - NET CONTRIBUTIONS 4.5% - PERCENTAGE OF TARGET POPULATION

LOW (UNDER 4.0%) BELOW AVERAGE (4.0% - 5.9%) AVERAGE (6.0% - 7.9%) ABOVE AVERAGE (8.0% - 9.9%) HIGH (10% AND ABOVE)

ERIEPOP 60,598 | AVG $53,352

2704 accts. | $29,251,2514.5%

ADAMSPOP 21,070 | AVG $70,483

1499 accts. | $17,393,4397.1%

ALLEGHENYPOP 233,675 | AVG $75,064

23,504 accts. | $357,889,59810.1%

ARMSTRONGPOP 13,037 AVG $55,202463 accts. $4,575,439

3.6%

BEAVERPOP 33,153 AVG $62,8761717 accts. $15,717,550

5.2%

BEDFORDPOP 9,922 | AVG $55,299296 accts. | $2,298,714

3.0%

BERKSPOP 94,450 | AVG $65,311

5837 accts. | $66,329,3206.2%

BLAIRPOP 25,939

AVG $56,2931315 accts. $13,665,022

5.1%

BRADFORDPOP 13,427 | AVG $57,738596 accts. | $7,256,083

4.4%

BUCKSPOP 132,377

AVG $104,64019276 accts.

$319,101,70414.6%

BUTLERPOP 38,426 AVG $87,2074054 accts. $51,633,301

10.6%

CAMBRIAPOP 26,377 AVG $56,4961263 accts. $12,728,414

4.8%

CAMERONPOP 816 AVG $46,053

27 ACCTS. $276,6393.3%

CARBONPOP 12,579

AVG $55,368569 accts. | $4,739,175

4.5%

CENTREPOP 24,411 | AVG $78,372

2780 accts. | $37,235,24511.4%

CHESTERPOP 120,162

AVG $115,56719806 accts.

$362,152,09916.5%

CLARIONPOP 7,321

AVG $57,392240 accts. $1,761,825

3.3% CLEARFIELDPOP 14,976 | AVG $51,233649 accts. | $6,806,477

4.3%

CLINTONPOP 8,072 AVG $53,653

250 accts. $2,315,347

3.1% COLUMBIAPOP 11,840 AVG $59,422

694 accts. $6,099,742

5.9%

CUMBERLANDPOP 50,023 | AVG $78,306

6679 accts.$92,425,489

13.4%

DAUPHINPOP 61,299

AVG $61,2025507 accts. $70,621,486

9.0%

DELAWARE (1)POP 125,524 | AVG $82,863

15411 accts. | $279,502,89612.3%

1

ELKPOP 6,030 | AVG $60,696457 accts. | $4,272,319

7.6%

WARRENPOP 7,972 | AVG $57,018447 accts. | $4,156,964

5.6%

FAYETTEPOP 26,019 | AVG $49,801841 accts. | $7,992,451

3.2%

FORESTPOP 463 | AVG $44,53116 accts. | $143,505

3.5%

FRANKLINPOP 34,945 AVG $63,3251466 accts.$15,579,297

4.2%

FULTONPOP 3,083

AVG $56,48866 accts.$307,6192.1%

GREENEPOP 7,221 | AVG $56,970205 accts. | $1,979,458

2.8%

HUNTINGDONPOP 8,598

AVG $51,067325 accts.$2,821,569

3.8%

INDIANAPOP 15,860AVG $60,526845 accts.$8,410,152

5.3%

JEFFERSONPOP 9,386

AVG $50,783315 accts.$2,971,385

3.4%

JUNIATAPOP 5,531

AVG $59,315180 accts.

$1,358,0993.3%

LACKA-WANNAPOP 42,598AVG $59,742

3323 accts.$44,126,322

7.8%

LANCASTERPOP 128,793 | AVG $67,560

7761 accts. | $88,700,0836.0%

LAWRENCEPOP 17,798AVG $54,993634 accts.$5,873,145

3.6%

LEBANONPOP 31,439AVG $62,1921792 accts.$19,005,868

5.7%

LEHIGHPOP 82,249

AVG $66,4526449 accts.

$97,307,0487.8%

LUZERNEPOP 62,459 | AVG $54,837

3665 accts. | $43,823,2085.9%

LYCOMINGPOP 23,833 | AVG $59,995

1095 accts. | $10,705,2954.6%

MCKEANPOP 8,517 | AVG $47,301267 accts. | $2,665,702

3.1%

MERCERPOP 22,901 | AVG $55,297794 accts. | $7,076,669

3.5%

MIFFLINPOP 10,461

AVG $47,233234 accts.

$2,068,9022.2%

MONROEPOP 34,257AVG $65,5921757 accts.$16,261,110

5.1%

MONTGOMERYPOP 178,455

AVG $106,39428726 accts.$542,596,684

16.1%

MONTOUR (2)POP 3,774 | AVG $68,478342 accts. | $5,651,583

9.1%

2

NORTHAMPTONPOP 61,413 AVG $75,9785611 accts.$72,204,987

9.1%

NORTH-UMBERLANDPOP 18,418

AVG $53,349903 accts.

