November 2022 Committee on School Finance/Permanent School Fund Item 5

Proposed Revisions to 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund
(First Reading and Filing Authorization)

November 18, 2022

COMMITTEE ON SCHOOL FINANCE/PERMANENT SCHOOL FUND: ACTION
STATE BOARD OF EDUCATION: CONSENT

SUMMARY: This item presents for first reading and filing authorization proposed revisions to 19 Texas Administrative Code (TAC) Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund. The proposed revisions would implement Senate Bill (SB) 1232, 87th Texas Legislature, Regular Session, 2021, which authorized the creation of the Texas Permanent School Fund (PSF) Corporation. The proposed revisions would repeal 19 TAC §§33.1, 33.5, 33.10, 33.15, 33.20, 33.25, 33.30, 33.35, 33.40, 33.45, 33.50, 33.55, 33.60, 33.65, and 33.67 and propose new §§33.3, 33.4, 33.6, 33.7, and 33.8. The proposed new rules would include changes to the existing rules relating to the Bond Guarantee Program, including changes to the reserve. The proposed revisions would also organize the rules in Chapter 33 by creating new Subchapter B, Texas Permanent School Fund Corporation Rules, which would contain §33.21.

STATUTORY AUTHORITY: Texas Constitution, Article VII, §5(a) and (f); Texas Education Code (TEC), §43.001; SB 1232, 87th Texas Legislature, Regular Session, 2021.

Texas Constitution, Article VII, §5(a), authorizes the State Board of Education (SBOE) to make distributions from the PSF to the available school fund with certain limits.

Texas Constitution, Article VII, §5(f), authorizes the SBOE to manage and invest the PSF according to the prudent investor standard and make investments it deems appropriate.

TEC, §43.001, describes the PSF as a perpetual endowment.

SB 1232, 87th Texas Legislature, Regular Session, 2021, allows the SBOE to create the Texas PSF Corporation and delegate its authority to manage the PSF to the Texas PSF Corporation.

The full text of statutory citations can be found in the statutory authority section of this agenda.

EFFECTIVE DATE: The proposed effective date of the proposed revisions is 20 days after filing as adopted with the Texas Register. 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 2023-2024 school year. The earlier effective date would allow the rules to align with statute as soon as possible.

PREVIOUS BOARD ACTION: The SBOE adopted rules in Chapter 33 effective September 1, 1996. The rules were last revised by the SBOE as follows. Sections 33.1, 33.40, and 33.55 were amended effective June 4, 2012. Sections 33.5, 33.25, 33.35, and 33.60 were amended effective April 8, 2021. Sections 33.10, 33.15, 33.20, and 33.30 were amended effective March 15, 2020. Section 33.45 was amended effective March 31, 2004. Section 33.21 was adopted effective March 22, 2022. Section 33.50 was adopted effective September 1, 1996. Sections 33.65 and 33.67 were amended March 29, 2018.

BACKGROUND INFORMATION AND JUSTIFICATION: In accordance with statute, the rules in Chapter 33 establish investment objectives, policies, and guidelines for the Texas Permanent School Fund.

SB 1232, 87th Texas Legislature, Regular Session, 2021, allows the State Board of Education to create the Texas PSF Corporation and delegate its authority to manage the PSF to the Texas PSF Corporation.

Existing §§33.5, 33.20, 33.65, and 33.67 would be repealed. The sections would be renumbered and amended as follows.

Proposed new §33.3, Duties and Responsibilities of the State Board of Education Related to the Texas Permanent School Fund Corporation, would replace existing §33.20. The following significant changes would be made from the existing rule. The proposed new rule would update the duties and responsibilities of the SBOE to align with SB 1232, including the repeal of provisions that are no longer applicable. The remaining provisions would specify the role of the SBOE as fiduciary of the PSF and the duties and responsibilities of the SBOE with respect to the Texas PSF Corporation, as set forth in SB 1232 and the Texas PSF Corporation's governing documents.

Proposed new §33.4, Ethical Standards for Members of the State Board of Education, would replace existing §33.5. The following significant changes would be made from the existing rule. The proposed new rule would remove most of the ethical provisions related to the investment and management of the PSF to align with the ethics policy to be adopted by the Texas PSF Corporation in accordance with SB 1232. The provisions that remain would provide ethical standards for SBOE members, the commissioner of education, and Texas Education Agency (TEA) staff as related to the PSF.

