By Duncan S.B. No. 512
Substitute the following for S.B. No. 512:
By Dutton C.S.S.B. No. 512
A BILL TO BE ENTITLED
1-1 AN ACT
1-2 relating to the investment and management of the permanent school
1-3 fund.
1-4 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
1-5 ARTICLE 1. PERMANENT SCHOOL FUND ADVISORY COMMITTEE
1-6 SECTION 1.01. Subchapter D, Chapter 7, Education Code, is
1-7 amended by adding Section 7.113 to read as follows:
1-8 Sec. 7.113. CONTRACT WITH STATE AUDITOR FOR INVESTIGATIONS.
1-9 (a) In this section, "investigation" has the meaning assigned by
1-10 Section 321.0136, Government Code.
1-11 (b) The board shall enter into a written contract with the
1-12 state auditor under Chapter 771, Government Code, for the state
1-13 auditor to investigate any allegation made in writing to the board
1-14 raising the issue of misfeasance or malfeasance relating to the
1-15 management or investment of the permanent school fund, including an
1-16 allegation relating to:
1-17 (1) the board's compliance with the investment
1-18 standards prescribed under Section 5(d), Article VII, Texas
1-19 Constitution;
1-20 (2) any violation of the ethics policy adopted by the
1-21 board under Section 43.0031;
1-22 (3) any violation of Section 43.0032;
1-23 (4) any conflict of interest that affects the board's
1-24 decisions relating to:
2-1 (A) consultant and money manager selection;
2-2 (B) asset allocation; and
2-3 (C) broker-dealer eligibility requirements; and
2-4 (5) the effect of an informal advisor on the board's
2-5 decisions relating to management or investment of the permanent
2-6 school fund.
2-7 SECTION 1.02. Chapter 43, Education Code, is amended by
2-8 adding Sections 43.0011 and 43.0012 to read as follows:
2-9 Sec. 43.0011. DEFINITION. In this chapter, "interested
2-10 person" means a person who applies for or receives anything of
2-11 value as a direct or indirect result of permanent school fund
2-12 investments.
2-13 Sec. 43.0012. PERMANENT SCHOOL FUND INVESTMENT ADVISORY
2-14 COMMITTEE. (a) The permanent school fund investment advisory
2-15 committee shall advise the State Board of Education regarding
2-16 management and investment of the permanent school fund.
2-17 (b) The committee is composed of:
2-18 (1) three members appointed by the governor, who are
2-19 not subject to confirmation by the senate;
2-20 (2) three members appointed by the lieutenant
2-21 governor; and
2-22 (3) three members appointed by the speaker of the
2-23 house of representatives.
2-24 (c) A member of the committee serves at the will of the
2-25 member's appointing authority.
2-26 (d) A person appointed to the committee must possess
2-27 substantial experience and expertise in investments, as determined
3-1 by the appointing authority.
3-2 (e) The committee shall select a presiding officer from
3-3 among its members and shall meet at the call of the presiding
3-4 officer.
3-5 (f) A member of the committee may not receive compensation
3-6 but is entitled to reimbursement for travel expenses incurred by
3-7 the member while conducting the business of the committee as
3-8 provided by the General Appropriations Act.
3-9 (g) The committee is not subject to Chapter 2110, Government
3-10 Code.
3-11 SECTION 1.03. Section 43.0031(b), Education Code, is amended
3-12 to read as follows:
3-13 (b) The ethics policy must include provisions applicable to:
3-14 (1) members of the State Board of Education;
3-15 (2) members of the permanent school fund investment
3-16 advisory committee;
3-17 (3) the commissioner;
3-18 (4) [(3)] employees of the agency; [and]
3-19 (5) [(4)] any person who provides services to the
3-20 board relating to the management or investment of the permanent
3-21 school fund; and
3-22 (6) an interested person.
3-23 SECTION 1.04. Section 43.0032, Education Code, is amended to
3-24 read as follows:
3-25 Sec. 43.0032. CONFLICTS OF INTEREST. (a) This section
3-26 applies to:
3-27 (1) a [A] member of the State Board of Education;
4-1 (2) a member of the permanent school fund advisory
4-2 committee;
4-3 (3) [,] the commissioner;
4-4 (4) [,] an employee of the agency;
4-5 (5) [, or] a person who provides services to the board
4-6 that relate to the management or investment of the permanent school
4-7 fund; and
4-8 (6) an interested person.
