78R3602 ESH-D
By: Gallego H.B. No. 1135
A BILL TO BE ENTITLED
AN ACT
relating to the investment and management of the permanent school
fund.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
ARTICLE 1. PERMANENT SCHOOL FUND ADVISORY COMMITTEE
SECTION 1.01. Subchapter D, Chapter 7, Education Code, is
amended by adding Section 7.113 to read as follows:
Sec. 7.113. CONTRACT WITH STATE AUDITOR FOR
INVESTIGATIONS. (a) In this section, "investigation" has the
meaning assigned by Section 321.0136, Government Code.
(b) The board shall enter into a written contract with the
state auditor under Chapter 771, Government Code, for the state
auditor to investigate any allegation made in writing to the board
raising the issue of misfeasance or malfeasance relating to the
management or investment of the permanent school fund, including an
allegation relating to:
(1) the board's compliance with the investment
standards prescribed under Section 5(d), Article VII, Texas
Constitution;
(2) any violation of the ethics policy adopted by the
board under Section 43.0031;
(3) any violation of Section 43.0032;
(4) any conflict of interest that affects the board's
decisions relating to:
(A) consultant and money manager selection;
(B) asset allocation; and
(C) broker-dealer eligibility requirements; and
(5) the effect of an informal advisor on the board's
decisions relating to management or investment of the permanent
school fund.
SECTION 1.02. Chapter 43, Education Code, is amended by
adding Sections 43.0011 and 43.0012 to read as follows:
Sec. 43.0011. DEFINITION. In this chapter, "interested
person" means a person who applies for or receives anything of value
as a direct or indirect result of permanent school fund
investments.
Sec. 43.0012. PERMANENT SCHOOL FUND INVESTMENT ADVISORY
COMMITTEE. (a) The permanent school fund investment advisory
committee shall advise the State Board of Education regarding
management and investment of the permanent school fund.
(b) The committee is composed of:
(1) three members appointed by the governor, who are
not subject to confirmation by the senate;
(2) three members appointed by the lieutenant
governor; and
(3) three members appointed by the speaker of the
house of representatives.
(c) A member of the committee serves at the will of the
member's appointing authority.
(d) A person appointed to the committee must possess
substantial experience and expertise in investments, as determined
by the appointing authority.
(e) The committee shall select a presiding officer from
among its members and shall meet at the call of the presiding
officer.
(f) A member of the committee may not receive compensation
but is entitled to reimbursement for travel expenses incurred by
the member while conducting the business of the committee as
provided by the General Appropriations Act.
(g) The committee is not subject to Chapter 2110, Government
Code.
SECTION 1.03. Section 43.0031(b), Education Code, is
amended to read as follows:
(b) The ethics policy must include provisions applicable
to:
(1) members of the State Board of Education;
(2) members of the permanent school fund investment
advisory committee;
(3) the commissioner;
(4) [(3)] employees of the agency; [and]
(5) [(4)] any person who provides services to the
board relating to the management or investment of the permanent
school fund; and
(6) an interested person.
SECTION 1.04. Section 43.0032, Education Code, is amended
by amending Subsections (a) and (c) and adding Subsection (a-1) to
read as follows:
(a) This section applies to:
(1) a [A] member of the State Board of Education;
(2) a member of the permanent school fund investment
advisory committee;
(3) [,] the commissioner;
(4) [,] an employee of the agency;
(5) [, or] a person who provides services to the board
that relate to the management or investment of the permanent school
fund; and
(6) an interested person.
(a-1) A person to whom this section applies who has a
business, commercial, or other relationship that a reasonable
person would find likely [could reasonably be expected] to diminish
the person's independence of judgment in the performance of the
person's responsibilities relating to the management or investment
of the fund shall disclose the relationship in writing to the board.
(c) A person who files a statement under Subsection
(a-1) [(a)] disclosing a possible conflict of interest may not
give advice or make decisions about a matter affected by the
possible conflict of interest unless the board, after consultation
with the general counsel of the agency, expressly waives this
prohibition. The board may delegate the authority to waive the
prohibition established by this subsection.