Proposed new §33.6, Bond Guarantee Program for School Districts, would replace existing §33.65. The following significant changes would be made from the existing rule. The commissioner would have the authority to increase or decrease the multiplier, and changes would be made to the fund's reserve to (1) allow the SBOE to establish an amount of capacity held in reserve of up to 5.0% of the fund's capacity; (2) remove the limitations on the use of the reserve capacity; and (3) provide the commissioner or SBOE the ability to increase or decrease the amount held in reserve. Additionally, the changes would allow applications for districts that experience unforeseen catastrophes or emergencies to be prioritized.

Proposed new §33.7, Bond Guarantee Program for Charter Schools, would replace existing §33.67. The only significant change that would be made from the existing rule would be to allow the commissioner to hold up to 5.0% of the charter school available capacity in reserve each month.

New §33.8, Compliance with Securities and Exchange Commission (SEC) Rule 15c2-12 Pertaining to Disclosure of Information Relating to the Bond Guarantee Program, would be proposed. The proposed new rule would codify the SEC Rule 15c2-12 undertaking in Chapter 33. Additionally, the new rule would add a definition of Texas PSF Corporation and specify that the annual report is prepared by the Texas PSF Corporation.

Existing §§33.1, 33.10, 33.15, 33.25, 33.30, 33.35, 33.40, 33.45, 33.50, 33.55, and 33.60 are proposed for repeal because they are no longer applicable to the SBOE due to the implementation of SB 1232 and the delegation of the authority to manage and invest the PSF to the Texas PSF Corporation.

The text of §§33.1, 33.5, 33.10, 33.15, 33.20, 33.25, 33.30, 33.35, 33.40, 33.45, 33.50, 33.55, 33.60, 33.65, and 33.67 proposed for repeal is not included as an attachment to this item due to the volume of rules; however, the rules are viewable on the TEA website at https://tea.texas.gov/about-tea/laws-and-rules/texas-administrative-code/19-tac-chapter-33.

FISCAL IMPACT: TEA has determined that there are no additional costs to state or local government required to comply with the proposal.

LOCAL EMPLOYMENT IMPACT: The proposal has no effect on local economy; therefore, no local employment impact statement is required under Texas Government Code, §2001.022.

SMALL BUSINESS, MICROBUSINESS, AND RURAL COMMUNITY IMPACT: The proposal has no direct adverse economic impact for small businesses, microbusinesses, or rural communities; therefore, no regulatory flexibility analysis specified in Texas Government Code, §2006.002, is required.

COST INCREASE TO REGULATED PERSONS: The proposal does not impose a cost on regulated persons, another state agency, a special district, or a local government and, therefore, is not subject to Texas Government Code, §2001.0045.

TAKINGS IMPACT ASSESSMENT: The proposal does not impose a burden on private real property and, therefore, does not constitute a taking under Texas Government Code, §2007.043.

GOVERNMENT GROWTH IMPACT: TEA staff prepared a Government Growth Impact Statement assessment for this proposed rulemaking. During the first five years the proposed rulemaking would be in effect, it would create new regulations and repeal existing regulations to align with SB 1232, 87th Texas Legislature, Regular Session, 2021. The new provisions would address the SBOE's responsibilities in relation to the PSF.

The proposed rulemaking would not create or eliminate a government program; would not require the creation of new employee positions or elimination of existing employee positions; would not require an increase or decrease in future legislative appropriations to the agency; would not require an increase or decrease in fees paid to the agency; would not expand or limit an existing regulation; would not increase or decrease the number of individuals subject to its applicability; and would not positively or adversely affect the state's economy.

PUBLIC BENEFIT AND COST TO PERSONS: The proposal would update and clarify provisions supporting the management and investment of the PSF. There is no anticipated economic cost to persons who are required to comply with the proposal.

DATA AND REPORTING IMPACT: The proposal would have no new data and reporting impact.

PRINCIPAL AND CLASSROOM TEACHER PAPERWORK REQUIREMENTS: TEA has determined that the proposal would not require a written report or other paperwork to be completed by a principal or classroom teacher.

PUBLIC COMMENTS: The public comment period on the proposal begins December 23, 2022, and ends at 5:00 p.m. on January 27, 2023. The SBOE will take registered oral and written comments on the proposal at the appropriate committee meeting in January 2023 in accordance with the SBOE board operating policies and procedures. A request for a public hearing on the proposal submitted under the Administrative Procedure Act must be received by the commissioner of education not more than 14 calendar days after notice of the proposal has been published in the Texas Register on December 23, 2022.

MOTION TO BE CONSIDERED: The State Board of Education:

Approve for first reading and filing authorization proposed revisions to 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund.

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

Separate Exhibit:
Text of Proposed Revisions to 19 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund
(to be provided in advance of the November 2022 meeting)