81R21575 CAE-D

By: Howard of Travis, Anchia, Branch, H.B. No. 2037

Eissler, Guillen, et al.

A BILL TO BE ENTITLED

AN ACT

relating to the creation of the Permanent School Fund Management Council to manage the permanent school fund; providing a criminal penalty.

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

SECTION 1. Chapter 43, Education Code, is amended by adding Sections 43.0011, 43.0012, and 43.0013 and amending Sections 43.003, 43.0031, 43.0032, and 43.0033 to read as follows:

Sec. 43.0011. DEFINITION. In this chapter, "council" means the Permanent School Fund Management Council.

Sec. 43.0012. PERMANENT SCHOOL FUND MANAGEMENT COUNCIL. (a) The Permanent School Fund Management Council consists of the following seven members:

(1) two members appointed by the governor;

(2) one member appointed by the governor from a list of candidates prepared by the speaker of the house of representatives;

(3) one member appointed by the governor from a list of candidates prepared by the State Board of Education;

(4) one member appointed by the lieutenant governor;

(5) one member appointed by the commissioner of the General Land Office; and

(6) one member appointed by the comptroller.

(b) Council members serve staggered terms of four years, with the terms of three members expiring on February 1 of one odd-numbered year and the terms of four members expiring on February 1 of the next odd-numbered year.

(c) A vacancy on the council is filled for the unexpired portion of the member's term in the same manner as the original appointment.

(d) The members of the council shall elect the presiding officer of the council, who serves a term of two years expiring February 1 of each odd-numbered year. A member may serve more than one term as presiding officer.

(e) The council, by a majority vote of all members, shall appoint a chief investment officer of the permanent school fund to serve at the will of the council.

(f) The council may adopt rules and operating procedures as necessary to administer the permanent school fund and perform other duties imposed on the council by law.

(g) The council shall meet at least quarterly and may hold other meetings called by the presiding officer.

(h) The council may create standing committees to advise the council. The council shall create:

(1) an audit and ethics committee;

(2) a policy committee; and

(3) a risk committee.

(i) The council is subject to the open meetings law, Chapter 551, Government Code, except that the council is not required to discuss an investment or potential investment with one or more council employees or with a third party in an open meeting to the same extent that the board of trustees of the Texas growth fund is provided an exception from the open meetings law under Section 551.075, Government Code.

Sec. 43.0013. ADMINISTRATIVE SUPPORT AND MANAGEMENT. (a) The council shall contract with a corporation formed by the comptroller to provide administrative support to the council.

(b) The council may contract with the corporation described by Subsection (a) to exercise any power or perform any duty of the council relating to the investment of the permanent school fund.

Sec. 43.003. INVESTMENT OF PERMANENT SCHOOL FUND. (a) In compliance with this section, the council [State Board of Education] may invest the permanent school fund in any investment permitted under Section 5(f), Article VII, Texas Constitution [the types of securities], which must be carefully examined by the council [State Board of Education] and be found to be safe and proper investments for the fund [as specified below:

[(1) securities, bonds, or other obligations issued, insured, or guaranteed in any manner by the United States Government or any of its agencies and in bonds issued by this state;

[(2) obligations and pledges of The University of Texas;

[(3) corporate bonds, debentures, or obligations of United States corporations of at least "A" rating;

[(4) obligations of United States corporations that mature in less than one year and are of the highest rating available at the time of investment;

[(5) bonds issued, assumed, or guaranteed by the Inter-American Development Bank, the International Bank of Reconstruction and Development (the World Bank), the African Development Bank, the Asian Development Bank, and the International Finance Corporation;

[(6) bonds of counties, school districts, municipalities, road precincts, drainage, irrigation, navigation, and levee districts in this state, subject to the following requirements:

[(A) the securities, before purchase, must have been diligently investigated by the attorney general both as to form and as to legal compliance with applicable laws;

[(B) the attorney general's certificate of validity procured by the party offering the bonds, obligations, or pledges must accompany the securities when they are submitted for registration to the comptroller, who must preserve the certificates;

[(C) the public securities, if purchased, and when certified and registered as specified under Paragraph (B), are incontestable unless issued fraudulently or in violation of a constitutional limitation, and the certificates of the attorney general are prima facie evidence of the validity of the bonds and bond coupons; and

[(D) after the issuing political subdivision has received the proceeds from the sales of the securities, the issuing agency is estopped to deny their validity, and the securities are valid and binding obligations;