4-9 (b) A person to whom this section applies who has a
4-10 business, commercial, or other relationship that a reasonable
4-11 person would find likely [could reasonably be expected] to diminish
4-12 the person's independence of judgment in the performance of the
4-13 person's responsibilities relating to the management or investment
4-14 of the fund shall disclose the relationship in writing to the
4-15 board.
4-16 (c) [(b)] The board or the board's designee shall, in the
4-17 ethics policy adopted under Section 43.0031, define the kinds of
4-18 relationships that may create a possible conflict of interest.
4-19 (d) [(c)] A person who files a statement under Subsection
4-20 (b) [(a)] disclosing a possible conflict of interest may not give
4-21 advice or make decisions about a matter affected by the possible
4-22 conflict of interest unless the board, after consultation with the
4-23 general counsel of the agency, expressly waives this prohibition.
4-24 The board may delegate the authority to waive the prohibition
4-25 established by this subsection.
4-26 SECTION 1.05. Section 43.0033, Education Code, is amended to
4-27 read as follows:
5-1 Sec. 43.0033. REPORTS OF EXPENDITURES. A consultant,
5-2 advisor, broker, money manager, investment manager, dealer, or
5-3 other person providing services to the State Board of Education
5-4 relating to the management and investment of the permanent school
5-5 fund shall file with the board regularly, as determined by the
5-6 board, a report that describes in detail any expenditure of more
5-7 than $50 made by the person on behalf of:
5-8 (1) a member of the board;
5-9 (2) a member of the permanent school fund advisory
5-10 committee;
5-11 (3) the commissioner; [or]
5-12 (4) [(3)] an employee of the agency or of a nonprofit
5-13 corporation created under Section 43.006; or
5-14 (5) an interested person.
5-15 SECTION 1.06. Chapter 43, Education Code, is amended by
5-16 adding Sections 43.0035, 43.0036, 43.0051, and 43.0052 to read as
5-17 follows:
5-18 Sec. 43.0035. FAILURE TO DISCLOSE POTENTIAL CONFLICT OF
5-19 INTEREST RELATING TO MANAGEMENT OR INVESTMENT OF PERMANENT SCHOOL
5-20 FUND. If an interested person enters into an arrangement involving
5-21 the management or investment of the permanent school fund under
5-22 which the interested person serves as a consultant, advisor,
5-23 broker, money manager, investment manager, dealer, or vendor of a
5-24 consultant, advisor, broker, money manager, investment manager, or
5-25 dealer, and the interested person fails to disclose a relationship
5-26 described by Section 43.0032(a) with another interested person:
5-27 (1) the arrangement is voidable by the State Board of
6-1 Education or the comptroller; and
6-2 (2) the State Board of Education or the comptroller
6-3 may enter an order declaring the person ineligible to contract for
6-4 business relating to management or investment of the permanent
6-5 school fund.
6-6 Sec. 43.0036. INFORMATION REGARDING PERSONS INTERESTED IN
6-7 INVESTMENTS OF PERMANENT SCHOOL FUND. (a) The State Board of
6-8 Education shall maintain on an Internet website a listing of each
6-9 interested person. The list must include the person's full name
6-10 and business address and must be updated at least once each
6-11 calendar quarter.
6-12 (b) The board may use an Internet website established and
6-13 maintained by the agency to comply with this section.
6-14 Sec. 43.0051. REQUIRED CONTRACT PROVISION. The State Board
6-15 of Education shall include as a part of each contract under which a
6-16 consultant, advisor, broker, money manager, investment manager,
6-17 dealer, or other person agrees to provide services to the board
6-18 relating to the management or investment of the permanent school
6-19 fund a standard provision adopted by the board:
6-20 (1) requiring the person to comply with all applicable
6-21 statutes and rules relating to the services provided by the person
6-22 to the board; and
6-23 (2) acknowledging that the board may terminate the
6-24 contract or any other arrangement between the board and the person
6-25 if the person fails to comply with those statutes and rules.
