BILL ANALYSIS

C.S.H.B. 104

By: Bonnen

Appropriations

Committee Report (Substituted)

BACKGROUND AND PURPOSE

The bill author has informed the committee that the state's conservative policies and strong economy have resulted in a strong fiscal outlook for the state budget, including a projected Economic Stabilization Fund (ESF) balance of $28.5 billion in state fiscal year 2027. The bill author has also informed the committee that the ESF remains the state’s primary reserve emergency fund, a role that requires high liquidity and results in relatively moderate investment returns. Furthermore, the bill author has further informed the committee that Texas continues to lead the nation in the development and commercialization of frontier technologies such as advanced nuclear technology, semiconductors, artificial intelligence, space exploration, and aerospace technology and that an elevated ESF balance presents an opportunity to develop investment policies for long-term growth and high returns in a manner that reinforces the state's leadership in these frontier technologies. C.S.H.B. 104 seeks to achieve these goals by establishing the Texas Future Fund as a separately managed account in the ESF.

CRIMINAL JUSTICE IMPACT

It is the committee's opinion that this bill does not expressly create a criminal offense, increase the punishment for an existing criminal offense or category of offenses, or change the eligibility of a person for community supervision, parole, or mandatory supervision.

RULEMAKING AUTHORITY

It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency, or institution.

ANALYSIS

C.S.H.B. 104 amends the Government Code to establish the Texas Future Fund. The purposes of the bill's provisions are to strengthen the state's proven leadership in supporting the advancement of innovative technologies and to develop and diversify the state's economy by authorizing investments in frontier technology infrastructure, industry sectors critical to national defense, and other innovative technologies.

Creation and Operation of Fund

Creation

C.S.H.B. 104 creates the Texas Future Fund as a separately managed account in the Economic Stabilization Fund (ESF), otherwise known as the Rainy Day Fund. The bill requires the comptroller of public accounts to administer the fund.

Investment of Money in Fund and Accounting

C.S.H.B. 104 requires the Texas Treasury Safekeeping Trust Company, or the trust company's designated investment manager, in consultation with the Texas Future Fund Investment Review Board established by the bill, to invest money in the fund in the manner authorized by the bill's provisions. The bill authorizes the trust company or its investment manager, as provided by the investment policy adopted by the board under the bill's provisions, to invest the proceeds and other earnings received from the sale of stock or other investments made using money in the fund and any interest earned on amounts in the fund. The bill requires the trust company to do the following:

· credit to the fund all payments, distributions, interest, and other earnings on the investments in the fund attributable to the investment of money in the fund; and

· provide separate accounting for, and reporting on, the investments made using money in the fund.

Investment Standard

C.S.H.B. 104 authorizes the trust company, in managing the investments made using money in the fund and in the manner authorized by the board, to acquire, exchange, sell, supervise, manage, or retain any kind of investment that a prudent investor, exercising reasonable care, skill, and caution, would acquire or retain in light of the purposes, terms, distribution requirements, and other circumstances then prevailing for the fund, taking into consideration the investment of all the fund's assets rather than a single investment.

Payment of Fund Expenses

C.S.H.B. 104 requires the reasonable expenses of administering and managing the fund and its assets to be paid from the fund.

Exclusion of Invested Amounts From Calculation of Certain Other Fund Balances

C.S.H.B. 104 establishes that the amount of money invested under the bill's provisions is not included in the balance of the ESF for purposes of the required investment of at least 10 percent of the ESF balance in a manner that ensures the liquidity of that amount.

Third-Party Contracts

C.S.H.B. 104 authorizes the trust company to enter into a contract with one or more qualified third parties for the administration, management, and custody of the fund's assets and any other responsibilities authorized under the bill. A contract described by these provisions must require the third party to act in a fiduciary capacity with respect to the fund's assets. The bill also authorizes the trust company to do the following:

· contract with a certified public accountant to perform an independent audit of the fund; and

· contract with a licensed attorney to review contracts and other legal documents.

Texas Future Fund Investment Review Board

Creation and Comptroller Support

C.S.H.B. 104 establishes the Texas Future Fund Investment Review Board to serve as the governing body of the fund. The bill requires the comptroller to provide administrative support and resources to the board as necessary for the board to perform its duties under the bill's provisions.

