By: Taylor S.B. No. 2440

A BILL TO BE ENTITLED

AN ACT

relating to the Texas school finance system, including the creation of the bicentennial education fund, the establishment of the Texas Education Investment Management Organization, and the management and investment of the permanent school fund.

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

SECTION 1. Section 31.021(a), Education Code, as amended by Acts 2017, 85th Leg., R.S., Ch. 705 (H.B. 3526), is amended to read as follows:

(a) The state technology and instructional materials fund consists of:

(1) an amount set aside by the Texas Education Investment Management Organization State Board of Education from the available school fund, in accordance with Section 43.001(d); and

(2) all amounts lawfully paid into the fund from any other source.

SECTION 2. Section 31.021(a), Education Code, as amended by Acts 2017, 85th Leg., R.S., Ch. 581 (S.B. 810), is amended to read as follows:

(a) The state instructional materials and technology fund consists of:

(1) an amount set aside by the Texas Education Investment Management Organization State Board of Education from the available school fund, in accordance with Section 43.001(d); and

(2) all amounts lawfully paid into the fund from any other source.

SECTION 3. The heading to Section 43.001, Education Code, is amended to read as follows:

Sec. 43.001. COMPOSITION OF PERMANENT SCHOOL FUND, AND AVAILABLE SCHOOL FUND, AND BICENTENNIAL EDUCATION FUND.

SECTION 4. Section 43.001, Education Code, is amended by adding Subsection (b-1) and amending Subsection (d) to read as follows:

(b-1) The bicentennial education fund, which shall be dedicated to providing funding for merit-based teacher pay and incentivizing academic improvement among historically underperforming student groups, consists of:

(1) the distributions to the fund from the permanent school fund as provided by Section 5(a-2), Article VII, Texas Constitution; and

(2) all other appropriations to the bicentennial education fund made by the legislature for public school purposes.

(d) Each biennium the Texas Education Investment Management Organization State Board of Education shall allocate a portion set aside an amount equal to 50 percent of the distribution for that biennium from the permanent school fund to the available school fund as provided by Section 5(a), Article VII, Texas Constitution, to be placed, subject to the General Appropriations Act, in the state instructional materials and technology fund established under Section 31.021.

SECTION 5. Chapter 43, Education Code, is amended by adding Section 43.0011 to read as follows:

Sec. 43.0011. PURPOSE OF PERMANENT SCHOOL FUND. The purpose of the permanent school fund is to maximize available revenue distributions for the education of students enrolled in the public education system.

SECTION 6. Chapter 43, Education Code, is amended by adding Section 43.0021 to read as follows:

Sec. 43.0021. TEXAS EDUCATION INVESTMENT MANAGEMENT ORGANIZATION. (a) The Texas Education Investment Management Organization is composed of nine members appointed by the governor, five of whom must have a substantial background and expertise in investments. The Governor shall appoint one member State Board of Education as one of the members of the organization. The Governor shall appoint one member of the School Land Board as one of the members of the organization.

(b) Appointments to the board shall be made without regard to race, color, disability, sex, religion, age, or national origin.

(c) Members of the board serve staggered six-year terms, with the terms of as near to one-third of the members as possible expiring on January 31 of each odd-numbered year.

(d) The governor shall designate a member of the board as presiding officer to serve in that capacity at the pleasure of the governor.

SECTION 7. Sections 43.003 through 43.0051, Education Code, are amended to read as follows:

Sec. 43.003. INVESTMENT OF PERMANENT SCHOOL FUND. In compliance with this section, the Texas Education Investment Management Organization State Board of Education may invest the permanent school fund in the types of securities, which must be carefully examined by the organization 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 organization 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 organization 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.

Sec. 43.0031. PERMANENT SCHOOL FUND ETHICS POLICY. (a) In addition to any other requirements provided by law, the Texas Education Investment Management Organization State Board of Education shall adopt and enforce an ethics policy 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 Texas Education Investment Management Organization State Board of Education;

(2) the commissioner;

(3) employees of the agency; and

(4) any person who provides services to the organization 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 organization board intends to adopt a proposed ethics policy or an amendment to or revision of an adopted ethics policy, the organization 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 organization 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 organization 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 organization board shall ensure that applicable provisions of the ethics policy are included in any contract under which a person provides services to the organization board relating to the management and investment of the permanent school fund.

Sec. 43.0032. CONFLICTS OF INTEREST. (a) A member of the Texas Education Investment Management Organization State Board of Education, the commissioner, an employee of the agency, or a person who provides services to the organization 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 organization board.