$7,699,6474.9%

PERRYPOP 9,948 | AVG $64,580635 accts. | $5,476,709

6.4%

PHILADELPHIA (3)POP 346,932 | $37,838

10424 accts. | $133,585,1903.0%

3

PIKEPOP 10,788 | AVG $68,867721 accts. | $5,501,577

6.7%

POTTERPOP 3,643 | AVG $51,680147 accts. | $2,268,862

4.0%

SCHUYLKILLPOP 28,231 | AVG $58,904

1359 accts. | $11,723,7554.8%

SNYDERPOP 8,809 | AVG $54,252377 accts. | $4,363,249

4.3%

SOMERSETPOP 13,718 | AVG $56,984526 accts. | $4,176,407

3.8%

SULLIVANPOP 766 | AVG $55,357

48 accts. | $323,8546.3%

SUSQUEHANNAPOP 8,152 | AVG $58,551400 accts. | $4,248,642

4.9%

TIOGAPOP 8,324 | AVG $57,287400 accts. | $3,080,011

4.8%

UNIONPOP 8,128

AVG $58,918555 accts. | $8,292,009

6.8%

VENANGOPOP 10,717AVG $50,082325 accts.$3,329,389

3.0%

WESTMORELANDPOP 67,000 | AVG $67,694

5553 accts. | $67,183,1458.3%

WASHINGTONPOP 41,143 | AVG $77,824

3766 accts. | $52,930,9589.2%

WAYNEPOP 8,884

AVG $59,095582 accts.$5,653,253

6.6%WYOMINGPOP 5,635 | AVG $60,295279 accts. | $3,098,005

5.0%

YORKPOP 99,147 | $69,066

7340 accts. | $82,398,6057.4%

CRAWFORDPOP 18,362 | AVG $54,029517 accts. | $7,452,056

2.8%


13

$440.7 Million to Help Make Higher Education Possible for 29,838 Students. The number of students who used their PA 529 accounts continued to grow. This fiscal year, 29,838 students benefited from $112.5 million in earnings. By plan, 1.72 percent more students (16,481 versus 16,202) used their PA 529 GSP accounts, while 20.39 percent more students (13,357 versus 11,095) used their PA 529 IP accounts in this fiscal year compared to fiscal year 2017-18 – reflecting the relative maturity of the plans. The amount of payouts also increased – about $440.6 million compared to $397.3 million in 2017-18 – an increase of 10.90 percent. The year-over-year increase in the PA 529 GSP was 5.76 percent, and for the PA 529 IP it was 17.53 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 GSPFY 2018-19

PA 529 IPFY 2018-19

CombinedFY 2018-19

PA 529 GSPSince Inception(September 1, 1993)

PA 529 IPSince Inception

(July 17, 2002)

CombinedSince Inception

No. of Payments 40,782 34,194 74,976 530,990 199,916 730,906

No. of Beneficiaries 16,481 13,357 29,838 81,989 48,916 130,905

No. of Schools Attended 1,152 N/A 1,152+ 2,602+ N/A 2,602+

Negative Surrender Value Payments

5,12612.57%

N/A N/A224,56442.30%

N/A N/A

Surrender Value* $40,057,139 N/A N/A $46,030,539 N/A N/A

$ Amount of Payments $236,025,457 $204,664,748 $440,690,206 $2,487,659,621 $1,261,847,959 $3,749,507,580

Amount of Gain$62,053,783

35.67%**$50,412,341

32.68%**$112,466,124

$726,600,17241.26%**

$262,279,99220.03%**

$988,880,165

*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 $62.0 million in growth by saving through the plan; since inception, they have gained $726.6 million for an average cumulative growth of 41.26 percent. Families taking withdrawals this year from the PA 529 IP for higher education expenses had collective gains of $50.4 million; since inception, they have gained $262.3 million for an average cumulative return of 20.03 percent.

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, 12.57 percent were for amounts higher than the accounts’ market value (i.e., had negative surrender values). Out of 40,782 qualified payments, 5,126 benefited from the guarantee. From the perspective of the GSP Fund this is the ninth year of significant improvement and the sixth year in a row since fiscal year 2007-08 that the overall surrender value for the year was positive — $40.1 million. Likewise, the aggregate surrender value, from the inception of the PA 529 GSP through the end of fiscal year 2018-19, remains positive. Of 530,990 payments, 224,564 (42.30 percent) had negative surrender values and, therefore, benefited from the guarantee. The total shortfall amount for all qualified withdrawals through June 30, 2019, improved to $46.0 million on payments of $2.5 billion from $7.3 million on payments of $2.3 billion last year.

PA 529 GUARANTEED SAVINGS PLAN


17

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

• State-Related University Average

• Private Four-year College Average

• Ivy League Average

Alternatively, families can save at any one of the state-funded schools – the 14 community colleges, 14 State System of Higher Education universities, or four state-related 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 state-funded 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 non-qualified 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.


