April 2016 Committee on School Finance Permanent School Fund Item 11

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)

April 8, 2016

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 TAC Chapter 33, Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund, Subchapter A, State Board of Education Rules, to better reflect the Permanent School Fund (PSF) asset allocation and to consolidate some provisions to avoid repetition.

STATUTORY AUTHORITY: Texas Education Code (TEC), §§7.102(c)(31) and (33), 43.0031-43.0034, and 43.004; Texas Government Code, §2263.004; and the Texas Constitution, Article VII, Section 5(a)(2), (d), and (f).

TEC, §7.102(c)(31), states that the State Board of Education (SBOE) may invest the Permanent School Fund (PSF) within the limits of the authority granted by the Texas Constitution, Article VII, §5, and the TEC, Chapter 43. The 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.

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

Texas Government Code, §2263.004, requires the SBOE to adopt by rule standards of conduct applicable to certain financial advisors or service providers.

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.

EFFECTIVE DATE: The proposed effective date of the proposed amendments is 20 days after filing as adopted with the Texas Register in order to implement the latest policy in a timely manner. 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 2016-2017 school year.

PREVIOUS BOARD ACTION: The SBOE adopted rules in 19 TAC Chapter 33 effective September 1, 1996. The SBOE last revised rules in Chapter 33 with an amendment to §33.65, Bond Guarantee Program, adopted effective February 1, 2016, and an amendment to §33.67, Bond Guarantee Program for Charter Schools, adopted effective October 19, 2015.

The SBOE adopted the statutorily required four-year review of SBOE rules in 19 TAC Chapter 33, Subchapter A, at its November 2015 meeting. A discussion item on the proposed amendments was presented to the Committee on School Finance/Permanent School Fund at its January 2016 meeting.

BACKGROUND INFORMATION AND SIGNIFICANT ISSUES: In accordance with statute, the rules in 19 TAC Chapter 33, Subchapter A, establish investment objectives, policies, and guidelines for the investment and management of the Texas Permanent School Fund.

The proposed amendments to 19 TAC Chapter 33, Subchapter A, shown as Attachment II, would, among other things, reflect the changing PSF investment portfolio, including investments of the PSF in investment funds, and changing market conditions.

The proposed amendment to 19 TAC §33.5, Code of Ethics, would provide various clarifications to the rule, including how it applies to investments of the PSF in investment funds.

The proposed amendment to 19 TAC §33.15, Objectives, would reflect the current objectives for the management of the PSF, including the asset allocation policy, established by the SBOE.

The proposed amendment to 19 TAC §33.20, Responsible Parties and Their Duties, would provide various clarifications to the rule to accurately reflect the responsibilities, respectively, of the SBOE, the PSF staff, and other parties retained by the SBOE to assist with aspects of the PSF.

The proposed amendment to 19 TAC §33.25, Permissible and Restricted Investments and General Guidelines for Investment Managers, would reflect the SBOE's general management authority over the PSF, including permitted and prohibited transactions as currently established or as may be established from time to time by the SBOE.

The proposed amendment to 19 TAC §33.30, Standards of Performance, would reflect the SBOE's general management authority over the PSF, including standards of performance for each asset class as currently established or as may be established from time to time by the SBOE.

The proposed amendment to 19 TAC §33.35, Guidelines for the Custodian and the Securities Lending Agent, would provide various clarifications to the rule and reflect the changing PSF investment portfolio and changing market conditions.

The proposed amendment to 19 TAC §33.60, Performance and Review Procedures, would clarify aspects of the SBOE's oversight role with respect to all asset classes.

FISCAL IMPACT: The distribution of the Permanent School Fund is projected to be $2.1 billion during the 2016-2017 biennium. The TEA has determined that there are no additional costs to persons or entities required to comply with the proposed amendments. In addition, there is no direct adverse economic impact for small businesses and microbusinesses; therefore, no regulatory flexibility analysis, specified in Texas Government Code, §2006.002, is required.

PUBLIC AND STUDENT BENEFIT:
The distribution of the PSF will flow to the school districts and reduce the tax burden to the public and the State of Texas. Proposed amendments would update and clarify provisions supporting the management and investment of the PSF.

PROCEDURAL AND REPORTING IMPLICATIONS: The proposed amendments would have no procedural and reporting implications.

LOCALLY MAINTAINED PAPERWORK REQUIREMENTS: The proposed amendments would have no locally maintained paperwork requirements.

PUBLIC COMMENTS: The official public comment period will begin when the proposal is published in the Texas Register.

ALTERNATIVES: None.

OTHER COMMENTS AND RELATED ISSUES: 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.

MOTION TO BE CONSIDERED: The State Board of Education:

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

Attachments:
I. Statutory Citations (PDF, 31KB)
II. 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 (including Figure: 19 TAC §33.5(n)(2)(J)) (PDF, 194KB)