[(7) preferred stocks and common stocks that the State Board of Education considers proper investments for the permanent school fund, subject to the following requirements:

[(A) in making all of those investments, the State Board of Education shall exercise the 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;

[(B) the company issuing the stock must be incorporated in the United States, and the stocks must have paid dividends for five consecutive years or longer immediately before the date of purchase and the stocks, except for bank stocks and insurance stocks, must be listed on an exchange registered with the Securities and Exchange Commission or its successors; and

[(C) not more than one percent of the permanent school fund may be invested in stock issued by one corporation and not more than five percent of the voting stock of any one corporation will be owned; and

[(8) notwithstanding any other law or provision of this code, first lien real estate mortgage securities insured by the Federal Housing Administration under the National Housing Act of the United States, or in any other first lien real estate mortgage securities guaranteed in whole or in part by the United States].

(b) The council and the School Land Board shall enter into a memorandum of understanding under which the council agrees not to invest in real estate without the consent of the board.

Sec. 43.0031. PERMANENT SCHOOL FUND ETHICS POLICY. [(a)] In addition to any other requirements provided by law, the council must comply with, and is subject to, the [State Board of Education shall adopt and enforce an] ethics policy adopted by the corporation that the council contracts with as required by Section 43.0013. If the corporation does not have an ethics policy the council must adopt and comply with an ethics policy. The comptroller shall enforce the ethics policy, regardless of whether the policy is adopted by the corporation or the council [that provides standards of conduct relating to the management and investment 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 permanent school fund and to persons responsible for managing and investing the fund:

[(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 permanent school fund.

[(c) Not later than the 45th day before the date on which the board intends to adopt a proposed ethics policy or an amendment to or revision of an adopted ethics policy, the board shall submit a copy of the proposed policy, amendment, or revision to the Texas Ethics Commission and the state auditor for review and comments. The board shall consider any comments from the commission or state auditor before adopting the proposed policy.

[(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 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 permanent school fund].

Sec. 43.0032. CONFLICTS OF INTEREST. (a) A member of the council [State Board of Education], [the commissioner,] an employee of the council [agency], or a person who provides services to the council [board] that relate to the management or investment 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 council [board].

(b) [The board or the board's designee shall, in the ethics policy adopted under Section 43.0031, define the kinds of relationships that may create a possible conflict of interest.

[(c)] A person who files a statement under Subsection (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 council [board, after consultation with the general counsel of the agency,] expressly waives this prohibition. The council [board] may delegate the authority to waive the prohibition established by this subsection.

Sec. 43.0033. REPORTS OF EXPENDITURES. A consultant, advisor, broker, or other person providing services to the council [State Board of Education] relating to the management and investment of the permanent school fund shall file with the council [board] regularly, as determined by the council [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 council [board]; or

(2) [the commissioner; or

[(3)] an employee of the council, [agency or of] a nonprofit corporation created under Section 43.006, or a corporation contracting with the council under Section 43.0013.

SECTION 2. Sections 43.0034(a) and (c), Education Code, are amended to read as follows:

(a) The council [board] shall prescribe forms for:

(1) statements of possible conflicts of interest and waivers of possible conflicts of interest under Section 43.0032; and

(2) reports of expenditures under Section 43.0033.

(c) The council [board] shall designate an employee of the council [agency] to act as custodian of statements, waivers, and reports described by Subsection (a) for purposes of public disclosure.

SECTION 3. Chapter 43, Education Code, is amended by adding Sections 43.0035, 43.0036, and 43.0037 and amending Sections 43.004, 43.005, and 43.0051 to read as follows:

Sec. 43.0035. APPEARANCE BY FORMER COUNCIL MEMBER. (a) A former member of the council may not make any communication to or appearance before the council or a member, chief investment officer, or employee of the council before the second anniversary of the date the individual ceased to be a member of the council if the communication or appearance is made:

(1) with the intent to influence council action; and

(2) on behalf of any person in connection with any matter on which the person seeks action by the council.

(b) A person commits an offense if the person violates this section. An offense under this section is a Class A misdemeanor.

Sec. 43.0036. FINANCIAL AUDIT. (a) The state auditor shall conduct an annual financial audit of the permanent school fund.

(b) The state auditor may contract with an independent and internationally recognized accounting firm with substantial experience in auditing investment accounts to conduct the financial audit of the permanent school fund.

(c) The council shall reimburse the state auditor for the cost of the audit.

