September 2015 Committee on School Finance Permanent School Fund Item 10

Review of 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund, Subchapter A, State Board of Education Rules

September 10, 2015

COMMITTEE ON SCHOOL FINANCE/PERMANENT SCHOOL FUND: DISCUSSION
STATE BOARD OF EDUCATION: NO ACTION

SUMMARY: Texas Government Code, §2001.039, establishes a four-year rule review cycle for all state agency rules, including State Board of Education (SBOE) rules. This item presents the review of 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund, Subchapter A, State Board of Education Rules. The rules being reviewed establish definitions, requirements, and procedures for the investment of the Permanent School Fund (PSF).

STATUTORY AUTHORITY: The statutory authority for the rule review is the Texas Government Code, §2001.039. The statutory authority for 19 TAC Chapter 33 is the Texas Education Code (TEC), §§7.102(c)(31) and (33), 43.0031-43.004, and 45.051-45.063; the Texas Government Code, §2263.004; and the Texas Constitution, Article VII, §5(f).

The Texas Government Code, §2001.039, requires all state agencies to review their rules at least once every four years.

The TEC, §7.102(c)(31), states that the SBOE may invest the 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, Guaranteed Bonds.

The 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. The 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.

The TEC, Chapter 45, Subchapter C, authorizes the guarantee of bonds. The TEC, §45.051, establishes definitions for the bond guarantee program. The TEC, §45.052, extends the bond guarantee upon approval by the commissioner of education to independent school districts and charter districts. The TEC, §45.053, establishes parameters around the amount of bonds that may be guaranteed and authorizes the SBOE to increase the limit on the bond guarantee program under certain circumstances. The TEC, §45.0531, authorizes the SBOE to establish a reserve amount when implementing the bond guarantee. The TEC, §45.0532, establishes the amount of guarantee available to charter districts and provides some limitations on when the guarantee may be granted. The TEC, §45.054 and §45.0541, establish what bonds issued by a school district or a charter district may be eligible for the guarantee. The TEC, §45.055, establishes the procedures and minimum requirements for an application for a bond guarantee. The TEC, §45.056, establishes the investigation required following receipt of an application for the guarantee of bonds. The TEC, §45.057, establishes what constitutes a guarantee endorsement. The TEC, §45.0571, establishes a separate charter district bond guarantee reserve fund. The TEC, §45.058, imposes a duty on school districts or charter districts to notify by a certain time when they are unable to pay maturing principal or interest. The TEC, §45.059 and §45.0591, describe the process required to make a payment from the PSF when a school district or charter district is unable to pay maturing principal or interest. The TEC, §45.060, prohibits the acceleration of maturity when the PSF makes a payment. The TEC, §45.061, establishes the process for reimbursement of the PSF after payment and authorizes certain setting of certain tax rates by the commissioner. The TEC, §45.062, authorizes seeking attorney general assistance to compel action with regard to the guarantee program in certain circumstances. The TEC, §45.063, authorizes the SBOE to adopt rules as necessary to implement the bond guarantee program.

The Texas Government Code, §2263.004, requires the SBOE to adopt by rule standards of conduct applicable to certain financial advisors or service providers.

The 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.

BOARD RESPONSE: This item is presented for review and comment.

PREVIOUS BOARD ACTION: The SBOE last adopted the review of 19 TAC Chapter 33 in November 2011, finding that the reasons for initially adopting the rules continued to exist. Subsequent to the 2011 review, the following changes were made to Chapter 33. Section 33.1, Constitutional Authority and Constitutional Restrictions; §33.5, Code of Ethics; §33.10, Purposes of the Texas Permanent School Fund Assets and the Statement of Investment Policy; §33.15, Objectives; §33.20, Responsible Parties and Their Duties; §33.40, Trading and Brokerage Policy; and §33.55, Standards for Selecting Consultants, Investment Managers, Custodians, and Other Professionals To Provide Expertise for the Fund, were last amended effective June 4, 2012. Section 33.25, Permissible and Restricted Investments and General Guidelines for Investment Managers, was last amended effective October 21, 2013. Section 33.65, Bond Guarantee Program for School Districts, was last amended effective January 8, 2015. Section 33.67, Bond Guarantee Program for Charter Schools, was adopted effective March 3, 2014, and was last amended effective January 8, 2015.

