Proposed Rules Title 34

TITLE 34. PUBLIC FINANCE

PART 1. COMPTROLLER OF PUBLIC ACCOUNTS

CHAPTER 5. FUNDS MANAGEMENT (FISCAL AFFAIRS)

SUBCHAPTER C. CLAIMS PROCESSING--TRAVEL VOUCHERS

34 TAC §5.22

(Editor's note: The text of the following section proposed for repeal will not be published. The section may be examined in the offices of the Comptroller of Public Accounts or in the Texas Register office, Room 245, James Earl Rudder Building, 1019 Brazos Street, Austin.)

The Comptroller of Public Accounts proposes the repeal of §5.22, concerning incorporation by reference: "State of Texas Travel Allowance Guide." The existing §5.22 is being repealed so that the content can be updated in a new §5.22 to simplify administration and allow for the implementation of electronic tools that support travel expense reimbursement for state agencies, employees, and other persons. The travel guide has been incorporated by reference as a rule under §5.22 and therefore the guide could not be updated without amending the rule. Much of the travel guide consists of guidelines, examples, illustrations, general discussions, restatements of provisions of Government Code, Chapter 660, and the General Appropriations Act. Because they have been incorporated by reference, any change to the guidelines, examples, or illustrations that may be useful, require the agency to initiate a formal rulemaking process to incorporate the change. The new rule would allow the comptroller to update or add to examples and guidelines without having to formally amend the rule every time updates are needed. These updates ensure that the most current examples and information available to assist agencies with travel expense reimbursement are provided.

John Heleman, Chief Revenue Estimator, has determined that for the first five-year period the rule will be in effect, there will be no significant revenue impact on the state or units of local government.

Mr. Heleman also has determined that the proposed repeal would benefit the public by clarifying travel provisions for government agencies and their employees. The proposed repeal would have no fiscal impact on small businesses. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Comments on the proposed repeal may be submitted to Joani Bishop, Manager, Claims Division, P.O. Box 13528, Capitol Station, Austin, Texas 78711.

The repeal is proposed under Government Code, §660.021, which provides the comptroller with the authority to adopt rules for the effective and efficient administration of the travel provisions of the Government Code and the General Appropriations Act.

The proposed repeal implements Government Code, §660.021 and §660.043.

§5.22.Incorporation by Reference: "State of Texas Travel Allowance Guide".

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on June 18, 2008.

TRD-200803115

Martin Cherry

General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: August 3, 2008

For further information, please call: (512) 475-0387

34 TAC §5.22

The Comptroller of Public Accounts proposes new §5.22, relating to State of Texas travel guidance. The new section replaces the existing §5.22, which is being repealed to simplify administration and allow for the efficient updating of guidelines, examples, illustrations, and to allow for the implementation of electronic tools that support travel expense reimbursement for state agencies, employees and other persons. The travel guide has been incorporated by reference as a rule under §5.22 and therefore the guide could not be updated without amending the rule. Much of the travel guide consists of guidelines, examples, illustrations, general discussions, and restatements of provisions of Government Code, Chapter 660, and the General Appropriations Act. Because they have been incorporated by reference, any change to the guidelines or examples that may be useful require the agency to initiate a formal rulemaking process to incorporate the change. The rule would allow the comptroller to update or add to examples and guidelines without having to formally amend the rule every time updates are needed. These updates ensure that the most current examples and information available to assist agencies with travel expense reimbursement are provided.

New §5.22 allows an additional method for determining reimbursable mileage. Under Government Code, §660.043, the number of miles traveled by an employee for state business may be determined by the Texas Mileage Guide or by a point-to-point itemization of miles traveled. While tracking the odometer is a reliable method for calculating miles for reimbursement purposes in most circumstances, new technology makes the calculation simpler and faster. The advent of readily available electronic nationwide mapping services, such as Yahoo maps, Google maps, MapQuest, satellite-based navigation systems, etc., allows individuals to enter starting points and ending points. Based on these inputs, the electronic mapping tools quickly and reliably calculate total mileage providing an alternative to tracking the vehicle's odometer readings. New §5.22 would allow an employee the choice of documenting point-to-point mileage using either the vehicle's odometer reading or by utilizing a readily available electronic mapping service to be selected by each agency.

Mr. Heleman also has determined that for each year of the first five years the new rule is in effect, the public would benefit by clarifying travel provisions for government agencies and their employees. The proposed new rule would have no significant fiscal impact on small businesses. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Comments on the proposed new rule may be submitted to Joani Bishop, Manager, Claims Division, P.O. Box 13528, Austin, Texas 78711.

The new section is proposed under Government Code, §660.021, which authorizes the comptroller to adopt rules for the effective and efficient administration of the travel provisions of the Government Code and the General Appropriations Act.

The new section implements Government Code, §660.021 and §660.043.

§5.22.State of Texas Travel Guidance.

(a) General travel information will be maintained on the comptroller's Web site. The information will include procedures, as provided in this rule, Government Code, Chapter 660, and the General Appropriations Act; examples; guidelines that will help support the travel expense reimbursement process for state agencies; and The Texas Mileage Guide providing the number of miles for the shortest or most cost-effective route between two points. Procedures, amounts, timing, limits, required documentation, permissible payees, distinctions among different types of state employees, or any other details concerning travel expense payments or reimbursements by a state agency are governed by Government Code, Chapter 660, the General Appropriations Act, and the rules adopted by the comptroller under Government Code, Chapter 660.

(b) Eligible expenses. A travel expense must be incurred before it is eligible for reimbursement.

(1) For lodging and transportation expenses, proof of payment must be documented to validate that the expenses were actually incurred.

(2) A state employee who receives free transportation or lodging in exchange for points or other non-monetary credits has not incurred an expense for reimbursement purposes.

(1) A state agency or a state employee may not seek reimbursement of a travel expense that the agency or employee knows or reasonably should know is not reimbursable.

(2) The comptroller's omission of a particular travel expense reimbursement as erroneous during a post-payment audit does not prevent the comptroller from designating a similar reimbursement as erroneous in a subsequent audit.

(d) Meal and lodging expenses.

(1) A state employee may be reimbursed for meal and/or lodging expenses that are incurred on a day that the employee conducts state business. The reimbursement is limited to the rates set forth in the General Appropriations Act. The reimbursement limit applies without a carry-over from one day to another.

(2) Meal and lodging expenses incurred at a duty point the night before state business begins are reimbursable.

(3) Meal and lodging expenses incurred more than one night before state business begins are not reimbursable unless traveling to the duty point reasonably requires more than one day or the expenses are incurred to qualify for a discount airfare.

(e) Apartment or house rental expenses.

(1) An apartment or house rental expense may be reimbursed if:

(A) the purpose of the rental is the conservation of state funds; and

(B) the agency reasonably anticipates that the employee will be using the apartment or house while conducting state business throughout the term of the lease.

(2) Application fees and other mandatory costs associated with applying for rental of the apartment or house are reimbursable.

(f) Other reimbursable expenses.

(1) In accordance with Government Code, §660.141, a state employee may be reimbursed for travel expenses incurred while staying extra days at a duty point to qualify for a discount airfare. Such expenses may be reimbursed only if:

(A) the amount of the reimbursement plus the amount of the discount is less than the average coach airfare or the contracted airfare; and

(B) the employing agency determines that the employee's absence for the extra days is not detrimental to the agency.

(2) Incidental expenses.

(A) Pursuant to Government Code, §660.002, a state employee or legislator is entitled to be reimbursed for incidental expenses when they are incurred for a state business reason.

(B) Examples of reimbursable incidental expenses include, but are not limited to: mandatory charges or mandatory service charges; telephone calls; toll charges; parking charges; repair charges for a state-owned vehicle; postage; passport or visa charges required for foreign travel; and currency exchange fees.

(g) Mileage.

(1) Amount of mileage reimbursement.

(A) The mileage reimbursement rate is established by the legislature in the General Appropriations Act.

(B) With the exception of tolls and parking expenses, the mileage reimbursement rate is inclusive of all expenses associated with the operation of the employee's personal vehicle.

(2) Determination of reimbursable mileage.

(A) The number of miles traveled by an employee for state business may be determined by the Texas Mileage Guide as published on the comptroller's Web site or by using point-to-point itemization.

(B) Point-to-point mileage may be documented by an employee's vehicle odometer reading or by a readily available electronic mapping service such as MapQuest, Yahoo Maps, Google Maps, satellite-based navigation systems, etc., as determined by each agency, institution of higher education, or other entity required to comply with Government Code, Chapter 660.

(h) Travel advance accounts.

(1) A state agency may establish an account for advancing funds to a state employee for the employee's projected travel expenses.

(2) A state agency that declines to establish a travel advance account may not make travel advances.

(3) A travel advance account may not be used for any purpose other than to make travel advances.

(4) A state agency may not issue a travel advance to:

(A) a prospective state employee;

(B) an employee of another state agency unless the employee will be providing services to the agency issuing the travel advance; or

(C) a person who is not a state employee, including a commercial transportation company, a commercial lodging establishment, a credit card issuer, and a travel agency.

(5) The comptroller may not reimburse the travel advance account of a state agency for a travel advance to a state employee who at the time of the advance had been properly reported to the comptroller as being indebted to the state.

(6) Under and over advances.

(A) If a state employee received a travel advance that is less than the reimbursable expenses incurred, the employing state agency may reimburse the employee for the difference.

(B) If an employee received a travel advance that is greater than the reimbursable expenses incurred, then the employee shall promptly reimburse the account for the difference.

(7) A travel advance account may not be reimbursed for a travel expense that would not have been reimbursed if the account had not been used.

(i) Voucher and documentation requirements.

(1) The comptroller requires supporting information and/or documentation to be included on a voucher prior to submission for payment.

(2) Supporting documentation must be sufficient to detail the expenses claimed. Supporting documentation requirements apply to a travel expense that is paid directly and to a travel expense reimbursement made by an agency. The information or documentation required changes periodically; however, it generally includes the following: documentation of employee's headquarters, required itemizations, purpose of trip, and required receipts.

(j) Audits conducted by the comptroller.

(1) Under Government Code, §660.028, the comptroller is required to periodically audit travel vouchers submitted for payment either before or after the comptroller issues a warrant or initiates an electronic funds transfer in response to the voucher. These audits and examinations assist the comptroller's office in determining whether:

(A) the expenses were reasonable and necessary;

(B) the purpose of travel clearly involved state business and was consistent with the agency's legal authority;

(C) the travel conducted and expenses incurred complied with the Travel Regulations Act, comptroller rules, travel provisions of the General Appropriations Act, the Texas Procurement and Support Services contract requirements, and policies and procedures adopted by the comptroller's office; and

(D) the number of individuals traveling for the same or a similar purpose was necessary to perform state business.

(2) The comptroller may question the fiscal responsibility of a payment even if it is technically legal.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on June 18, 2008.

TRD-200803116

Martin Cherry

General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: August 3, 2008

For further information, please call: (512) 475-0387

SUBCHAPTER O. UNIFORM STATEWIDE ACCOUNTING SYSTEM

34 TAC §5.200

The Comptroller of Public Accounts proposes amendments to §5.200, concerning state property accounting system. The purpose of the amendments is to improve the accuracy and efficiency of the state property accounting system by updating the definition of capital asset; shortening the timeframe that must elapse before an agency may delete missing property from the state property accounting system; and deleting reference to obsolete provisions regarding reassignable personal property and certain transition provisions which are no longer necessary. The proposed amendments also conform §5.200 to legislative changes made to the state property accounting statutes (Government Code, Chapter 403, Subchapter L) and to related provisions in the surplus and salvage property statutes (Government Code, Chapter 2175). House Bill 2914, 77th Legislature, 2001, amended Government Code, §§403.273, 403.274 and 403.276, regarding documenting the lending of agency property to another agency; the timing of physical inventories; the change of an agency head or property manager; and the reporting of lost, destroyed or damaged property to the appropriate agencies. The amendment also reflect amendments to Government Code, Chapter 2175, as they relate to an exception from the surplus/salvage property statutes relating to recyclable materials (Government Code, §2175.303(2)); institutions or agencies or higher education (Government Code, §2175.304); as well as amendments to Chapter 2175 adding exceptions from the surplus/salvage property statutes as they pertain to surplus computer equipment for the Secretary of State (Government Code, §2175.305), the Office of Court Administration (Government Code, §2175.307), and certain agencies involved in the areas of health, human services, or education (Government Code, §2175.306).

The proposed amendment also updates the names of certain state agencies whose names have been changed since the rule was last amended.

Mr. Heleman also has determined that for each year of the first five years the rule is in effect, the proposed amendment would benefit the public by improving the accuracy and efficiency of the state property accounting system. The proposed amendment would have no significant fiscal impact on small businesses. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Comments on the proposed amendments may be addressed to Darrell Edge, Manager, Fiscal Integrity Division, P.O. Box 13528, Austin, Texas 78711. If a person wants to ensure that the comptroller considers and responds to a comment made about this proposal, then the person must ensure that the comptroller receives the comment not later than the 30th day after the issue date of the Texas Register in which this proposal appears.

The amendments is proposed under Government Code, §403.271(b), which requires the comptroller to adopt necessary rules for the implementation of the state property accounting system.

The amendment implements Government Code, §§403.271 - 403.278.

§5.200.State Property Accounting System.

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Annual physical inventory--The physical inventory that a state agency must conduct once each year in accordance with this section.

(2) Betterment of personal property--An improvement of personal property that materially increases its serviceability or useful life, or both.

(3) Capital asset--A possession of the state that has [~~a value of at least $1,000 and~~] an estimated useful life of more than one year. [~~The term does not include real property, improvements to real property, or infrastructure.~~]

(4) Capital lease--A lease of personal property under which the lessee substantially assumes the risks and benefits of ownership as specified under generally accepted accounting principles.

(5) Capitalized asset--A capital asset that has a value equal to or greater than the capitalization threshold established for that asset type.

(6) [~~(5)~~] Charitable organization--The term has the meaning assigned by Civil Practice and Remedies Code, §84.003.

(7) [~~(6)~~] Comptroller--The comptroller of public accounts for the State of Texas.

(8) [~~(7)~~] Computer equipment--The equipment includes computer, telecommunications devices and systems, automated information systems, and peripheral devices and hardware that are necessary to the efficient installation and operation of that equipment, but does not include computer software.

(9) [~~(8)~~] Controlled asset--A possession of the state that a state agency has determined must be secured and tracked because of the nature of the possession. The term does not include a capitalized [~~capital~~] asset, real property, an improvement to real property, or infrastructure.

(10) [~~(9)~~] Fiduciary fund--A fund held by a state agency as trustee of the fund. The term includes pension funds and non-expendable trust funds.

(11) [~~(10)~~] Include--A term of enlargement and not of limitation or exclusive enumeration. The use of the term does not create a presumption that components not expressed are excluded.

(12) [~~(11)~~] May not--A prohibition. The term does not mean "might not" or its equivalents.

(13) [~~(12)~~] Personal property--A capital asset not classified as real property [~~or a controlled asset~~].

(14) [~~(13)~~] Proprietary fund--A self-supporting fund whose resources are generated through user charges. The term includes enterprise and internal service funds.

~~[(14) Reassignable personal property--Personal property that retains usage value for the state, continues to be functionally capable of serving a state agency, and is not surplus personal property.]~~

(15) Replacement of personal property--A replacement of an internal or external part of personal property that allows it to complete its normal useful life.

