The SBOE a good steward of fund to support Texas public schools
(Opinion column by State Board of Education Chair Donna Bahorich published in the Houston Chronicle on March 27, 2019)
For 153 years, the State Board of Education (SBOE) has been entrusted with managing the financial investments of the Permanent School Fund (PSF), the constitutionally-prescribed perpetual educational fund to support Texas public schools.
With a market value of $44 billion today, the PSF is the largest educational endowment in the country. Of that total value, $10 billion of land, mineral rights, and certain real asset investments are managed by the School Land Board. The remaining $34 billion in financial investments is managed by the elected SBOE and is the subject of my comments.
The SBOE has called for legislative changes to unify the decision-making structure of the PSF. The current bifurcated management, begun in 2001, has affected performance, distributions and expenses.
The SBOE’s goal is to distribute as much money as possible to help pay for the education of today’s students, while maintaining the value of future distributions for our rapidly increasing student population. Texas today has 2.17 million more students now than it did 30 years ago. Only three states are growing at a faster pace.
The need to balance the present and future needs of students is also part of the state budget, requiring the SBOE to perform an analysis to inform state leadership.
In making distributions, the SBOE evaluates options at three public meetings. The review process includes an evaluation of financial projections under different economic scenarios. Inflation and student population growth are key considerations. Distributions currently provide around $1 billion per year to Texas schools, critical funding dedicated to textbooks, technology and daily operating costs. From 2006-2021, the SBOE-managed fund will provide nearly $12.4 billion to Texas schools, while the total PSF will provide almost $16 billion.
For years, distributions were comprised of cash income from fixed income and equity securities. As interest rates steadily declined in the 1980s and 1990s, the legislature and voters realized that it would be difficult to maintain stable and growing distributions and adopted a total return methodology in 2003 to direct PSF distribution. Total return includes consideration of dividends, interest and capital appreciation. This foresight was timely as the yield on the 10-year US Treasury note, for example, fell by 13.16 percentage points from 1981 to 2018.
We’re proud that the portion of the fund overseen by the SBOE has performed well when compared against peer funds. Over the past decade, BNY Mellon reports through December 2018, the SBOE-managed fund performance placed it in the top 33 percent of public funds over $1 billion and the top 39 percent for those over $5 billion. For endowments and foundations over $1 billion, the SBOE placed in the top 34 percent the last decade.
According to the 2018 National Association of College & University Business Officers (NACUBO) report of endowments over $1 billion (of which Ivy League schools are a subset), the SBOE-managed fund’s performance over ten years was 6.45 percent, net of fees, versus a 6.00 percent average NACUBO return. If the SBOE-managed fund was the “ninth Ivy” our performance would rank in the middle third. To look at performance a little closer to home, the ten-year performance for the Permanent University Fund was 6.42 percent versus 6.77 percent for the SBOE-managed fund, ending fiscal year 2018. We believe the evidence shows we have been good stewards.
Each investment fund is unique with different missions, investment objectives, and risk tolerances. The distinguishing feature of the PSF is the need to maintain a stable credit profile rating of Aaa. The PSF strength is used to back $80 billion in school district bonds today, an exceptional mission. This saves Texas schools about $200 million per year in interest and insurance expenses.
The SBOE has taken multiple actions to ensure that management fees are minimized. We use strategic partnerships and have brought certain portfolios in-house. Since 2006, the SBOE-managed fund has progressively diversified, like peer funds. Assets such as private equity and real estate investments have generated significant net returns, after all fees and expenses. Our fees and expenses are in line with industry averages.
Transparency and accountability are the keys to good governance. The SBOE believes it is important to make these multi-million-dollar investment decisions in full view of the Texas taxpayer. SBOE meetings are open to the public and have been live-streamed and archived online for a decade. For the last four years, the PSF also received the Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association.
We agree that the endowment is a Texas treasure that must be protected and nurtured. The State Board of Education’s oversight of this fund has been strong, prudent, ethical and carried out in full view of the public. We are proud of the productive and responsible role we have played in providing funding for every student in Texas. It is our constitutional duty and a solemn privilege.