80R15128 EJI/ESH-F

By: McCall H.B. No. 3699

Substitute the following for H.B. No. 3699:

By: Pickett C.S.H.B. No. 3699

A BILL TO BE ENTITLED

AN ACT

relating to the management of public school land and the investment of the permanent school fund.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:

SECTION 1. Sections 51.011(a) and (a-1), Natural Resources Code, are amended to read as follows:

(a) Any land, mineral or royalty interest, real estate investment, or other interest, including revenue received from those sources, that is set apart to the permanent school fund under the constitution and laws of this state together with the mineral estate in riverbeds, channels, and the tidelands, including islands, shall be subject to the sole and exclusive management and control of the school land board and the commissioner under the provisions of this chapter and other applicable law.

(a-1) The board may acquire, sell, lease, trade, improve, maintain, protect, or otherwise manage, control, or use land, mineral and royalty interests, real estate investments, or other interests, including revenue received from those sources, that are [is] set apart to the permanent school fund in any manner, at such prices, and under such terms and conditions as the board finds to be in the best interest of the fund.

SECTION 2. The heading to Section 51.401, Natural Resources Code, is amended to read as follows:

Sec. 51.401. REAL ESTATE SPECIAL FUND ACCOUNT.

SECTION 3. Sections 51.401(a) and (b), Natural Resources Code, are amended to read as follows:

(a) The board may designate funds received from any land, mineral or royalty interest, real estate investment, or other interest, including revenue received from those sources, that is set apart to the permanent school fund under the constitution and laws of this state together with the mineral estate in riverbeds, channels, and the tidelands, including islands, [the sale of permanent school fund land under this chapter and the proceeds of future mineral leases and royalties generated from existing and future leases of permanent school fund mineral interests received under Chapters 52 and 53] for deposit in the real estate [a] special fund account of the permanent school fund in the State Treasury to be used by the board as provided by this subchapter.

(b) The real estate special fund account must be an interest-bearing account, and the interest received on the account shall be deposited in the State Treasury to the credit of the real estate special fund account of the permanent school fund.

SECTION 4. Subchapter I, Chapter 51, Natural Resources Code, is amended by adding Section 51.4011 to read as follows:

Sec. 51.4011. DESIGNATION OF BOARD AS MANAGER OF REAL ESTATE SPECIAL FUND ACCOUNT. The board shall manage and control the real estate special fund account for purposes of Section 4, Article VII, Texas Constitution.

SECTION 5. Section 51.402, Natural Resources Code, is amended by amending Subsections (a) and (b) and adding Subsection (b-1) to read as follows:

(a) The board may use the money designated under Section 51.401 for any of the following purposes:

(1) to add to a tract of public school land to form a tract of sufficient size to be manageable;

(2) to add contiguous land to public school land;

(3) to acquire, as public school land, interests in real property for biological, commercial, geological, cultural, or recreational purposes;

(4) to acquire mineral and royalty interests for the use and benefit of the permanent school fund;

(5) to protect, maintain, or enhance the value of public school land;

(6) to acquire interests in real estate; [or]

(7) to pay reasonable fees for professional services related to a permanent school fund investment; or

(8) to acquire, sell, lease, trade, improve, maintain, protect, or use land, mineral or royalty interests, real estate investments, or other interests at prices and under terms the board determines to be in the best interest of the permanent school fund.

(b) Before using funds under Subsection (a), the board must determine, using the prudent investor standard, that the use of the funds for the intended purpose is authorized by Subsection (a) and in the best interest of the permanent school fund. A determination by the board on the use of funds under this section is conclusive unless the determination was made as a result of fraud or obvious error.

(b-1) The board may confer with one or more employees of the board or with a third party regarding an investment or potential investment in real estate, including the acquisition or potential acquisition of interests in real estate, to the extent permitted to the board of trustees of the Texas growth fund under Section 551.075, Government Code.

SECTION 6. Section 51.4021, Natural Resources Code, is amended to read as follows:

Sec. 51.4021. APPOINTMENT OF REAL ESTATE SPECIAL FUND MANAGERS, INVESTMENT CONSULTANTS, OR ADVISORS. (a) The board may appoint investment managers, consultants, or advisors to invest or assist the board in investing the money designated under Section 51.401 by contracting for professional investment management or investment advisory services with one or more organizations that are in the business of managing or advising on the management of real estate investments.