FUTURE ACTION EXPECTED: The review of 19 TAC Chapter 33 will be presented to the SBOE for adoption at the November 2015 board meeting.

BACKGROUND INFORMATION AND SIGNIFICANT ISSUES: The rules in 19 TAC Chapter 33 establish investment objectives, policies, and guidelines for the PSF.

Section 33.1 describes the composition, limitation on distribution, and SBOE management of the PSF as required by the Texas constitution. Section 33.2 describes the yearly process by which the SBOE determines PSF distributions subject to the constitutional limitations. Section 33.5 describes the code of ethics and disclosures, including prescribed forms, that apply to members, relevant staff, and service providers regarding the management of the PSF as required by statute. Section 33.10 and §33.15 describe the investment policy of the PSF as required by statute. Section 33.20 describes the relevant duties of entities assisting the SBOE in their duty to manage the PSF, which ensures transparency and appropriate division of duties in fulfilling constitutional and statutory requirements. Section 33.25 describes the parameters that must be met by the SBOE investment managers, which ensures investments meet constitutional, statutory, and policy objectives established by and for the SBOE. Section 33.30 establishes performance standards that the SBOE's PSF committee should follow to ensure management of the fund complies with constitutional, statutory, and policy objectives. Section 33.35 establishes guidelines for custodians and securities lending agents, which ensures investments meet constitutional, statutory, and policy objectives established by and for the SBOE. Section 33.40 establishes the board's trading and brokerage policy to meet the statutory requirements of adopting policies and objectives. Section 33.45 establishes the board's policy regarding proxy voting as necessary given their constitutional and statutory investment authority. Section 33.50 establishes the socially and politically responsible investment policy of the board in accordance with statutory requirements to adopt an investment policy. Section 33.55 sets out the standards the SBOE uses in selecting outside expertise to ensure transparency and meeting the constitutional, statutory, and policy objectives established by and for the SBOE. Section 33.60 establishes requirements for performance and review procedures in accordance with statutory requirements to analyze performance. Section 33.65 and §33.67 establish the bond guarantee program for school districts and charter districts in accordance with the constitution and statutory directives.

The constitutional and statutory requirements governing the PSF and its investment, distribution, and guarantee of bonds remain in effect. Consequently, the need for the rules still exists.

ANTICIPATED REVISIONS TO RULES: As separate items in this agenda, proposed amendments to §33.65 and §33.67 are being presented for second reading and final adoption.

Staff anticipates presenting additional changes to Chapter 33 for discussion at a future meeting.

RULE REVIEW: The Texas Education Agency (TEA) plans to file the review of 19 TAC Chapter 33 with the Texas Register following the September 2015 SBOE meeting. The TEA will accept comments as to whether reasons for adopting 19 TAC Chapter 33 continue to exist. The official comment period will begin with publication of the proposed review of 19 TAC Chapter 33 in the Texas Register.

The filing of the notice of proposed review soliciting comments as to whether the reasons for adoption continue to exist would not preclude any amendments that may be proposed at different dates through a separate rulemaking process.

FISCAL IMPACT: None.

PUBLIC AND STUDENT BENEFIT: The rules in 19 TAC Chapter 33 establish provisions supporting the management and investment of the PSF. The distribution of the PSF will flow to the school districts and reduce the tax burden to the public and the state of Texas.

PROCEDURAL AND REPORTING IMPLICATIONS: None.

LOCALLY MAINTAINED PAPERWORK REQUIREMENTS: None.

PUBLIC COMMENTS: None.

ALTERNATIVES: None.

OTHER COMMENTS AND RELATED ISSUES: Separate items in this agenda present proposed amendments to §33.65 and §33.67 for second reading and final adoption.

Staff Member Responsible:
Holland Timmins, Executive Administrator
and Chief Investment Officer of the
Texas Permanent School Fund

Attachments:
I. Statutory Citations (PDF, 65KB)
II. Text of 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund (PDF, 275KB)