(d) The state auditor or the accounting firm selected to conduct the audit shall report the results of the audit directly to the council.

(e) Not later than the 30th day after the date the council receives a copy of the audit report, the council shall file a copy of the audit report with the governor, the lieutenant governor, the speaker of the house of representatives, the commissioner, and the comptroller.

Sec. 43.0037. REPORTS. (a) Before December 1 of each year, the council shall prepare a written report detailing the council's investment and fiduciary practices and policies.

(b) Not later than January 1 of each year, the council shall distribute the report to the governor, the lieutenant governor, the speaker of the house of representatives, the presiding officers of the standing committees of each house of the legislature with primary jurisdiction over primary and secondary education, the presiding officers of the standing committees of each house of the legislature with primary jurisdiction over state finance or appropriations, and the state auditor.

Sec. 43.004. WRITTEN INVESTMENT OBJECTIVES; PERFORMANCE EVALUATION. (a) The council [State Board of Education] shall develop written investment objectives concerning the investment 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 council [board] shall employ a well-recognized performance measurement service to evaluate and analyze the investment results of the permanent school fund. The service shall compare investment results with the written investment objectives developed by the council [board], and shall also compare the investment of the permanent school fund with the investment of other public and private funds.

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

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

Sec. 43.0051. TRANSFERS TO REAL ESTATE SPECIAL FUND ACCOUNT OF THE PERMANENT SCHOOL FUND. The council [State Board of Education] may transfer funds from the portion of the permanent school fund managed by the council [State Board of Education] to the real estate special fund account of the permanent school fund if the council [State Board of Education] determines, using the standard of care set forth in Subsection (f), Section 5, Article VII, Texas Constitution, that such transfer is in the best interest of the permanent school fund.

SECTION 4. Sections 43.006(a), (b), (c), (d), and (f), Education Code, are amended to read as follows:

(a) The council [State Board of Education] may delegate investment authority for the investment of the permanent school fund to the same extent as an institution with respect to an institutional fund under Chapter 163, Property Code.

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

(c) The council [board] must approve the:

(1) articles of incorporation and bylaws of the corporation and any amendment to the articles of incorporation or bylaws;

(2) investment policies of the corporation, including changes to those policies;

(3) audit and ethics committee of the corporation; and

(4) code of ethics of the corporation.

(d) The board of directors of the corporation must be members of the council [State Board of Education].

(f) The corporation shall file quarterly reports with the council [State Board of Education] concerning matters required by the council [board].

SECTION 5. Section 43.007, Education Code, is amended to read as follows:

Sec. 43.007. PURCHASE AND SALE OR EXCHANGE OF SECURITIES. (a) The council [State Board of Education] may authorize the purchase of all 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 council [board] may authorize the reissue of those securities held at any time for the account of the permanent school fund in either registered or negotiable form. The council [State Board of Education] may authorize the sale of any 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 of the securities held for the account of the permanent school fund.

(b) In making purchases, sales, exchanges, and reissues, the council [State Board of Education] shall exercise the judgment and care prescribed by Section 5(f), Article VII, Texas Constitution [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 securities are sold, reissued, or exchanged as provided by Subsection (a), the custodian of the securities shall deliver the securities sold, reissued, or exchanged in accordance with the directions of the council [State Board of Education].

SECTION 6. Sections 43.009(a), (b), and (c), Education Code, are amended to read as follows:

(a) The council [State Board of Education] may authorize the governing body of any political subdivision in this state to pay off and discharge, at any interest paying date whether the bonds are matured or not, all or any part of any outstanding bond indebtedness owned by the permanent school fund.

(b) The governing body of a political subdivision desiring to pay off and discharge any bonded indebtedness owned by the fund shall apply in writing to the council [State Board of Education], not later than the 30th day before any interest paying date on the bonds, describing the bonds or part of the bonds it desires to pay off and discharge. The application must be accompanied by an affidavit stating that only tax money collected from a tax levy made for the specific purpose of providing a sinking fund and paying interest on the particular bonds to be redeemed will be spent in redeeming, taking up, or paying off the bonds.

(c) The council [State Board of Education], on receiving the application and affidavit, shall take action on them in the manner it considers best and shall notify the applicant whether the application is refused or granted in whole or in part.