(b) The organization board or the organization's 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 organization board, after consultation with the general counsel of the agency, expressly waives this prohibition. The organization 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 Texas Education Investment Management Organization State Board of Education relating to the management and investment of the permanent school fund shall file with the organization board regularly, as determined by the organization 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 organization board; or

(2) the commissioner; or

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

Sec. 43.0034. FORMS; PUBLIC INFORMATION. (a) The organization 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.

(b) A statement, waiver, or report described by Subsection (a) is public information.

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

Sec. 43.004. WRITTEN INVESTMENT OBJECTIVES; PERFORMANCE EVALUATION. (a) The Texas Education Investment Management Organization 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 organization 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 organization 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 Texas Education Investment Management Organization State Board of Education may contract with private professional investment managers to assist the board in making investments of the permanent school fund. A contract under this subsection must be approved by the organization board or otherwise entered into in accordance with board rules relating to contracting authority.

(b) The Texas Education Investment Management Organization 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 organization board.

Sec. 43.0051. TRANSFERS TO REAL ESTATE SPECIAL FUND ACCOUNT OF THE PERMANENT SCHOOL FUND. The Texas Education Investment Management Organization State Board of Education may transfer funds from the portion of the permanent school fund managed by the organization State Board of Education to the real estate special fund account of the permanent school fund if the organization 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 8. Sections 43.007 through 43.012, Education Code, are amended to read as follows:

Sec. 43.007. PURCHASE AND SALE OR EXCHANGE OF SECURITIES. (a) The Texas Education Investment Management Organization 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 organization 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 organization 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 organization 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.

(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 organization State Board of Education.

Sec. 43.009. PREPAYMENT OF CERTAIN BONDS HELD BY THE PERMANENT SCHOOL FUND. (a) The Texas Education Investment Management Organization 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 organization 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 organization 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.

(d) A person who has a duty under this section may not give or receive any commission, premium, or compensation for the performance of that duty.

(e) Only tax money collected from tax levies made for the specific purpose of providing a sinking fund and paying interest on the particular bonds to be redeemed may be spent in redeeming, taking up, or paying off of bonds as provided by this section, unless the bonds are being redeemed for the purpose of being refunded.

Sec. 43.010. DEFAULT OF SCHOOL DISTRICT SECURITIES HELD BY THE PERMANENT SCHOOL FUND. (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 Texas Education Investment Management Organization State Board of Education may:

(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 organization State Board of Education

satisfactory proof that the district's taxing ability is insufficient, 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.

(b) Revenue collected by either method specified by Subsection (a) shall be distributed proportionately to all owners of the defaulted securities in compliance with the following:

(1) the proportionate share for each owner is based on the interest and principal requirements of the original security before authorized refunding; and

(2) prior acceptance of refunding securities does not reduce an owner's proportionate share.

(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 organization 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 organization 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.

Sec. 43.011. AUTHORIZED REFUNDING OF DEFAULTED SCHOOL BONDS. (a) In compliance with this section, the Texas Education Investment Management Organization State Board of Education 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 organization 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 organization State Board of Education may effect a refunding of the debt due and to become due only if the organization board 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 organization 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 organization 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 organization 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 organization 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 organization State Board of Education shall be governed by the following:

(A) the organization 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 organization State Board of Education at any rate the organization board considers feasible, and the refunding bonds may, at the discretion of the organization State Board of Education, be made non-interest bearing to a date fixed by the board.

(e) The organization 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.

(f) Except as otherwise provided or permitted by this section, the refunding of the bonds of school districts authorized by this section must be in compliance with the general provisions with regard to the refunding of school district bonds.

Sec. 43.012. REFUNDING OTHER DEFAULTED OBLIGATIONS. (a) Defaulted obligations, other than bonds of school districts as provided by Section 43.011, due the available school fund may be refinanced or refunded with the approval of the Texas Education Investment Management Organization State Board of Education in compliance with this section.

(b) In this section, "defaulted obligations" includes delinquent interest whether represented by coupons or not, interest on delinquent interest, and any other form of obligation due the available school fund.

(c) The obligor must apply to the organization State Board of Education and show:

(1) that the obligations due the available school fund have been in default in whole or in part for a continuous period of at least 15 years; and

(2) that the obligor is not in default in the payment of the principal of any bonds owned by the permanent school fund.

(d) If the organization State Board of Education finds that the requirements provided by Subsection (c) have been met, it may approve a refinancing or the issuance of refunding bonds on the conditions:

(1) that the refunding bonds must mature serially in not exceeding 40 years from the date of issuance;

(2) that the principal amount of the refunding bonds may be not less than the total amount of the obligations then in default and due the available school fund; and

(3) that the refunding bonds must bear interest at a rate or rates determined by the organization State Board of Education to be for the best interest of the available school fund.