(16) Salvage personal property--Personal property that no longer serves its original purpose because it is depleted, worn out, damaged, consumed, outdated, or obsolete. The term does not include personal property that has a remaining useful life.

(17) State agency--A state governmental entity that manages, administers, or controls personal property.

(18) State employee--An officer or employee of a state agency.

(19) State property accounting system--The [~~personal property~~] fixed asset component of the uniform statewide accounting system.

(20) Supplemental physical inventories--The optional physical inventories that a state agency conducts in addition to the required annual physical inventory.

(21) Surplus personal property--Personal property in the possession of a state agency that is not currently needed by the agency and is not required for the agency's foreseeable needs. The term does not include salvage personal property.

(22) Trust property--Property not owned by the state that a state agency temporarily holds on behalf of the owner and is not used in agency operations.

[(b) Controlled assets. The state agency that manages, administers, or controls a possession of the state should use good business practices when determining whether the possession is a controlled asset.]

(b) [~~(c)~~] Exemptions.

(1) Equipment and supplies purchased through programs, contracts, or grants with the Department of State Health Services [ ~~Texas Department of Health~~].

(A) An item of equipment or a supply is exempt from the requirements of subsections (c) - (q) [~~(b) and (d)-(s)~~] of this section if it is:

(i) used to promote and maintain public health;

(ii) is purchased by or for a qualified entity; and

(iii) is purchased through a program, contract, or grant with the Department of State Health Services [~~Texas Department of Health~~].

(B) The exemption ends if the item or supply is returned to the Department of State Health Services [~~Texas Department of Health~~] upon the termination of the applicable program, contract, or grant. When the exemption ends, the formerly exempt equipment or supply must be reported to the state property accounting system in accordance with the comptroller's requirements.

(C) A state agency that purchases an exempt item of equipment or a supply shall develop and maintain internal control procedures for keeping a complete and accurate inventory of the items exempt under subparagraph (A) of this paragraph.

(D) In this paragraph, "qualified entity" includes an individual, a corporation, a local unit of government, and a state agency.

(2) The Department of Assistive and Rehabilitative Services [ ~~Texas Rehabilitation Commission and the Texas Commission for the Blind~~].

(A) A material, tool, book, or other necessary apparatus provided to a client by the Department of Assistive and Rehabilitative Services [ ~~Texas Rehabilitation Commission or the Texas Commission for the Blind~~] is exempt from subsections (c) - (q) [~~(b) and (d)-(s)~~] of this section.

(B) The Department of Assistive and Rehabilitative Services [~~Texas Rehabilitation Commission and the Texas Commission for the Blind~~] shall [~~each~~ ] develop and maintain internal control procedures for keeping a complete and accurate inventory of the items that are exempt under subparagraph (A) of this paragraph.

(D) An item that no longer qualifies for an exemption under subparagraph (A) of this paragraph must be added to the state property accounting system.

(3) Items provided to clients of state agencies.

(A) The comptroller may exempt from the reporting requirements of this section a material, tool, book, or other necessary apparatus if the item is provided to a client by a qualifying state agency.

(B) The appropriate state agency shall develop and maintain internal control procedures for keeping a complete and accurate inventory of the items that are exempt under subparagraph (A) of this paragraph.

(D) An item that no longer qualifies for an exemption under subparagraph (A) of this paragraph must be added to the state property accounting system.

(1) General requirement. A state agency must be certified as an internal state agency or a reporting state agency.

(2) Initial certification. A state agency that has not been certified before the effective date of this section must properly complete and submit to the comptroller the form required by the comptroller. The agency must specify on the form whether the agency wants certification as an internal state agency or a reporting state agency. The comptroller shall review the form and consider the agency's ability to comply with this section before certifying the agency.

(3) State agency requests for changes in certification.

(A) A reporting state agency may change its certification to an internal state agency by:

(i) properly completing the form required by the comptroller; and

(ii) obtaining the comptroller's approval of the change.

(B) An internal state agency may change its certification to a reporting state agency by:

(i) properly completing the form required by the comptroller; and

(ii) obtaining the comptroller's approval of the change.

(C) When considering whether to approve or disapprove a state agency's request for a certification change, the comptroller shall:

(i) consider the agency's history of complying or not complying with this section's requirements for the agency's current certification; and

(ii) determine the agency's capability to comply with this section's requirements for the agency's requested certification.

(D) This subparagraph applies if the comptroller receives a state agency's request for a certification change not later than the 30th day before the start of the next fiscal year. If the comptroller approves the change, then the change is effective on the later of:

(i) the first day of the fiscal year following the fiscal year during which the comptroller approves the change; or

(ii) the date the state property accounting system receives a full and accurate reporting from the agency of its property balances as of the end of the fiscal year during which the comptroller approves the change.

(E) This subparagraph applies if the comptroller receives a state agency's request for a certification change during the last 29 days of a fiscal year. If the comptroller approves the change, then the change is effective on the later of:

(i) the first day of the second fiscal year following the fiscal year during which the comptroller receives the request; or

(ii) the date the state property accounting system receives a full and accurate reporting from the agency of its property balances as of the end of the fiscal year following the fiscal year in which the comptroller receives the request.

(4) Certification changes initiated by the comptroller.

(A) The comptroller may change a state agency's certification from a reporting state agency to an internal state agency or vice versa anytime the comptroller determines the change is needed.

(B) If the comptroller changes a state agency's certification under subparagraph (A) of this paragraph, then the change is effective on the date specified by the comptroller.

(5) Criteria for certification as an internal state agency. A state agency may be an internal state agency only if:

(A) the agency determines that it will use the state property accounting system as its own property accounting system; and

(B) the agency agrees to maintain a perpetual inventory.

6) Criteria for certification as a reporting state agency.

(A) A state agency is a reporting state agency if it:

(i) is not exempt from this section; and

(ii) is not an internal state agency.

(B) A reporting state agency shall modify its [~~personal~~ ] property accounting system to comply with the comptroller's reporting requirements, as periodically amended.

(C) A reporting state agency shall demonstrate to the comptroller's satisfaction that the agency has disaster recovery capability.

(d) [~~(e)~~] Physical inventories.

(1) Frequency and timing of physical inventories.

(A) Except as provided by subsection (m) [~~(n)~~ ] of this section, a state agency shall conduct an annual physical inventory of the personal property and trust property in the agency's possession. The agency may choose the date of the inventory.

(B) The comptroller encourages a state agency to conduct each year one or more supplemental physical inventories of the personal property and trust property in the agency's possession.

(2) Requirements for annual physical inventories.

(A) When a state agency conducts an annual physical inventory of the personal property and trust property in the agency's possession, the agency shall:

(i) ensure that each property item is still within the agency's possession;

(ii) determine whether the person who has custody of each property item as indicated on the agency's records still has custody of the item; and

(iii) determine the condition of each property item.

(B) A state agency may use any method for conducting an annual physical inventory that is acceptable to the comptroller.

(C) If the results of a state agency's annual physical inventory vary from the records on the state property accounting system, then the agency shall immediately report the discrepancies to the comptroller through the system. The report must provide a reason for each discrepancy.

(3) Reports to the comptroller about annual physical inventories.

(A) The head of a state agency shall send a report to the comptroller about the agency's annual physical inventory.

(B) The report must contain:

(i) a copy of the results of the inventory; and

(ii) a signed statement that:

(I) provides the date the inventory was conducted;

(II) identifies the individual who the comptroller may contact for information about the inventory;

(III) describes the methods used to conduct the inventory;

(IV) summarizes the values received from the inventory; and

(V) contains the other information required by the comptroller.

(C) Deadline for reports. The head of a state agency shall ensure that the comptroller receives a copy of the results of the agency's inventory and the signed statement not later than the earliest of:

(i) the 45th day after the date the inventory is conducted; or

(ii) the 20th day after the end of the fiscal year for which the inventory is conducted.

(4) Requirements for supplemental physical inventories.

(A) A state agency may use any method for conducting a supplemental physical inventory that is acceptable to the comptroller. Statistical sampling and dollar unit sampling techniques are acceptable if they are properly used and comply with the comptroller's requirements.

(B) A state agency shall maintain in its records the results of each supplemental physical inventory.

(C) If the results of a state agency's supplemental physical inventory vary from the records on the state property accounting system, then the agency should consider the immediate conducting of an annual physical inventory.

(5) Loaned personal property. Personal property that a state agency has loaned to another state agency is the responsibility of the lending state agency for the purpose of this subsection.

(6) Transferred personal property. Personal property[ ~~, including reassignable personal property,~~] that a state agency has transferred to another state agency is the responsibility of the transferring state agency until the transfer has been completed in accordance with the comptroller's requirements.

(7) Missing, stolen, salvage, or surplus personal property. A state agency must include in a physical inventory the agency's missing, stolen, salvage, or surplus personal property until it has been deleted from the state property accounting system in accordance with this section.

(e) [~~(f)~~] Records and reporting.

(1) Internal state agencies.

(A) An internal state agency shall maintain a perpetual inventory. The agency shall record personal property and trust property on the state property accounting system at the time of acquisition. The information must be recorded in accordance with the comptroller's requirements.

(B) The comptroller shall maintain an internal agency's property records on the state property accounting system.

(2) Reporting state agencies.

(A) A reporting state agency shall report information to the state property accounting system in accordance with the comptroller's schedules, procedures, and classification system. The comptroller may require a reporting state agency to submit information at any time. The comptroller shall notify reporting state agencies in writing about the required frequency of the agencies' reports.

(B) A reporting state agency shall maintain its property records in the manner and format required by this section and the comptroller. The agency shall ensure that its property accounting system is always capable of providing the information required by the state property accounting system.

(3) Group and unit tracking of personal property.

(A) A state agency shall track personal property on a unit basis.

(B) Possessions of the state other than personal property may be tracked on a group basis only if the requirements of subparagraphs (C) and (D) of this paragraph are satisfied.

(i) have the same characteristics;

(ii) have the same purchase and in-service dates;

(iii) have the same class code;

(iv) are visually identifiable as logically belonging to the group; and

(v) may be depreciated using the same methods.

(D) Notwithstanding anything in this paragraph, possessions of the state that are purchased with debt financing by the Texas Public Finance Authority may be tracked on a group basis only if all the possessions in the group are included in the same lease supplement.

(4) Missing, stolen, damaged, or destroyed personal property.

(A) Upon receiving a report about stolen, damaged, or destroyed personal property from a head of agency under subsection (f)(1)(C) or (D) [~~(g)(1)(C) or (D)~~] of this section or from a property manager under subsection (g)(2)(B) or (C) [ ~~(h)(2)(B) or (C)~~] of this section, the comptroller shall forward necessary records about the property to the [~~state auditor and the~~] attorney general.

(B) The attorney general may investigate and take appropriate legal action to recover the value of stolen, damaged, or destroyed personal property. The attorney general shall determine the value of the property to be recovered based on the market value of the property and the degree of responsibility of the person who was entrusted with the property.

(C) A state agency shall [~~may not~~] delete missing personal property from the state property accounting system before two [~~three~~] annual physical inventories have been conducted or two [~~three~~] calendar years have elapsed since it was determined to be missing.

(D) A state agency may delete missing, stolen, damaged, or destroyed personal property from the state property accounting system only in accordance with the comptroller's procedures.

(f) [~~(g)~~] Responsibilities of heads of state agencies.

(1) Care, custody, and control of personal property.

(A) The head of a state agency is responsible for the custody and care of personal property and trust property in the agency's possession. This responsibility does not end when a property manager is designated.

(B) The head of a state agency is responsible for ensuring that the agency maintains adequate inventory controls on personal property and trust property. Upon request, the state auditor may advise and make recommendations to the agency about those controls.

(C) If the head of a state agency has reasonable cause to believe that the agency's personal property or trust property is missing, damaged, or destroyed because of a state employee's negligence, then the head of the agency shall file a report with the comptroller[~~, the state auditor,~~] and the attorney general.

(i) A report to the comptroller must be made immediately and by entering the appropriate disposal code into the state property accounting system.

[(ii) A report to the state auditor must be made through a deletion request entered into the state property accounting system. A head of agency should transmit to the state auditor by facsimile the appropriate form within 24 hours after entering the deletion request.]

(ii) [~~(iii)~~] A report to the attorney general must include the appropriate form. The form must be transmitted to the attorney general by facsimile. The report must be made not later than the fifth working day after reasonable cause for the belief arises.

(D) If the head of a state agency has reasonable cause to believe that the agency's personal property or trust property has been stolen, then the head of agency shall inform the comptroller[ ~~,the state auditor~~ ], the attorney general, and law enforcement personnel.

(i) A report to the comptroller must be made immediately and by entering the appropriate disposal code into the state property accounting system.

[(ii) [A report to the state auditor must be made through a deletion request entered into the state property accounting system. A head of agency should transmit to the state auditor by facsimile the appropriate form and police report within 24 hours after entering the deletion request.]

(iii) [~~(iv)~~] A report to law enforcement personnel must be made not later than the 48th hour after reasonable cause for the belief arises.

(2) Designation, supervision, and training of property managers.

(A) The head of a state agency shall:

(i) designate a property manager for the agency;

(ii) inform the comptroller of the designation by properly completing and submitting the form required by the comptroller; and

(iii) ensure that the property manager receives training about this section and the state property accounting system.

(B) The head of a state agency may designate more than one property manager for the agency only if the comptroller approves.

(C) The head of a state agency may designate one or more alternate property managers for the agency. The head of agency shall inform the comptroller of the designation by properly completing and submitting the form required by the comptroller.

(D) If a state agency's property manager or alternate property manager changes, then the head of the agency shall inform the comptroller of the change by properly completing and submitting the form required by the comptroller.

(E) The head of a state agency shall ensure that the property manager for the agency properly carries out the property manager's duties as required by this section.

(3) Providing receipts. The head of a state agency shall provide the receipt required by subsection (g)(4) [~~(h)(4)~~ ] of this section if the head of agency is entrusted with personal property or trust property.

(4) Use of personal property or trust property. The head of a state agency may use personal property and trust property only for state purposes.

(5) Change in the head of a state agency.

(A) When the head of a state agency changes, the outgoing head of agency shall complete the form required by the comptroller and deliver the form to the incoming head of agency.

(B) After verifying and signing the form, the incoming head of agency shall send copies of the form to the comptroller [ ~~and the state auditor~~].

(6) Liability. The head of a state agency is financially liable for the loss sustained by the state if the head of agency is entrusted with personal property or trust property and:

(A) the property disappears because the head of agency fails to exercise reasonable care for its safekeeping;

(B) the property deteriorates because the head of agency fails to exercise reasonable care to maintain and service it; or

(g) [~~(h)~~] Responsibilities of property managers.

(1) Determining the responsibilities of alternate property managers. The property manager of a state agency shall determine the responsibilities of the agency's alternate property managers. The property manager shall ensure that the alternate property managers properly fulfill their responsibilities.

(2) Custody of personal property and trust property.

(A) The property manager of a state agency is the custodian of all personal property and trust property possessed by the agency.

(B) If a property manager has reasonable cause to believe that personal property or trust property is missing, damaged, or destroyed because of a state employee's negligence, then the property manager shall inform the comptroller[~~, the state auditor,~~] and the attorney general. A report to the comptroller must be made in the form and manner required by the comptroller.

