November 2019 Committee on School Finance/Permanent School Fund Item 5

Adoption of 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
(Adoption of Review)

November 15, 2019

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

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 adoption of 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 (TGC), §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; TGC, §2263.004; and the Texas Constitution, Article VII, §5(f)

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. 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.

TEC, §43.0031, requires the SBOE to adopt and enforce an ethics policy regarding management and investment of the PSF. 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. TEC, §43.0033, requires certain persons providing services to the SBOE regarding management and investment of the PSF to file expenditure reports. 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.  

TEC, Chapter 45, Subchapter C, authorizes the guarantee of bonds. TEC, §45.051, establishes definitions for the bond guarantee program. TEC, §45.052, extends the bond guarantee upon approval by the commissioner of education to independent school districts and charter districts. 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. TEC, §45.0531, authorizes the SBOE to establish a reserve amount when implementing the bond guarantee. TEC, §45.0532, establishes the amount of guarantee available to charter districts and provides some limitations on when the guarantee may be granted. TEC, §45.054 and §45.0541, establish what bonds issued by a school district or a charter district may be eligible for the guarantee. TEC, §45.055, establishes the procedures and minimum requirements for an application for a bond guarantee. TEC, §45.056, establishes the investigation required following receipt of an application for the guarantee of bonds. TEC, §45.057, establishes what constitutes a guarantee endorsement. TEC, §45.0571, establishes a separate charter district bond guarantee reserve fund. 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. 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. TEC, §45.060, prohibits the acceleration of maturity when the PSF makes a payment. TEC, §45.061, establishes the process for reimbursement of the PSF after payment and authorizes certain setting of certain tax rates by the commissioner. TEC, §45.062, authorizes seeking attorney general assistance to compel action with regard to the guarantee program in certain circumstances. 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. 

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

PREVIOUS BOARD ACTION:  The review of 19 TAC Chapter 33, Subchapter A, was presented to the Committee on School Finance/Permanent School Fund at the September 2019 board meeting. 

BACKGROUND INFORMATION AND JUSTIFICATION:  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. 

If authorized by the SBOE, the Texas Education Agency (TEA) will file the adopted review with the Texas Register stating that the SBOE finds the reasons for adopting 19 TAC Chapter 33, Subchapter A, continue to exist.

ANTICIPATED REVISIONS TO RULES: A separate item in this agenda presents proposed amendments to 19 TAC Chapter 33, Subchapter A, for first reading and filing authorization. 

PUBLIC COMMENTS: The TEA filed the review of 19 TAC Chapter 33, Subchapter A, with the Texas Register following the September 2019 SBOE meeting. The public comment period on the proposed review began October 4, 2019, and ended on November 8, 2019.At the time this item was prepared, no comments had been received regarding the review. Any public comments received will be provided to the SBOE during the November 2019 meeting. The SBOE will take registered oral and written comments on the proposed review at the committee meeting in November 2019 in accordance with the SBOE board operating policies and procedures.

MOTION TO BE CONSIDERED: The State Board of Education:

    Adopt 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

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

Attachment:    Text 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