SECTION 1.05. Section 43.0033, Education Code, is amended
to read as follows:
Sec. 43.0033. REPORTS OF EXPENDITURES. A consultant,
advisor, broker, money manager, investment manager, dealer, or
other person providing services to the State Board of Education
relating to the management and investment of the permanent school
fund shall file with the board regularly, as determined by the
board, a report that describes in detail any expenditure of more
than $50 made by the person on behalf of:
(1) a member of the board;
(2) a member of the permanent school fund investment
advisory committee;
(3) the commissioner; [or]
(4) [(3)] an employee of the agency or of a nonprofit
corporation created under Section 43.006; or
(5) an interested person.
SECTION 1.06. Chapter 43, Education Code, is amended by
adding Sections 43.0035, 43.0036, 43.0051, and 43.0052 to read as
follows:
Sec. 43.0035. FAILURE TO DISCLOSE POTENTIAL CONFLICT OF
INTEREST RELATING TO MANAGEMENT OR INVESTMENT OF PERMANENT SCHOOL
FUND. If an interested person enters into an arrangement involving
the management or investment of the permanent school fund under
which the interested person serves as a consultant, advisor,
broker, money manager, investment manager, dealer, or vendor of a
consultant, advisor, broker, money manager, investment manager, or
dealer and the interested person fails to disclose a relationship
described by Section 43.0032(a-1) with another interested person:
(1) the arrangement is voidable by the State Board of
Education or the comptroller; and
(2) the State Board of Education or the comptroller
may enter an order declaring the person ineligible to contract for
business relating to management or investment of the permanent
school fund.
Sec. 43.0036. INFORMATION REGARDING PERSONS INTERESTED IN
INVESTMENTS OF PERMANENT SCHOOL FUND. (a) The State Board of
Education shall maintain on an Internet website a listing of each
interested person. The list must include the person's full name and
business address and must be updated at least once each calendar
quarter.
(b) The State Board of Education may use an Internet website
established and maintained by the agency to comply with this
section.
Sec. 43.0051. REQUIRED CONTRACT PROVISION. The State
Board of Education shall include as a part of each contract under
which a consultant, advisor, broker, money manager, investment
manager, dealer, or other person agrees to provide services to the
board relating to the management or investment of the permanent
school fund a standard provision adopted by the board:
(1) requiring the person to comply with all applicable
statutes and rules relating to the services provided by the person
to the board; and
(2) acknowledging that the board may terminate the
contract or any other arrangement between the board and the person
if the person fails to comply with those statutes and rules.
Sec. 43.0052. COOPERATION RELATING TO INVESTIGATION OR
DISCIPLINARY ACTIONS OF CERTAIN PERSONS INTERESTED IN MANAGEMENT OR
INVESTMENT OF PERMANENT SCHOOL FUND. (a) As appropriate, the
comptroller shall provide information relating to disciplinary
actions taken by the State Board of Education or the comptroller
against a consultant, advisor, broker, money manager, investment
manager, or dealer doing business with or seeking to do business
with the permanent school fund to:
(1) the United States Securities and Exchange
Commission;
(2) the securities commissioner;
(3) self-regulatory organizations, including the
National Association of Securities Dealers, Inc. (NASD); and
(4) professional organizations of persons involved in
management or investment of institutional funds, including the
Association for Investment Management and Research.
(b) The comptroller shall closely cooperate with persons
described by Subsections (a)(1)-(4) in those persons'
investigations involving consultants, brokers, or dealers doing
business with or seeking to do business with the permanent school
fund.
SECTION 1.07. Section 43.006(f), Education Code, is amended
to read as follows:
(f) The corporation shall file [quarterly] reports with the
State Board of Education concerning matters required by the board.
The board may determine the frequency of reports under this
subsection.
