January 2020 Committee on School Finance/Permanent School Fund Item 8

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)

January 31, 2020

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 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. No changes are recommended since approved for first reading. 

STATUTORY AUTHORITY: Texas Constitution, Article VII, §5(a) and (f); Texas Education Code (TEC), §43.001; and §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. At the November 2019 meeting, the SBOE approved the proposed amendments to 19 TAC Chapter 33, Subchapter A, for first reading and filing authorization.

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 second reading and final adoption 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.

No changes are recommended since approved for first reading. 

FISCAL IMPACT: No changes have been made to this section since published as proposed.

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: No changes have been made to this section since published as proposed.

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: No changes have been made to this section since published as proposed.

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: No changes have been made to this section since published as proposed.

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: No changes have been made to this section since published as proposed.

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: No changes have been made to this section since published as proposed.

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: No changes have been made to this section since published as proposed.

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: No changes have been made to this section since published as proposed.

The proposal would have no new data and reporting impact. 

PRINCIPAL AND CLASSROOM TEACHER PAPERWORK REQUIREMENTS: No changes have been made to this section since published as proposed.

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: Following the November 2019 SBOE meeting, notice of proposed amendments to 19 TAC Chapter 33, Subchapter A, was filed with the Texas Register, initiating the public comment period. The public comment period on the proposal began December 20, 2019, and ended January 24, 2020. No comments had been received at the time this item was prepared. A summary of any public comments received regarding the proposal will be provided to the SBOE during the January 2020 meeting. 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. 

MOTION TO BE CONSIDERED: The State Board of Education:

Approve 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; and

Make an affirmative finding that immediate adoption 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, is necessary and shall have an effective date of 20 days after filing as adopted with the Texas Register. (Per TEC, §7.102(f), a vote of two-thirds of the members of the board is necessary for an earlier effective date.)

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