Bills aim to fix management, payouts of public school fund
Lawmakers are proposing a wide range of fixes for the state’s public school endowment, which has lost out on billions in growth during the past decade while paying out less to schoolchildren.
One bipartisan bill backed by high-powered legislators would restore the State Board of Education’s control over nearly all of the investments for the $44 billion Texas Permanent School Fund, reverting to the way it was before a 2001 law change.
Another would allow the School Land Board, which now controls about $10 billion of the endowment, to double the amount it can send annually directly to schools — up to $600 million. Yet another would take most of the money away from the feuding boards and create a new
nine-member governing body appointed by the governor to decide how the endowment invests and distributes its dollars.
In a yearlong investigation, “Broken Trust,” the Houston Chronicle found that, while endowment is far larger than it was 20 years ago, it has grown more slowly than many comparable funds. And it has been paying out less to schools than it did in the previous 20 years in inflation-adjusted dollars.
Last year, the fund distributed only 2.8 percent of its value — roughly half the share paid out by many endowments. If it had paid out 5 percent of a four-year average market value, as many endowments try to, Texas schools would have received $720 million more in 2018.
Despite the filing of several bills , discussion about the 165-yearold endowment has been overshadowed so far this legislative session by fights around school finance and property tax reform. Gov. Greg Abbott has declared both of those issues emergency items. Many Texans have seen rising tax bills, while the state’s contribution to schools remains flat. Enrollment growth and shrinking budgets have forced many school districts to cut again and again.
“There is only so much oxygen in the room,” said Rep. Mary González, D-Clint, who sits on the House Public Education Committee.
New laws led to problems
The Chronicle’s investigation — based on more than 100 public records requests, thousands of pages of records and interviews with current and former endowment employees — found a series of law changes since 2001 have radically reshaped the structure of the fund, impacting its performance and the amount of money it sends to schools.
The fund is now under the control of two separate governing bodies — the State Board of Education and the School Land Board — that manage chunks of the portfolio but don’t coordinate investments and never meet together.
The two boards have publicly sparred in recent months about how best to invest and distribute money, each claiming to have a superior strategy or higher returns. Together, they have been charged more than $1 billion in investment fees during the last decade, the investigation showed.
A key point in the debate is which governing body should have the authority to retain and invest the state’s oil and gas royalty revenue from leases on state land. Until 2001, the land board collected the money and sent it passively along to the education board to invest. But a law passed that year allowed the land board to retain the money and invest it.
A series of law changes and constitutional amendments since has changed the way money is sent to schools. The education board was tasked with setting a distribution rate based on a complex formula that, in part, depends on how much money it receives from the land board. Lawmakers also authorized the land board to send up to $300 million per year directly to schools, instead of to the education board, but it has no requirement to do so.
The changes created a serious governance issue, said Sen. Kirk Watson, an Austin Democrat who has introduced a bill that would return the royalty revenue to the education board to invest. That bill has the backing of five Republican Senate committee chairs. Republican Rep. Ken King has filed identical legislation in the House.
It also is supported by the education board’s chairwoman, Donna Bahorich, who said it aims to “permanently and efficiently fix the decision-making structure that affects the performance, distributions and expenses. Consolidation of the two pieces of the Permanent School Fund into one decision-making structure would be for the benefit of putting more money to work for the school children.”
‘Power grab’?
But George P. Bush, who chairs the School Land Board, has called the bill a “power grab.”
He instead called for the Legislature to raise the $300 million annual cap on how much his board can send directly to schools.
Rep. Dan Huberty, R-Houston, who heads the Public Education Committee, filed legislation earlier this month that would increase the cap to $600 million per year. That bill would require a constitutional amendment and voter approval.
Bush has publicly stated that the land board’s returns on investments were at the top of all state funds, citing double-digit annual returns. Internal reports obtained by the Chronicle, however, show that the land board — after factoring in fees and cash tied up in the state treasury — actually earned only about 3.8 percent annually since 2006.
Bush’s office said much of the cash, about $3 billion, is already committed to external fund managers.
A bill authored by Rep. Jim Murphy, chairman of the House Committee on Pensions, Investments, and Financial Services, would aim to free that money and send it to the education board to invest if it is not needed in the short term by the land board. Under the bill, cash could be returned to the land board as needed.
A proposal by Sen. Larry Taylor, R-Friendswood and chairman of the Senate Committee on Education, would perhaps most fundamentally change the fund’s structure.
It would create an entirely new investment body made up of nine gubernatorial appointees, most of whom would have to have a “substantial background and expertise in investments.” One member of each the State Board of Education and the School Land Board would be among the nine.
The new board would be responsible for investing the school fund’s revenue and setting the amount the endowment sends to schools, though the Land Board would still be allowed to buy and sell “real property,” including mineral interests.
The bill also would create a Bicentennial Education Fund, which would provide money from the Permanent School Fund to school districts for merit-based teacher pay and for “incentivizing scholastic achievement among historically underperforming student groups.”
Taylor could not be reached for comment.
Critical of investigation
Bush did not respond to an interview request. His spokeswoman issued a statement last week criticizing the Chronicle’s investigation.
The newspaper reported that since the land board started investing with outside fund managers in 2006, it has committed or invested nearly $3.7 billion with companies run by friends, business associates or campaign donors. Those donors together have given more than $1.4 million since 2006 to board members or elected officials with the power to appoint them during that time.
In the statement, Bush did not address those conflicts, saying only that the Chronicle’s findings were made “without proper knowledge or understanding of the issue.”
Last year, the land board generated $1.6 billion in revenue, the statement noted. It reiterated that the board can only send $300 million per year directly to schools because of the constitutional restriction. (It can, however, pass additional revenue on to the education board to invest and distribute.) The board plans to send $300 million annually directly to schools in fiscal years 2019 through 2021.
“Our students deserve better than to be thrown into the middle of an ill-informed finance expose,” Bush said through the spokeswoman.
Bahorich, the chairwoman of the education board, which also faced scrutiny for its investment returns and fees, acknowledged that structural problems impacted the fund’s overall performance, though she said the education board’s portion has performed well. She also said she plans to increase the fund’s transparency and accountability.
“Anything that highlights what we can improve on is a benefit at the end of the day,” she said.
Dominic Giarratani, assistant director of government relations at the Texas Association of School Boards, said his group agrees with calls made to strengthen and increase the boards’ financial reporting, and to move more of the investment management in house.
But he has not seen legislation that would radically boost overall profitability. “We don’t see most of these things increasing the size of the fund,” Giarratani said.
González, from the House Public Education Committee, said it’s too early to know what will happen to the bills addressing the fund. She predicted that even if they fail, lawmakers will continue working after they return home in May to learn about the issues raised and how best to boost returns and transparency.
“There are questions the Legislature needs to ask,” she said.