SECTION 1.08. Chapter 43, Education Code, is amended by
adding Sections 43.0061, 43.0062, and 43.0063 to read as follows:
Sec. 43.0061. BARRING CERTAIN PERSONS FROM CONTRACTING TO
PROVIDE SERVICES RELATING TO MANAGEMENT OR INVESTMENT OF PERMANENT
SCHOOL FUND. (a) An interested person may be barred from
contracting with the State Board of Education or another interested
person to provide services relating to the management or investment
of the permanent school fund if it is determined at a contested case
hearing held under Section 43.0062 that the interested person who
is the subject of the hearing has violated:
(1) the ethics policy adopted by the board under
Section 43.0031; or
(2) the conflict of interest restrictions under
Section 43.0032.
(b) This section does not affect the validity of a contract
entered into before a determination is made that the interested
person should be barred from contracting with the State Board of
Education or another interested person unless the contract may be
voided under this chapter.
Sec. 43.0062. HEARINGS BY STATE OFFICE OF ADMINISTRATIVE
HEARINGS. (a) The commissioner, on behalf of the State Board of
Education, and the chief administrative law judge of the State
Office of Administrative Hearings shall adopt a memorandum of
understanding under which the State Office of Administrative
Hearings conducts the contested case hearings required for purposes
of Section 43.0061.
(b) The memorandum of understanding must require the chief
administrative law judge and the State Board of Education to
cooperate in connection with a contested case hearing required for
purposes of Section 43.0061.
(c) The memorandum of understanding must provide that the
administrative law judge who conducts a contested case hearing for
the State Office of Administrative Hearings on behalf of the State
Board of Education, after completing the hearing, shall:
(1) determine whether a ground exists under Section
43.0061(a) so that an interested person should be barred from
contracting with the State Board of Education or another interested
person to provide services relating to the management or investment
of the permanent school fund; and
(2) if a determination is made that the interested
person should be barred from contracting with the board or another
interested person, notwithstanding Section 2003.042, Government
Code, enter the final decision in the case concerning the period for
which the person is barred based on:
(A) whether the person has previously violated
the ethics policy or conflict of interest restrictions;
(B) the seriousness of the person's violation;
and
(C) the damage to the interests of the permanent
school fund.
(d) A person may obtain judicial review of a decision of an
administrative law judge under this section in the manner provided
by Subchapter G, Chapter 2001, Government Code.
Sec. 43.0063. MANAGEMENT AND PERFORMANCE AUDIT. (a) As
frequently as the legislative audit committee determines necessary
or advisable, the committee shall select an independent firm with
substantial experience in evaluating institutional investment
practices and performance to evaluate investment management
practices and performance relating to the permanent school fund.
(b) The legislative audit committee shall determine
specific areas to be evaluated.
(c) A firm selected under this section shall file a report
of the firm's evaluation under this section with the legislative
audit committee not later than the date specified by the committee.
(d) The agency shall pay the costs of each evaluation under
this section out of the available school fund.
SECTION 1.09. Section 43.007, Education Code, is amended to
read as follows:
Sec. 43.007. PURCHASE AND SALE OR EXCHANGE OF INVESTMENTS
[SECURITIES]. (a) The State Board of Education may authorize the
purchase of all investments [of the types of securities] in which it
is authorized by law to invest the permanent school fund [in either
registered or negotiable form]. The board may authorize the
reissue of those investments [securities] held at any time for the
account of the permanent school fund [in either registered or
negotiable form]. The State Board of Education may authorize the
sale of any investments [of the securities] held for the account of
the permanent school fund and reinvest the proceeds of sale for the
fund and may authorize the exchange of any investments [of the
securities] held for the account of the permanent school fund.
(b) In making purchases, sales, exchanges, and reissues,
the State Board of Education shall exercise the standard of care
prescribed by Section 5(d), Article VII, Texas Constitution
[judgment and care under the circumstances then prevailing that
persons of ordinary prudence, discretion, and intelligence
exercise in the management of their own affairs not in regard to
speculation but in regard to the permanent disposition of their
funds, considering the probable income as well as the probable
safety of their capital].