18

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 long-term 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. This year, actuarial projections remained unchanged. The investment return assumption remained 6.00 percent net of fees. 2019 tuition inflation projections remained the same as in 2018, 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 2018 projection for overall tuition inflation weighted by the Tuition Level at which families were saving was 5.03 percent – again, over the long term and as an average. In 2019, the weighted overall tuition inflation assumption remained virtually unchanged (4.98 percent).

Subsequent to the close of the 2018-19 fiscal year, the decision was made to adjust a number of actuarial assumptions. Please see Subsequent Changes on page 35 for more information.

Asset Allocations.

To achieve the investment return goal of 6.00 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, 2019, is illustrated in the following chart.

PA 529 GSP Actual Asset Allocations as of June 30, 2019 Total Assets: $2,100,114,137

20%$413,295,485

50%$1,050,308,955

30%$636,509,697

Equities

Fixed Income

Alternatives


19

PA 529 GSP Fund Exceeded a 100 Percent Funded Actuarial Status.For the seventh consecutive year, the PA 529 GSP Fund was more than 100 percent funded. Based on the actuarial assumptions, as of June 30, 2019, the PA 529 GSP Fund was 127.35 percent funded, 4.45 percent higher than June 30, 2018 (121.93 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 more than fully recovered since hitting a low on March 31, 2009, when it was 70.4 percent funded. Correspondingly, the projected actuarial reserve was $458 million on June 30, 2019 – improved from $368 million on June 30, 2018, and its low point of -$403.4 million on March 31, 2009.

PA 529 GSP Contributions Held Steady While Assets Continue to Grow.Gross contributions into PA 529 GSP accounts totaled $208.0 million for fiscal year 2018-19, which was slightly higher (0.12 percent) than last year’s contributions ($207.7 million). The graph below shows the gross contributions by fiscal year.

PA 529 GSP Gross Contributions by Fiscal Yearand % Year-Over-Year Changes

% Changes

$210,000,000

$205,000,000

$200,000,000

$195,000,000

$190,000,000

$185,000,000

$180,000,000

$175,000,000FY 2016-17

10.99%

FY 2014-15

N/A

FY 2015-16

-2.08%

FY 2017-18

-0.49%

FY 2018-19

0.12%

Contributions included $419,971 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 $10.0 million through Upromise Rewards.


20

As of June 30, 2019, total assets equaled $2,100,114,104 – 4.38 percent higher than on June 30, 2018 ($2,011,973,092). The following graph illustrates the change in the PA 529 GSP Fund’s assets since 2000.

PA 529 GSP Assets Under Management as of June 30

The PA 529 GSP Remains a Successful, Lower-Risk College and Career Savings Plan.The PA 529 GSP’s long-term investment success, actuarial status, fees, and credit pricing along with continued tuition increases mean the plan continues to be a lower-risk, but not risk-free, 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 6.45 percent net of fees. The three-year annualized return was 8.15 percent and the five-year annualized return was 6.49 percent. The graph below shows the one-year returns since the plan’s inception.

PA 529 GSP Fund Performance as of June 30

$2,200,000,000

$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

$0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

20.00%

15.00%

10.00%

5.00%

0.00%

-5.00%

-10.00%

-15.00%

-20.00%

1999

2000

2001

2002

2003

2004

2005

2008

2009

2006

2007

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Note: All returns are net of fees.


21

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 per-credit tuition costs for the five average Tuition Levels in 1995-96 through academic year 2019-20. It also provides the annualized and cumulative tuition inflation rates.

Tuition Inflation by Academic Year$2,400

$2,200

$2,000

$1,800

$1,600

$1,400

$1,200

$1,000

$800

$600

$400

$200

$0

95-9

696

-97

97-9

898

-99

99-0

000

-01

01-0

202

-03

03-0

404

-05

05-0

606

-07

07-0

808

-09

09-1

010

-11

11-1

212

-13

13-1

414

-15

15-1

616

-17

17-1

8

Ivy League Colleges

Community Colleges

State System

State-Related

Private Four-Year Colleges

18-1

9

$2,291.60

$1,509.00

$712.65

$321.50*

$137.09

19-2

0

*Excludes East Stroudsburg University, Indiana University of Pennsylvania, Millersville University, and Shippensburg 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.

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 41.31 percent.

PA 529 INVESTMENT PLAN


25

PA 529 IP Investment Options Described. On April 25, 2019, the PA 529 IP’s investment options were expanded and enhanced with the inclusion of the Vanguard Real Estate Index Portfolio. This portfolio seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of a benchmark index that measures the performance of publicly traded equity REITs and other real estate-related investments. This portfolio was added as a way to better diversify participant portfolios, particularly with respect to inflation risk mitigation.

PA 529 IP Contributions and Assets Grew. Contributions into PA 529 IP accounts increased to $380.2 million in fiscal year 2018-19 compared to $360.4 million in 2017-18 – up 5.51 percent. This year’s contributions exceeded those made in any previous fiscal year. The following chart shows the gross contributions by fiscal year since 2014-15.