6-26 Sec. 43.0052. COOPERATION RELATING TO INVESTIGATION OR
6-27 DISCIPLINARY ACTIONS OF CERTAIN PERSONS INTERESTED IN MANAGEMENT OR
7-1 INVESTMENT OF PERMANENT SCHOOL FUND. (a) As appropriate, the
7-2 comptroller shall provide information relating to disciplinary
7-3 actions taken by the State Board of Education or the comptroller
7-4 against a consultant, advisor, broker, money manager, investment
7-5 manager, or dealer doing business with or seeking to do business
7-6 with the permanent school fund to:
7-7 (1) the United States Securities and Exchange
7-8 Commission;
7-9 (2) the securities commissioner;
7-10 (3) self-regulatory organizations, including the
7-11 National Association of Securities Dealers, Inc.; and
7-12 (4) professional organizations of persons involved in
7-13 management or investment of institutional funds, including the
7-14 Association for Investment Management and Research.
7-15 (b) The comptroller shall closely cooperate with persons
7-16 described by Subsections (a)(1)-(4) in those persons'
7-17 investigations involving consultants, brokers, or dealers doing
7-18 business with or seeking to do business with the permanent school
7-19 fund.
7-20 SECTION 1.07. Section 43.006(f), Education Code, is amended
7-21 to read as follows:
7-22 (f) The corporation shall file [quarterly] reports with the
7-23 State Board of Education concerning matters required by the board.
7-24 The board may determine the frequency of reports under this
7-25 subsection.
7-26 SECTION 1.08. Chapter 43, Education Code, is amended by
7-27 adding Sections 43.0061-43.0063 to read as follows:
8-1 Sec. 43.0061. BARRING CERTAIN PERSONS FROM CONTRACTING TO
8-2 PROVIDE SERVICES RELATING TO MANAGEMENT OR INVESTMENT OF PERMANENT
8-3 SCHOOL FUND. (a) An interested person may be barred from
8-4 contracting with the State Board of Education or another interested
8-5 person to provide services relating to the management or investment
8-6 of the permanent school fund if it is determined at a contested
8-7 case hearing held under Section 43.0062 that the interested person
8-8 who is the subject of the hearing has violated:
8-9 (1) the ethics policy adopted by the board under
8-10 Section 43.0031; or
8-11 (2) the conflict of interest restrictions under
8-12 Section 43.0032.
8-13 (b) This section does not affect the validity of a contract
8-14 entered into before a determination is made that the interested
8-15 person should be barred from contracting with the board or another
8-16 interested person unless the contract may be voided under this
8-17 chapter.
8-18 Sec. 43.0062. HEARINGS BY STATE OFFICE OF ADMINISTRATIVE
8-19 HEARINGS. (a) The commissioner, on behalf of the State Board of
8-20 Education, and the chief administrative law judge of the State
8-21 Office of Administrative Hearings shall adopt a memorandum of
8-22 understanding under which the State Office of Administrative
8-23 Hearings conducts the contested case hearings required for purposes
8-24 of Section 43.0061.
8-25 (b) The memorandum of understanding must require the chief
8-26 administrative law judge and the board to cooperate in connection
8-27 with a contested case hearing required for purposes of Section
9-1 43.0061.
9-2 (c) The memorandum of understanding must provide that the
9-3 administrative law judge who conducts a contested case hearing for
9-4 the State Office of Administrative Hearings on behalf of the board,
9-5 after completing the hearing, shall:
9-6 (1) determine whether a ground exists under Section
9-7 43.0061(a) so that an interested person should be barred from
9-8 contracting with the State Board of Education or another interested
9-9 person to provide services relating to the management or investment
9-10 of the permanent school fund; and
9-11 (2) if a determination is made that the interested
9-12 person should be barred from contracting with the board or another
9-13 interested person, notwithstanding Section 2003.042, Government
9-14 Code, enter the final decision in the case concerning the period
9-15 for which the person is barred based on:
9-16 (A) whether the person has previously violated
9-17 the ethics policy or conflict of interest restrictions;
9-18 (B) the seriousness of the person's violation;
9-19 and
9-20 (C) the damage to the interests of the permanent
9-21 school fund.