(c) When any investments [securities] are sold, reissued,
or exchanged as provided by Subsection (a), the custodian of the
investments [securities] shall deliver the investments
[securities] sold, reissued, or exchanged in accordance with the
directions of the State Board of Education.
SECTION 1.10. The heading to Section 43.010, Education
Code, is amended to read as follows:
Sec. 43.010. DEFAULT OF SCHOOL DISTRICT BONDS [SECURITIES]
HELD BY [THE] PERMANENT SCHOOL FUND.
SECTION 1.11. Sections 43.010(b) and (d), Education Code,
are amended to read as follows:
(b) Revenue collected by either method specified by
Subsection (a) shall be distributed proportionately to all owners
of the defaulted bonds [securities] in compliance with the
following:
(1) the proportionate share for each owner is based on
the interest and principal requirements of the original bond
[security] before authorized refunding; and
(2) prior acceptance of refunding bonds [securities]
does not reduce an owner's proportionate share.
(d) The comptroller may not issue any warrant from the
foundation school fund to or for the benefit of any district that
has been for as long as two years in default in the payment of
principal or interest on any bond [security] owned by the permanent
school fund until the State Board of Education certifies that the
district has satisfactorily complied with the appropriate
provisions of this section, in which event the comptroller shall
resume making payments to or for the benefit of the district,
including the making of pretermitted payments.
SECTION 1.12. Section 43.015(f), Education Code, is amended
to read as follows:
(f) The comptroller shall be the custodian of investments
[all securities enumerated in Section 43.003(6) and of other
securities as] designated by the State Board of Education in which
the school funds of the state are invested. The comptroller shall
keep those investments [securities] in the comptroller's custody
until paid off, discharged, delivered as required by the State
Board of Education, or otherwise disposed of by the proper
authorities of the state, and on the proper installment of any
interest or dividend, shall see that the proper credit is given, and
the coupons on bonds, when paid, shall be separated from the bonds
and cancelled by the comptroller.
SECTION 1.13. Section 43.017, Education Code, is amended to
read as follows:
Sec. 43.017. USE OF COMMERCIAL BANKS AS AGENTS FOR
COLLECTION OF INCOME FROM PERMANENT SCHOOL FUND INVESTMENTS. (a)
The State Board of Education may contract with one or more
commercial banks to receive payments of dividends and interest on
investments [securities] in which the state permanent school funds
are invested and transmit that money with identification of its
source to the comptroller for the account of the available school
fund by the fastest available means.
(b) In choosing each commercial bank with which to contract
as authorized by Subsection (a), the State Board of Education shall
assure itself of:
(1) the financial stability of the bank;
(2) the location of the bank with respect to its
proximity to the banks on which checks are drawn in payment of
dividends and interest on investments [securities] of the permanent
school fund;
(3) the experience and reliability of the bank in
acting as agent for others in the similar collection and
expeditious remittance of money; and
(4) the reasonableness of the bank's charges for the
services, both in amount of the charges and in relation to the
increased investment earnings of the available school fund that
will result from speedier receipt by the comptroller of the money.
SECTION 1.14. Section 43.018(b), Education Code, is amended
to read as follows:
(b) The State Board of Education may contract with a
commercial bank pursuant to this section only if:
(1) the bank is located in a city having a major stock
exchange;
(2) the bank is experienced in the operation of a fully
secured securities loan program;
(3) the bank has adequate capital in the prudent
judgment of the State Board of Education to assure the safety of the
securities entrusted to it as a custodian;
(4) the bank will require of any securities broker or
dealer to which it lends securities owned by the state permanent
school fund that the broker or dealer deliver to it cash collateral
for the loan of securities, and that the cash collateral will at all
times be not less than 100 percent of the market value of the
securities lent;
(5) the bank executes an indemnification agreement,
satisfactory in form and content to the State Board of Education,
fully indemnifying the permanent and available school funds against
loss resulting from borrower default or the failure of the bank to
properly execute the responsibilities of the bank under the
applicable securities lending agreement [the bank's service as
custodian of securities of the permanent school fund and its
operation of a securities loan program using securities of the
permanent school fund];
(6) the bank will speedily collect and remit on the day
of collection by the fastest available means to the comptroller any
dividends and interest collectible by it on securities held by it as
custodian, together with identification as to the source of the
dividends or interest; and
(7) the bank is the bank agreeing to pay to the
available school fund the largest sum or highest percentage of the
income derived by the bank from use of the securities of the
permanent school fund in the operation of a securities loan
program.