PA 529 IP Gross Contributions by Fiscal Year and Year-Over-Year Changes

% Changes 2.17%

$400,000,000

$350,000,000

$300,000,000

$250,000,000

$200,000,000

$150,000,000

$100,000,000

$50,000,000

$0FY 2015-16

12.72%

FY 2016-17

17.07%

FY 2017-18

5.51%

FY 2018-19

N/A

FY 2014-15

Contributions included $1.1 million earned through the Upromise Rewards program. Since 2006, contributions into PA 529 IP accounts earned through Upromise Rewards have totaled $9.0 million.


26

Assets in the PA 529 IP as of June 30, 2019, were $3,069,917,969 compared with $2,730,654,404 as of June 30, 2018 – a year-over-year increase of 12.4 percent. The following graph shows the annual growth in assets (net contributions and market growth) since the plan’s inception on July 17, 2002.

PA 529 IP Assets Under Management and % Year-Over-Year Increase as of June 30

% Increase

$3,540,000,000

$3,040,000,000

$2,540,000,000

$2,040,000,000

$1,540,000,000

$1,040,000,000

$540,000,000

$40,000,000

N/A

2003*

179.7%

2004

68.7%

2005

40.1%

2006

33.6%

2007**

22.5%

2008

2.4%

2009

31.6%

2010

21.3%

2013

25.8%

2014

11.3%

2015

8.7%

2016

35.1%

2011

13.4%

2012

17.7% 13.7%

2017 2018 2019

12.4%

*July 17, 2002, to June 30, 2003.**Investment management transferred to Vanguard November 2006 (Direct Plan) and April 2007 (Advisor Plan).


27

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 6.47 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 2008.

Annual PA 529 IP Fund Investment Returns* as of June 3025.00%

20.00%

15.00%

10.00%

5.00%

0.00%

-5.00%

-10.00%

-15.00%

-20.00%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

*Weighted average of investment portfolios’ returns. Note: The Real Estate Index Portfolio is not included in this chart because it was added to the Program in April 2019 and does not yet have one-year returns.


28

Assets and Performance by Investment Options.

The distribution of assets among the IP’s 17 different investment options has remained fairly consistent over time. The age-based options have comprised around 60 percent of total plan assets while the static options have hovered around 40 percent. Among the age-based options, the Aggressive Age-Based Option has garnered the most assets (34.63 percent), followed by the Moderate Age-Based Option (20.74 percent), leaving just 3.52 percent in the Conservative Age-Based Option. Among the static options, the Aggressive Growth Portfolio has consistently held the most assets – 11.00 percent – while the Real Estate Index Portfolio holds the least at around 0.01 percent. The following chart illustrates the distribution of assets among the 17 options as of June 30, 2019.

Distribution of Assets Among PA 529 IP Investment Options as of June 30, 2019

Moderate Age-Based - $636,592,807

Total Stock Market Index Portfolio - $266,506,669

Interest Accumulation Portfolio - $104,826,415

Conservative Growth Portfolio - $61,162,087

Aggressive Age-Based - $1,063,058,290

Aggressive Growth Portfolio - $337,716,387

Growth Portfolio - $161,418,867

Conservative Age-Based - $108,072,733

Moderate Growth Portfolio - $128,199,171

Income Portfolio - $46,060,989

Conservative Income Portfolio - $32,817,367

Social Index Portfolio - $57,096,378

Short-Term Inflation-Protected Securities Portfolio - $29,309,519

Total Bank Market Portfolio - $16,107,151

Total International Bond Index Portfolio - $769,017

Total International Stock Index Portfolio - $19,970,303

Real Estate Index Portfolio - $233,820*

Distribution %:

40%

35%

30%

25%

20%

15%

10%

5%

0%

5.26%34.63% 20.74% 11.00% 8.68% 4.18% 3.41% 1.99% 1.86%3.52% 1.50% 1.07% 0.95% 0.65% 0.52% 0.03% 0.01%

*The Real Estate Index Portfolio was added to the PA 529 IP’s Investment Options on April 25, 2019.


29

Returns in all of the investment options were positive. It should be noted that the Interest Accumulation, Inflation-Protected Securities, Total Bond Market Index, and Total International Stock Index Portfolios were added to the PA 529 IP in 2016 and the Total International Bond Index was added in 2018 and, as such, do not yet have three- or five-year returns. Similarly, the Real Estate Index Portfolio was added to the PA 529 IP in 2019 and does not yet have one-, three-, and five-year returns.

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 (ranging from 0.2150% to 0.3150% as of June 30, 2019) are reflected in the plan’s portfolio returns, but not in the benchmarks.

The chart following provides the returns by investment options for one-, three-, and five-year returns, as well as the since-conversion 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.


