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.