Composition

C.S.H.B. 104 establishes that board is composed of the following nine members:

· three members appointed by the comptroller;

· two members appointed by the governor;

· two members appointed by the lieutenant governor; and

· two members appointed by the governor from a list of candidates for appointment provided by the speaker of the house of representatives.

The bill requires the comptroller and the lieutenant governor to do the following in making appointments to the board:

· appoint one member each with experience in private equity, venture capital, or a similar field; and

· appoint one member each with experience in frontier technology infrastructure, an industry sector that is critical to national defense, or another innovative technology.

The bill requires the governor to do the following in making appointments to the board:

· appoint one member, and one candidate for appointment from a list of candidates provided by the speaker of the house, with experience in private equity, venture capital, or a similar field; and

· appoint one member, and one candidate for appointment from a list of candidates provided by the speaker of the house, with experience in frontier technology infrastructure, an industry sector that is critical to national defense, or another innovative technology.

The bill also requires the comptroller to appoint at least one member with experience managing, directing, overseeing, or investing public funds or public pension assets. The bill authorizes the governor to reject one or more of the candidates on a list submitted by the speaker of the house and request a list of additional candidates for appointment. The bill requires the comptroller to designate one member appointed by the comptroller as the presiding officer of the board.

C.S.H.B. 104 requires the comptroller, governor, and lieutenant governor, as soon as practicable after the bill's effective date but not later than October 1, 2025, to appoint the initial members of the board as required by the bill's provisions. The bill requires the initial members appointed to the board, other than the member designated as the presiding officer of the board, to draw lots to determine which three members serve a two-year term, which three members serve a
four-year term, and which two members serve a six-year term. The member designated as the presiding officer of the board serves a six-year term.

Board Member Terms and Vacancy

C.S.H.B. 104 establishes that board members serve for staggered six-year terms, with the terms of three members expiring on January 31 of each odd-numbered year, and requires the appropriate appointing authority to appoint a replacement as provided by the bill's provisions not later than the 30th day after the date a member's term expires. A vacancy on the board must be filled in the same manner and is subject to the same qualifications as the original appointment. The bill requires a board member appointed to fill a vacancy to serve the remainder of the unexpired term.

Eligibility for Appointment

C.S.H.B. 104 establishes that a person is not eligible for appointment to the board if the person or their spouse is employed by, or participates in, the management of a business entity or other organization receiving an investment from the fund or owns or controls, directly or indirectly, an interest in such a business entity or organization.

Conflicts of Interest

C.S.H.B. 104 requires the board, subject to the comptroller's approval, to adopt a code of ethics, including conflict of interest standards, based on standards of professional conduct and ethics common in the financial industry for conduct governing members of the board and the investment decision-making process. The bill requires each board member to affirm in writing the member's compliance with the code of ethics and the corresponding conflict of interest standards. Those standards must, at a minimum, define conflicts of interest and address appropriate standards for recusal, required disclosure of conflicts, waivers of conflicts, and actions required to address undisclosed conflicts.

Board Member Training

C.S.H.B. 104 requires a board member, before the member may assume their duties, to complete a training course provided by the comptroller. Such a training course must provide information to the member regarding the role and functions of the board and the requirements of state open meetings law and state public information law.

Compensation and Expenses of Appointed Board Members

C.S.H.B. 104 requires board members to serve without compensation. However, the bill requires  board members to be reimbursed for their actual expenses incurred in attending board meetings or in performing other work of the board when that work is approved by the presiding officer of the board.

Board Meetings

C.S.H.B. 104 requires the board to meet at least twice each year to review the fund's investments and authorizes the board to conduct a closed meeting in accordance with state open meetings law to discuss issues related to managing, acquiring, or selling securities.