SECTION 7. Sections 43.010(a), (c), and (d), Education Code, are amended to read as follows:

(a) If interest or principal has not been paid for two years or more on any bonds issued by any school district and held by the permanent school fund, the council [State Board of Education] may direct the commissioner to:

(1) compel the district to levy a tax sufficient to meet the interest and principal payments then or later due; or

(2) if the district furnishes to the council [State Board of Education] satisfactory proof that the district's taxing ability is insufficient, direct the commissioner to require the district to:

(A) exhaust all legal remedies in collecting delinquent taxes; and

(B) levy a tax at the maximum lawful rate on the bona fide valuation of taxable property located in the district.

(c) As long as any school district is delinquent in its payments of principal or interest on any of its bonds owned by the permanent school fund, the council [State Board of Education] may specify the method of crediting payments to the state made by the district as to principal and interest.

(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 security owned by the permanent school fund until the council [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 8. Sections 43.011(a), (b), (c), (d), and (e), Education Code, are amended to read as follows:

(a) In compliance with this section, the council or State Board of Education, as applicable, may revise, readjust, modify, refinance, or refund defaulted bonds issued by any school district in this state and owned by either the permanent school fund or the available school fund.

(b) Application must be made to the council or State Board of Education by the district that issued the bonds and must show that:

(1) delinquent interest totals at least 50 percent of the principal amount of the bonds; and

(2) taxable valuation has decreased to such an extent that a full application of the proceeds of the voted authorized tax authorized to be levied on the $100 taxable property valuation will not meet interest and principal annually maturing on the bonds.

(c) The council or State Board of Education may effect a refunding of the debt due and to become due only if the council or board, as applicable, finds that:

(1) the district is unable to pay the sums already matured and the sums contracted to be paid as they mature by paying annually to the council or board [State Board of Education] the full proceeds of a 50-cent tax levy on the $100 of all taxable valuation of property in the district;

(2) the taxable valuation of property in the district has decreased at least 75 percent since the bonds were issued and that the decrease was not caused by the district or any of its officials;

(3) the district for a period of at least five years before applying to the council or board [State Board of Education] for refunding has levied a tax of 50 cents on the $100 of taxable valuation of property in the district, and that despite such levies, the aggregate amount due the council or board [State Board of Education] exceeds the aggregate amount due at the beginning of the period;

(4) the district has not authorized and sold additional bonds during the five-year period immediately preceding the application; and

(5) the district has in good faith endeavored to pay its debt in accordance with the contract evidenced by the bonds held for the account of the permanent school fund or the available school fund.

(d) If the conditions specified by Subsection (c) are found to exist, the district is, for purposes of this section, insolvent, and the council or State Board of Education may exchange the bonds, interest coupons, and other evidences of indebtedness for new refunding bonds of the district issued in compliance with the following:

(1) the principal amount of the refunding bonds may not be less than the total amount of the bonds, matured interest coupons, accrued interest, and interest on delinquent interest then actually due to the permanent school fund or the available school fund; and

(2) the rate of interest to be borne by the refunding bonds may be lower than that borne by the bonds to be refunded if in consideration of the interest reduction the district agrees to levy a tax each year for a period of 40 years at a rate sufficient to produce annually a sum equal to 90 percent of the amount that can be calculated by the levy of a tax at the rate of 50 cents on the $100 of taxable valuation of property as determined by the latest approved tax roll of the district, and in determining the rate of interest to be borne by the refunding bonds, the council or board [State Board of Education] shall be governed by the following:

(A) the council or board [State Board of Education] may require the rate to be a percent per annum as in its judgment will represent the maximum rate that can be paid by the district and still permit an orderly and certain retirement of the refunding bonds within 40 years from their date;

(B) the interest rate of refunding bonds to be received in exchange for bonds owned by the permanent school fund may not be less than the minimum rate at which bonds may then be purchased as investments for the permanent school fund; and

(C) the rate of interest of refunding bonds to be received in exchange for bonds owned by the available school fund may be set by the council or board [State Board of Education] at any rate the council or board considers feasible, and the refunding bonds may, at the discretion of the council or board [State Board of Education], be made non-interest bearing to a date fixed by the council or board.

(e) The council or State Board of Education may not make a revision, readjustment, modification, refinancing, or refunding that will release or extinguish any debt or obligation then due and payable to the permanent school fund or to the available school fund.

SECTION 9. Sections 43.012(e) and (f), Education Code, are amended to read as follows:

(e) The council [State Board of Education] may accept refunding bonds in lieu of either matured or unmatured bonds held for the benefit of the permanent school fund if the rate of interest on the new refunding bonds is at least the same rate as that of the bonds being refunded.