(b) To be eligible for appointment under this section, an investment manager, consultant, or advisor shall agree to abide by the [must be:

[(1) registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.);

[(2)a bank as defined by that Act; or

[(3) an insurance company qualified to perform real estate investment services under the laws of more than one state.

[(c) In a contract under this section, the board shall specify any] policies, requirements, or restrictions, including ethical standards and disclosure policies and criteria for determining the quality of investments and for the use of standard rating services, that the board adopts for real estate investments of the permanent school fund. Money designated under Section 51.401 may not be invested in a real estate investment trust, as defined by Section 200.001, Business Organizations Code.

(c) [(d)] Compensation paid to an investment manager, consultant, or advisor by the board must be consistent with the compensation standards of the investment industry and compensation paid by similarly situated institutional investors.

(d) [(e)] Chapter 2263, Government Code, applies to investment managers, consultants, or advisors appointed under this section. The board by rule shall adopt standards of conduct for investment managers, consultants, or advisors appointed under this section as required by Section 2263.004, Government Code, and shall implement the disclosure requirements of Section 2263.005 of that code.

SECTION 7. Section 51.412(a), Natural Resources Code, is amended to read as follows:

(a) Not later than September 1 of each even-numbered year, the board shall submit to the legislature a report that, specifically and in detail, assesses the direct and indirect economic impact, as anticipated by the board, of the investment of funds designated under Section 51.401 for deposit in the real estate special fund account of the permanent school fund. The board may not disclose information under this section that is confidential under applicable state or federal law. The report must include the following information:

(1) the total amount of money designated by Section 51.401 for deposit in the real estate special fund account of the permanent school fund that the board intends to invest;

(2) the rate of return the board expects to attain on the investment;

(3) the amount of money the board expects to distribute to the available school fund or the investment special fund account of the permanent school fund after making the investments;

(4) the distribution of the board's investments by county;

(5) the effect of the board's investments on the level of employment, personal income, and capital investment in the state; and

(6) any other information the board considers necessary to include in the report.

SECTION 8. Subchapter I, Chapter 51, Natural Resources Code, is amended by adding Section 51.413 to read as follows:

Sec. 51.413. TRANSFERS FROM REAL ESTATE SPECIAL FUND ACCOUNT TO AVAILABLE SCHOOL FUND. On the first working day of each month in a state fiscal year, the comptroller shall transfer from the real estate special fund account of the permanent school fund to the available school fund an amount equal to one-twelfth of the annual distribution from the real estate special fund account of the permanent school fund to the available school fund as provided by Section 4, Article VII, Texas Constitution, for the fiscal year.

SECTION 9. Section 43.001(b), Education Code, as amended by Chapters 201 and 328, Acts of the 78th Legislature, Regular Session, 2003, is reenacted and amended to read as follows:

(b) The available school fund, which shall be apportioned annually to each county according to its scholastic population, consists of:

(1) the distributions to the fund from the investment special fund account of the permanent school fund as provided by Section 5(a), Article VII, Texas Constitution;

(2) the distributions to the fund from the real estate special fund account of the permanent school fund as provided by Section 4(a), Article VII, Texas Constitution;

(3) one-fourth of all revenue derived from all state occupation taxes, exclusive of delinquencies and cost of collection;

(4) [(3)] one-fourth of revenue derived from state gasoline and special fuels excise taxes as provided by law; and

(5) [(4)] all other appropriations to the available school fund made by the legislature for public school purposes.

SECTION 10. The heading to Section 43.002, Education Code, is amended to read as follows:

Sec. 43.002. TRANSFERS FROM INVESTMENT SPECIAL FUND ACCOUNT OF PERMANENT SCHOOL FUND AND GENERAL REVENUE FUND TO AVAILABLE SCHOOL FUND.

SECTION 11. Section 43.002(a), Education Code, is amended to read as follows:

(a) On the first working day of each month in a state fiscal year, the comptroller shall transfer from the investment special fund account of the permanent school fund to the available school fund an amount equal to one-twelfth of the annual distribution from the investment special fund account of the permanent school fund to the available school fund as provided by Section 5(a), Article VII, Texas Constitution, for the fiscal year.