Board Powers and Duties

C.S.H.B. 104 requires the board to do the following:

· oversee the investment of the fund's assets;

· provide guidance on the investment strategy to be used to manage the fund's assets;

· develop and require adherence to procedures for operational and investment due diligence on investment opportunities that meet the requirements of the bill's provisions, which must be based upon financial industry best practices;

· develop and maintain a list of target industries and investment opportunities that represent sectors critical to national defense, frontier technologies with the greatest potential to drive innovation, and the diversification of the state's economy;

· establish an investment policy for the fund, which, at a minimum, must do the following, subject to the comptroller's approval:

o limit fund investment to no more than 20 percent of the estimated total value of any single project calculated at the time of investment;

o limit fund participation to no more than 30 percent of the total value of any single entity calculated at the time of the investment;

o prioritize investments in entities with a physical presence in Texas;

o prioritize investments in entities expanding employment opportunities in Texas;

o prohibit the use of race, color, ethnicity, sex, gender identity, or sexual orientation in investment decisions; and

o require compliance with statutory provisions that prohibit investment of public money in certain investments, prohibit contracts with certain companies, and prohibit certain transactions with abortion providers or their affiliates; and

· biennially establish priorities for the fund's investment program and consider the priorities when making investment decisions under the bill's provisions.

Investment Procedure

C.S.H.B. 104 requires the board, subject to the comptroller's approval, to develop procedures for making investments under the bill's provisions. The bill requires the trust company or the trust company's designated investment manager to do the following for each investment being considered:

· present its due diligence findings to the board;

· provide a written investment memorandum summarizing the investment opportunity, along with an assessment of the expected investment risk and rate of return, and estimated effect on the state's economy; and

· provide a summary of how each investment opportunity being recommended meets the overall objectives of the board's investment policy and related investment requirements.

Board Report

C.S.H.B. 104 requires the board to submit a report to the legislature, not later than December 31 of each even-numbered year, with the following information:

· a summary of the investments made using money in the fund during the preceding state fiscal year, including, for each investment, the name of the entity receiving the investment, the amount of the investment, and a brief description of the activities of the entity receiving the investment; and

· a summary of the estimated effect of the investments made using money in the fund on the state's economy.

Public Information

C.S.H.B. 104 establishes that the following information is public information and may be disclosed under state public information law:

· the name, address, and a summary description of an entity that has received an investment of money from the fund;

· the date on which the fund made an investment in an entity, if applicable, and the date of any additional investments in the entity;

· the dollar amount of capital committed or invested in an entity or project;

· the dollar amount of capital returned by an entity in connection with an investment from the fund;

· the internal rate of return or another investment performance metric used in connection with each investment of money from the fund and the date on which the rate of return or other investment performance metric was calculated;

· the names of the principals responsible for managing any entity in which money from the fund is or has invested;

· each recusal filed by a board member in connection with a deliberation or decision of the board relating to an investment of money from the fund;

· the minutes and audio or video recordings of each open portion of a board meeting at which an item described in this list of public information was discussed;

· the state's percentage ownership interest in an entity that received an investment of money from the fund;

· any annual ethics disclosure report submitted to the board or the trust company from an entity that has received an investment of money from the fund; and

· any other relevant information concerning a fund investment of money from the fund with the consent of the receiving entity.

All information received by the board, the comptroller, the trust company, or a contractor of the comptroller or the trust company from or about an entity that has received an investment from the fund or an entity that was considered for an investment of money from the fund that is not expressly listed as public information by the bill is confidential and excepted from the requirements of state public information law.

Designation of the Fund Within the ESF

C.S.H.B. 104 requires the comptroller to designate $5 billion of the ESF balance as the initial balance of a separately managed account in the ESF. The account must be known as the Texas Future Fund, administered by the comptroller, and managed in accordance with the bill's provisions.

EFFECTIVE DATE

On passage, or, if the bill does not receive the necessary vote, September 1, 2025.

COMPARISON OF INTRODUCED AND SUBSTITUTE

While C.S.H.B. 104 may differ from the introduced in minor or nonsubstantive ways, the following summarizes the substantial differences between the introduced and committee substitute versions of the bill.

Establishment and Purpose

Whereas the introduced provided that the Texas Future Fund is established to strengthen the state's proven leadership in supporting the advancement of innovative technologies, the substitute establishes that one of the purposes of the bill's provisions is to do so. Additionally, whereas the introduced established that the purpose of the fund is to develop and diversify the state's economy by making investments in frontier technology infrastructure, industry sectors critical to national defense, and other innovative technologies as recommended by the Texas Future Fund Investment Review Board established by the bill, the substitute establishes that one of the purposes of the bill's provisions is to develop and diversify the state's economy by authorizing investments in such infrastructure, sectors, and technologies, without the introduced version's specification that the investments are recommended by the board.

