SBW H.B. 9 75(R)BILL ANALYSIS PENSIONS & INVESTMENTS H.B. 9 By: Stiles 3-5-97 Committee Report (Unamended) BACKGROUND The 74th Legislature created the Texas Tomorrow Fund, which is a prepaid higher education tuition program. This program allows the purchaser to enter a contract to prepay the tuition and fees for the purchaser's beneficiary to attend a public institution of higher education. The beneficiary or purchaser must be a Texas resident when the contract is initiated, and, under current law, the beneficiary must be under age 18. If the student attends a private institution, the plan does not pay the difference between the cost of a private institution and a public institution. At this time, thirteen other states have prepaid tuition programs; approximately five other states are preparing to implement similar programs. Though the program has been very successful, the Comptroller's office has identified some areas in which the statute can be improved and updated. Among the suggested changes are amendments to prevent purchasers from using the Private College Plan as tax shelters, allowing for the prepayment of tuition and fees for any high school student regardless of age, and conforming the law to Section 529 of the Internal Revenue Code. Section 529 requires states to impose penalties on refunds in certain circumstances, such as when a refund is requested because the beneficiary does not attend college. PURPOSE The purpose of this bill is to update the existing law to improve the prepaid tuition program and conform with federal requirements. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends Section 54.619 (d) and (e), Education Code to strike the term "beneficiary" and replace this with the term "purchaser" to specify exactly who will be receiving the amount of money which exceeds the tuition and fees of the institution. SECTION 2. Amends Section 54.621, Education Code, by amending Subsections (a) and (c). Sec. 54.621. BENEFICIARY. (a) is amended by the addition of the language to clarify the definition of a beneficiary of a prepaid tuition contract to include someone enrolled in high school who is 18 years of age or older. (c) is amended by the addition of the language to clarify that the tuition and fees paid by prepaid tuition contract are determined if the beneficiary were a resident student, notwithstanding Section 54.052(d). This section also strikes the language which defined the beneficiary as a resident regardless of their actual residence or time enrolled. SECTION 3. Amends Section 54.627, Education Code, by amending Subsections (a), (b), (c), and (d). Sec. 54.627. CHANGE OF BENEFICIARY. (a) is amended by the addition of the language which provides for an exception in Subsection (b) of this section to Subsection (a) which states, with the addition of new language, that a new beneficiary cannot be treated as a distribution only if they meet the requirements set forth in Section 529 of the Internal Revenue Code of 1986. This section also strikes the language that required the new beneficiary to be a sibling, step-sibling, or half-sibling of the original beneficiary. (b) is amended by the addition of the language which clarifies that the purchaser may designate a new beneficiary that does not have to be a relative of the original beneficiary if the purchaser is the state, a local government of this state, or an organization exempt from taxation under Section 501(a) of the Internal Revenue Code of 1986. (c) is amended by redesignating the original Subsection (b) as (c). (d) is amended by redesignating the original Subsection (c) as (d). SECTION 4. Amends Section 54.632, Education Code by adding Subsection (d) which provides for the imposition of penalties for refunds and excessive amounts in amounts payable under Sections 54.619 (d) and (e) to comply with Section 529 of the Internal Revenue Code of 1986. SECTION 5. Amends Section 54.633, Education Code by amending the heading and Subsections (a), (d), (e), (g)-(k), and adding (l). Sec. 54.633. is amended by the striking of the term "NEEDY" in the heading, "PREPAID HIGHER EDUCATION TUITION SCHOLARSHIPS FOR STUDENTS." (a) is amended by the addition of the language to define the board as also a direct-support organization established by the board under Subsection (e) and can establish economic or academic requirements for a prepaid higher education tuition scholarship. This may also be set by the board themselves. (d) is amended by the addition of the language to include state or local government as possible sources of funding for scholarships. (e) is amended by the addition of the language to broaden the powers of a direct-support organization established by the board to include allowing the organization to award as well as purchase scholarships and allowing the organization to establish requirements of economic and academic eligibility to coincide with the rules of the board. (g) is amended by the addition of the language to define the duties of the comptroller who serves as the executive director of the organization. These duties include selecting employees to serve as staff to the board of the organization from the office of the comptroller and supervising these employees while performing the duties assigned to the comptroller by the board. The comptroller is also required to provide information for the board's qualifications for employment and responsibilities of standards of conduct for the board and the board's staff. (h) is amended by the addition of the language which requires the board to develop and implement policies that separate the policy-making responsibilities of the board and management responsibilities of the comptroller and staff of the board. (i) is amended by redesignating the original (g) as (i). (j) is amended by redesignating the original (h) as (j). (k) is amended by redesignating the original (i) as (k) and striking Subsection (h) to be replaced by Subsection (j) to correspond with the new designations of this Act. (l) is amended by the addition of the language which allows for a contract of prepaid tuition to be purchased for scholarships under this section without identifying a specific beneficiary. SECTION 6. Amends Section 54.636, Education Code by amending Subsection (e). (e) is amended by the addition of the language to expand the board's investment authority by adopting the prudent person rule for investments of the assets of the fund and striking the terminology which required the board to invest in accordance to the Public Funds Investment Act. SECTION 7. Amends Section 54.639, Education Code, by amending Subsection (a), and adding Subsections (b), and (c). Sec. 54.639. EXEMPTION FROM CREDITORS' CLAIMS. (a) is amended to expand the definition of the exemption of money in the fund to include claims of creditors of a purchaser or a successor of a purchaser or beneficiary. (b) is amended by the addition of the language to exempt the rights of the purchaser, beneficiary, or successor from attachment, levy, garnishment, execution, and seizure of any debt, judgement, or claim in the interest of a purchaser or beneficiary. (c) is amended by the addition of the language to establish that a claim or judgement does not impair or entitle a claim or judgement holder to enforce a lien against the rights of a purchaser, beneficiary, or successor under a prepaid tuition contract or the right to payment of tuition and fees. SECTION 8. Amends Section 54.641(a), Education Code to change the date required for the board to furnish the purchaser a statement regarding the status of the contract to January 1 of each year. SECTION 9. Amends Section 54.643, Education Code, by adding Subsection (c) to permit the release of confidential information to the IRS and state tax agencies as required by law, notwithstanding any other provisions. SECTION 10. Amends Subchapter F, Chapter 54, Education Code, by adding Section 54.644 (a)(f). Sec. 54.644. TAX EMEMPT STATUS REQUIREMENTS. (a) is amended to states intent of section which is to meet requirements of Section 529 of the Internal Revenue Code. (b) is amended to require that payments to the fund be in cash, and prohibits payments in excess of amounts required. (c) is amended to require that the board maintain a separate accounting for each beneficiary. (d) is amended to prohibit purchasers and beneficiaries from controlling or directing the investment of payments or earnings. (e) is amended to prohibit purchasers and beneficiaries from using the interest in the contract as security for a loan or obligation. (f) is amended to require the board to make reports required by the U.S. Treasury. SECTION 11. Repeals Section 54.638, Education Code, which required the board to request rulings from the IRS and Securities and Exchange Commission and inform purchasers of the status of these rulings which are now being written into the statute. SECTION 12. Emergency Clause.