30

PA 529 IP Returns by Investment Options as of June 30, 2019

% of Accounts

1-Year Returns

3-Year Returns

5-Year Returns

Returns Since Inception

Age-Based Options 57.46%

Aggressive 33.62%

Ages 4 or Younger 5.52% 5.47% 11.73% 7.22% 6.44%

Ages 5-6 5.68% 5.80% - - 4.91%

Ages 7-8 5.68% 5.80% - - 4.91%

Ages 9-10 3.00% 6.21% 9.88% 6.41% 6.14%

Ages 11-12 3.33% 6.49% - - 5.67%

Ages 13-14 2.98% 6.81% 7.98% 5.80% 5.88%

Ages 15-16 2.72% 7.08% - - 6.26%

Ages 17-18 1.94% 7.28% 5.51% 4.48% 5.02%

Ages 19 and Older 2.77% 7.46% - - 6.77%

Moderate 19.26%

Ages 4 or Younger 3.74% 5.80% - - 4.91%

Ages 5-6 1.88% 6.21% 9.88% 6.41% 6.14%

Ages 7-8 2.12% 6.49% - - 5.67%

Ages 9-10 2.18% 6.81% 7.98% 5.80% 5.88%

Ages 11-12 2.29% 7.08% - - 6.26%

Ages 13-14 1.89% 7.28% 5.51% 4.48% 5.02%

Ages 15-16 1.70% 7.46% - - 6.77%

Ages 17-18 and Ages 19 and Older 3.46% 5.37% - - 5.00%

Conservative 4.58%

Ages 4 or Younger 0.58% 6.49% - - 5.67%

Ages 5-6 0.31% 6.81% 7.98% 5.80% 5.88%

Ages 7-8 0.44% 7.08% - - 6.26%

Ages 9-10 0.53% 7.28% 5.51% 4.48% 5.02%

Ages 11-12 0.57% 7.46% - - 6.77%

Ages 13-14 0.46% 5.37% - - 5.00%

Ages 15-16 0.43% 4.38% - - 4.07%

Ages 17-18 0.41% 3.39% - - 3.14%

Ages 19 and Older 0.85% 2.36% - - 1.49%

Individual Options 48.20%

Aggressive Growth Portfolio 10.76% 5.47% 11.73% 7.22% 6.44%

Growth Portfolio 6.24% 6.21% 9.88% 6.41% 6.14%

Moderate Growth Portfolio 4.63% 6.81% 7.98% 5.80% 5.88%

Conservative Growth Portfolio 2.32% 7.28% 5.51% 4.48% 5.02%

Income Portfolio 2.50% 7.44% 3.94% 3.93% 4.72%

Conservative Income Portfolio 1.58% 5.14% 1.66% 1.81% 2.89%

Total Stock Market Index Portfolio 9.34% 8.82% 13.76% 9.89% 8.08%

Social Index Portfolio 2.84% 11.11% 15.74% 11.22% 7.50%

Interest Accumulation Portfolio 2.86% 2.36% - - 1.49%

Short-Term Inflation-Protected Securities Index Portfolio

1.99% 2.97% - - 1.42%

Total Bond Market Index Portfolio 0.91% 7.67% - - 2.42%

Total International Stock Index Portfolio 2.06% 0.49% - - 7.65%

Total International Bond Index Portfolio 0.12% 7.55% - - 7.02%

Real Estate Index Portfolio 0.05% - - - 1.60%


31

Assets and Investment Performance by Underlying Vanguard Funds.

Looking at the underlying Vanguard funds in which the PA 529 IP invests, the largest portion (35.51 percent) of assets were in the Total Stock Market Index, followed by the Total Bond Market II Index at 24.12 percent, with the remaining 40 percent distributed among the other seven funds (18.58 percent in the Total International Stock Market Index, 10.80 percent in the Vanguard Total International Bond Index, 6.37 percent in the Pennsylvania Short-Term Reserves Account, 2.24 percent in the Vanguard Short-Term Inflation-Protected Securities Portfolio, 1.86 percent in the FTSE Social Index, and 0.52 percent in the Vanguard Total Bond Market Index) as of June 30, 2019. See the graph below. It should be noted that all but one of the PA 529 IP’s underlying funds are Gold- or Silver-rated by Morningstar. The remaining fund, the Vanguard Short-Term Reserves Account, is not rated by Morningstar because it is not a regular ’40 Act mutual fund.

The percentage shown above each bar in the graph provides the investment performance of the underlying Vanguard mutual funds for the years shown.

PA 529 IP Assets and Investment Performance by Underlying Vanguard Mutual Funds as of June 30

*Added April 27, 2018Note: The Real Estate Index Portfolio was added to the PA 529 IP’s Investment Option on April 25, 2019 and is not displayed on the chart.

Vanguard Short-Term Inflation-Protected Securities

FTSE Social Index

Total Bond Market II Index

Total International Stock Market Index

Total Stock Market Index

Total Bond Market Index Inst

Vanguard Total Intl Bond Index*

PA Short-Term Reserves

2011 2012 2013

$1,150,000,000

$1,100,000,000

$1,050,000,000

$1,000,000,000

$950,000,000

$900,000,000

$850,000,000

$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

$02015 2017 2018 20192014 2016

2011Returns

32.02%

31.05%

7.28%

3.62%

0.20%

26.57%

2012Returns

3.98%

-14.58%

11.95%

7.50%

0.10%

2.90%

13.63%

2013Returns

21.58%

-5.03%

-0.85%

0.09%

24.69%

2014Returns

25.26%

22.47%

4.47%

4.19%

0.06%

25.23%

2015Returns

7.25%

-4.55%

-1.80%

1.77%

0.06%

10.74%

2017Returns

18.49%

20.10%

0.28%

-0.44%

N/A

21.47%

2.24%

-9.07%

4.73%

6.08%

0.31%

-0.20%

2016Returns

2018Returns

14.85%

7.14%

1.36%

-0.51%

1.72%

15.57%

-0.52%

2019Returns

35.51%

18.58%

2.24%

24.12%

6.37%

1.86%

0.52%

10.80%


32

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 real-life 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, 2019.