SECTION 12. Sections 43.0031(a), (b), (d), and (e), Education Code, are amended to read as follows:

(a) In addition to any other requirements provided by law, the State Board of Education shall adopt and enforce an ethics policy that provides standards of conduct relating to the management and investment of the investment special fund account of the permanent school fund. The ethics policy must include provisions that address the following issues as they apply to the management and investment of the investment special fund account of the permanent school fund and to persons responsible for managing and investing the special fund account:

(1) general ethical standards;

(2) conflicts of interest;

(3) prohibited transactions and interests;

(4) the acceptance of gifts and entertainment;

(5) compliance with applicable professional standards;

(6) ethics training; and

(7) compliance with and enforcement of the ethics policy.

(b) The ethics policy must include provisions applicable to:

(1) members of the State Board of Education;

(2) the commissioner;

(3) employees of the agency; and

(4) any person who provides services to the board relating to the management or investment of the investment special fund account of the permanent school fund.

(d) The provisions of the ethics policy that apply to a person who provides services to the board relating to the management or investment of the investment special fund account of the permanent school fund must be based on the Code of Ethics and the Standards of Professional Conduct prescribed by the Association for Investment Management and Research or other ethics standards adopted by another appropriate professionally recognized entity.

(e) The board shall ensure that applicable provisions of the ethics policy are included in any contract under which a person provides services to the board relating to the management and investment of the investment special fund account of the permanent school fund.

SECTION 13. Section 43.0032(a), Education Code, is amended to read as follows:

(a) A member of the State Board of Education, the commissioner, an employee of the agency, or a person who provides services to the board that relate to the management or investment of the investment special fund account of the permanent school fund who has a business, commercial, or other relationship that 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.

SECTION 14. Sections 43.0033, 43.004, and 43.005, Education Code, are amended to read as follows:

Sec. 43.0033. REPORTS OF EXPENDITURES. A consultant, advisor, broker, or other person providing services to the State Board of Education relating to the management and investment of the investment special fund account 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) the commissioner; or

(3) an employee of the agency or of a nonprofit corporation created under Section 43.006.

Sec. 43.004. WRITTEN INVESTMENT OBJECTIVES; PERFORMANCE EVALUATION. (a) The State Board of Education shall develop written investment objectives concerning the investment of the investment special fund account of the permanent school fund. The objectives may address desired rates of return, risks involved, investment time frames, and any other relevant considerations.

(b) The board shall employ a well-recognized performance measurement service to evaluate and analyze the investment results of the investment special fund account of the permanent school fund. The service shall compare investment results with the written investment objectives developed by the board, and shall also compare the investment of the investment special fund account of the permanent school fund with the investment of other public and private funds.

Sec. 43.005. EXTERNAL INVESTMENT MANAGERS. (a) The State Board of Education may contract with private professional investment managers to assist the board in making investments of the investment special fund account of the permanent school fund. A contract under this subsection must be approved by the board or otherwise entered into in accordance with board rules relating to contracting authority.

(b) The State Board of Education by rule may delegate a power or duty relating to the investment of the investment special fund account of the permanent school fund to a committee, officer, employee, or other agent of the board.

SECTION 15. Sections 43.006(a), (b), and (e), Education Code, are amended to read as follows:

(a) The State Board of Education may delegate investment authority and contract for the investment of the investment special fund account of the permanent school fund to the same extent as the governing board of an institution of higher education with respect to an institutional fund under Chapter 163, Property Code.

(b) The board may enter into a contract with a nonprofit corporation for the corporation to invest funds under the control and management of the board, including the investment special fund account of the permanent school fund, as designated by the board. The corporation may not engage in any business other than investing funds designated by the board under the contract.

(e) If an investment contract entered into under Subsection (b) includes the investment special fund account of the permanent school fund within the scope of funds under the control and management of the State Board of Education to be invested by the corporation, the board shall provide for an annual financial audit of the investment special fund account of the permanent school fund. Subject to the legislative audit committee's approval of including the audit in the audit plan under Section 321.013(c), Government Code, the audit shall be performed by the state auditor.