(f) Refunding bonds issued with the approval or pursuant to a refunding agreement with the council or the State Board of Education in compliance with either this section or Section 43.011 shall, on the order of the council or board [State Board of Education], be exchanged by the comptroller for the defaulted obligations they have been issued to refund.

SECTION 10. Section 43.014(a), Education Code, is amended to read as follows:

(a) On or before July 1 of each year, the comptroller shall estimate the amount of the available school fund receivable from every source during the following school year and report the estimate to the council and the State Board of Education.

SECTION 11. Sections 43.015(b), (e), and (f), Education Code, are amended to read as follows:

(b) The comptroller shall provide the council and the State Board of Education with the reports specified by Subsection (a) and with additional reports concerning those funds requested by the council or the State Board of Education.

(e) On order of the council or the State Board of Education, as applicable, the comptroller shall exchange or accept refunding bonds in lieu of:

(1) either matured or unmatured bonds held for the benefit of the permanent school fund, which are being refunded under this chapter;

(2) defaulted obligations held for the benefit of the available school fund if the refunding bonds are issued in compliance with Section 43.012;

(3) defaulted obligations of any school district of this state held for the benefit of the permanent school fund or the available school fund if the refunding bonds are issued in compliance with Section 43.011; or

(4) refunding bonds of any school district of this state for school bonds not matured held by the comptroller for the permanent school fund if the new refunding bonds are issued by the school district in compliance with this code.

(f) The comptroller shall be the custodian of all [securities enumerated in Section 43.003(6) and of other] securities as designated by the council or the State Board of Education in which the school funds of the state are invested. The comptroller shall keep those securities in the comptroller's custody until paid off, discharged, delivered as required by the council or the board, as applicable [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 12. 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 council [State Board of Education] may contract with one or more commercial banks to receive payments of dividends and interest on 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 council [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 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 13. Sections 43.018 and 43.019, Education Code, are amended to read as follows:

Sec. 43.018. PARTICIPATION IN FULLY SECURED SECURITIES LOAN PROGRAMS. (a) The council [State Board of Education] may contract with a commercial bank to serve both as a custodian of securities in which the state permanent school funds are invested and to lend those securities, under the conditions prescribed by Subsection (b), to securities brokers and dealers on short-term loan.

(b) The council [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 council [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 council [State Board of Education], fully indemnifying the permanent and available school funds against loss resulting from 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.

Sec. 43.019. ACCOUNTING TREATMENT OF CERTAIN EXCHANGES. The council [State Board of Education] may account for the exchange of permanent school fund securities in a closely related sale and purchase transaction in a manner in which the gain or loss on the sale is deferred as an adjustment to the book value of the security purchased, if:

(1) the security sold and the security purchased have a fixed maturity value;

(2) the council [board] is authorized by law to invest the permanent school fund in the security purchased;

(3) the sale is made in clear contemplation of reinvesting substantially all of the proceeds;

(4) substantially all of the proceeds are reinvested;

(5) the transaction is completed within a reasonable time after the sale, not to exceed 30 business days; and

(6) the transaction results in an improvement in effective income yield, taking into consideration the deferral of any gain or loss on the sale.

SECTION 14. Sections 45.053(a), (c), and (d), Education Code, are amended to read as follows:

(a) Except as provided by Subsection (d), 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 of the permanent school fund, as estimated by the Permanent School Fund Management Council [board] and certified by the state auditor.

(c) The commissioner shall prepare and the Permanent School Fund Management Council [board] shall adopt an annual report on the status of the guaranteed bond program.

(d) The Permanent School Fund Management Council [board] by rule may increase the limit prescribed by Subsection (a) to an amount not to exceed five times the cost value of the permanent school fund, provided that the increased limit is consistent with federal law and regulations and does not prevent the bonds to be guaranteed from receiving the highest available credit rating, as determined by the council [board]. The council [board] shall at least annually consider whether to change any limit in accordance with this subsection. This subsection may not be construed in a manner that impairs, limits, or removes the guarantee of bonds that have been approved by the commissioner.

SECTION 15. Section 45.055(c), Education Code, is amended to read as follows:

(c) The application must be accompanied by a fee set by rule of the Permanent School Fund Management Council [board] in an amount designed to cover the costs of administering the guarantee program.