(i) A report to the comptroller must be made immediately and by entering the appropriate disposal code into the state property accounting system.

[(ii) A report to the state auditor must be made through a deletion request entered into the state property accounting system. A property manager should transmit to the state auditor by facsimile the appropriate form within 24 hours after entering the deletion request.]

(C) If a property manager has reasonable cause to believe that the agency's personal property or trust property has been stolen, then the property manager shall inform the comptroller[ ~~, the state auditor~~ ], the attorney general, and law enforcement personnel.

(i) A report to the comptroller must be made immediately and by entering the appropriate disposal code into the state property accounting system.

[(ii) A report to the state auditor must be made through a deletion request entered into the state property accounting system. A property manager should transmit to the state auditor by facsimile the appropriate form and police report within 24 hours after entering the deletion request.]

(iii) [~~(iv)~~] A report to law enforcement personnel must be made not later than the 48th hour after reasonable cause for the belief arises.

(3) Maintaining records. The property manager of a state agency shall maintain the records required by the comptroller and this section.

(4) Entrusting personal property or trust property to other persons.

(A) A property manager may not entrust personal property or trust property to a person unless the person provides a signed, written, and dated receipt to the property manager.

(B) The receipt must contain a statement similar to the following. "I understand that I am financially liable to the state for the disappearance of the personal property or trust property if I fail to exercise reasonable care for its safekeeping; the deterioration of the property if I fail to exercise reasonable care to maintain and service it; and the damage or destruction of the property if it occurs because of my negligent or intentional wrongful act."

(C) A property manager may not entrust personal property or trust property to a person if the property manager knows or reasonably should know that the person will use the property for other than state purposes.

(5) Use of personal property and trust property. A property manager may use personal property and trust property only for state purposes.

(6) Changes in property managers.

(A) When a property manager changes, the outgoing property manager shall complete the form required by the comptroller and deliver the form to the incoming property manager.

(B) After verifying and signing the form, the incoming property manager shall send copies of the form to the comptroller [~~and the state auditor~~].

(7) Liability. A property manager is financially liable for the loss sustained by the state if the property manager is entrusted with personal property or trust property and:

(A) the property disappears because the property manager fails to exercise reasonable care for its safekeeping;

(B) the property deteriorates because the property manager fails to exercise reasonable care to maintain and service it; or

(h) [~~(i)~~] Responsibilities of state employees.

(1) Providing receipts. A state employee shall provide the receipt required by subsection (g)(4) [~~(h)(4)~~] of this section if the employee is entrusted with personal property or trust property.

(2) Use of personal property and trust property. A state employee may use personal property [ ~~and trust property~~] only for state purposes.

(3) Liability. A state employee is financially liable for the loss sustained by the state if the employee is entrusted with personal property or trust property and:

(A) the property disappears because the employee fails to exercise reasonable care for its safekeeping;

(B) the property deteriorates because the employee fails to exercise reasonable care to maintain and service it; or

(i) [~~(j)~~] Valuation of personal property.

(1) General provision. This subsection governs the valuation of personal property as reported to the state property accounting system.

(2) Newly acquired personal property. The value of newly acquired personal property must be equal to the sum of:

(A) the cost of the property; and

(B) the costs required to place the property into service.

(3) Donated personal property.

(A) The value of personal property acquired through donation must be equal to its fair market value on the date of donation.

(B) The fair market value of donated personal property must be determined through a reasonable market study.

(C) A state agency that conducts a market study shall fully document the methods used to conduct the study. The agency shall keep the documentation in the agency's records in accordance with the comptroller's requirements. The agency shall send a copy of the documentation to the state property accounting system.

(4) Personal property manufactured by the state. The value of personal property manufactured by the state must be equal to the total cost of labor and materials. Overhead costs may be included in the value if the manufacturing state agency determines it would be cost-effective.

(5) Betterments and replacements of personal property.

(A) A state agency shall determine the value of a betterment or replacement of personal property:

(i) immediately following the completion of the betterment or replacement; or

(ii) at the agency's earliest opportunity as deemed appropriate by the agency and the comptroller.

(B) The value of a betterment of personal property must be expensed unless the betterment increases the value or useful life of the property by a material amount [~~at least 25%~~]. If a betterment is not expensed, then the value of the property must be increased on the state property accounting system in accordance with the comptroller's requirements.

(C) The value of a replacement of personal property is equal to the cost of the replacement less the original cost of the part being replaced. The value of the replacement must be expensed unless the replacement materially increases the value or estimated useful life of the property. If a replacement is not expensed, then the value of the property must be increased on the state property accounting system in accordance with the comptroller's requirements.

(D) If a state agency is required to increase the value of personal property on the state property accounting system because of a betterment or replacement, then the agency shall keep documentation in its records that supports the amount of the increase. The agency shall make the documentation available for inspection upon request. The agency may destroy the documentation only in accordance with the comptroller's requirements.

(6) Debt-financed personal property.

(A) In this paragraph, the total principal of debt-financed personal property is equal to the purchase price of the property plus the applicable service charge imposed by the Texas Public Finance Authority.

(B) The acquisition cost of debt-financed personal property other than manufactured items must reflect the total principal of the property and the costs required to place the property into service.

(C) The acquisition cost of debt-financed personal property that has been manufactured should be equal to the total cost of acquiring the property plus the cost of placing the property into service. This includes the principal, interest, finance charges, costs of issuance, and administrative fees.

(7) Leased personal property.

(A) Personal property that a state agency has leased under a capital lease must be valued in accordance with this paragraph.

(B) Subject to subparagraph (C) of this paragraph, the cost of leased personal property is equal to the present value of the minimum lease payments plus the cost of placing the property into service. The cost of the property does not include any costs not paid by the agency.

(8) Trade-ins. If a state agency is authorized to trade personal property for other personal property, then the agency must report the trade to the state property accounting system in accordance with the comptroller's requirements.

(9) Condition of personal property. When a state agency reports [~~reassignable,~~] surplus[, ] or salvage personal property to the state property accounting system, the agency must include the condition of the property in the report. The agency should use the categories adopted by the comptroller when reporting the condition of personal property.

(10) Previously depreciated personal property. If a state agency obtains ownership of personal property that was previously purchased with federal funds and depreciated for federal reporting purposes, then the agency shall value the property at its original cost. The previous depreciation has no effect on the value of the personal property for the purposes of the state property accounting system.

(j) [~~(k)~~] Accounting practices.

(1) Depreciation of personal property.

(A) The depreciable personal property of proprietary and fiduciary funds must be depreciated in accordance with generally accepted accounting principles.

(B) An internal state agency shall depreciate personal property that is a general fixed asset by using the straight-line method. The depreciation must be recorded on the state property accounting system on a memorandum basis unless generally accepted accounting principles require depreciation. Regardless of how the depreciation is recorded, it shall be recorded at the end of each fiscal year unless the comptroller specifies otherwise.

(C) The amount that personal property depreciates over a fiscal year by using the straight-line method is equal to the difference between the property's acquisition cost and its salvage value; divided by the estimated useful life of the property expressed in months [~~years~~].

(D) A state agency shall use the state property accounting system's default value for the estimated useful life of personal property unless the agency documents a different value based on the agency's experience. This subparagraph applies only when a state agency is calculating depreciation for the purpose of recording it on the state property accounting system.

(2) Transfer of personal property between funds.

(A) If a state agency transfers personal property from a proprietary fund to a governmental fund, then a new cost basis must be established for the property in the governmental fund. The new cost basis must be based on the acquisition cost of the property as recorded in the proprietary fund less any accumulated depreciation earned on the property. There is no requirement for the agency to modify the estimated useful life of the property.

(B) If a state agency transfers personal property from a governmental fund to a proprietary or fiduciary fund, then the acquisition cost of the property must be recorded in the proprietary or fiduciary fund. The acquisition cost as recorded in the proprietary or fiduciary fund must be equal to the acquisition cost as recorded in the governmental fund. The estimated useful life of the property must be adjusted to reflect the best estimate of useful life available to the proprietary or fiduciary fund.

(C) If a state agency transfers personal property from a governmental fund to another governmental fund, then the acquisition cost of the property as recorded in the new fund must be the same as the cost recorded in the old fund.

(3) Reporting and reconciliation of personal property inventory balances.

(A) A state agency shall:

(i) report to the state property accounting system general ledger information using generally accepted accounting principles;

(ii) track beginning balances at the beginning of each year; and

(iii) report additions, deletions, and adjustments in personal property throughout the year so that year end balances can be determined.

(B) An internal state agency should reconcile its general ledger balances for personal property to the supporting financial detail in the state property accounting system. The agency should accomplish the reconciliation on a monthly basis at the month-end closing. All adjustments made during the reconciliation should be supported and documented. The agency may destroy the documentation only in accordance with the comptroller's requirements.

(C) A reporting state agency should reconcile its corresponding balances to the detail reported to the state property accounting system on a quarterly basis. Adjustments should be entered not later than the 20th day after the end of the quarter. All adjustments should be supported and documented. The agency may destroy the documentation only in accordance with the comptroller's requirements.

(k) [~~(l)~~] Maintaining records.

(1) Forms. A state agency shall use the forms prescribed by the comptroller when taking any action authorized or required by this section. The comptroller may adopt and modify forms as the comptroller deems necessary.

(2) Loans of personal property.

(A) A state agency may loan [~~that loans~~] personal property to another state agency only if the head of the agency lending the property provides written authorization for the lending. The head of the agency to which the property is lent must execute a written receipt [~~shall document the loan as required by the comptroller~~].

(B) A state agency that loans personal property to another state agency shall document the loan as required by the comptroller.

(C) [~~(B)~~] A state agency that loans personal property to another state agency does not suspend or eliminate its responsibilities toward the property under this section and applicable law.

(3) Transfers of personal property.

(A) A state agency that transfers personal property to another state agency shall comply with the procedures and requirements adopted by the comptroller.

(B) A state agency that receives personal property from another state agency shall comply with the procedures and requirements adopted by the comptroller.

(C) Personal property that is transferred from one state agency to another is in the possession of the transferring agency until the receiving agency properly enters its receipt of the property in the state property accounting system.

(D) A state agency may not transfer property purchased through the master lease financing program administered by the Texas Public Finance Authority unless the authority provides advance approval of the transfer in accordance with the authority's requirements.

~~[(4) Reassignable personal property.]~~

[(A) A state agency that has possession of reassignable personal property shall identify the property to the state property accounting system. The system shall then advertise the availability of the property to other state agencies.]

[(B) A state agency that transfers reassignable personal property to another state agency and the state agency that receives the property shall comply with the comptroller's procedures for the transfer.]

[(C) This subparagraph applies if a state agency transfers to at least two state agencies reassignable personal property that is tracked on a group basis on the state property accounting system. The transferring state agency shall identify to the system the property that is transferred to each state agency. Each receiving state agency shall record its receipt of the property on the state property accounting system in accordance with subsection (f) of this section.]

(4) [~~(5)~~] Surplus and salvage personal property.

(A) A state agency shall comply with applicable law and rules when transferring, selling, or disposing of its surplus or salvage personal property.

(B) When a state agency determines that it possesses surplus or salvage personal property, the agency shall notify the state property accounting system in accordance with the comptroller's requirements.

(C) The notification provided under subparagraph (B) of this paragraph constitutes official notice to the Texas Facilities [~~General Services~~ ] Commission that the surplus or salvage personal property is available for sale or other disposition.

(D) A state agency may delete surplus or salvage personal property from the state property accounting system in accordance [ ~~only by requesting the comptroller's approval. An approval request must comply~~] with the comptroller's procedures.

(E) Surplus personal property that has not been reported to the state property accounting system must be added to the system before the property may be deleted from the system.

(F) Salvage personal property shall be removed from the state property accounting system in accordance with the comptroller's requirements.

(G) Each house of the legislature is exempt from the surplus property provisions of Government Code, Chapter 2175 [ ~~the State Purchasing and General Services Act, Article 9~~], if the rules and regulations of the administration committee of the house has adopted a system for disposing of the property. An agency in the legislative branch shall dispose of its surplus or salvage property under a disposition system established by that agency.

(H) Subparagraphs (A) - (F) of this paragraph do not apply to products and by-products of research, forestry, agriculture, livestock, and industrial enterprises that exceed the quantity required for consumption by the producing state agency if the agency has a continuing and adequate system of marketing research and sales. The deletion of those products and by-products from the state property accounting system must comply with the comptroller's requirements.

(I) State eleemosynary institutions [~~and institutions and agencies of higher learning~~] are exempt from the provisions of Government Code, Chapter 2175 [ ~~in the State Purchasing and General Services Act, Article 9~~ ], that relate to the disposition of surplus or salvage property except as provided by other law.

(J) Government Code, Chapter 2175, does not apply to the disposition of certain recyclable materials, including paper, cardboard, aluminum cans, plastics, glass, one-use pallets, used tires, used oil, and scrap metal, where the disposition is not in the best interests of the state or economically feasible.

(K) Institutions or agencies of higher education are exempt from the provisions of Government Code, Chapter 2175, that relate to the disposition of surplus or salvage property:

(i) where the governing board of each university system, institution, or agency of higher education establishes written procedures for the disposition of surplus or salvage property of the system, institution or agency; and

(ii) where the procedures allow for the direct transfer of materials or equipment that can be used for instructional purposes to a public school or school district, or an assistance organization designated by the school district, in accordance with other law.

(L) Government Code, Chapter 2175, does not apply to the disposition of surplus computer equipment:

(i) by the Secretary of State, who shall give preference to transferring the property to counties for the purpose of improving voter registration technology and complying with Election Code, §18.063;

(ii) by a state agency involved in the areas of health, human services, or education, who shall give preference to transfer the property to a public school, school district, or assistance organization specified by the school district, or;

(iii) the Office of Court Administration, who shall give preference to transferring the equipment to a local or state governmental entity in the judicial branch of local or state government.

(l) [~~(m)~~] Inventory control.

(1) Marking of personal property. A state agency shall permanently mark each item of personal property in the agency's possession as property of the State of Texas. The marking is permanent for the purpose of this paragraph if the marking can be removed only through considerable or intentional means. The marking shall be highly visible so that conducting a physical inventory is facilitated.

(2) Property inventory numbers.

(A) A state agency shall assign a unique property inventory number to each item of personal property that is tracked on a unit basis. The number shall be printed on a label. The label shall be attached to the item in a highly visible location so that conducting a physical inventory is facilitated.

(B) A property inventory number may not be reused, even if property has been deleted from the state property accounting system.

(3) Responsibility for securing and tracking personal property. A state agency is responsible for ensuring that its personal property and trust property are tracked and secured in the manner that is most likely to prevent damage to and the theft, loss, or misuse of the property.

(4) Locating personal property. A state agency must know where all of its personal property and trust property is located at all times.

(m) [~~(n)~~] Abolished state agencies.

(1) Application of this subsection. This subsection applies to an abolished state agency only to the extent this section is consistent with the law that abolishes the agency.

(2) Responsibilities of the head of an abolished state agency.

(A) The head of an abolished state agency shall:

(i) conduct a complete and accurate physical inventory of the agency's possessions in accordance with the comptroller's requirements;

(ii) furnish a copy of the inventory to the Texas Facilities [~~General Services~~] Commission not later than the effective date of the abolition; and

(iii) transfer all personal property of the agency to the Texas Facilities [~~General Services~~] Commission in accordance with the comptroller's requirements.