SECTION 16. Section 43.007(a), Education Code, is amended to read as follows:

(a) The State Board of Education may authorize the purchase [of all of the types] of securities for the investment special fund account of [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 securities held at any time for the investment special fund account of the permanent school fund in either registered or negotiable form. The State Board of Education may authorize the sale of any of the securities held for the investment special fund account of the permanent school fund and reinvest the proceeds of sale for the fund and may authorize the exchange of any of the securities held for the investment special fund account of the permanent school fund.

SECTION 17. Section 45.052, Education Code, is amended to read as follows:

Sec. 45.052. GUARANTEE. On approval by the commissioner, bonds issued under Subchapter A, including refunding bonds, are guaranteed by the investment special fund account [corpus and income] of the permanent school fund.

SECTION 18. Sections 45.053(a) and (b), Education Code, are amended to read as follows:

(a) The commissioner may not approve bonds for guarantee if the approval would result in the total amount of outstanding guaranteed bonds exceeding an amount equal to 2-1/2 times the cost value or market value, whichever is less, of the investment special fund account of the permanent school fund, as estimated by the board and certified by the state auditor.

(b) Each year, the state auditor shall analyze the status of guaranteed bonds as compared to the cost value and market value of the investment special fund account of the permanent school fund. Based on that analysis, the state auditor shall certify whether the amount of bonds guaranteed is within the limit prescribed by this section.

SECTION 19. Sections 45.059 and 45.061, Education Code, are amended to read as follows:

Sec. 45.059. PAYMENT FROM PERMANENT SCHOOL FUND. (a) Immediately following receipt of notice under Section 45.058, the commissioner shall instruct the comptroller to transfer from the appropriate account in the investment special fund account of the permanent school fund to the school district's paying agent the amount necessary to pay the maturing or matured principal or interest.

(b) Immediately following receipt of the funds for payment of the principal or interest, the paying agent shall pay the amount due and forward the canceled bond or coupon to the comptroller. The comptroller shall hold the canceled bond or coupon on behalf of the investment special fund account of the permanent school fund.

(c) Following full reimbursement to the investment special fund account of the permanent school fund with interest, the comptroller shall further cancel the bond or coupon and forward it to the school district for which payment was made.

Sec. 45.061. REIMBURSEMENT OF PERMANENT SCHOOL FUND. (a) If the commissioner orders payment from the permanent school fund on behalf of a school district, the commissioner shall direct the comptroller to withhold the amount paid, plus interest, from the first state money payable to the [school] district. The amount withheld shall be deposited to the credit of the investment special fund account of the permanent school fund.

(b) In accordance with the rules of the board, the commissioner may authorize reimbursement to the investment special fund account of the permanent school fund with interest in a manner other than that provided by this section.

SECTION 20. Section 45.062(a), Education Code, is amended to read as follows:

(a) If two or more payments from the investment special fund account of the permanent school fund are made on the guaranteed bonds of a school district and the commissioner determines that the [school] district is acting in bad faith under the guarantee, the commissioner may request the attorney general to institute appropriate legal action to compel the [school] district and its officers, agents, and employees to comply with the duties required of them by law in regard to the bonds.

SECTION 21. (a) Sections 51.401(c) and (d), Natural Resources Code, are repealed.

(b) The following sections of the Education Code are repealed:

(1) Section 43.003;

(2) Section 43.007(b); and

(3) Section 43.020.

SECTION 22. (a) Except as provided by Subsection (b) of this section, this Act takes effect immediately if this Act receives a vote of two-thirds of all the members elected to each house, as provided by Section 39, Article III, Texas Constitution. If this Act does not receive the vote necessary for immediate effect, this Act takes effect September 1, 2007, except as provided by Subsection (b) of this section.

(b) Sections 4 and 7 through 20 of this Act take effect January 1, 2008, but only if the constitutional amendment to create real estate and investment special fund accounts within the permanent school fund and to allow the returns from permanent school fund real estate portfolio investments to be added to the available school fund for the support of public schools is approved by the voters. If the proposed constitutional amendment is not approved by the voters, Sections 4 and 7 through 20 of this Act have no effect.