Creation and Operation of Fund

Creation

Whereas the introduced established that the fund is a separately managed account within the ESF to be administered by the comptroller, the substitute establishes that the fund is created as a separately managed account in the ESF and requires the comptroller to administer the fund.

Investment of Money in Fund and Accounting

Whereas the introduced required the trust company or the trust company's designated investment manager to make investments with money from the fund under guidance of the board, the substitute requires that company or manager to invest money in the fund in consultation with the board. Additionally, whereas the introduced authorizes the trust company or its investment manager, pursuant to the board policy adopted under the bill's provisions, to invest proceeds, interest earned, or other earnings received from the sale of stock or other investments in the fund, the substitute authorizes that company or manager, as provided by the investment policy adopted by the board under the bill's provisions, to invest the proceeds and other earnings received from the sale of stock or other investments made using money in the fund and any interest earned on amounts in the fund.

Whereas the introduced required the trust company to provide separate accounting and reporting for the investments in the fund, the substitute requires the trust company to provide separate accounting for, and reporting on, the investments made using money in the fund. Additionally, whereas the introduced required the trust company to credit to the fund all payments, distributions, interest, and other earnings on the investments in the fund, the substitute requires the trust company to do so with respect to all payments, distributions, interest, and other earnings attributable to the investment of money in the fund.

Investment Standard

Both the introduced and the substitute authorize the trust company, in managing the investments made using money in the fund, to acquire, exchange, sell, supervise, manage, or retain any kind of applicable investment. However, whereas the substitute required the trust company to do so under guidance of the board, the substitute authorizes the trust company to do so in the manner authorized by the board.

Exclusion of Invested Amounts From Calculation of Certain Other Fund Balances

Whereas the introduced established that amounts invested pursuant to the bill's provisions are not included in the balance of the ESF for purposes of the required investment of at least 10 percent of the ESF balance in a manner that ensures the liquidity of that amount, the substitute establishes that the amount of money invested under the bill's provisions is not included in the balance of the ESF for those purposes. 

Third-Party Contracts

Whereas the introduced required an entity that is contracted to administer, manage, or custody assets of the fund to be contractually required to act in a fiduciary capacity with respect to the assets of the fund, the substitute requires a contract described by the bill's provisions relating to third-party contracts to require the third party to act in such a capacity.

Texas Future Fund Investment Review Board

Creation

Whereas the introduced established the Texas Future Fund Investment Review Board as the governing body of the fund, the substitute establishes that the board is established to serve as the governing body of the fund. Both the introduced and the substitute establish that the board is composed of nine members and set out the composition of the board, but the versions differ in the following ways:

· while both the introduced and the substitute establish that three members are appointed by the comptroller, the introduced required one of those members to be designated the chair of the board, whereas the substitute does not but instead requires the comptroller to designate one of those members as the presiding officer of the board;

· the substitute omits the provision from the introduced establishing that two board members are appointed by the speaker of the house of representatives;

· the substitute includes a provision from the introduced establishing that two board members are appointed by the governor from a list of candidates for appointment provided by the speaker of the house of representatives;

· the substitute includes a requirement absent from the introduced for the governor, with respect to the members appointed by the governor from the list of candidates provided by the speaker of the house, to appoint one candidate for appointment with experience in private equity, venture capital, or a similar field and one candidate for appointment with experience in frontier technology infrastructure, an industry sector that is critical to national defense, or another innovative technology;

· the substitute includes an authorization absent from the introduced for the governor to reject one or more of the candidates on a list submitted by the speaker of the house of representatives and request a list of additional candidates for appointment; and

· whereas the introduced required the comptroller to appoint one member with experience managing, directing, overseeing, or investing public funds or public pension assets, the substitute requires the comptroller to appoint at least one such member.

The substitute includes the following procedural provisions absent from the introduced:

· a requirement for the comptroller, governor, and lieutenant governor, as soon as practicable after the bill's effective date but not later than October 1, 2025, to appoint the initial members of the board;

· a requirement for the initial members appointed to the board, other than the member designated as the presiding officer of the board, to draw lots to determine which three members serve a two-year term, which three members serve a four-year term, and which two members serve a six-year term; and

· a provision establishing that the member designated as the presiding officer of the board serves a six-year term.

