July 2016 Committee on School Finance Permanent School Fund Item 9
Proposed Amendments to 19 TAC Chapter 33, Statement of Investment Objectives,
Policies, and Guidelines of the Texas Permanent School Fund,
Subchapter A, State Board of Education Rules
(Second Reading and Final Adoption)
July 22, 2016
COMMITTEE ON SCHOOL FINANCE/PERMANENT SCHOOL FUND: ACTION
STATE BOARD OF EDUCATION: ACTION
SUMMARY: This item presents for second reading and final adoption proposed amendments to 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund, Subchapter A, State Board of Education Rules, to better reflect the Permanent School Fund (PSF) asset allocation and to consolidate some provisions to avoid repetition.
STATUTORY AUTHORITY: Texas Education Code (TEC), §§7.102(c)(31) and (33), 43.0031-43.0034, and 43.004; Texas Government Code, §2263.004; and the Texas Constitution, Article VII, Section 5(a)(2), (d), and (f).
TEC, §7.102(c)(31), states that the State Board of Education (SBOE) may invest the Permanent School Fund (PSF) within the limits of the authority granted by the Texas Constitution, Article VII, §5, and the TEC, Chapter 43. The TEC, §7.102(c)(33), authorizes the SBOE to adopt an annual report on the status of the guaranteed bond program and states that the SBOE may adopt rules as necessary to administer the guaranteed bond program as provided under the TEC, Chapter 45, Subchapter C.
TEC, §43.0031, requires the SBOE to adopt and enforce an ethics policy regarding management and investment of the PSF. The TEC, §43.0032, requires disclosure of certain relationships with entities that provide services relating to the management and investment of the PSF, requires the board to define those relationships, and prohibits giving advice when relationships exist in certain circumstances. The TEC, §43.0033, requires certain persons providing services to the SBOE regarding management and investment of the PSF to file expenditure reports. The TEC, §43.0034, requires the SBOE to adopt forms for conflicts of interest and expenditure reports.
TEC, §43.004, requires the SBOE to adopt written investment objectives for the PSF and employ a service to analyze the performance of the PSF.
Texas Government Code, §2263.004, requires the SBOE to adopt by rule standards of conduct applicable to certain financial advisors or service providers.
Texas Constitution, Article VII, §5, describes the PSF, the limit on distributions to the Available School Fund, the setting of spending rates by the SBOE, and the ten-year distribution test; authorizes a bond guarantee utilizing the PSF; and describes the management of the PSF by the SBOE.
EFFECTIVE DATE: The proposed effective date of the proposed amendments is 20 days after filing as adopted with the Texas Register in order to implement the latest policy in a timely manner. Under TEC, §7.102(f), the SBOE must approve the rule action at second reading and final adoption by a vote of two-thirds of its members to specify an effective date earlier than the beginning of the 2017-2018 school year.
PREVIOUS BOARD ACTION: The SBOE adopted rules in 19 TAC Chapter 33 effective September 1, 1996. The SBOE last revised rules in Chapter 33 with an amendment to §33.65, Bond Guarantee Program, adopted effective February 1, 2016, and an amendment to §33.67, Bond Guarantee Program for Charter Schools, adopted effective October 19, 2015.
The SBOE adopted the statutorily required four-year review of SBOE rules in 19 TAC Chapter 33, Subchapter A, at its November 2015 meeting. The proposed amendments to Chapter 33, Subchapter A, were approved for first reading and filing authorization at the April 2016 SBOE meeting.
BACKGROUND INFORMATION AND SIGNIFICANT ISSUES: In accordance with statute, the rules in 19 TAC Chapter 33, Subchapter A, establish investment objectives, policies, and guidelines for the investment and management of the Texas Permanent School Fund.
The proposed amendments to 19 TAC Chapter 33, Subchapter A, shown as Attachment II, would, among other things, reflect the changing PSF investment portfolio, including investments of the PSF in investment funds, and changing market conditions.
The proposed amendment to 19 TAC §33.5, Code of Ethics, would provide various clarifications to the rule, including how it applies to investments of the PSF in investment funds.