(B) The physical inventory required by subparagraph (A)(i) of this paragraph is in addition to the annual physical inventory required by subsection (d) [~~(e)~~] of this section.

(3) Responsibilities of the Texas Facilities [ ~~General Services~~] Commission. The Texas Facilities [ ~~General Services~~] Commission shall care for the personal property transferred to the commission under paragraph (2) of this subsection until the commission distributes or sells the property in accordance with applicable law.

(n) [~~(o)~~] Real property.

(1) Using the state property accounting system to track real property. A state agency may use the state property accounting system to track real property if the agency:

(A) establishes its own coding and accounting structures; and

(B) complies with the comptroller's requirements.

(2) Submitting information to the General Land Office. A state agency may not use the state property accounting system to track real property instead of submitting information about the property to the General Land Office.

(o) [~~(p)~~] Access to the state property accounting system. An individual may have access to the state property accounting system only in accordance with the procedures and security limitations prescribed by the comptroller.

(p) [~~(q)~~] Consequences of violating this section. The comptroller may refuse to draw warrants or initiate electronic funds transfers on behalf of a state agency that fails to comply with this section.

(q) [~~(r)~~] Conflict with federal laws or regulations. If a federal law or regulation conflicts with this section, then the law or regulation prevails over this section to the extent necessary to avoid the conflict.

~~[(s) Transition.]~~

~~[(1) Application of this subsection. This subsection applies to personal property of a state agency only if:]~~

~~[(A) the agency was not required to report the property to the General Services Commission by the State Purchasing and General Services Act, Article 8; and]~~

~~[(B) this section requires the agency to report the property to the state property accounting system.]~~

[(2) Deadline for initial reporting of personal property. Notwithstanding anything in subsections (a)-(r) of this section, a state agency shall complete its initial reporting of personal property to the state property accounting system not later than August 31, 1994.]

(r) [~~(t)~~] Disposal of computer equipment by charitable organizations.

(1) Application of this subsection. This subsection applies to computer equipment purchased by a charitable organization for $500 or more with funds received from the state through appropriation by the Texas Legislature [~~legislature~~] or by grant or by other means.

(2) General requirements. Except as provided by paragraphs (3) and (4) of this subsection, a charitable organization that purchases computer equipment with funds received from the state may not dispose of or discard the computer equipment before the fourth anniversary of the date the charitable organization purchased that equipment.

(3) Exceptions. This subsection does not prohibit:

(A) the sale or trade of computer equipment; or

(B) the disposal of equipment that is not operational.

(4) Donations to other charitable organizations. A charitable organization may dispose of computer equipment purchased with state funds within the four-year period after the date of purchase by donating the equipment to another charitable organization.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on June 18, 2008.

TRD-200803117

Martin Cherry

General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: August 3, 2008

For further information, please call: (512) 475-0387

CHAPTER 7. PREPAID HIGHER EDUCATION TUITION PROGRAM

SUBCHAPTER A. GENERAL RULES

34 TAC §7.1

The Comptroller of Public Accounts proposes an amendment to §7.1, concerning general statement of purpose of the Prepaid Higher Education Tuition Board, to incorporate the new prepaid tuition unit undergraduate education program (Texas Tomorrow Fund II). This section is being amended to implement House Bill 3900, 80th Legislature, 2007. House Bill 3900 amends the Education Code, Chapter 54, by adding Subchapter H, Prepaid Tuition Unit Undergraduate Education Program: Texas Tomorrow Fund II (codified at Education Code, §§54.751 - 54.778). House Bill 3900 directs the Texas Prepaid Higher Education Tuition Board ("board") to administer the new prepaid tuition unit undergraduate education program. Under the new law, a person may prepay the costs of all or a portion of a beneficiary's undergraduate tuition and required fees at a general academic teaching institution, two-year institution of higher education, private or independent institution of higher education, or accredited out-of-state institution of higher education. The amendment adds a new subsection (c) to incorporate into the general purpose of the board the responsibility to develop, implement, and administer the new prepaid tuition unit program, and describe the purpose of the program and the subchapters' role in informing the public about the program.

Mr. Heleman also has determined that for each year of the first five years the rule is in effect, the public benefit anticipated as a result of enforcing the rule will be in providing information on the new prepaid tuition unit undergraduate education program. The proposed amendment would have no significant fiscal impact on small businesses. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Comments on the proposal may be submitted to Linda Fernandez, Manager, Texas Tomorrow Funds, Post Office Box 13407, Austin, Texas 78711-3407, or transmitted electronically to linda.fernandez@cpa.state.tx.us.

The amendment is proposed under Education Code, §54.752(b)(1), which authorizes the board to adopt rules to implement the Prepaid Tuition Unit Undergraduate Education Program.

The amendment implements Education Code, §54.752.

§7.1.General Statement of Purpose.

(a) - (b) (No change.)

(1) The board develops, implements, and administers the prepaid tuition unit undergraduate education program under Education Code, Chapter 54, Subchapter H.

(2) The prepaid tuition unit undergraduate education program enables individuals to enter into a prepaid tuition contract with the board on behalf of a beneficiary for the purchase of one or more tuition units that the beneficiary is entitled to apply to the payment of the beneficiary's undergraduate tuition and required fees at an eligible educational institution.

(3) This subchapter and Subchapter L of this chapter inform the public about the prepaid tuition unit undergraduate education program.

(d) [~~(c)~~] Board. This chapter provides an orderly procedure to accomplish the board's responsibilities.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on June 19, 2008.

TRD-200803162

Martin Cherry

General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: August 3, 2008

For further information, please call: (512) 475-0387

SUBCHAPTER C. BOARD RESPONSIBILITIES

34 TAC §7.21

The Comptroller of Public Accounts proposes an amendment to §7.21, concerning general responsibilities of the Prepaid Higher Education Tuition Board. This section is being amended to implement House Bill 3900, 80th Legislature, 2007. House Bill 3900 amends the Education Code, Chapter 54, by adding Subchapter H, Prepaid Tuition Unit Undergraduate Education Program: Texas Tomorrow Fund II (codified at Education Code, §§54.751 - 54.778). House Bill 3900 directs the Texas Prepaid Higher Education Tuition Board ("board") to administer the new prepaid tuition unit undergraduate education program. Under the new law, a person may prepay the costs of all or a portion of a beneficiary's undergraduate tuition and required fees at a general academic teaching institution, two-year institution of higher education, private or independent institution of higher education, or accredited out-of-state institution of higher education. The amendment incorporates into the general responsibilities of the board additional powers that may be required to develop, implement, and administer the new prepaid tuition unit program, as authorized by Education Code, §54.752. The amendment revises the language regarding contract approval amounts in paragraph (6) to make this paragraph consistent with a recent amendment to §7.33(5) adopted by the board related to delegated responsibilities. The amendment adds new paragraph (7) regarding board authority to approve agreements or other transactions with the United States, state agencies, general academic teaching institutions, two-year institutions of higher education, and local governments. The amendment also adds new paragraph (8) regarding board authority to approve contracts with persons or entities to market and enroll persons in the programs.

The amendment is proposed under Education Code, §54.752(b)(1), which authorizes the board to adopt rules to implement the Prepaid Tuition Unit Undergraduate Education Program.

The amendment implements Education Code, §54.752.

§7.21.General Responsibilities.

The board shall retain the following responsibilities, all of which expressly are not delegated to the executive director:

(1) - (5) (No change.)

(6) negotiation and execution of purchase, contracts, leases, lease purchases, licenses and agreements involving payments of equal to or more than he amount(s) stated in Government Code, §2254.021(2) [~~$10,000~~]; [~~and~~]

(7) approval of agreements or other transactions with the United States, state agencies, general academic teaching institutions, two-year institutions of higher education, and local governments;

(8) approval of contracts with persons or entities to market and enroll persons in the programs; and

(9) [~~(7)~~] all policy making responsibilities of general applicability, provided that the board may delegate policy making responsibility to the executive director where parameters have been adopted by the board to be followed by the executive director in the exercise of such responsibility.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on June 19, 2008.

TRD-200803163

Martin Cherry

General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: August 3, 2008

For further information, please call: (512) 475-0387

SUBCHAPTER D. EXECUTIVE DIRECTOR

34 TAC §7.33

The Comptroller of Public Accounts proposes an amendment to §7.33, concerning delegated responsibilities of the Prepaid Higher Education Tuition Board that are delegated to the comptroller, as executive director of the board. This section is being amended to implement House Bill 3900, 80th Legislature, 2007, to incorporate additional responsibilities necessary or proper to administer the new prepaid tuition unit undergraduate education program (Texas Tomorrow Fund II). House Bill 3900 amends the Education Code, Chapter 54, by adding Subchapter H, Prepaid Tuition Unit Undergraduate Education Program: Texas Tomorrow Fund II (codified at Education Code, §§54.751 - 54.778). House Bill 3900 directs the Texas Prepaid Higher Education Tuition Board ("board") to administer the new prepaid tuition unit undergraduate education program. Under the new law, a person may prepay the costs of all or a portion of a beneficiary's undergraduate tuition and required fees at a general academic teaching institution, two-year institution of higher education, private or independent institution of higher education, or accredited out-of-state institution of higher education. The amendment incorporates into the delegated responsibilities of the board additional powers outlined in Education Code, §54.752, which may be required by the executive director to implement the new prepaid tuition unit undergraduate education program. The amendment adds new paragraph (7) authorizing the executive director to negotiate agreements or other transactions with the United States, state agencies, general academic teaching institutions, two-year institutions of higher education, and local governments. Proposed new paragraph (8) authorizes the executive director to appear before governmental agencies. Proposed new paragraph (9) authorizes the executive director to engage the services of private consultants, actuaries, trustees, records administrators, managers, legal counsel, and auditors for administrative or technical assistance. Proposed new paragraph (10) authorizes the executive director to solicit and accept on behalf of the board gifts, grants, loans, and other aid from any source or participate in any other way in any government program to carry out this chapter. Proposed new paragraph (11) authorizes the executive director to purchase liability insurance covering the board and employees and agents of the board.

The amendment is proposed under Education Code, §54.752(b)(1), which authorizes the board to adopt rules to implement the Prepaid Tuition Unit Undergraduate Education Program.

The amendment implements Education Code, §54.752.

§7.33.Delegated Responsibilities.

Authority to act in the following areas is delegated to the executive director by the board:

(1) - (5) (No change.)

(6) to authorize a refund, change of beneficiary, conversion to another plan and assess fees as specified by the board or consistent with rules and policies adopted by the board; [~~and~~]

(7) to negotiate agreements or other transactions with the United States, state agencies, general academic teaching institutions, two-year institutions of higher education, and local governments;

(8) to appear on his or her own behalf or on behalf of the board before governmental agencies;

(9) to engage the services of private consultants, actuaries, trustees, records administrators, managers, legal counsel, and auditors for administrative or technical assistance;

(10) to solicit and accept on behalf of the board gifts, grants, loans, and other aid from any source or participate in any other way in any government program to carry out this chapter;

(11) to purchase liability insurance covering the board and employees and agents of the board; and

(12) [~~(7)~~] to perform such other duties as specified by the board.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on June 19, 2008.

TRD-200803164

Martin Cherry

General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: August 3, 2008

For further information, please call: (512) 475-0387

SUBCHAPTER I. REFUNDS, TERMINATION

34 TAC §7.82

The Comptroller of Public Accounts proposes an amendment to §7.82, concerning termination of prepaid tuition contract. The proposed amendment deletes from subsection (d) an obsolete provision prohibiting the purchaser of a prepaid tuition contract that terminated automatically as provided by Education Code §54.631(b) from receiving a refund. This provision was adopted to comply with a federal law that is no longer in effect.

Mr. Heleman also has determined that for each year of the first five years the rule is in effect, the proposed amendment would benefit the public clarifying the procedures relevant to certain refund request. The proposed amendment would have no significant fiscal impact on small businesses. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Comments on the amendment may be submitted to Linda Fernandez, Manager, Texas Tomorrow Funds, Post Office Box 13407, Austin, Texas 78711-3407, or transmitted electronically to linda.fernandez@cpa.state.tx.us.

The amendment is proposed under Education Code, §54.618(b)(2), which gives the board the authority to adopt rules to implement this subchapter.

The amendment implements Education Code, §54.632(c) and §54.632(b), which requires the board to determine the method by which the amount of the refund is calculated and provides that the person named in the contract is entitled to a refund on termination of the contract.

§7.82.Termination of Prepaid Tuition Contract.

(a) The prepaid tuition contract shall be terminated automatically:

(1) if the board determines that a purchaser has misrepresented residency, age, or other information required by the board in connection with the purchase of a contract; or

(2) upon failure to pay any amounts due under the prepaid tuition contract prior to the expiration of any applicable grace periods.

(b) At its option, a purchaser may voluntarily terminate a prepaid tuition contract upon submission of a written request, provided the beneficiary is under 18 years of age and has not graduated from high school or attained high school equivalency certification. Termination shall be effective 30 days after receipt of such request by the board. The sum of payments made by the purchaser under the prepaid tuition contract, less a cancellation fee, may be refunded to the purchaser, subject to the limitations set forth in §7.81 of this title (relating to Refunds), or the purchaser may transfer any benefits under such contract to another qualified beneficiary under a prepaid tuition contract.

(c) If the beneficiary is at least 18 years of age, or has graduated from high school or attained high school equivalency certification, either the purchaser or the beneficiary may terminate the prepaid tuition contract.

(d) A prepaid tuition contract terminates automatically on the tenth anniversary of the date the beneficiary is projected to graduate from high school. Time spent as an active duty member of the United States armed services shall toll the ten-year anniversary period. [~~No refunds shall be given after the expiration of the ten-year anniversary period.~~]

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on June 18, 2008.

TRD-200803118

Martin Cherry

General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: August 3, 2008

For further information, please call: (512) 475-0387

SUBCHAPTER L. PREPAID TUITION UNIT UNDERGRADUATE EDUCATION PROGRAM: TEXAS TOMORROW FUND II

34 TAC §§7.121 - 7.145

The Comptroller of Public Accounts proposes new §§7.121 - 7.145, concerning implementation of the new prepaid tuition unit undergraduate education program (Texas Tomorrow Fund II). The new sections will be under new Subchapter L, Prepaid Tuition Unit Undergraduate Education Program: Texas Tomorrow Fund II. The new sections implement House Bill 3900, 80th Legislature, 2007. House Bill 3900 amends Education Code, Chapter 54, by adding Subchapter H, Prepaid Tuition Unit Undergraduate Education Program: Texas Tomorrow Fund II (codified in Education Code, §§54.751 - 54.778). House Bill 3900 directs the Texas Prepaid Higher Education Tuition Board ("board") to administer the new prepaid tuition unit undergraduate education program. Under the new law, a person may prepay the costs of all or a portion of a beneficiary's undergraduate tuition and required fees at a general academic teaching institution, two-year institution of higher education, private or independent institution of higher education, or accredited out-of-state institution of higher education.

New §7.121 addresses the application of the rules. The new section provides that the prepaid tuition unit undergraduate education program is being established to enable individuals to enter into a prepaid tuition contract with the board on behalf of a beneficiary for the purchase of tuition units that the beneficiary will be able to redeem for the payment of all or a portion of the beneficiary's undergraduate tuition and required fees at an eligible educational institution.