Board Member Terms and Vacancy

The introduced specified that the board members serve at the pleasure of the appropriate appointing authority, whereas the substitute does not. While both the introduced and substitute require the appropriate appointing authority to appoint a replacement not later than the 30th day after the date a board member's term expires, the substitute specifies that the authority do so is provided by the bill's provisions, whereas the introduced did not. The substitute omits the requirement from the introduced for the appropriate appointing authority, if a vacancy occurs on the board, to appoint a successor, in the same manner as the original appointment, to serve for the remainder of the unexpired term not later than the 30th day after the date the vacancy occurs. Instead, the substitute includes the following provisions absent from the introduced:

· a provision establishing that a vacancy on the board must be filled in the same manner and is subject to the same qualifications as the original appointment; and

· a requirement for a board member appointed to fill a vacancy on the board to serve the remainder of the unexpired term.

Eligibility

The substitute replaces the introduced version's prohibition against a person being a member of the board if the person or their spouse is employed by, or participates in, the management of a business entity or other organization receiving an investment from the fund, or owns or controls, directly or indirectly, an interest in such an entity or organization with a provision establishing that such a person is not eligible for appointment to the board.

Compensation and Expenses of Board Members

The substitute replaces the introduced version's requirement for appointed board members to serve without pay with a requirement for board members to serve without compensation.

General Powers and Duties of Board

Whereas the introduced required the board to oversee the investment of the fund, including providing guidance on the investment philosophy that should be pursued in managing the fund's assets, the substitute requires the board to oversee the investment of the fund's assets and to provide guidance on the investment strategy to be used to manage the fund's assets.

While both the introduced and the substitute require the board to take certain actions with respect to the board's powers and duties, the versions differ in the following ways:

· the substitute replaces the introduced version's references to "opportunities" with references to "investment opportunities" throughout the bill's provisions relating to the board's powers and duties; and

· the substitute replaces the introduced version's references to a "company" and "companies" with references to an "entity" and "entities," as applicable, throughout those provisions.

Whereas the introduced required the board to biennially set priorities for the fund's investment program, the substitute requires the board to biennially establish those priorities.

Investment Procedures

While both the introduced and the substitute require the trust company or the trust company's designated investment manager to take certain actions for each investment being considered, the versions differ in the following ways:  

· while both the introduced and the substitute require the trust company or the trust company's designated investment manager to provide a written investment memorandum summarizing the investment opportunity, along with an assessment of certain information, the introduced required that assessment to include information on the estimated impact on the state's economy, whereas the introduced requires that assessment to include information on the estimated effect on the state's economy;  and

· while both the introduced and the substitute require the trust company or the trust company's designated investment manager to provide a summary of how each opportunity being recommended meets the overall objectives of the board's investment policy and related investment requirements, the substitute specifies that the opportunity is an investment opportunity, whereas the introduced did not.

Board Report

While both the introduced and the substitute require the board to submit a report to the legislature not later than December 31 of each even-numbered year containing certain information, the versions differ in the following ways:

· whereas the introduced required the report to include a summary of the investments made as of the most recent fiscal-year end, including the name of the companies, the amount of the investments, and brief description of the companies activities, the substitute requires the report to include a summary of the investments made using money in the fund during the preceding state fiscal year, including, for each investment, the name of the entity receiving the investment, the amount of the investment, and a brief description of the activities of the entity receiving the investment; and

· whereas the introduced required the report to include a summary of the estimated impact the investments have had on the state's economy, the introduced requires the report to include a summary of the estimated effect of the investments made using money in the fund on the state's economy.

Public Information

While both the introduced and the substitute set out a list of information that is public information and may be disclosed under state public information law, the versions differ in the following ways:

· whereas the introduced established that the date on which the fund made an investment in a company and the date of any follow-on investments, if applicable, is public information, the substitute establishes that the date on which the fund made an investment in an entity and, if applicable, any additional investments in the entity is public information.

· the substitute replaces the introduced version's references to an "investment" with references to an "investment of money" throughout the bill's provisions relating to public information; and

· the substitute replaces the introduced version's references to a "company" with references to an "entity" throughout those provisions.

Designation of the Fund Within the ESF

Whereas the introduced required the comptroller to designate $5 billion of the ESF to comprise a separately managed account within the ESF called the "Texas Future Fund," the substitute requires the comptroller to designate $5 billion of the ESF balance as the initial balance of a separately managed account in the ESF and requires that account to be known as the Texas Future Fund.