9-22 (d) A person may obtain judicial review of a decision of an
9-23 administrative law judge under this section in the manner provided
9-24 by Subchapter G, Chapter 2001, Government Code.
9-25 Sec. 43.0063. MANAGEMENT AND PERFORMANCE AUDIT. (a) As
9-26 frequently as the legislative audit committee determines necessary
9-27 or advisable, the committee shall select an independent firm with
10-1 substantial experience in evaluating institutional investment
10-2 practices and performance to evaluate investment management
10-3 practices and performance relating to the permanent school fund.
10-4 (b) The legislative audit committee shall determine specific
10-5 areas to be evaluated.
10-6 (c) A firm selected under this section shall file a report
10-7 of the firm's evaluation under this section with the legislative
10-8 audit committee not later than the date specified by the committee.
10-9 (d) The agency shall pay the costs of each evaluation under
10-10 this section out of the available school fund.
10-11 SECTION 1.09. Section 43.007, Education Code, is amended to
10-12 read as follows:
10-13 Sec. 43.007. PURCHASE AND SALE OR EXCHANGE OF INVESTMENTS
10-14 [SECURITIES]. (a) The State Board of Education may authorize the
10-15 purchase of all investments [of the types of securities] in which
10-16 it is authorized by law to invest the permanent school fund [in
10-17 either registered or negotiable form]. The board may authorize the
10-18 reissue of those investments [securities] held at any time for the
10-19 account of the permanent school fund [in either registered or
10-20 negotiable form]. The State Board of Education may authorize the
10-21 sale of any investments [of the securities] held for the account of
10-22 the permanent school fund and reinvest the proceeds of sale for the
10-23 fund and may authorize the exchange of any investments [of the
10-24 securities] held for the account of the permanent school fund.
10-25 (b) In making purchases, sales, exchanges, and reissues, the
10-26 State Board of Education shall exercise the standard of care
10-27 prescribed by Section 5(d), Article VII, Texas Constitution
11-1 [judgment and care under the circumstances then prevailing that
11-2 persons of ordinary prudence, discretion, and intelligence exercise
11-3 in the management of their own affairs not in regard to speculation
11-4 but in regard to the permanent disposition of their funds,
11-5 considering the probable income as well as the probable safety of
11-6 their capital].
11-7 (c) When any investments [securities] are sold, reissued, or
11-8 exchanged as provided by Subsection (a), the custodian of the
11-9 investments [securities] shall deliver the investments [securities]
11-10 sold, reissued, or exchanged in accordance with the directions of
11-11 the State Board of Education.
11-12 SECTION 1.10. The heading to Section 43.010, Education Code,
11-13 is amended to read as follows:
11-14 Sec. 43.010. DEFAULT OF SCHOOL DISTRICT BONDS [SECURITIES]
11-15 HELD BY [THE] PERMANENT SCHOOL FUND.
11-16 SECTION 1.11. Sections 43.010(b) and (d), Education Code, are
11-17 amended to read as follows:
11-18 (b) Revenue collected by either method specified by
11-19 Subsection (a) shall be distributed proportionately to all owners
11-20 of the defaulted bonds [securities] in compliance with the
11-21 following:
11-22 (1) the proportionate share for each owner is based on
11-23 the interest and principal requirements of the original bond
11-24 [security] before authorized refunding; and
11-25 (2) prior acceptance of refunding bonds [securities]
11-26 does not reduce an owner's proportionate share.
11-27 (d) The comptroller may not issue any warrant from the
12-1 foundation school fund to or for the benefit of any district that
12-2 has been for as long as two years in default in the payment of
12-3 principal or interest on any bond [security] owned by the permanent
12-4 school fund until the State Board of Education certifies that the
12-5 district has satisfactorily complied with the appropriate
12-6 provisions of this section, in which event the comptroller shall
12-7 resume making payments to or for the benefit of the district,
12-8 including the making of pretermitted payments.