New §7.122 outlines definitions that are applicable to the program, including among others, definitions of eligible educational institution, tuition unit, Refund Value, Reduced Refund Value, Transfer Value and three-year holding period. As provided by House Bill 3900, eligible educational institutions include general academic teaching institutions, two-year institutions of higher education, private or independent institutions of higher education, or accredited out-of-state institutions of higher education, as defined under Education Code §61.003 and §54.751.

New §7.123 provides that the program is intended to meet the requirements of Internal Revenue Code, §529 as a qualified tuition program.

New §7.124 addresses the purchase of tuition units, types of tuition units (Types I, II and III), assigned value and price of the units.

New §7.125 describes the redemption of tuition units, providing that when a beneficiary under a prepaid tuition contract redeems tuition units to pay costs of tuition and required fees, the board will apply money from the Texas Tomorrow Fund II, in the amount provided by Education Code, §54.765, to pay all or the applicable portion of the costs of the beneficiary's tuition and required fees at the eligible educational institution in which the beneficiary enrolls. Consistent with House Bill 3900, the section provides that tuition units must be held for at least three years before being redeemed to pay for tuition and required fees.

New §7.126 outlines the requirements of a prepaid tuition unit contract required be completed to enroll in the program.

New §7.127 describes the requirements to be a purchaser and beneficiary under the program. Consistent with House Bill 3900, the section provides that at the time the purchaser enters into a prepaid tuition contract, the beneficiary of the contract must be a resident of this state or a nonresident who is the child of a parent who is a resident of this state.

New §7.128 addresses contract payments. The section provides that payments under prepaid tuition contracts may be made in single or periodic Pay-As-You-Go payments, or under an installment plan, or both. The section also provides that installment payments will include an implied interest component at a rate set by the board to ensure the actuarial soundness of the fund.

New §7.129 addresses the deferred use of prepaid credit hours.

New §7.130 outlines the requirements to change a beneficiary.

New §7.131 describes purchaser obligations and requests.

New §7.132 provides that nothing in these rules should be construed as a promise or guarantee that a beneficiary will be admitted to any public or private institution of higher education, allowed to continue enrollment at a public or private institution of higher education, or allowed to graduate from a public or private institution of higher education.

New §7.133 describes the circumstances for contract termination.

New §7.134 describes circumstances of default and delinquency conversion. The section provides that an account is subject to a late payment penalty for payments not received within 15 days of the payment due date. The section provides further that any refund in the event of a default shall be limited to the Reduced Refund Value.

New §7.135 describes the parameters for obtaining a refund on an unused or terminated tuition contract. The section provides generally that if an account is held for three or more years, a purchaser is entitled to a refund of the Refund Value of the account (includes some earnings). If a purchaser cancels the prepaid tuition contract within 3 years of the first payment due date, the purchaser may be entitled to a Reduced Refund Value (no earnings with the refund), unless special circumstances apply.

New §7.136 addresses payments to eligible educational institutions upon redemption of tuition units.

New §7.137 describes transfers among Internal Revenue Code, §529, qualified tuition programs. The section provides that a purchaser may transfer money between a prepaid tuition account and an account under another Internal Revenue Code, §529, plan established by this state or by another state or other authorized entity in accordance with Internal Revenue Code, §529, and that the value of the account at the time of transfer is an amount defined as the Transfer Value less any fees due and payable under the contract.

New §7.138 outlines recordkeeping requirements for rollover contributions from other Internal Revenue Code, §529, programs.

New §7.139 provides that the board will administer the Texas Tomorrow Fund II in a manner that is sufficiently actuarially sound to pay the costs of program administration and operations and to meet the obligations of the program. The proposed new rule also provides that the board may adjust the terms of subsequent prepaid tuition contracts as necessary to ensure the actuarial soundness of the fund.

New §7.140 provides that on the request of the comptroller as the comptroller considers necessary to ensure the actuarial soundness of the fund, the board may temporarily suspend new enrollment in the program. The proposed new rule provides further that if the comptroller determines that the program is financially infeasible, the comptroller will notify the governor and the legislature and recommend that the program be modified or terminated.

New §7.141 addresses the effect of program termination on an existing contract.

New §7.142 outlines the requirement for and components of an annual statement for the purchaser regarding the status of the purchaser's prepaid tuition contract.

New §7.143 describes the Texas Save and Match program under which money paid by a purchaser under a prepaid tuition contract may be matched with contributions made by another person or entity to the Texas Save and Match program and used to purchase additional tuition units on behalf of the beneficiary. Contributions may also be matched with any money appropriated by the legislature for the Texas Save and Match program and used to purchase additional tuition units on behalf of certain beneficiaries.

New §7.144 allows gift contributions to be made, and provides that a person or entity may purchase tuition units for a beneficiary designated in an existing prepaid tuition contract by making a gift contribution.

New §7.145 describes marketing considerations, and provides that the program will be marketed in a manner that promotes the participation goals and targets of the most recent revision of "Closing the Gaps," the state's master plan for higher education.

John Heleman, Chief Revenue Estimator, has determined that for the first five-year period the rules will be in effect, there will be no significant revenue impact on the state or units of local government.

Mr. Heleman also has determined that for each year of the first five years the rules are in effect, the public benefit anticipated as a result of enforcing the rules will be in providing information on the new prepaid tuition unit undergraduate education program. The proposed rules would have no significant fiscal impact on small businesses. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rules.

Comments on the proposal may be submitted to Linda Fernandez, Manager, Texas Tomorrow Funds, Comptroller of Public Accounts, Post Office Box 13407, Capitol Station, Austin, Texas 78711-3407, or transmitted electronically to linda.fernandez@cpa.state.tx.us.

The new sections are proposed under House Bill 3900, 80th Legislature, 2007, which requires the board to administer the prepaid tuition unit undergraduate education program, and Education Code, §54.752(b)(1), which authorizes the board to adopt rules to implement the program.

The new sections implement Education Code, Chapter 54, Subchapter H.

§7.121.Application.

(a) This subchapter applies to prepaid tuition contracts under the prepaid tuition unit undergraduate education program (Texas Tomorrow Fund II) to enable individuals to enter into a prepaid tuition contract with the board on behalf of a beneficiary for the purchase of one or more tuition units that the beneficiary is entitled to apply to the payment of the beneficiary's undergraduate tuition and required fees at an eligible educational institution.

(b) Applications shall be made available through the Prepaid Tuition Unit Undergraduate Education Program, Office of the Comptroller of Public Accounts, P.O. Box 13407, Austin, Texas 78711-3407; 111 East 17th Street, Room 1114, Austin, Texas 78711-1440, or by calling toll-free at 1-800-445-4723 (GRAD), or as otherwise provided by the board on the board's Internet web site.

(c) The rights of purchasers and beneficiaries are subject to the provisions of this subchapter, Education Code, Chapter 54, Subchapter H, Internal Revenue Code, §529, and the terms and conditions of the prepaid tuition contract. To the extent of irreconcilable conflict, the provisions of Internal Revenue Code, §529; Education Code, Chapter 54, Subchapter H; and this subchapter prevail over the prepaid tuition contract. Any amendment to Internal Revenue Code, §529; Education Code, Chapter 54, Subchapter H; or this subchapter that would apply to a prepaid tuition contract will automatically constitute an amendment to the prepaid tuition contract.

§7.122.Definitions.

The following words, terms, and phrases, when used in this subchapter, shall have the following meanings:

(1) "Accredited out-of-state institution of higher education" means a public or private institution of higher education that:

(A) is located outside this state; and

(B) is accredited by a recognized accrediting agency.

(2) "Beneficiary" means the person designated under a prepaid tuition contract as the person entitled to apply one or more tuition units purchased under the contract to the payment of the person's undergraduate tuition and required fees at a general academic teaching institution, two-year institution of higher education, private or independent institution of higher education, or accredited out-of-state institution of higher education.

(3) "Board" means the Prepaid Higher Education Tuition Board.

(4) "Eligible educational institution" means a general academic teaching institution, two-year institution of higher education, private or independent institution of higher education, or accredited out-of-state institution of higher education, that qualify as eligible educational institutions under Internal Revenue Code, §529.

(5) "Enrollment period" means the period established by the board during which a purchaser may enter into a contract with the board to purchase tuition units. The initial enrollment period is September 1 through the end of February. For beneficiaries who are newborn infants under one year of age at the time of enrollment, the initial enrollment period will be extended to cover the period of September 1 through July 31. These enrollment periods will apply annually thereafter subject to change by the board.

(6) "First payment due date" means the date the first payment is due after enrolling in the program and establishing a new prepaid tuition contract. The first payment due date will be specified in the prepaid tuition contract, and shall initially be established as May 1st. The first payment due date serves as the anniversary date for establishing the three-year holding period. The first payment due date may be changed subsequently by the board for future enrollment periods.

(7) "Fund" means the Texas Tomorrow Fund II.

(8) "General academic teaching institution" has the meaning assigned by Education Code, §61.003, except that the term does not include a public state college.

(9) "Market value" means an amount equal to the total purchase price of any unused tuition units, plus the portion of the total net earnings on assets of the Fund attributable to that amount (including any negative returns).

(10) "Matriculation" means enrollment as a member of the student body at an eligible educational institution.

(11) "Paid in full" means that all the required payments for the tuition units and any assessed fees under the prepaid tuition contract have been received and credited to the account.

(12) "Pay-As-You-Go" means purchasing tuition units at the price in effect for that type of tuition unit on the day payment is received for the tuition unit. Pay-As-You-Go includes paying for tuition units with a lump sum payment or multiple lump sum payments, without being obligated to pay for any additional tuition units.

(13) "Plan manager" means a professional investment manager that is under contract with the board to serve as a plan administrator and to invest the assets of the fund on behalf of the board.

(14) "Prepaid tuition contract" means a contract under which a person purchases from the board on behalf of a beneficiary one or more tuition units that the beneficiary is entitled to apply to the payment of the beneficiary's undergraduate tuition and required fees at a general academic teaching institution, two-year institution of higher education, private or independent institution of higher education, or accredited out-of-state institution of higher education.

(15) "Prepayment" means payment of the balance due or a portion of the balance due under a prepaid tuition contract, ahead of the schedule provided in the contract.

(16) "Private or independent institution of higher education," "public junior college," "public state college," "public technical institute," and "recognized accrediting agency" have the meanings assigned by Education Code, §61.003.

(17) "Program" or "Plan" means the prepaid tuition unit undergraduate education program. The board may select a different name for the program for marketing purposes.

(18) "Purchaser" means a person who enters into a prepaid tuition contract with the board on behalf of a beneficiary for the purchase of one or more tuition units.

(19) "Redemption" means the exchange of one or more tuition units to pay costs of tuition and required fees at an eligible educational institution.

(20) "Reduced Refund Value" means the lesser of:

(A) the amount paid by the purchaser or other contributor to purchase any unused tuition units under the contract on behalf of the beneficiary; or

(B) the current market value of the invested payments or contributions for any unused tuition units, as determined by the plan manager. Reduced Refund Value does not include any state provided or procured matching contributions or any earnings on state provided or procured matching contributions.

(21) "Refund Value" means an amount equal to the total purchase price of the unused tuition units to be refunded from the account, plus annual net earnings on the contributions made to the account to purchase the tuition units that are being refunded (including any negative returns), with the earnings rate to be set by the board at a rate that is up to two percent less than the actual investment return for the fund for each of the years the contract is in effect, provided that in no event shall the annual net earnings on the contributions ever exceed five percent annually, and provided further that for any year in which the investment return does not support payment of any earnings, the board may elect not to credit and pay any earnings on the contributions, to preserve the actuarial soundness of the fund. Refund Value does not include any state provided or procured matching contributions or any earnings on State provided or procured matching contributions.

(22) "Required fee" means a fee, other than a laboratory fee for a specific course, that is charged by a public or private institution of higher education to all students at the institution who are not exempt from the fee. For purposes of this subdivision, a fee is a required fee only to the extent that the fee is considered a qualified higher education expense under Internal Revenue Code, §529. Required fees are generally those fees imposed on all students as a condition of enrollment. Required fees do not include fees such as equipment usage fees required for particular courses, charges for room and board, book costs, or any optional fees.

(23) "Sales period" means the year long period from September 1 through August 31 during which a purchaser who has established a prepaid tuition contract may make purchases under the contract at the price(s) established under the contract, or at the price established for tuition units applicable to the sales period if additional tuition units are purchased during the sales period.

(24) "Three-year holding period" means the period of time that must transpire before a beneficiary or purchaser may redeem a tuition unit to pay for qualified higher education expenses, as provided under §7.125(g) of this title (relating to Redemption of Tuition Units).

(25) "Transfer value" means the value of the prepaid tuition contract at the time of transfer, that is the lesser of:

(A) an amount equal to the cost, at the time of the transfer, of the tuition and required fees that would be covered by redemption of the number and type of tuition units to be transferred from the account (but not including any units resulting from any State provided or procured matching funds) if the beneficiary were redeeming the units at a general academic teaching institution or two-year institution of higher education as follows:

(i) for a Type I unit, at the general academic teaching institution that, in the sales year in which the unit was purchased, had the highest tuition and required fee cost;

(ii) for a Type II unit, at a general academic teaching institution that, in the sales year in which the unit was purchased, had tuition and required fee cost at the weighted average; and

(iii) for a Type III unit, at a two-year institution of higher education that, in the sales year in which the unit was purchased, had tuition and required fee cost at the weighted average; or

(B) an amount equal to the current market value of the unused tuition units to be transferred from the account, which is an amount equal to the total purchase price of the unused tuition units to be transferred from the account (but not including any state provided or procured matching contributions), plus the portion of the total net earnings on assets of the Fund attributable to that amount (including any negative returns), but not including any earnings on state provided or procured matching contributions, as determined by the plan manager.

(26) "Tuition" means the charges imposed by a general academic teaching institution, two-year institution of higher education, private or independent institution of higher education, or accredited out-of-state institution of higher education, on undergraduates as a condition of enrollment, which are identified by such institution as tuition.

(27) "Tuition unit" means a portion of the cost of undergraduate resident tuition and required fees that may be prepaid, whose assigned value, when used to pay the cost of tuition and required fees at an eligible educational institution, is equal to:

(A) for a Type I tuition unit, one percent of the cost of undergraduate resident tuition and required fees for one academic year consisting of 30 semester hours charged by the general academic teaching institution with the highest such tuition and fee costs for the academic year in which the unit is redeemed, determined as provided by Education Code, §54.753(d);

(B) for a Type II tuition unit, one percent of the weighted average cost of undergraduate resident tuition and required fees for one academic year consisting of 30 semester hours charged by general academic teaching institutions for the academic year in which the unit is redeemed, determined as provided by Education Code, §54.753(e); or

(C) for a Type III tuition unit, one percent of the weighted average cost of undergraduate resident tuition and required fees for one academic year consisting of 30 semester hours charged by two-year institutions of higher education for the academic year in which the unit is redeemed, determined as provided by Education Code, §54.753(f).

(28) "Two-year institution of higher education" means a public junior college, a public state college, and a public technical institute, as those terms are defined in Education Code, §61.003.