Investment InInvested

On11/17/2006

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

Invested On

6/30/2017

Invested On

6/30/2018

Aggressive Growth Portfolio

$2,197.96 $1,999.96 $2,279.94 $3,121.92 $2,737.09 $2,075.44 $2,087.33 $1,758.35 $1,417.11 $1,371.97 $1,394.56 $1,175.36 $1,054.70

Growth Portfolio $2,119.83 $1,964.63 $2,152.07 $2,714.18 $2,389.87 $1,899.44 $1,869.34 $1,634.47 $1,283.13 $1,246.97 $1,326.57 $1,157.16 $1,062.10

Moderate Growth Portfolio

$2,055.77 $1,943.07 $2,043.40 $2,379.37 $2,106.38 $1,758.69 $1,697.74 $1,533.23 $1,325.63 $1,285.90 $1,259.08 $1,139.13 $1,068.10

Conservative Growth Portfolio

$1,855.98 $1,788.04 $1,812.51 $1,959.89 $1,751.00 $1,533.94 $1,453.42 $1,376.87 $1,244.80 $1,217.05 $1,174.64 $1,110.67 $1,072.80

Income Portfolio $1,789.92 $1,751.39 $1,704.68 $1,721.03 $1,557.78 $1,435.34 $1,344.71 $1,307.45 $1,212.62 $1,181.43 $1,122.93 $1,092.93 $1,074.40

Conservative Income Portfolio

$1,433.12 $1,417.52 $1,313.62 $1,285.34 $1,207.34 $1,169.91 $1,100.67 $1,124.86 $1,093.26 $1,093.90 $1,050.66 $1,053.71 $1,051.40

Interest Accumulation Portfolio*

$1,080.96 $1,050.49 $1,013.11 $1,000.90 $1,000.90 $1,000.90 $1,000.90 $1,000.90 $1,000.90 $1,000.90 N/A $1,038.76 $1,023.60

Total Stock Market Index Portfolio

$2,665.38 $2,443.06 $2,802.64 $3,807.42 $3,306.77 $2,504.94 $2,418.60 $1,999.50 $1,602.68 $1,499.79 $1,472.40 $1,246.53 $1,088.20

Short-Term Inflation-Protected Securities Index Portfolio**

$1,453.09 $1,453.09 $1,265.76 $1,303.16 $1,195.89 $1,119.43 $1,004.87 $1,062.91 $1,021.05 $1,043.80 N/A $1,010.00 $1,029.70

Social Index Portfolio $2,489.47 $2,355.23 $2,985.08 $4,101.51 $3,482.05 $2,766.39 $2,700.49 $2,122.70 $1,701.97 $1,541.78 $1,550.46 $1,280.21 $1,111.10

Total Bond Market Index Portfolio***

N/A $992.00 $1,068.09

Total International Stock Index Portfolio***

N/A $1,066.70 $1,071.93

Blended Growth Portfolio****

$1,064.90

Disciplined Growth Portfolio****

$1,070.80

Conservative Portfolio****

$1,074.60

Blended Income Portfolio****

$1,053.70

Moderate Income Portfolio****

$1,043.80

Balanced Income Portfolio****

$1,033.90

Total International Bond Index Portfolio****

$1,075.50

*Includes assets transferred from the Prime Money Market Portfolio on September 16, 2016.**Includes assets transferred from the Inflation-Protected Securities Portfolio on October 14, 2016.***Added October 14, 2016.****Added April 27, 2018Note: The Real Estate Index Portfolio was added April 25, 2019, and is not listed in the chart above.

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 25.04 percent.

SUBSEQUENT CHANGES


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PA 529 GSP Actuarial Assumptions Reduced.The actuarial assumed rate of return for the PA 529 GSP has been further reduced from 6% to 5.5%. The GSP is currently funded at 127.25% and the rate reduction to a less risky and more conservative level will allow the program to allocate more assets to lower-risk investments, manage the plan prudently, and help maintain the overall health of the GSP’s portfolio.

The 2020 tuition inflation projections were also reduced for certain tuition levels. The ten-year trends in Pennsylvania tuition inflation are lower than average annual increases over the longer term since the inception of the PA 529 GSP, leading to these reductions. The tuition inflation assumption changes are as follows: The University of Pittsburgh and the State-Related Average have both been reduced from 6.00% to 5.00%, Pennsylvania State University - Main Campus has been reduced from 6.25% to 5.25%, Pennsylvania State University - Branch Campuses has been reduced from 4.00% to 3.50%, and Temple University has been reduced from 5.50% to 4.50%.

Neither of these actuarial assumption changes are expected to have a significant effect on the actuarial status of the PA 529 GSP plan. Using current tuition inflation and investment return assumptions, the GSP Fund was 127.37% funded with a surplus of $447,832,470 as of August 31, 2019. Using the new assumptions, the GSP Fund was 126.76% funded with a surplus of $440,056,655 for the same period.