(e) The organization 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 organization State Board of Education in compliance with either this section or Section 43.011 shall, on the order of the organization State Board of Education, be exchanged by the comptroller for the defaulted obligations they have been issued to refund.

SECTION 9. Sections 43.014 and 43.015, Education Code, are amended to read as follows:

Sec. 43.014. DUTIES OF COMPTROLLER. (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 Texas Education Investment Management Organization State Board of Education.

(b) On or before the meeting of each regular session of the legislature, the comptroller shall report to the legislature an estimate of the amount of the available school fund that is to be received for the following two years, and the sources from which that amount accrues, and that is subject to appropriation for the establishment and support of public schools.

(c) On or before the first working day of each month, the comptroller shall certify to the commissioner the total amount of money collected from every source during the preceding month and on hand to the credit of the available school fund.

(d) On receipt of certificates issued to the comptroller by the commissioner, the comptroller shall draw warrants in favor of the treasurer of the available school fund of each school district for the amounts stated in the certificates. All such warrants shall be registered.

Sec. 43.015. DUTIES OF COMPTROLLER. (a) Not later than the 30th day before the first day of each regular session of the legislature and not later than the 10th day before the first day of any special session at which there can be legislation respecting the public schools, the comptroller shall report to the governor the condition of the permanent school fund and the available school fund, the amount of each fund, and the manner of its disbursement.

(b) The comptroller shall provide the Texas Education Investment Management Organization State Board of Education with the reports specified by Subsection (a) and with additional reports concerning those funds requested by the organization State Board of Education.

(c) The comptroller shall ensure that no portion of either the permanent school fund or the available school fund is used to pay any warrant drawn against any other fund.

(d) The comptroller shall receive and hold in a special deposit and account for all properties belonging to the available school fund. All warrants drawn on that fund by the comptroller pursuant to a certificate of the commissioner must be registered by the comptroller and then transmitted to the commissioner, and when properly endorsed shall be paid by the comptroller in the order of their presentation.

(e) On order of the organization State Board of Education, 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 organization 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 organization 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 10. Sections 43.017 through 43.019, Education Code, are 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 Texas Education Investment Management Organization 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 organization 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.

Sec. 43.018. PARTICIPATION IN FULLY SECURED SECURITIES LOAN PROGRAMS. (a) The Texas Education Investment Management Organization 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 organization 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 organization 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 organization 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 Texas Education Investment Management Organization 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 organization 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 11. Section 51.011, Natural Resources Code, is amended by amending Subsection (a) and adding Subsections (a-3) and (a-4) to read as follows:

(a) Any land or[,] 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 controlled, sold, and leased by [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-3) All revenue received from mineral or royalty interests described by Subsection (a), including bonus payments, surface lease revenues, royalties, and any other type of revenue received from those interests, shall be transferred each month to the Texas Education Investment Management Organization for investment in the permanent school fund.

SECTION 12. Section 32.012, Natural Resources Code, is amended to read as follows:

Sec. 32.012. MEMBERS OF THE BOARD. (a) The board is composed of:

(1) the commissioner;

(2) two citizens [a citizen] of the state appointed by the governor with the advice and consent of the senate; and

(3) two citizens [a citizen] of the state appointed by the attorney general with the advice and consent of the senate.

(a-1) One citizen appointed by the governor and one citizen appointed by the attorney general must be selected from lists of nominees submitted by the State Board of Education. The State Board of Education shall submit to the governor or the attorney general, as applicable, a list of six nominees for a vacant position described by this subsection. The governor or attorney general, as applicable, may request that the State Board of Education submit a second list of six nominees if the governor or attorney general does not choose to appoint a nominee from the first list.

(b) The authority of the attorney general to appoint [one of the] members of the board, including the authority to make appointments during the recess of the senate, is the same as the authority of the governor to fill vacancies in state offices under the Texas Constitution.

(c) Each appointment made by the governor and the attorney general shall be made in accordance with and subject to the provisions of the Texas Constitution authorizing the filling of vacancies in state offices by appointment of the governor.

SECTION 13. Subchapter B, Chapter 32, Natural Resources Code, is amended by adding Section 32.0161 to read as follows:

Sec. 32.0161. ANNUAL JOINT MEETING. The board and the Texas Education Investment Management Organization shall hold an annual joint public meeting to discuss the allocation of the assets of the permanent school fund and the investment of the money in the fund.