12-9 SECTION 1.12. Section 43.015(f), Education Code, is amended
12-10 to read as follows:
12-11 (f) The comptroller shall be the custodian of investments
12-12 [all securities enumerated in Section 43.003(6) and of other
12-13 securities as] designated by the State Board of Education in which
12-14 the school funds of the state are invested. The comptroller shall
12-15 keep those investments [securities] in the comptroller's custody
12-16 until paid off, discharged, delivered as required by the State
12-17 Board of Education, or otherwise disposed of by the proper
12-18 authorities of the state, and on the proper installment of any
12-19 interest or dividend, shall see that the proper credit is given,
12-20 and the coupons on bonds, when paid, shall be separated from the
12-21 bonds and cancelled by the comptroller.
12-22 SECTION 1.13. Section 43.017, Education Code, is amended to
12-23 read as follows:
12-24 Sec. 43.017. USE OF COMMERCIAL BANKS AS AGENTS FOR
12-25 COLLECTION OF INCOME FROM PERMANENT SCHOOL FUND INVESTMENTS. (a)
12-26 The State Board of Education may contract with one or more
12-27 commercial banks to receive payments of dividends and interest on
13-1 investments [securities] in which the state permanent school funds
13-2 are invested and transmit that money with identification of its
13-3 source to the comptroller for the account of the available school
13-4 fund by the fastest available means.
13-5 (b) In choosing each commercial bank with which to contract
13-6 as authorized by Subsection (a), the State Board of Education shall
13-7 assure itself of:
13-8 (1) the financial stability of the bank;
13-9 (2) the location of the bank with respect to its
13-10 proximity to the banks on which checks are drawn in payment of
13-11 dividends and interest on investments [securities] of the permanent
13-12 school fund;
13-13 (3) the experience and reliability of the bank in
13-14 acting as agent for others in the similar collection and
13-15 expeditious remittance of money; and
13-16 (4) the reasonableness of the bank's charges for the
13-17 services, both in amount of the charges and in relation to the
13-18 increased investment earnings of the available school fund that
13-19 will result from speedier receipt by the comptroller of the money.
13-20 SECTION 1.14. Section 43.018(b), Education Code, is amended
13-21 to read as follows:
13-22 (b) The State Board of Education may contract with a
13-23 commercial bank pursuant to this section only if:
13-24 (1) the bank is located in a city having a major stock
13-25 exchange;
13-26 (2) the bank is experienced in the operation of a
13-27 fully secured securities loan program;
14-1 (3) the bank has adequate capital in the prudent
14-2 judgment of the State Board of Education to assure the safety of
14-3 the securities entrusted to it as a custodian;
14-4 (4) the bank will require of any securities broker or
14-5 dealer to which it lends securities owned by the state permanent
14-6 school fund that the broker or dealer deliver to it cash collateral
14-7 for the loan of securities, and that the cash collateral will at
14-8 all times be not less than 100 percent of the market value of the
14-9 securities lent;
14-10 (5) the bank executes an indemnification agreement,
14-11 satisfactory in form and content to the State Board of Education,
14-12 fully indemnifying the permanent and available school funds against
14-13 loss resulting from borrower default or the failure of the bank to
14-14 properly execute the responsibilities of the bank under the
14-15 applicable securities lending agreement [the bank's service as
14-16 custodian of securities of the permanent school fund and its
14-17 operation of a securities loan program using securities of the
14-18 permanent school fund];
14-19 (6) the bank will speedily collect and remit on the
14-20 day of collection by the fastest available means to the comptroller
14-21 any dividends and interest collectible by it on securities held by
14-22 it as custodian, together with identification as to the source of
14-23 the dividends or interest; and
14-24 (7) the bank is the bank agreeing to pay to the
14-25 available school fund the largest sum or highest percentage of the
14-26 income derived by the bank from use of the securities of the
14-27 permanent school fund in the operation of a securities loan
15-1 program.
