BILL ANALYSIS Pensions and Investments Committee C.S.S.B. 409 04-12-95 April 20, 1995 Committee Report (Substituted) BACKGROUND Generally accepted accounting principles are currently not applied to the amortization of premiums and discounts on fixed income securities in the Permanent School Fund. A premium is paid for a security when, due to a decline in interest rates, the purchase price of the security exceeds its original face value. A discount is incurred with respect to a security when, due to a rise in interest rates, the purchase price of the security is less than its face value. Currently, the treatment of the discount or premium is reported in the year the fixed-income security was sold or redeemed. PURPOSE This bill applies the accrual basis of accounting (i.e. generally accepted accounting principles) amortization of premiums and discounts on fixed income securities in the Permanent School Fund. SB 409 requires the amount of an interest payment treated as principal or the amount of a discount treated as additional revenue be determined at the end of a period using an interest method that produces a periodic interest revenue or expenditure. In other words, the treatment of the discount or premium will be spread evenly over the term of the fixed-income security. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency, or institution. SECTION BY SECTION ANALYSIS SECTION 1: Amends Section 15.04, Education Code as follows: (a) Requires the principal of the security and a portion of the interest accruing on a premium equal to the premium to be treated as principal as provided by Subsection (c) and to be returned to the permanent school fund if the State Board of Education (board) authorizes the payment of a premium out of the permanent school fund in the purchase of any fixed-income security as an investment for that fund. (b) Requires the discount received in a purchase to be paid to the available school fund as additional interest revenue as provided by Subsection (c), if the board authorizes the purchase of a fixed-income security at less than par. (c) Requires the amount of interest payment treated as principal under Subsection (a) or the amount of a discount treated as additional revenue under Subsection (b) to be determined at the end of a period using an interest method that produces a periodic interest revenue or expenditure, including amortization, that represents a level effective interest rate on the sum of the maturity value of the fixed-income security and its unamortized premium or discount at the beginning of the period. Provides that the difference between the amount of the fixed-income security is the amount of the periodic amortization. (d) Defines "effective interest rate," "fixed-income security," and "stated interest revenue." SECTION 2: Effective date, September 1, 1995. SECTION 3: States that this Act applies to each fixed-income security purchased as an investment for the permanent school fund, regardless of the date of purchase. SECTION 4: Provides that this Act prevails to the extent this Act conflicts with any other Act of the 74th Legislature, Regular Session, 1995, including S.B. 1. SECTION 5: Emergency clause COMPARISON OF ORIGINAL TO SUBSTITUTE The substitute calls for a September 1, 1995 effective date, whereas the original bill called for immediate effect. The substitute bill amends the Education Code, whereas the original bill amended the Government Code. SUMMARY OF COMMITTEE ACTION SB 409 was considered by the committee in a public hearing on April 19, 1995. Carlos Resendez representing himself and the Texas Education Agency testified for the bill. The committee considered a complete committee substitute for the bill. The substitute was adopted without objection. The bill was reported favorably as substituted with the recommedation that it do pass and be printed, by a record vote of 5 ayes, 0 nays, 0 pnv & 4 absent.