(29) "Weighted average" with respect to tuition and required fees means:

(A) for Type II tuition units, a weighted average cost for undergraduate resident tuition and required fees of general academic teaching institutions for the applicable academic year, computed by the method specified in Education Code, §54.753(e); and

(B) for Type III tuition units, a weighted average cost for undergraduate resident tuition and required fees of two-year institutions of higher education for the applicable academic year, computed by the method specified in Education Code, §54.753(f).

§7.123.Tax Exempt Status Requirements.

(a) The provisions of this section are intended to meet the requirements of Internal Revenue Code, §529.

(b) A payment of an amount due to the fund for a prepaid tuition contract must be made in cash or cash equivalent. A person may not make a payment to the fund (regardless of whether such payment is a direct purchase, gift, contribution under the Texas Save & Match program, or other payment) to the extent that any such payment with respect to a beneficiary, when aggregated with the other Internal Revenue Code, 529 Plans for such beneficiary, would exceed the contribution limits of Internal Revenue Code, §529.

(c) The plan manager will monitor contributions to and withdrawals from the fund and any account within the fund to ensure that any applicable limits on contributions or withdrawals are not exceeded.

(d) The plan manager shall maintain a separate accounting for each beneficiary.

(e) The plan manager shall determine the earnings portion of each distribution, if any, in accordance with methods that are consistent with Internal Revenue Code, §529.

(f) The plan manager shall report the earnings portion of any distribution or refund on a statement to the purchaser or other distributee as appropriate, and to the Secretary of the United States Treasury, as may be required by the Internal Revenue Code, §529.

(g) The purchaser and beneficiary under the prepaid tuition contract, and any other contributor, may not:

(1) control or direct the investment of payments under the contract or any earnings of the fund; or

(2) use any interest in the contract as security or collateral for a loan or other obligation.

(h) The board and plan manager shall make such reports as the Secretary of the United States Treasury may require to maintain compliance with Internal Revenue Code, §529.

(i) Policies and procedures. As authorized under Education Code, Chapter 54, Subchapters F, G, and H, the board may adopt any policy or procedure, and such policy and procedure automatically amends each outstanding prepaid tuition contract, as necessary for:

(1) the prepaid tuition contract to obtain or maintain qualification as a qualified tuition program under Internal Revenue Code, §529;

(2) purchasers and beneficiaries to obtain and maintain the federal income tax benefits or favorable treatment that is provided by Internal Revenue Code, §529; or

(3) the prepaid tuition contract to obtain or maintain exemption from registration under federal securities law. If outstanding prepaid tuition contracts are automatically amended as a result of this rule, purchasers will be notified of the amendment through the Internet web site of the program.

§7.124.Prepaid Tuition Units: Purchase; Assigned Value; Types; Price.

(a) Under the program, a purchaser may prepay the costs of all or a portion of a beneficiary's undergraduate tuition and required fees at an eligible educational institution by entering into a prepaid tuition contract with the board to purchase one or more tuition units of a type described by this section at the applicable price established by the board for that type of unit for the year in which the unit is purchased.

(1) The portion of the beneficiary's undergraduate tuition and required fees for which a tuition unit may be redeemed is assigned to the tuition unit at the time of purchase.

(2) Tuition unit(s) may be redeemed to pay that portion of the tuition and fees at the general academic teaching institution or two-year institution of higher education in any academic year in which the unit is redeemed in accordance with this subchapter.

(3) The purchaser may purchase one type of unit or a combination of two or three types of units.

(b) The assigned value of a tuition unit, purchased as provided by this section, when used to pay the cost of tuition and required fees, is equal to one percent of the amount necessary for the academic year in which the unit is redeemed to cover the applicable cost of undergraduate resident tuition and required fees for one academic year consisting of 30 semester credit hours as follows:

(1) for a Type I tuition unit, the cost of undergraduate resident tuition and required fees charged by the general academic teaching institution with the highest such tuition and fee costs, determined as provided by subsection (d) of this section;

(2) for a Type II tuition unit, the weighted average undergraduate resident tuition and required fees charged by general academic teaching institutions, determined as provided by subsection (e) of this section; and

(3) for a Type III tuition unit, the weighted average undergraduate resident tuition and required fees of two-year institutions of higher education, determined as provided by subsection (f) of this section.

(c) Each year, the board will establish the price at which each type of tuition unit may be purchased during the next sales period and the percentage of the total cost of undergraduate resident tuition and required fees for one academic year consisting of 30 semester credit hours for which each type of tuition unit may be redeemed at each general academic teaching institution and two-year institution.

(1) The percentage will be based on the total cost of required tuition and fees at a particular general academic teaching institution or two-year institution of higher education in relation to the amount determined for the institution with the highest cost or weighted average cost, as applicable.

(2) The purchase price established for each type of unit will be equal to the applicable cost of tuition and required fees as determined under this section for the most recent academic year that began before the beginning of the sales period.

(3) The sales period to which those prices apply expires on the first anniversary of the date the units become available for purchase at the prices established for that year.

(4) Revisions to the purchase price established for each type of unit will be published in the Texas Register and on the board's Internet web site and shall apply to prepaid tuition contracts entered into on or after the effective date for the new price set by the board.

(d) The board shall base the purchase price of a Type I tuition unit on one percent of the cost of the undergraduate resident tuition and required fees for the applicable academic year at the general academic teaching institution with the highest such tuition and fee cost for that academic year.

(e) The board shall base the purchase price of a Type II tuition unit on one percent of the cost of the Weighted Average tuition and required fees of general academic teaching institutions for the applicable academic year. That cost is determined by:

(1) for each general academic teaching institution, multiplying the average amount of the institution's undergraduate resident tuition and required fees for an academic year consisting of 30 semester credit hours by the number of full-time equivalent undergraduate resident students at that institution;

(2) adding together the products computed under paragraph (1) of this subsection, for each institution; and

(3) dividing the sum determined under paragraph (2) of this subsection, by the total number of full-time equivalent undergraduate resident students at all general academic teaching institutions.

(f) The board shall base the purchase price of a Type III tuition unit on one percent of the cost of the Weighted Average tuition and required fees of two-year institutions of higher education for the applicable academic year, disregarding any portion of the tuition charged by a public junior college to a resident of this state who does not reside within the taxing jurisdiction of the junior college. That cost is determined by:

(1) for each two-year institution of higher education, multiplying the average amount of the institution's undergraduate resident tuition and required fees for an academic year consisting of 30 semester credit hours by the number of full-time equivalent undergraduate resident students at that institution;

(2) adding together the products computed under paragraph (1) of this subsection, for each institution; and

(3) dividing the sum determined under paragraph (2) of this subsection, by the total number of full-time equivalent undergraduate resident students at all two-year institutions of higher education.

(g) For the purposes of determining the cost of tuition and required fees at an eligible educational institution, if the tuition and required fees vary at an institution by the particular college or program area at the institution or campus, the tuition and required fees for those programs will be considered separately in calculating the weighted average costs for Type II and III tuition units and the price for Type I tuition units.

(h) The board will establish, in compliance with Internal Revenue Code, §529, the minimum amount that the purchaser is required to pay under the contract on behalf of a single beneficiary. The initial minimums set forth in this subsection may be periodically changed by the board as needed to maintain compliance with Internal Revenue Code, §529, or to maintain the actuarial soundness of the fund.

(1) The minimum number of tuition units that must be purchased to establish a new prepaid tuition contract using a lump sum or Pay-As-You-Go purchase is one. Additional tuition units or fractional units may be added to an existing prepaid tuition contract by periodic Pay-As-You-Go purchases of a minimum of $25 each.

(2) The minimum number of tuition units that must be contracted for purchase to establish a new prepaid tuition contract using an installment plan is 25 Type I tuition units or 50 Type II or III tuition units. Additional tuition units or fractional units beyond the initial installment contract amount may be purchased by periodic Pay-As-You-Go purchases of a minimum of $25 each and credited to the same beneficiary in a new or amended contract under the existing enrollment. The purchaser does not have to wait until a new enrollment period to add tuition units through Pay-As-You-Go purchases.

(3) The minimum for an Automated Clearing House (ACH) payment is $25.

(i) The maximum number of tuition units that may be purchased and assigned to a single beneficiary is 600 Type I units or an approximate equivalent in Type II or III units.

(j) At the time of the establishment of the account to which a purchaser's prepaid tuition contract money is assigned, the board may impose an administrative fee not to exceed $25. The administrative fee may be imposed only once for an account established for the same purchaser and beneficiary, regardless of the number of account upgrades, contracts, or payment plans later established by the purchaser for that same beneficiary. Money from that fee will be used directly in maintaining the actuarial soundness of the fund as required by Education Code, §54.770.

§7.125.Redemption of Tuition Units.

(a) In accordance with this subchapter, when a beneficiary under a prepaid tuition contract redeems tuition units to pay costs of tuition and required fees, the board shall apply money in the Fund, in the amount provided by Education Code, §54.765, to pay all or the applicable portion of the costs of the beneficiary's tuition and required fees at the general academic teaching institution, two-year institution of higher education, private or independent institution of higher education, or accredited out-of-state institution of higher education in which the beneficiary enrolls.

(1) Subject to subsection (c)(2) of this section, and the other provisions of this section, a beneficiary may redeem any type of tuition unit or partial tuition unit for attendance at an institution described by this section.

(2) A general academic teaching institution or two-year institution of higher education shall accept the amount transferred to the institution under Education Code, §54.765(c), when the unit or units are redeemed as payment for all or the applicable portion of the beneficiary's tuition and required fees.

(b) To pay for the entire cost of undergraduate resident tuition and required fees for an academic year consisting of 30 semester credit hours:

(1) redemption of 100 Type I tuition units (or an approximate equivalent amount of Type II or III units) is required at the general academic teaching institution with the highest tuition and fee cost as described by Education Code, §54.753(d);

(2) redemption of 100 Type II tuition units (or an approximate equivalent amount of Type I or III units) is required at a general academic teaching institution with the applicable tuition and fee cost at the Weighted Average as described by Education Code, §54.753(e); and

(3) redemption of 100 Type III units (or an approximate equivalent amount of Type I or II units) is required at a two-year institution of higher education with the applicable tuition and fee cost at the Weighted Average as described by Education Code, §54.753(f).

(c) The number of tuition units that must be redeemed to pay for the entire cost of tuition and required fees for an academic year at another general academic teaching institution or two-year institution of higher education may be higher or lower:

(1) in proportion to the amount that the cost of tuition and required fees at that institution is higher or lower than the amount determined for the institution with the highest cost or Weighted Average cost, as applicable; or

(2) if a more or less valuable type of tuition unit is redeemed.

(d) To assist purchasers in determining the number of tuition units a beneficiary must redeem to cover the costs of tuition and required fees at general academic teaching institutions and two-year institutions of higher education, each year the board shall prepare a tuition unit redemption chart and will post the chart on the board's Internet website. The chart will show for each general academic teaching institution and for each two-year institution of higher education the number of each type of units purchased that year that would be required to cover the cost of tuition and required fees, based on an academic year consisting of 30 semester credit hours.

(1) The exact amount of tuition units that will be required to attend a particular institution will depend upon the cost of tuition and required fees at the institution in the year of redemption.

(2) For Type I tuition units, the number of units required to attend a particular institution may be less than anticipated when purchased if that institution's costs are less than the general academic teaching institution with the highest tuition and fee cost in the year of redemption.

(3) For Type II and III tuition units, the number of units required to attend a particular institution may be more or less than anticipated when purchased, and will depend on whether that institution's costs are higher or lower than the Weighted Average cost in the year of redemption. To the extent the cost of a particular institution is higher than the Weighted Average cost, the beneficiary will have to redeem additional tuition units to cover the higher cost, or pay the amount of the difference as provided in subsection (e) of this section.

(e) If a beneficiary redeems fewer tuition units of the type or combination of types necessary to pay the total cost of the beneficiary's tuition and required fees at the general academic teaching institution, two-year institution of higher education, private or independent institution of higher education, or accredited out-of-state institution of higher education at which the beneficiary enrolls, the beneficiary is responsible for paying the amount of the difference between the amount of tuition and required fees for which the beneficiary pays through the redemption of one or more tuition units and the total cost of the beneficiary's tuition and required fees at the institution.

(f) A beneficiary who redeems Type III tuition units (or an approximate equivalent amount of Type I or II units) to attend a public junior college and who does not reside within the taxing jurisdiction of the junior college is responsible for paying any portion of the tuition charged by the junior college to persons who do not reside within that taxing jurisdiction.

(g) A beneficiary or purchaser may not redeem a tuition unit earlier than the third anniversary of the date the unit was purchased.

(1) For the purpose of calculating the three-year holding period for an initial Pay-As-You-Go purchase, the first payment due date after initially enrolling in the program is considered the date the initial units were purchased. These units may not be redeemed to pay for tuition and required fees until the third anniversary after the payment due date.

(2) For installment plan payments, the three-year holding period is considered met if the purchaser enrolls in the program and the first payment due date is at least three years prior to any redemption of tuition units, and the installment plan is paid in full before redemption of any of the tuition units.

(3) Additional Pay-As-You-Go purchases start a new three-year holding period as of the date payment is received for the additional tuition units.

(4) Under the three-year holding period, the latest date that a purchaser could purchase tuition units to pay for a semester of undergraduate education using Pay-As-You-Go purchases is three years prior to the date of expected redemption of the tuition units, subject to the requirement that all tuition units under the contract must be used not later than the 10th anniversary of the date the beneficiary is projected to graduate from high school, not counting time spent by the beneficiary as an active duty member of the United States armed services.

(5) If all of the tuition units in an account do not meet the three-year holding period, the purchaser may redeem those units or fractional units that meet the three-year holding period, and redeem the remaining tuition units in the account when the three-year holding period is met.

(h) A beneficiary may redeem more than 100 tuition units in one academic year of the type or combination of types as needed to pay the total cost of the beneficiary's tuition and required fees at an eligible educational institution.

(i) To accommodate part-time attendance or the enrollment in more or less semester hours than the contemplated 30 credit hours in an academic year, the board may calculate a per credit hour tuition unit cost for the eligible educational institution applicable to the year of redemption, whereby the number of tuition units required to be redeemed shall be in proportion to the amount that tuition and required fees to be charged to the beneficiary by the eligible educational institution are more or less costly than the cost for attending two semesters of 15 credit hours each or 30 total credit hours in an academic year.

(j) A beneficiary may redeem fractional tuition units as needed to pay the cost of the beneficiary's tuition and required fees at an eligible educational institution.

§7.126.Prepaid Tuition Contract.

(a) To apply for enrollment in the program, a purchaser shall complete and submit a prepaid tuition contract form, approved by the board.

(b) A purchaser shall provide the following information on the form:

(1) the name, address, social security number or tax identification number of the purchaser;

(2) name, date of birth and social security number of the beneficiary, or in the case of a newborn, provide proof of an application for a social security number through the Social Security Administration;

(3) the date the beneficiary is projected to graduate from high school;

(4) a certification indicating that the purchaser is eligible to enroll in the program because either the beneficiary or a parent of the beneficiary is a resident of this state, as provided in §7.127 of this title (relating to Purchaser; Beneficiary);

(5) how the purchaser intends to finance the prepaid tuition contract;

(6) the name of any person who shall have a right of survivorship with respect to the purchaser's rights under the prepaid tuition contract;

(7) the annual gross household income of the purchaser;

(8) the highest educational level achieved by the purchaser;

(9) the race or ethnicity of the beneficiary; and

(10) how the purchaser first learned about the program.