SECTION 1.15. Section 321.013, Government Code, is amended
by adding Subsection (j) to read as follows:
(j) The State Auditor shall enter into a written contract
with the State Board of Education for the State Auditor to
investigate an allegation relating to the management and investment
of the permanent school fund as prescribed by Section 7.113,
Education Code. After an investigation of an allegation is
completed, the State Auditor shall prepare a written report of the
results of that investigation. The State Auditor shall submit the
report to the committee before publication. The State Auditor
shall file a copy of the report with the governor, the lieutenant
governor, the speaker of the house of representatives, each member
of the State Board of Education, and each member of the standing
committees of the senate and of the house of representatives with
primary jurisdiction over the State Board of Education.
SECTION 1.16. Not later than December 1, 2003, the
governor, lieutenant governor, and speaker of the house of
representatives shall appoint members of the permanent school fund
investment advisory committee, as required by Section 43.0012,
Education Code, as added by this article.
SECTION 1.17. Sections 43.0035 and 43.0051, Education Code,
as added by this article, apply only to an arrangement or contract
entered into on or after September 1, 2003.
SECTION 1.18. Not later than December 1, 2003, the State
Board of Education shall post on an Internet website the
information required by Section 43.0036, Education Code, as added
by this article.
SECTION 1.19. Not later than December 1, 2003, the
commissioner of education, on behalf of the State Board of
Education, and the chief administrative law judge of the State
Office of Administrative Hearings shall adopt a memorandum of
understanding as prescribed by Section 43.0062, Education Code, as
added by this article.
SECTION 1.20. Not later than December 1, 2003, the
legislative audit committee shall select an independent firm to
evaluate investment management practices and performance relating
to the permanent school fund as required by Section 43.0063,
Education Code, as added by this article. The evaluation must
include a comprehensive analysis of the State Board of Education's
investment program relating to the permanent school fund.
ARTICLE 2. COMPOSITION OF AND AUTHORIZED INVESTMENTS FOR
PERMANENT SCHOOL FUND
SECTION 2.01. Section 43.003, Education Code, is repealed.
SECTION 2.02. Sections 43.001(a) and (b), Education Code,
are amended to read as follows:
(a) The permanent school fund, which is a perpetual
endowment for the public schools of this state, consists of:
(1) all land appropriated for the public schools by
the constitution and laws of this state;
(2) all of the unappropriated public domain remaining
in this state, including all land recovered by the state by suit or
otherwise except pine forest land as defined by Section 88.111;
(3) all proceeds from the authorized sale of permanent
school fund land;
(4) all proceeds from the lawful sale of any other
properties belonging to the permanent school fund;
(5) all investments [authorized by Section 43.003] of
properties belonging to the permanent school fund; and
(6) all income from the mineral development of
permanent school fund land, including income from mineral
development of riverbeds and other submerged land.
(b) The available school fund, which shall be apportioned
annually to each county according to its scholastic population,
consists of:
(1) the interest and dividends arising from any
investments [securities] or funds belonging to the permanent school
fund;
(2) all interest derivable from the proceeds of the
sale of land set apart for the permanent school fund;
(3) all money derived from the lease of land belonging
to the permanent school fund;
(4) one-fourth of all revenue derived from all state
occupation taxes, exclusive of delinquencies and cost of
collection;
(5) one-fourth of revenue derived from state gasoline
and special fuels excise taxes as provided by law; and
(6) all other appropriations to the available school
fund made by the legislature for public school purposes.
ARTICLE 3. EFFECTIVE DATE
SECTION 3.01. This Act takes effect September 1, 2003.