SECTION 14. Subchapter B, Chapter 32, Natural Resources Code, is amended by adding Section 32.0191 to read as follows:

Sec. 32.0191. SEPARATION OF RESPONSIBILITIES. The board shall develop and implement policies that clearly separate the policymaking responsibilities of the board and the management responsibilities of the commissioner and the staff of the land office.

SECTION 15. Subchapter B, Chapter 32, Natural Resources Code, is amended by adding Section 32.027 to read as follows:

Sec. 32.027. MEMBER TRAINING. (a) A person who is appointed to and qualifies for office as a member of the board may not vote, deliberate, or be counted as a member in attendance at a meeting of the board until the person completes a training program that complies with this section.

(b) The training program must provide the person with information regarding:

(1) the law governing board operations;

(2) the programs, functions, rules, and budget of the board;

(3) the board's investment programs and strategies;

(4) the permanent school fund, including a comprehensive overview of the law governing the fund;

(5) the scope of and limitations on the rulemaking authority of the board;

(6) the results of the most recent formal audit of the board;

(7) the requirements of:

(A) laws relating to open meetings, public information, administrative procedure, and disclosure of conflicts of interest; and

(B) other laws applicable to members of a state policymaking body in performing their duties; and

(8) any applicable ethics policies adopted by the board or the Texas Ethics Commission.

(c) A person appointed to the board is entitled to reimbursement, as provided by the General Appropriations Act, for the travel expenses incurred in attending the training program regardless of whether the attendance at the program occurs before or after the person qualifies for office.

(d) The commissioner shall create a training manual that includes the information required by Subsection (b).

(e) The commissioner shall distribute a copy of the training manual annually to each appointed member of the board. On receipt of the training manual, each appointed member of the board shall sign and submit to the commissioner a statement acknowledging receipt of the training manual.

SECTION 16. Subchapter B, Chapter 32, Natural Resources Code, is amended by adding Section 32.028 to read as follows:

Sec. 32.028. COMPLAINTS. (a) The board shall maintain a system to promptly and efficiently act on complaints filed with the board. The board shall maintain information about parties to the complaint, the subject matter of the complaint, a summary of the results of the review or investigation of the complaint, and its disposition.

(b) The board shall make information available describing its procedures for complaint investigation and resolution.

(c) The board shall periodically notify the complaint parties of the status of the complaint until final disposition.

SECTION 17. Section 51.017, Natural Resources Code, is amended to read as follows:

On request, the commissioner shall furnish to the Texas Education Investment Management Organization or the Commissioner of Education State Board of Education all available data.

SECTION 18. Section 51.401, Natural Resources Code, is amended by amending Subsection (a) and adding Subsections (c), (d), and (d-1) to read as follows:

(a) The board may designate money [funds] received from the sale of real property or [any land,] mineral or royalty interests [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, for deposit in the real estate special fund account of the permanent school fund in the State Treasury to be used by the board to acquire fee or lesser interests in real property, including mineral or royalty interests, for the use and benefit of the permanent school fund, as provided by Section 51.402 [this subchapter].

(c) Money received from the sale of real property, including mineral or royalty interests, and designated under this subchapter for the acquisition of real property, including mineral or royalty interests, must be used by the board not later than one year after the date of the sale from which the money is derived.

(d) Any money from a specific sale that remains in the real estate special fund account for longer than one year shall be immediately deposited in the State Treasury to the credit of the Texas Education Investment Management Organization for investment in the permanent school fund.

(d-1) Each quarter, the board shall provide a cashflow report to the Texas Education Investment Management Organization that specifies the use of all funds designated under Subsection (a) and the amount of time that money from each specific sale has remained in the real estate special fund account.

SECTION 19. Section 51.402, Natural Resources Code, is amended by amending Subsections (b) and (c) to read as follows:

(b) Before acquiring real property, including mineral or royalty interests, [using funds] under Subsection (a), the board must determine, using the prudent investor standard, that the acquisition is [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.]

(c) Notwithstanding Subsection (a) of this section, on January 1 of each even-numbered year, the sum of any funds designated under Section 51.401 not being used for a purpose listed in Subsection (a) of this section and the market value of the investments in real estate made under this section [on January 1 of each even-numbered year] may not exceed an amount that is equal to 15 percent of the sum of:

(1) the funds held by the board and the State Board of Education as part of the permanent school fund; and

(2) the market value of the assets held by the board and the State Board of Education as part of the permanent school fund [on that date].