15-2 SECTION 1.15. Section 321.013, Government Code, is amended by
15-3 adding Subsection (j) to read as follows:
15-4 (j) The State Auditor shall enter into a written contract
15-5 with the State Board of Education for the State Auditor to
15-6 investigate an allegation relating to the management and investment
15-7 of the permanent school fund as prescribed by Section 7.113,
15-8 Education Code. After an investigation of an allegation is
15-9 completed, the State Auditor shall prepare a written report of the
15-10 results of that investigation. The State Auditor shall submit the
15-11 report to the committee before publication. The State Auditor shall
15-12 file a copy of the report with the governor, the lieutenant
15-13 governor, the speaker of the house of representatives, each member
15-14 of the State Board of Education, and each member of the standing
15-15 committees of the senate and of the house of representatives with
15-16 primary jurisdiction over the State Board of Education.
15-17 SECTION 1.16. Not later than March 1, 2002, the governor,
15-18 lieutenant governor, and speaker of the house of representatives
15-19 shall appoint members of the investment advisory committee, as
15-20 required by Section 43.0012, Education Code, as added by this
15-21 article.
15-22 SECTION 1.17. Sections 43.0035 and 43.0051, Education Code,
15-23 as added by this article, apply only to an arrangement or contract
15-24 entered into on or after January 1, 2002.
15-25 SECTION 1.18. Not later than March 1, 2002, the State Board
15-26 of Education shall post on an Internet website the information
15-27 required by Section 43.0036, Education Code, as added by this
16-1 article.
16-2 SECTION 1.19. Not later than March 1, 2002, the commissioner
16-3 of education, on behalf of the State Board of Education, and the
16-4 chief administrative law judge of the State Office of
16-5 Administrative Hearings shall adopt a memorandum of understanding
16-6 as prescribed by Section 43.0062, Education Code, as added by this
16-7 article.
16-8 SECTION 1.20. Not later than March 1, 2002, the legislative
16-9 audit committee shall select an independent firm to evaluate
16-10 investment management practices and performance relating to the
16-11 permanent school fund as required by Section 43.0063, Education
16-12 Code, as added by this article. The evaluation must include a
16-13 comprehensive analysis of the State Board of Education's investment
16-14 program relating to the permanent school fund.
16-15 SECTION 1.21. This article takes effect September 1, 2002.
16-16 ARTICLE 2. COMPOSITION OF AND AUTHORIZED INVESTMENTS FOR
16-17 PERMANENT SCHOOL FUND
16-18 SECTION 2.01. Section 43.003, Education Code, is repealed.
16-19 SECTION 2.02. Sections 43.001(a) and (b), Education Code, are
16-20 amended to read as follows:
16-21 (a) The permanent school fund, which is a perpetual
16-22 endowment for the public schools of this state, consists of:
16-23 (1) all land appropriated for the public schools by
16-24 the constitution and laws of this state;
16-25 (2) all of the unappropriated public domain remaining
16-26 in this state, including all land recovered by the state by suit or
16-27 otherwise except pine forest land as defined by Section 88.111;
17-1 (3) all proceeds from the authorized sale of permanent
17-2 school fund land;
17-3 (4) all proceeds from the lawful sale of any other
17-4 properties belonging to the permanent school fund;
17-5 (5) all investments [authorized by Section 43.003] of
17-6 properties belonging to the permanent school fund; and
17-7 (6) all income from the mineral development of
17-8 permanent school fund land, including income from mineral
17-9 development of riverbeds and other submerged land.
17-10 (b) The available school fund, which shall be apportioned
17-11 annually to each county according to its scholastic population,
17-12 consists of:
17-13 (1) the interest and dividends arising from any
17-14 investments [securities] or funds belonging to the permanent school
17-15 fund;
17-16 (2) all interest derivable from the proceeds of the
17-17 sale of land set apart for the permanent school fund;
17-18 (3) all money derived from the lease of land belonging
17-19 to the permanent school fund;
17-20 (4) one-fourth of all revenue derived from all state
17-21 occupation taxes, exclusive of delinquencies and cost of
17-22 collection;
17-23 (5) one-fourth of revenue derived from state gasoline
17-24 and special fuels excise taxes as provided by law; and
17-25 (6) all other appropriations to the available school
17-26 fund made by the legislature for public school purposes.
17-27 SECTION 2.03. This article takes effect September 1, 2001.