In accordance with the TEC, §43.0031(c), a copy of the proposed amendment to 19 TAC §33.5 was submitted to the Texas Ethics Commission and the State Auditor's Office for review and comment following SBOE approval of the proposed amendment for first reading and filing authorization at the April 2016 meeting. The SBOE is to consider any comments from the commission or state auditor received prior to final adoption. At the time this item was prepared, however, no formal comments had been received from the Texas Ethics Commission or the State Auditor's Office. Any comments received will be provided to the board.
The proposed amendment to 19 TAC §33.15, Objectives, would reflect the current objectives for the management of the PSF, including the asset allocation policy, established by the SBOE.
The proposed amendment to 19 TAC §33.20, Responsible Parties and Their Duties, would provide various clarifications to the rule to accurately reflect the responsibilities, respectively, of the SBOE, the PSF staff, and other parties retained by the SBOE to assist with aspects of the PSF.
The proposed amendment to 19 TAC §33.25, Permissible and Restricted Investments and General Guidelines for Investment Managers, would reflect the SBOE's general management authority over the PSF, including permitted and prohibited transactions as currently established or as may be established from time to time by the SBOE.
The proposed amendment to 19 TAC §33.30, Standards of Performance, would reflect the SBOE's general management authority over the PSF, including standards of performance for each asset class as currently established or as may be established from time to time by the SBOE.
The proposed amendment to 19 TAC §33.35, Guidelines for the Custodian and the Securities Lending Agent, would provide various clarifications to the rule and reflect the changing PSF investment portfolio and changing market conditions. Since approved for first reading and filing authorization, changes to §33.35 are recommended for clarification. Section 33.35(2)(H)(i)(II)(-e-) and (VI)(-d-) would be amended to clarify that the long-term rating of AA2 and AA by Moody's Investor Service and Standard & Poor's Corporation is required at the time of purchase.
The proposed amendment to 19 TAC §33.60, Performance and Review Procedures, would clarify aspects of the SBOE's oversight role with respect to all asset classes.
FISCAL IMPACT: The distribution of the Permanent School Fund is projected to be $2.1 billion during the 2016-2017 biennium. The TEA has determined that there are no additional costs to persons or entities required to comply with the proposed amendments. In addition, there is no direct adverse economic impact for small businesses and microbusinesses; therefore, no regulatory flexibility analysis, specified in Texas Government Code, §2006.002, is required. There is no effect on local economy for the first five years that the proposed amendments are in effect; therefore, no local employment impact statement is required under Texas Government Code, §2001.022.
PUBLIC AND STUDENT BENEFIT: The distribution of the PSF will flow to the school districts and reduce the tax burden to the public and the State of Texas. Proposed amendments would update and clarify provisions supporting the management and investment of the PSF.
PROCEDURAL AND REPORTING IMPLICATIONS: The proposed amendments would have no procedural and reporting implications.
LOCALLY MAINTAINED PAPERWORK REQUIREMENTS: The proposed amendments would have no locally maintained paperwork requirements.
PUBLIC COMMENTS: Following the April 2016 SBOE meeting, notice of the proposed amendments was filed with the Texas Register, initiating the official public comment period. No public comments had been received at the time this item was prepared. A summary of any public comments received regarding the proposal, including any from the Texas Ethics Commission or the State Auditor's Office, will be provided to the SBOE during the July 2016 meeting.
ALTERNATIVES: None.
OTHER COMMENTS AND RELATED ISSUES: None.
MOTION TO BE CONSIDERED: The State Board of Education:
By an affirmative vote of two-thirds of the members of the board, approve for second reading and final adoption the proposed amendments to 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund, Subchapter A, State Board of Education Rules, with an effective date of 20 days after filing as adopted with the Texas Register.
Staff Member Responsible:
Holland Timmins, Executive Administrator
and Chief Investment Officer of the
Texas Permanent School Fund
Attachments:
I. Statutory Citations (PDF, 30KB)
II. Text of Proposed Amendments to 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund, Subchapter A, State Board of Education Rules (including Figure: 19 TAC §33.5(n)(2)(J)) (PDF, 201KB)