June 14, 2022 Committee of the Full Board Item 2

Review of the Report on Permanent School Fund Percentage Distribution Rates Under Consideration for Fiscal Years 2024 and 2025

June 17, 2022

COMMITTEE OF THE FULL BOARD: ACTION
STATE BOARD OF EDUCATION: CONSENT

SUMMARY: This item provides an opportunity for the board to evaluate and approve the report on Permanent School Fund (PSF) percentage distribution rates under consideration for fiscal years 2024 and 2025. The board will consider various factors associated with the distribution rate such as expected returns, inflation, and student growth.  Additionally, this item provides the opportunity for the board to discuss anticipated instructional materials needs for the 2024-2025 biennium.

STATUTORY AUTHORITY: Texas Constitution, Article VII, §2 and §5; and 19 Texas Administrative Code (TAC) Chapter 33.

The Texas Constitution, Article VII, §2 and §5 establish the permanent school fund, the assets that comprise the permanent school fund, the bond guarantee program, the available school fund, and authorize the State Board of Education (SBOE) to manage and invest the permanent school fund in accordance with the prudent person standard.

19 TAC Chapter 33 codifies administrative rules that provide a statement of investment objectives, policies, and guidelines of the Texas Permanent School Fund and Bond Guarantee Program as adopted by the SBOE.

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

PREVIOUS BOARD ACTION: At the July 2020 meeting, the board approved the percentage distribution rate to the Available School Fund (ASF) from the PSF for fiscal years 2022 and 2023 to be between 3.76% and 4.68%.

BACKGROUND INFORMATION AND JUSTIFICATION: The amendment to Article VII of the Constitution changed the PSF distribution from an income-based policy to a total return policy. This distribution rate is to be determined by a vote of two-thirds of the total membership of the SBOE taken before the regular session of the legislature convenes. If the SBOE does not adopt a rate, then the legislature will adopt a rate by general law or appropriation. The current rate is 4.18% of the average market value for the trailing 16 state fiscal quarters ending November 30, 2020.

According to the General Appropriations Act (SB 1): Permanent School Fund Distribution Rate, at least 45 days prior to the adoption of the distribution rate from the Permanent School Fund to the Available School Fund by the State Board of Education, the Texas Education Agency must report to the Legislative Budget Board and the Governor on the following:

  1. The distribution rate or rates under consideration
  2. The assumptions and methodology used in determining the rate or rates under consideration
  3. The annual amount the distribution rate or rates under consideration are estimated to provide, and the difference between them and the annual distribution amounts for the preceding three biennia
  4. The optimal distribution amount for the preceding biennium, based on an analysis of intergenerational equity, and the difference between it and the actual distribution amount

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