November 2019 Committee on School Finance/Permanent School Fund Item 6

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
(First Reading and Filing Authorization)

November 15, 2019

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

SUMMARY: This item presents for first reading and filing authorization proposed amendments to 19 Texas Administrative Code (TAC) Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund, Subchapter A, State Board of Education Rules. The proposed amendments would reorganize references to the Permanent School Fund (PSF) distribution policy, include references to new authority and duties assigned by the 86th Texas Legislature, 2019, and address permissible fixed income investments.

STATUTORY AUTHORITY: Texas Constitution, Article VII, §5(a) and (f); Texas Education Code (TEC), §43.001; TEC, §43.0052, as added by House Bill (HB) 4388, 86th Texas Legislature, 2019; and Texas Natural Resources Code (NRC), §32.012, as amended by Senate Bill (SB) 608, 86th Texas Legislature, 2019; §32.0161, as added by SB 608, 86th Texas Legislature, 2019; and §32.068 and §51.414, as added by HB 4388, 86th Texas Legislature, 2019. 

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.

TEC, §43.0052, as added by HB 4388, 86th Texas Legislature, 2019, and Texas Natural Resources Code, §32.068 and §51.414, as added by HB 4388, created the Liquid Account within the PSF to be managed by the SBOE and require the SBOE and School Land Board to send quarterly investment and financial reports to the other.

Texas Natural Resources Code, §32.012, as amended by SB 608, 86th Texas Legislature, 2019, and §32.0161, as added by SB 608, require the SBOE to submit to the governor a list of six nominees for each of two positions on the School Land Board and requires the SBOE and the School Land Board to hold a joint annual public meeting to discuss the PSF.

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 amendments 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 2020-2021 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 proposed rules were last revised by the SBOE as follows. Sections 33.10, 33.40, and 33.55 were amended effective June 4, 2012. Sections 33.15 and 33.20 were amended effective September 1, 2018. Sections 33.25, 33.30, 33.35, and 33.60 were amended effective August 21, 2016. Section 33.45 was amended effective March 31, 2004.

BACKGROUND INFORMATION AND JUSTIFICATION: In accordance with statute, the rules in 19 TAC Chapter 33 establish investment objectives, policies, and guidelines for the PSF. 

Legislation from the 86th Texas Legislature, 2019, made changes to the TEC and the Texas Natural Resources Code that impact the PSF and the SBOE's authority and duties related to the PSF. This item provides an opportunity for the committee to discuss the legislation and approve for first reading and filing authorization necessary changes to Chapter 33. 

The proposed amendment to §33.10, Purposes of Texas Permanent School Fund Assets and the Statement of Investment Policy, would specify that one objective of the PSF distribution policy is to maintain the value of assets per student after adjusting for inflation, as stated in 19 TAC §33.15. 

The proposed amendments to §33.15, Objectives; §33.20, Responsible Parties and Their Duties; §33.30, Standards of Performance; and §33.60, Performance and Review Procedures, would implement SB 608 and HB 4388, 86th Texas Legislature, 2019, by accounting for the creation of the Liquid Account within the PSF and the requirement that the SBOE and School Land Board send quarterly investment and financial reports to one other.

The proposed amendment to §33.25, Permissible and Restricted Investments and General Guidelines for Investment Managers, would allow for specific uses of U.S. Treasury futures and the acquisition of a limited percentage of speculative-grade rated securities in the fixed income portfolio to enhance portfolio management abilities. 

The proposed amendment to §33.35, Guidelines for the Custodian and the Securities Lending Agent, would remove a reference to a credit ratings firm that is no longer providing the services.

The proposed amendments were not presented as a discussion item. The SBOE, however, may wish to consider this item for first reading and filing authorization as authorized under its operating procedures. Therefore, this item is presented for first reading and filing authorization consideration at this meeting. It is recommended that the SBOE consider this item for first reading and filing authorization to ensure that the rules are aligned with statute as soon as possible. 

FISCAL IMPACT: The Texas Education Agency (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. The proposed rulemaking would expand the rules by adding provisions in alignment with recent statutory changes. The new provisions 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 create a new regulation; would not limit or repeal 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 proposed amendments 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: The 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 20, 2019, and ends January 24, 2020. The SBOE will take registered oral and written comments on the proposal at the appropriate committee meeting in January 2020 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 20, 2019.

MOTION TO BE CONSIDERED: The State Board of Education:

Suspend the board operating procedures in accordance with §5.2(a) to allow consideration at first reading and filing authorization; and 

Approve for first reading and filing authorization 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.

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

Attachment:    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