(1) the name, address, social security number or tax identification number of the purchaser;

(2) the terms under which the purchaser must pay any amounts owed under the contract;

(3) the consequences of default;

(4) the name, date of birth, and social security number of the beneficiary under the contract, provided that the board may allow additional time for the purchaser to obtain the social security number of a newborn;

(5) the terms under which another person may be substituted as the beneficiary;

(6) the date the beneficiary is projected to graduate from high school;

(7) the name of any person designated by the purchaser who shall have a right of survivorship with respect to purchaser's rights under the prepaid tuition contract;

(8) the name of any person who may terminate or cancel the contract;

(9) the terms under which the contract may be terminated or cancelled;

(10) the terms under which the purchaser is entitled to a refund;

(11) the method by which the amount of the refund is computed; and

(12) other provisions the board considers necessary or appropriate.

(d) The prepaid tuition contract may provide for the purchase of additional tuition units in subsequent years at the then-current price of the additional units.

(e) The prepaid tuition contract may also provide for the purchase of additional units in subsequent years through the Texas Save and Match program or through gift or other contributions by persons on behalf of a beneficiary, at the then-current price of the additional units at the time a contribution is made.

§7.127.Purchaser; Beneficiary.

(a) A purchaser may be any person who is permitted to be a purchaser under Internal Revenue Code, §529. The purchaser is not required to be a resident of this state, except as provided by subsection (d)(2) of this section.

(b) A purchaser is the owner of the account to which the purchaser's prepaid tuition contract money is assigned.

(c) A prepaid tuition contract may be established by one purchaser at the time it is established during enrollment, and thereafter it shall have only one purchaser as owner except when owned by more than one individual, trust, estate, or UGMA/UTMA custodian, guardian, corporation, non-profit entity, or other legal entity (or any combination thereof) as a result of a transfer by operation of law.

(d) At the time the purchaser enters into a prepaid tuition contract, the beneficiary of the contract must be:

(1) a resident of this state; or

(2) a nonresident who is the child of a parent who is a resident of this state.

(e) Notwithstanding any provision of Education Code, Chapter 54, Subchapter B, tuition and required fees charged by a general academic teaching institution or two-year institution of higher education that are paid for with tuition units, shall be determined as if the beneficiary of that contract were a resident student.

§7.128.Contract Payment.

(a) Payments under prepaid tuition contracts may be made in single or periodic Pay-As-You-Go payments, or under an installment plan, or both. The first payment due date for a newly enrolled purchaser is May 1, or as may be otherwise established by the board for subsequent enrollment periods.

(b) For payments under a contract to be made in installments over a period longer than one year, those payments can be made in annual, or monthly installments, in accordance with any permitted installment plans established by the board.

(1) Monthly installment plans shall include as a minimum: monthly installments to matriculation, a 10-year installment plan, and a 5-year installment plan.

(2) Annual installment plans include annual installments to matriculation, a 5-year installment plan, or a 10-year installment plan.

(3) Installment payments shall be due on the 1st of the month.

(4) Installment payments shall include an implied interest component at a rate set by the board to ensure the actuarial soundness of the fund.

(5) Installment plans must be paid in full prior to redemption of any units purchased by the installment plan.

(6) Under an installment plan, the basic unit price will not change over the life of the installment agreement, unless the agreement is later amended. The tuition unit price for new installment plans to be entered into during later enrollment periods will be adjusted by the board to reflect the then effective base tuition unit price and an updated implied interest component at a rate applicable to the new installment plans.

(7) A purchaser may initially establish both an installment plan contract and a Pay-As-You-Go contract when enrolling in the program, but the contract payments will be tracked separately. The purchaser will receive one combined account statement reflecting all payments under the different payment plans for the same purchaser and same beneficiary.

(c) There shall be no prepayment penalty imposed if a purchaser pays off an installment plan ahead of the schedule outlined in the prepaid tuition contract. Prepayments may result in a credit toward any monies due to reflect that the prepaid tuition contract was paid off early. Prepayments may be applied to reduce the outstanding contract balance, reduce the amount or number of monthly payments, or to make monthly payments ahead of schedule, at the option of the purchaser. In the absence of direction from the purchaser, prepayments will be applied to reduce the outstanding contract balance.

(d) The price for tuition units purchased using Pay-As-You-Go payments shall be the tuition unit price established by the board in accordance with §7.124 of this title (relating to Prepaid Tuition Units: Purchase; Assigned Value; Types; Price), for the sales period in which the tuition unit was purchased. If additional Pay-As-You-Go payments are made to purchase additional tuition units under a pre-existing prepaid tuition contract, the prepaid tuition contract shall be automatically amended to incorporate the additional tuition units purchased and the additional tuition units shall be credited to the existing account.

(e) A purchaser may make payments under a prepaid tuition contract by check, money order, electronic funds transfer, or payroll deduction. A purchaser may change payment methods. Credit cards may not be used to purchase tuition units.

(f) A purchaser may make payments under a prepaid tuition contract by payroll deduction, under procedures developed by the board and the comptroller to facilitate payments.

(1) To facilitate the establishment of payroll deductions by public employees, the board may extend the enrollment period as necessary to accommodate the employee benefit open enrollment period of the state or a political subdivision of the state during which payroll deductions are normally established.

(2) A purchaser electing to make payments under a prepaid tuition contract by payroll deduction shall specify whether the payments should be applied to pay for purchases under an installment plan or to make regular Pay-As-You-Go purchases.

(3) The purchase price for tuition units to be purchased by payroll deduction shall be based on:

(A) for payments under an installment plan, the price in effect for the sales period when the first tuition unit payment is or was received, regardless of the date the employee enrolls in payroll deduction; or

(B) for Pay-As-You-Go purchases, the price in effect for the sales period when each payment is actually received.

(g) Upgrades. Upgrades to an existing prepaid tuition unit account are allowed. An upgrade of an account is defined as adding additional tuition units to the account beyond the units specified in the original or existing prepaid tuition contract, by amending the contract or adding a new contract to the account.

(1) Pay-As-You-Go purchases of additional tuition units can be added to an existing Pay-As-You-Go contract without amending the contract. A new three-year holding period for tuition unit redemptions begins for new Pay-As-You-Go purchases.

(2) Pay-As-You-Go purchases of additional tuition units can be added to an existing enrollment that has a pre-existing installment plan contract, at any time during the sales period. However, Pay-As-You-Go purchases will be under a new contract and tracked separately from the installment plan purchases for implementation of the three-year holding period. The purchaser will receive a single account statement reflecting all payment plans under the account.

(3) The payment timeframe of an existing installment plan contract may be extended by contract amendment so long as the amended contract calls for payment in full prior to redemption of any of the tuition units. Other upgrades to an existing installment plan will also be performed by contract amendment.

(4) An installment plan contract may be added to an existing account that is set up as a Pay-As-You-Go plan contract, but only during an enrollment period. The new installment plan will be considered a separate contract from the Pay-As-You-Go contract. The installment plan for additional units will be priced at the tuition unit prices in effect on the date when the plan manager receives and accepts a signed new contract from the purchaser to acquire the additional tuition units. Both payment plans will be reflected on a single account statement for the purchaser.

(5) A purchaser can have multiple payment plans in a single beneficiary account but the aggregate amount should not exceed the limit of 600 Type I tuition unit equivalents per beneficiary.

(h) Downgrades. A prepaid tuition unit contract may be downgraded without terminating the contract. A downgrade of an account is defined as agreeing to purchase fewer tuition units than originally specified in the original contract.

(i) The board may impose a fee for a late payment under a prepaid tuition contract.

(j) The purchaser will also bear the cost if a purchaser's attempted payment is refused by a financial institution.

§7.129.Deferred Use of Prepaid Credit Hours.

(a) A prepaid tuition contract will allow a beneficiary:

(1) to elect to pay from a source other than tuition units purchased under the contract the beneficiary's tuition and required fees for some or all of the tuition and required fees to which the beneficiary is entitled to payment under the contract; and

(2) to defer to a subsequent semester or other academic term the right to payment of the beneficiary's tuition and required fees by using tuition units remaining under the contract.

(b) This section does not affect the date on which a prepaid tuition contract terminates and does not give the beneficiary the right to a payment under the contract after termination of the contract.

§7.130.Change of Beneficiary.

(a) The purchaser of a prepaid tuition contract may designate a different beneficiary in place of the original beneficiary subject to the following conditions:

(1) the new beneficiary must meet the requirements of a beneficiary under §7.127 of this title (relating to Purchaser; Beneficiary), on the date the designation is changed;

(2) the new beneficiary must meet the requirements of Internal Revenue Code, §529 (such as being a member of the family of the former beneficiary, as defined by §529(e)(2)), to prevent the change of beneficiary from being treated as a distribution under that law;

(3) documentation must be submitted evidencing the relationship between the replacement beneficiary and the former beneficiary; and

(4) the terms of the contract may be adjusted so that the purchaser is required to pay the amount the purchaser would have been required to pay had the purchaser originally designated the new beneficiary as the beneficiary, taking into account any payments made before the date the designation is changed.

(b) Amounts paid before the beneficiary is changed shall be credited against amounts due at the time of the change. If the amount due at the time of the change is less than the amount paid prior to the change, such amount shall be credited against other amounts due through the term of the contract. If the amount paid prior to the change exceeds the amounts due through the term of the contract, the amount in excess of the amounts due shall be refunded to the purchaser.

(d) A fee will not be imposed in connection with the designation of a new beneficiary under this subchapter.

(e) The purchaser of a prepaid tuition contract may not sell the contract.

§7.131.Purchaser Obligations and Requests.

(a) The purchaser is the person who is obligated to make payments under a prepaid tuition contract.

(b) Unless otherwise provided in this subchapter, the purchaser shall execute all prepaid tuition contract changes, conversions, transfers, terminations and refund requests.

(c) Any request to change a purchaser, change a beneficiary, or terminate a contract, must be submitted in a writing signed by the purchaser.

(d) A purchaser may designate in writing to the board on the enrollment form, or in a separate written request, a person with a right of survivorship in the event of the purchaser's death. However, until the rights under the contract pass to the designee, such designee has no right to direct decisions regarding contract changes, conversions, transfers or termination. Without limitation on the foregoing, the contract may be modified or terminated by, or refund disbursed to, the purchaser without the consent or authorization of a designee of survivorship rights. It is the purchaser's responsibility to update the survivorship information as appropriate.

§7.132.No Promise or Guarantee of Admission.

Nothing in this subchapter or the program should be construed as a promise or guarantee that a beneficiary will be:

(1) admitted to any public or private institution of higher education;

(2) admitted to a particular public or private institution of higher education;

(3) allowed to continue enrollment at a public or private institution of higher education; or

(4) graduated from a public or private institution of higher education.

§7.133.Contract Termination.

(a) The prepaid tuition contract may be terminated by the board:

(1) if the board determines that a purchaser has misrepresented residency, age, or other information required by the board in connection with the purchase of a contract;

(2) upon default for failure to pay any amounts due under the prepaid tuition contract prior to the expiration of any applicable grace periods as outlined in §7.134 of this title (relating to Default and Delinquency Conversion), unless such contract is converted to a Pay-As-You-Go contract; or

(3) if the purchaser fails to provide a valid social security account number or other applicable tax identification number for the purchaser or beneficiary within six months of enrollment.

(b) At its option, a purchaser may voluntarily cancel a prepaid tuition contract upon submission of a proper written request signed by the purchaser.

(c) A prepaid tuition contract terminates automatically on the tenth anniversary of the date the beneficiary was projected to graduate from high school, as indicated by the purchaser in the enrollment contract.

(1) For the purpose of this subsection, the date the beneficiary is projected to graduate from high school includes the projected completion of a nontraditional secondary education, such as obtaining a general education development certificate, certificate of high school equivalency, or other credentials equivalent to a public high school degree, as indicated by the purchaser in the enrollment contract.

(2) Time spent as an active duty member of the United States armed services shall toll the ten-year anniversary period.

(3) If there is a change of beneficiary, the ten-year anniversary period is calculated based on the projected high school graduation date of the new beneficiary, as indicated in the enrollment contract or change of beneficiary form.

(4) If a contract has been terminated automatically, the plan manager will make a reasonable effort to locate the purchaser for the purpose of processing a refund.

(5) Until the purchaser is located or the purchaser applies for a refund, any unused monies from the account will remain in the Fund to support the actuarial soundness of the Fund.

(6) Once a contract has been terminated automatically, the account will cease to accrue any further net earnings as of the date the contract has been terminated.

(d) Refunds for cancellations or terminations will be governed by §7.135 of this title (relating to Refunds).

§7.134.Default and Delinquency Conversion.

(a) An account is subject to a late payment penalty for payments not received within 15 days of the payment due date.

(b) If no payments are received within 90 days of the first payment due date under a newly established account, the account is in default and will be cancelled.

(c) Failure to make any payment within 30, 60, or 90 days of the due date will result in the plan manager sending out a delinquency notice. A late payment penalty will be assessed in each instance, and the failure to make timely payment will be considered a default.

(d) If a default has not been cured within 90 days of the outstanding payment default date, the plan manager will send out a default notice advising the purchaser that the contract will be converted in 30 days if not properly cured by the purchaser.

(e) A purchaser may cure the default status of its prepaid tuition contract prior to the expiration of 120 days after the payment default date, subject to payment of all the delinquent amounts and any fees specified in the board's fee schedule. A contract that is not cured within 120 days after default shall be converted from an installment plan to a "Pay-As-You-Go" contract reflecting the number of tuition units paid for at the time of the conversion, less any outstanding fees. Any future purchases under the contract will reflect the prices in existence at the time of purchase. If the purchaser wishes to establish another installment plan at a later date after a contract has been converted, the purchaser must wait until the next enrollment period to do so.

(f) Failure to make timely payments for 6 consecutive or non-consecutive months out of a 12 month period may also result in termination of the installment plan and conversion of the contract to a Pay-As-You-Go contract.

(g) Any refund in the event of a default shall be limited to the Reduced Refund Value as governed by the provisions related to contract termination in §7.135 of this title (relating to Refunds).

§7.135.Refunds.

(a) Refunds shall be made in accordance with provisions of this subchapter and the prepaid tuition contract, in a manner that will not adversely affect the tax status of the program under applicable provisions of Internal Revenue Code, §529. Refunds shall be governed by this subchapter as amended and Internal Revenue Code, §529, as in effect on the date the request for refund is submitted to the plan manager.

(b) Earnings may be paid with a refund only if the board determines that such payment will not adversely affect the actuarial soundness of the fund to pay the costs of program administration and operations and to meet the obligations of the program, as provided by Education Code, §54.770. It is the board's intent that refund amounts will be based on the definitions of "Refund Value," "Reduced Refund Value," or "Transfer Value," in §7.122 of this title (relating to Definitions), as applicable.

(c) The purchaser is entitled to a refund following cancellation or termination of a prepaid tuition contract, subject to any limitations imposed by Internal Revenue Code, §529, this subchapter, and the provisions of the prepaid tuition contract.

(d) Refunds shall be made to the purchaser of the prepaid tuition contract or, in the event of the purchaser's death, the person designated in the enrollment contract or other legal document to have the right of survivorship.