NEWS RELEASE


PA 529 GUARANTEED SAVINGS PLAN EXCEEDS TARGETS, LOWERS FUTURE ASSUMED RATE OF RETURN TO REDUCE RISK

Fund returns 6.45% in fiscal year 2018-2019, exceeding 6% assumed rate;Treasury to lower assumed rate moving forward to 5.5%

Harrisburg, PA – Pennsylvania Treasurer Joe Torsella announced today that the PA 529 College and Career Savings Program Guaranteed Savings Plan (GSP) earned an annual return rate of 6.45%, net of fees, in fiscal year 2018-2019, exceeding its assumed actuarial return rate of 6%.

“Every dollar saved in the PA 529 College and Career Savings Program represents the education and training of Pennsylvania’s future workforce. Today’s announcement that Treasury beat this target lets families using the GSP know that their savings are being managed with care,” said Torsella. “Treasury beat its target benchmark while spending just over $3 million in Wall Street fees, a fraction of what many institutional investors spent. I take pride in the investment strategy that Treasury has adopted, which allows us to keep costs low and maintain the good health of the GSP.”

Treasury will lower the GSP’s long-term assumed rate of return to 5.5%. The GSP is currently funded at 127%, and the rate reduction will allow the GSP to allocate more assets to lower-risk investments, and manage the plan prudently. These allocation changes will help maintain the overall health of the plan’s portfolio.

“To ensure the best results for PA 529 GSP account owners, it is important that Treasury works to re-evaluate the health of the plan,” said Torsella. “Lowering the assumed rate of return is a prudent decision to assure the GSP will continue to thrive and provide funds for Pennsylvania’s next generation, no matter what path they choose to further their education.”


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The PA 529 College and Career Savings Program gives families the tools they need to help save for future education expenses. The Program offers tax benefits for account owners. Contributions to PA 529 plans are deductible from Pennsylvania state income taxes and accounts are exempt from state inheritance tax. Assets in a PA 529 do not count against families when determining state financial aid eligibility. PA 529 accounts can be used at most institutions across the country, whether it be a trade school, community college, or four-year university.

The PA 529 GSP is a lower-risk investment option which helps families save for tomorrow’s tuition at today’s plan rates, with returns based on college tuition increases. The PA 529 College and Career Savings Program also offers the Investment Plan (IP) which gives account owners 17 investment options with varying levels of risk. Returns for IP accounts are based on market performance.

Pennsylvania families currently have $5.2 billion in assets invested in PA 529 College and Career Savings Program plans. In the program’s more than 25 years, it has paid out more than $962.1 million for qualified education expenses.



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PA 529 IP Fees Reduced Again.Effective October 1, 2019, the fee for each investment option was reduced by one basis point (0.01%). The PA 529 IP fees now range from 0.2150% - 0.3150%. This reduction is a result of an increase in assets under management and the Treasury anticipates future fee reductions for IP account owners when certain funding thresholds are met as the IP asset value continues to grow. This latest reduction continues a multi-year record of working to reduce fees for PA 529 savers.

NEWS RELEASE


TREASURER TORSELLA ANNOUNCES FURTHER FEE REDUCTION FOR PA 529 INVESTMENT PLANResulting in approximately $310,000 in savings to families across the Investment Plan

Harrisburg, PA – Pennsylvania Treasurer Joe Torsella announced today a further reduction in fees for the PA 529 College and Career Savings Program Investment Plan (IP). This most recent reduction keeps IP fees at some of the lowest levels when compared to similar plans in other states.

“Keeping PA 529 fees as low as possible helps make sure families’ hard-earned dollars are there to cover education costs for their children.” said Torsella. “Offering affordable savings options for families ensures more of our children will enter the workforce without crushing student loan debt. Here at Treasury we work tirelessly to make sure Pennsylvania’s families have access to the best tools possible to help them save for postsecondary education costs.”

Treasury is reducing fees for PA 529 IP account holders by one basis point (0.01%) and plans further reductions as the plan’s assets increase to certain thresholds. This reduction results in approximately $310,000 in savings across the IP.

The PA 529 IP offers account owners 17 investment options with varying risk to choose from through Vanguard. The PA 529 College and Career Savings Program also offers the Guaranteed Savings Plan (GSP)—a lower-risk option allowing account holders to save for tomorrow’s tuition rates at today’s prices. IP investment returns are based on market performance, while GSP returns are based on tuition increases.

Pennsylvania families currently have $5.2 billion in assets invested in the IP and GSP plans combined, with $3.1 billion in the IP alone.

The PA 529 College and Career Savings Program has been helping Pennsylvania families save and pay for postsecondary expenses for more than 25 years. Over the life of the program, it has paid out more than $962.1 million for qualified postsecondary education expenses. PA 529 account holders receive tax benefits including contributions that are deductible from PA state income taxes and account balances that are exempt from the state inheritance tax. Assets in a PA 529 do not count against families when determining state financial aid eligibility.