SECTION 16. Section 45.061(b), Education Code, is amended to read as follows:

(b) In accordance with the rules of the Permanent School Fund Management Council [board], the commissioner may authorize reimbursement to the permanent school fund with interest in a manner other than that provided by this section.

SECTION 17. Section 45.063, Education Code, is amended to read as follows:

Sec. 45.063. RULES. The Permanent School Fund Management Council [board] may adopt rules necessary for the administration of the bond guarantee program.

SECTION 18. 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 Permanent School Fund Management Council [State Board of Education] for investment in 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 19. Section 51.413, Natural Resources Code, is amended to read as follows:

Sec. 51.413. TRANSFERS FROM THE REAL ESTATE SPECIAL FUND ACCOUNT TO THE AVAILABLE SCHOOL FUND AND THE PERMANENT SCHOOL FUND. The board may, by a resolution adopted at a regular meeting, release from the real estate special fund account funds previously designated under Section 51.401 of this chapter or managed, used, or encumbered under Section 51.402 or Section 51.4021 of this chapter to be deposited in the State Treasury to the credit of:

(1) the available school fund; or

(2) the Permanent School Fund Management Council [State Board of Education] for investment in the permanent school fund.

SECTION 20. Sections 7.102(c)(31), 43.006(e), and 45.051(1), Education Code, are repealed.

SECTION 21. (a) Not later than February 1, 2010, the appropriate appointing authorities specified in Section 43.0012, Education Code, as added by this Act, shall appoint the initial members of the Permanent School Fund Management Council as required by that section.

(b) In appointing the initial members of the Permanent School Fund Management Council:

(1) the governor shall appoint four persons as follows:

(A) two persons for a term expiring February 1, 2011; and

(B) two persons for a term expiring February 1, 2013;

(2) the lieutenant governor shall appoint one person for a term expiring February 1, 2013;

(3) the commissioner of the General Land Office shall appoint one person for a term expiring February 1, 2011; and

(4) the comptroller shall appoint one person for a term expiring February 1, 2013.

(c) The Permanent School Fund Management Council may not take any action until all of the appointed members have taken office.

SECTION 22. As soon as practicable after the date on which all of the members of the Permanent School Fund Management Council have taken office, but not later than May 1, 2010, the Permanent School Fund Management Council, the State Board of Education, the Texas Education Agency, and the comptroller shall develop and adopt a memorandum of understanding that:

(1) identifies in detail the applicable powers and duties of the State Board of Education that are being transferred to the Permanent School Fund Management Council as a result of this Act; and

(2) establishes a plan for the identification and transfer of records, property, and unspent appropriations of the State Board of Education that are used for purposes of managing the permanent school fund to the Permanent School Fund Management Council.

SECTION 23. (a) Not later than September 1, 2010:

(1) all full-time employees of the Texas Education Agency who provide support to the State Board of Education relating to the investment of the permanent school fund become employees of the comptroller;

(2) all functions and activities performed by the State Board of Education with respect to the management of the permanent school fund that, as a result of this Act, are subject to management by the Permanent School Fund Management Council are transferred to the Permanent School Fund Management Council;

(3) a rule, form, policy, procedure, or decision adopted by the State Board of Education relating to the management of the permanent school fund that, as a result of this Act, is subject to management by the Permanent School Fund Management Council continues in effect as a rule, form, policy, procedure, or decision of the Permanent School Fund Management Council until amended or replaced by the Permanent School Fund Management Council;

(4) a reference in law or an administrative rule to the State Board of Education relating to the permanent school fund that, as a result of this Act, is subject to management by the Permanent School Fund Management Council is a reference to the Permanent School Fund Management Council; and

(5) a complaint, investigation, or other proceeding before the State Board of Education relating to the permanent school fund that, as a result of this Act, is subject to management by the Permanent School Fund Management Council is transferred without change in status to the Permanent School Fund Management Council.

(b) The Permanent School Fund Management Council assumes, as appropriate and without a change in status, the position of the State Board of Education under a contract or in an action or proceeding to which the State Board of Education is a party and that:

(1) relates to the permanent school fund; and

(2) as a result of this Act, is subject to management by the Permanent School Fund Management Council.

SECTION 24. This Act takes effect December 1, 2009, but only if the constitutional amendment proposed by the 81st Legislature, Regular Session, 2009, creating the Permanent School Fund Management Council is approved by the voters. If that amendment is not approved by the voters, this Act has no effect.