(e) Should a beneficiary terminate his/her student status on or after the date on which the institution denies refunds to students withdrawing for a particular semester, no refund shall be paid under the prepaid tuition contract for amounts relating to such semester.

(f) If the prepaid tuition contract is cancelled due to the death or disability of the beneficiary, or due to the receipt of a scholarship by the beneficiary, the purchaser may elect to change the beneficiary or apply for a refund of the Refund Value of the account, less any fees due and payable to the program under the board's fee schedule. The administrative fee will be retained by the program.

(g) If the beneficiary redeems fewer tuition units to pay the cost of tuition and required fees than the number of units purchased on behalf of the beneficiary under a prepaid tuition contract, other than to defer redemption as permitted in accordance with Education Code, §54.758, the purchaser may request a refund of the Refund Value of the account, less any fees due and payable under the contract, or transfer the remaining units to another beneficiary in accordance with this subchapter. The administrative fee will be retained by the board.

(h) If the beneficiary decides not to attend an institution of higher education within a reasonable amount of time after graduating from high school, the purchaser may elect to:

(1) change the beneficiary to another eligible beneficiary;

(2) hold the tuition units in the account until the 10th anniversary of the date the beneficiary was projected to graduate from high school, not counting time spent by the beneficiary as an active duty member of the United States armed services; or

(3) cancel the contract and request a refund of the Refund Value of the account, less any fees due and payable to the program. The administrative fee will be retained by the board.

(i) If the prepaid tuition contract is terminated due to misrepresentation, failure to provide required information or default, the purchaser may apply for a refund of the Reduced Refund Value of the account, less any fees due and payable to the program under the board's fee schedule. The administrative fee will be retained by the program.

(j) If the prepaid tuition contract is terminated automatically due to expiration of the 10 year anniversary period specified in §7.133(c) of this title (related to Contract Termination), the purchaser may apply for a refund of the Refund Value of the account, less any fees due and payable to the program under the board's fee schedule. However, the Refund Value will be limited to include only net earnings that have accrued under the contract up until the date the contract has been terminated automatically.

(k) In the event of any other cancellation request not addressed separately in this subchapter:

(1) if the cancellation request is received prior to the third anniversary of the first payment due date, the purchaser may apply for a refund of the Reduced Refund Value of the account. The administrative fee will be retained by the board; or

(2) if the cancellation request is received on or following the third anniversary of the first payment due date, the purchaser may apply for a refund of the Refund Value of the account (for those tuition units held for three or more years) or the Reduced Refund Value (for tuition units held less than three years). The administrative fee will be retained by the board.

(l) A lump sum refund may be made within 60 days of receiving a properly completed signed request for refund from the purchaser on a form promulgated by the plan manager, along with any required supporting documentation. Proof of death, disability or scholarship shall be in a form acceptable to the board.

(m) Notwithstanding any other provision of this section, the purchaser may designate in the prepaid tuition contract a person who shall have a right of survivorship with respect to purchaser's rights under a prepaid tuition contract; provided that such designation shall in no way affect the purchaser's ability to modify or terminate the contract and receive a refund without the consent or authorization of the designee. The purchaser may change the designation at any time by properly completing and submitting to the plan manager a right of survivorship form. The purchaser shall provide any other information requested by the board in support of the designation. It is the purchaser's responsibility to provide the plan manager with current information for survivorship rights.

(n) Distributions or transfers to another qualified tuition plan are governed by §7.137 of this title (relating to Transfers Among 529 Plans) and Education Code, §54.7671.

(o) Refunds or distributions that exceed the qualified higher education expenses incurred by the beneficiary during the year of the distribution, or other nonqualified withdrawals, may subject the distributee to income tax liability on any earnings and a tax penalty, as provided by Internal Revenue Code, §529.

(p) The number of refunds per year for a single purchaser shall be limited to twice in a 12 month period and shall be for a minimum of 100% of the purchaser's tuition units or in increments of 25 units, whichever is less.

§7.136.Transfers to Institutions on Redemptions of Tuition Units.

(a) When a beneficiary enrolls at a general academic teaching institution or two-year institution of higher education and notifies the institution that payment will be made by redeemed tuition units, the comptroller will arrange for the transfer to the institution of the appropriate amount specified under Education Code, §54.765(c), (d) and (e).

(b) When a beneficiary enrolls at a private or independent institution of higher education or accredited out-of-state institution of higher education, upon request the comptroller will arrange for the transfer to the institution of the amount specified under Education Code, §54.765(f).

§7.137.Transfers Among 529 Plans.

(a) A purchaser may transfer money between an account under this subchapter and an account under another plan established by this state or by another state or other authorized entity in accordance with Internal Revenue Code, §529, to the extent and in the manner authorized by that section.

(b) The value of the account at the time of transfer is the Transfer Value less any fees due and payable under the contract.

(c) To apply for a transfer, the purchaser shall complete and submit a transfer request form promulgated by the board not later than 30 days prior to the desired effective date of the transfer. Upon request by the executive director, plan manager, or other designee, the purchaser shall provide any additional information necessary to properly effectuate the transfer.

(d) Any fees that are due and payable to the program under the board's fee schedule must be paid by the purchaser prior to the transfer.

(e) Transfers to another qualified tuition program for the benefit of a designated beneficiary are limited to one per 12-month period or as otherwise provided by Internal Revenue Code, §529.

§7.138.Recordkeeping for Certain Rollover Contributions.

(a) In the case of a rollover contribution from another qualified tuition plan, a Coverdell education savings account, or a qualified U.S. Savings Bond, the purchaser shall provide appropriate documentation and certifications to the plan manager to identify the source of the contribution, confirm that the contribution is a qualified rollover under Internal Revenue Code, §529, and to specify that portion of the contribution that is attributable to the purchaser's contributions or investment in the previous account and that portion of the rollover contribution that is attributable to earnings that were accumulated in the previous account. Rollovers must be completed within 60 days to avoid potential tax consequences.

(b) For a purchase of tuition units using a contribution from a direct transfer between 529 programs, such as a trustee-to-trustee rollover, the purchaser must arrange for the distributing program to provide to the plan manager a statement setting forth the earnings portion of the rollover distribution within 30 days after the distribution or by January 10th of the year following the calendar year in which the rollover occurred, whichever is earlier.

(c) Upon receipt of the rollover contribution, the plan manager will add the earnings portion of the rollover contribution to the earnings recorded under the prepaid tuition contract to which the rollover contribution is made.

(d) Until the plan manager receives appropriate documentation showing the earnings portion of the rollover contribution, the board will treat the entire amount of the contribution as earnings in the prepaid tuition contract receiving the distribution.

(e) For the purpose of this section, "appropriate documentation" means:

(1) in the case of a rollover contribution from a Coverdell education savings account, an account statement issued by the financial institution that acted as trustee or custodian of the education savings account that shows basis and earnings in the account;

(2) in the case of a rollover contribution from the redemption of qualified U.S. Savings Bonds, an account statement or Form 1099-INT issued by the financial institution that redeemed the bonds showing interest from the redemption of the bonds;

(3) in the case of a rollover contribution from another 529 program, a statement issued by the distributing 529 program that shows the earnings portion of the distribution; or

(4) other documentation acceptable to the board supported by the purchaser's certification.

§7.139.Actuarial Soundness of Fund.

(a) The board will administer the fund in a manner that is sufficiently actuarially sound to pay the costs of program administration and operations and to meet the obligations of the program.

(b) The board will annually evaluate the actuarial soundness of the fund.

(c) The board may adjust the terms of subsequent prepaid tuition contracts as necessary to ensure the actuarial soundness of the fund.

§7.140.Suspension of New Enrollment; Program Modification or Termination.

(a) On the request of the comptroller as the comptroller considers necessary to ensure the actuarial soundness of the fund, the board may temporarily suspend new enrollment in the program.

(b) If the comptroller determines that the program is financially infeasible, the comptroller shall notify the governor and the legislature and recommend that the program be modified or terminated.

§7.141.Effect of Program Termination on Contract.

(a) A prepaid tuition contract remains in effect after the program is terminated if, when the program is terminated, the beneficiary:

(1) has been accepted by or is enrolled at a general academic teaching institution, two-year institution of higher education, private or independent institution of higher education, or accredited out-of-state institution of higher education; or

(2) is projected to graduate from high school not later than the third anniversary of the date the program is terminated.

(b) A prepaid tuition contract terminates when the program is terminated if the contract does not remain in effect under subsection (a) of this section.

(c) For contracts that are terminated pursuant to subsection (b) of this section, the purchaser is entitled to a refund of the Refund Value, less any fees that are past due and payable to the program under the board's fee schedule.

§7.142.Statement Regarding Status of Prepaid Tuition Contract.

(a) Not later than January 1 of each year, the plan manager shall make available online without charge to each purchaser a statement of:

(1) the amount paid by the purchaser under the prepaid tuition contract;

(2) the total number of each type of tuition unit covered by the contract at any one time;

(3) the number of each type of tuition unit remaining under the contract;

(4) the number of each type of tuition unit that has met the three-year holding period;

(5) the value of the purchasers' tuition units if redeemed at any general academic teaching institution or two-year institution of higher education designated for that year by the purchaser in the time and manner required by the board, not to exceed five institutions, with such information being provided in the tuition unit redemption chart developed pursuant to §7.125(d) of this title (relating to Redemption of Tuition Units); and

(6) any other information the board determines is necessary or appropriate.

(b) As soon as feasible after the end of the calendar year, the plan manager shall provide a written statement without charge to each purchaser reflecting the information listed in subsection (a) of this section, covering activities in the account through the end of the calendar year.

(d) The plan manager shall also provide a statement if tuition units are redeemed under the contract during the year, and if any other distributions are made under the contract that calendar year.

§7.143.Texas Save and Match Program.

(a) The board establishes the Texas Save and Match program under which money paid by a purchaser under a prepaid tuition contract may be matched with:

(1) contributions made by another person or entity to the Texas Save and Match program and used to purchase additional tuition units on behalf of the beneficiary; and

(2) money appropriated by the legislature for the Texas Save and Match program and used to purchase additional tuition units on behalf of certain beneficiaries.

(b) Beneficiaries eligible to receive matching contributions from money appropriated by the legislature for the Texas Save and Match program include:

(1) beneficiaries whose annual household income is below the state median family income, adjusted for household size;

(2) beneficiaries whose enrollment in the program would promote the participation goals and targets of the most recent revision of "Closing the Gaps," the state's master plan for higher education; or

(3) beneficiaries who meet other criteria that may be established by board rule.

(c) If a beneficiary does not qualify for a matching contribution from money appropriated by the legislature, the beneficiary may still receive a matching contribution that has been made and designated by another person or entity for that beneficiary.

(d) The board, or the executive director on behalf of the board, may solicit and accept gifts, grants, loans, and other aid from any source to benefit the Texas Save and Match program, the prepaid tuition program, other beneficiaries under the prepaid tuition program, or as otherwise indicated by the donor. Donations received by the board or executive director may be used to purchase tuition units, award scholarships, facilitate marketing or other implementation of the prepaid tuition program, or to fulfill other donor intent.

(e) Application Process and Forms.

(1) A person desiring to make a matching contribution to a prepaid tuition contract shall complete and submit a matching contribution form promulgated by the executive director, along with any requested supporting documentation, in accordance with the instructions on the form.

(2) If money is appropriated by the legislature for the Texas Save and Match program, the board will establish an application process for purchasers to apply for matching contributions from the money appropriated for that purpose.

(f) Beneficiaries may be selected for a matching contribution by:

(1) the person or entity making the contribution; or

(2) the executive director, upon application of the purchaser demonstrating that the beneficiary meets the eligibility criteria established by the board under subsection (b) of this section, or by the executive director under subsection (d) of this section, to the extent of available funds for that purpose.

(g) The total amount paid and contributed to a prepaid tuition contract on behalf of a single beneficiary may not exceed the value equivalent of 600 Type I tuition units or any other limit that may be established by board policy and Internal Revenue Code, §529. The plan manager shall disallow any matching contributions on behalf of a designated beneficiary if the additional contribution would result in exceeding any limits established under this subsection.

(h) A person or entity making a matching contribution and any designated beneficiary may not directly or indirectly direct the investment of any contributions to, or earnings on, the account.

(i) Matching contribution payments may be made by check, money order, or electronic funds transfer.

(j) The plan manager shall keep records of contributions made under the Texas Save and Match program.

(k) Timing of matching contributions.

(1) Matching contributions may be made at any time after a purchaser has established an account within an enrollment period, to match any payments made by the purchaser during the sales period.

(2) Matching contributions may be used to help meet the minimum tuition unit purchases required to establish an account.

(l) The executive director shall develop operating procedures for the Texas Save and Match program.

§7.144.Gift Contributions.

(a) A person or entity may purchase tuition units for a beneficiary designated in an existing prepaid tuition contract by paying an amount referred to as a "gift contribution."

(b) A gift contribution may purchase additional tuition units or, in the case of a prepaid tuition contract using the installment plan for purchases, the gift contribution may be applied to current or future installment payments covered by the prepaid tuition contract.

(c) If the prepaid tuition contract uses an installment plan for purchases, the gift contribution will be applied to the next payment(s) due under the installment plan, unless the plan manager receives other written instructions from the purchaser of the existing prepaid tuition contract. Gift contributions may be used to reduce principal under an installment plan, reduce the amount or number of monthly payments, or to purchase additional lump sum tuition units, at the option of the purchaser.

(d) If a gift contribution results in an account balance that exceeds the value equivalent of 600 Type I tuition units or any other limit that might be imposed under Internal Revenue Code, §529, the excess contribution amount will be returned to the contributor.

(e) Persons or entities may make gift contributions to an established prepaid tuition account at any time, including outside the enrollment period.

(f) The tuition unit price for any lump sum gift contributions will be the tuition unit price in effect for the sales period when the payment is actually received by the plan manager. If the gift contribution is applied to make installment plan purchases that are due under the contract, the gift contribution will be applied at the price established in the prepaid tuition contract for the installment payments.

(g) Tuition units purchased by gift contribution and any installment payments made by gift contribution that are credited to an existing prepaid tuition contract account will be owned by, and subject to the direction and control of, the purchaser of the existing prepaid tuition contract. Such tuition units will not be owned by, or under the direction or control of, the person or entity making the gift contribution.

(h) A person or entity making a gift contribution and any designated beneficiary may not directly or indirectly direct the investment of any contributions to, or earnings on, the account.

§7.145.Marketing Considerations.

(a) The program will be marketed in a manner that promotes the participation goals and targets of the most recent revision of "Closing the Gaps," the state's master plan for higher education.

(b) The program will seek strategies that promote enrollment in the program by persons likely to qualify for federal earned income tax credits.

(c) The executive director may establish workgroups as necessary to identify enrollment barriers, solicit input from key stakeholders, and recommend initiatives to enhance program participation, especially for purchasers and beneficiaries eligible for the Texas Save and Match program. The workgroups may include, without limitation, representatives from such agencies as the Health and Human Services Commission, Texas Workforce Commission, the Texas Higher Education Coordinating Board, other agencies, community organizations, and constituencies interested in promoting higher education.

(d) The executive director may use employees of the executive director to conduct or assist in conducting marketing efforts on behalf of the board.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on June 19, 2008.

TRD-200803165

Martin Cherry

General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: August 3, 2008

For further information, please call: (512) 475-0387