SECTION 20. Sections 51.4021(a) and (b), Natural Resources Code, are amended to read as follows:

(a) In consultation with the Texas Education Investment Management Organization the The board may appoint investment managers, consultants, or advisors to invest or assist the board in investing the money designated under Section 51.401, to the extent the investment of the money is authorized under this chapter, 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 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 only be invested to the extent the board has the authority under this chapter to make the investment, and may not be invested in a real estate investment trust, as defined by Section 200.001, Business Organizations Code, or otherwise invested in a manner not authorized under this chapter.

SECTION 21. Sections 51.408(a), (b), (d), and (e), Natural Resources Code, are amended to read as follows:

(a) In addition to any other requirements provided by law, the board shall adopt and enforce an ethics policy that provides standards of conduct relating to the management and investment of the funds designated for that purpose under Section 51.401. The ethics policy must include provisions that address the following issues as they apply to the management and investment of the funds and to persons responsible for acquiring or managing real property or mineral or royalty interests of the permanent school fund or [and] investing the funds to the extent authorized by this chapter:

(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 board;

(2) the commissioner;

(3) employees of the board; and

(4) any person who provides services to the board relating to the management [or investment] of the funds designated under Section 51.401 or the investment of funds to the extent authorized by this chapter.

(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 funds designated under Section 51.401 or the investment of those funds to the extent authorized by this chapter 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 funds designated under Section 51.401 or the investment of those funds to the extent authorized by this chapter.

SECTION 22. Section 51.409(a), Natural Resources Code, is amended to read as follows:

(a) A member of the board, the commissioner, an employee of the board, or a person who provides services to the board that relate to the management [or investment] of the funds designated under Section 51.401 or the investment of those funds to the extent authorized under this chapter 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 of public school lands or investment of the funds shall disclose the relationship in writing to the board.

SECTION 23. Section 51.410, Natural Resources Code, is amended to read as follows:

Sec. 51.410. REPORTS OF EXPENDITURES. A consultant, advisor, broker, or other person providing services to the board relating to the management [and investment] of the funds designated under Section 51.401 or the investment of those funds to the extent authorized by this chapter 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 board.

SECTION 24. Section 51.412, Natural Resources Code, is amended to read as follows:

Sec. 51.412. REPORTS TO LEGISLATURE. [(a)] Not later than September 1 of each [even-numbered] year, the board shall submit to the legislature a report that includes [, 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 received under this chapter and designated under [by] Section 51.401 for deposit in the real estate special fund account of the permanent school fund that the board intends to use for a purpose authorized under that section [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 State Board of Education for investment in the permanent school fund under Section 51.413 [after making the investments];

(3) [(4)] the distribution [of the board's investments] by county of real property interests, including mineral or royalty interests, and including the actual or expected revenues from the interests, that were acquired by the board for the use and benefit of the permanent school fund since the most recently submitted report under this section;

(4) the market value of all investments and assets managed by the board and the total market value of the permanent school fund;

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

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

[(b) Not later than January 1 of each odd-numbered year, the board shall submit to the legislature a report that assesses the return and economic impact of the investments reported to the legislature before the preceding regular legislative session.]

SECTION 25. Section 51.413(a), Natural Resources Code, is amended to read as follows:

(a) 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 or used under Section 51.402 to acquire real property, including mineral or royalty interests, [managed, used, or encumbered under Section 51.402 or Section 51.4021] to be deposited in the State Treasury to the credit of:

(1) the available school fund; or

(2) the State Board of Education for investment in the permanent school fund.

SECTION 26. The following provisions are repealed:

(1) Section 43.006, Education Code; and

(2) Section 51.011 (a-2), Natural Resources Code.

SECTION 27. As soon as practicable after the appointment of the members of the Texas Education Investment Management Organization, the School Board of Education and the School Land Board shall provide for the transfer of powers, duties, functions, programs, and activities under this Act. The transfer must be completed by August 1, 2020.

SECTION 28. Not later than September 1, 2020, the governor and the attorney general shall appoint members to the School Land Board in accordance with Section 32.012(a-1), Natural Resources Code, as added by this Act.

SECTION 29. Section 32.027, Natural Resources Code, as added by this Act, applies to a member of the School Land Board appointed before, on, or after the effective date of this Act. A member of the School Land Board may not vote, deliberate, or be counted as a member in attendance at a meeting of the board held on or after December 1, 2019, until the member completes the training.

SECTION 30. This Act takes effect on the date the constitutional amendment proposed by the 86th Legislature, Regular Session, 2019, relating to the creation of the bicentennial education fund, the dedication of funds for teacher pay and historically underperforming student groups, and the transfer of the management and investment of the permanent school fund to an entity designated by the legislature.