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FINDINGS AND RECOMMENDATIONS


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Findings and Recommendations.The program’s enabling legislation requires the annual report to present findings and recommendations.

By Virtually Any Metric, the Program Continues to Excel.

• The total number of accounts across both PA 529 plans grew to 238,741, an increase of 4.47% from last year (228,533).

• During this fiscal year, PA 529 account owners contributed $588.2 million compared to $568.1 million last year, an increase of 3.54%.

• Total assets across both PA 529 plans grew to $5.20 billion, an increase of 9.6% from last year ($4.74 billion).

• 29,838 students used their PA 529 accounts to pay for qualified higher education expenses this year and garnered more than $110.0 million in earnings. Comparatively, last year, 27,297 students used their PA 529 accounts to pay for qualified higher education expenses, with $104.4 million in earnings.

The Commonwealth Should Eliminate the PA 529 Program’s Competitive Disadvantage.

Pennsylvania provides a tax deduction for contributions made to any 529 program, while most other states limit such deductions to only those contributions made to their home-state programs. Thirty-five of the 42 states (and D.C.) with income taxes provide a state income tax deduction or credit for 529 contributions; 28 of those 35 limit the deduction to home-state program contributions. Pennsylvania is one of the seven states that give a tax deduction for participants in non-home-state 529 programs – and it is the only large state to do so. This puts Pennsylvania’s program at a competitive disadvantage and undoubtedly leads many Pennsylvania families to make uninformed decisions on the best way for them to save for postsecondary education. This disadvantage is evidenced by a number of factors:

• Disparity in 529 plan penetration rate. PA 529 has a penetration rate of 8.11%, while similar out-of-state plans marketed nationally have a penetration rate of 18.84%.

• Loss of PA 529 contributions. Based on available data, Pennsylvanians invest approximately $300 million in other states’ 529 plans every year.

• Loss of Tax Revenue. It is estimated that Pennsylvania loses $8.5 million in tax revenue per year due to this inequity.

Many Pennsylvanians who are sending their higher education savings out of state may be unaware of the Commonwealth’s 529 program benefits. Many financial advisors do not or cannot inform their clients of the Pennsylvania 529 plans because of the existing tax deduction policy. Furthermore, Pennsylvanians effectively subsidize other states’ 529 programs because the savings they put into out-of-state plans help to cover the expenses of those plans. Many plans waive or reduce account fees for in-state participants, and some use revenues from their programs (generated in part from Pennsylvanians) to provide scholarships only for their own state’s residents.

The current inequitable playing field disadvantages Pennsylvania’s program and, consequently, those families that are loyal to their home-state options.

Eliminating the unfair advantage that Pennsylvania currently grants to other states’ 529 plans would result in lower fees and other benefits for Pennsylvania families. We recommend that the Governor and General Assembly enact legislation that would offer a state tax deduction only for contributions to a PA 529 account.


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The Commonwealth Should Enact Legislation to Ensure that PA 529 GSP Withdrawals for Elementary and Secondary School Expenses are Treated Appropriately.

In 2018, Congress passed federal legislation that allowed elementary and secondary school expenses to be considered qualified withdrawals from 529 plans.

The PA 529 GSP was designed to assist Pennsylvanians save and pay for postsecondary education. The plan’s structure and investment time horizons were implemented accordingly. It was never envisioned that the program would be used to pay for elementary and secondary school expenses. While these expenses are currently permitted, the TAP Act must be amended in order to allow the PA 529 GSP to pay them in a more appropriate manner.

On June 27, 2019, H.B. 1671 was introduced by Representative Peifer that would accomplish this. We encourage the Governor and General Assembly to pass this important legislation.

The Commonwealth Should Increase its Support of the PA 529 College and Career Savings Program.

Policy makers should consider initiatives and collaborations among Commonwealth entities and institutions to build awareness, increase utilization, and enhance the benefits of the PA 529 College and Career Savings Program.

By working together, much can be accomplished with budgetary and nonbudgetary solutions.

The Commonwealth Should Consider Offering a Tax Credit to Pennsylvania Employers for Providing Matching Contributions to a Pennsylvania 529 Plan.

The Commonwealth could incentivize employers to encourage their employees to save for higher education by offering a modest tax credit for matching contributions. The states that currently allow such tax credits, -Arkansas, Colorado, Illinois, Nebraska, Nevada, Wisconsin, and Utah- give employers 25 percent tax credits on matching contributions up to $500 per employee.

The positive effect that this would have on higher education savings cannot be overstated. In much the same way as matching contributions to employees’ 401(k) accounts has led to increased retirement savings, matching 529 plan contributions will inspire employees to save for higher education. Additionally, while the PA 529 College and Career Savings Program already partners with employers across the Commonwealth to host informational sessions at employee benefit fairs and offer employees the ability to make direct deductions from their paycheck into a PA 529 account, a tax credit would persuade even more Pennsylvania employers to work with the Program to educate their employees and encourage them to save for their family members’ postsecondary educations.

The Commonwealth should consider all reasonable measures, such as this, that will make saving for higher education less burdensome for its citizens.

613 North DriveHarrisburg, Pennsylvania 17120pa529.com 717-772-5000




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