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TEXAS STATE BOARD OF EDUCATION

TEXAS PERMANENT SCHOOL FUND

CHARTER FACILITIES PROGRAM

DEVELOPMENT PLAN

Presented by

David Bradley, Chairman

Committee on Finance and Permanent School Fund

TABLE OF CONTENTS

History of the Permanent School Fund

Development of mission statement

Summary of Action Steps

Action Steps-Discussion

EXHIBITS to PROPOSAL

1. Letter from Fiduciary Counsel

2. UTIMCO Articles of Incorporation

3. Proposed Certificate of Formation

4. UTIMCO Bylaws

5. Proposed Bylaws

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History of the PERMANENT SCHOOL FUND

The PSF was created with a $2,000,000 appropriation by the Texas Legislature (the "Legislature") in 1854 expressly for the benefit of the public schools of Texas. The Constitution of 1876 stipulated that certain lands and all proceeds from the sale of these lands should also constitute the PSF. Additional acts later gave more public domain land and rights to the PSF. In 1953, the U.S. Congress passed the Submerged Lands Act that relinquished to coastal states all rights of the U.S. navigable waters within state boundaries. If the state, by law, had set a larger boundary prior to or at the time of admission to the Union, or if the boundary had been approved by Congress, then the larger boundary applied. After three years of litigation (1957 – 1960), the U. S. Supreme Court, on May 31, 1960, affirmed Texas' historic three marine leagues (10.35 miles) seaward boundary. Texas proved its submerged lands property rights to three leagues into the Gulf of Mexico by citing historic laws and treaties dating back to 1836. All lands lying within that limit belong to the PSF. The proceeds from the sale and the mineral-related rental of all dedicated Permanent School Fund lands, including, bonuses, delay rentals and royalty payments, became the corpus of the Fund.

The land grant is set forth in Article VII § 2 of the Texas Constitution which provides as follows:

PERPETUAL SCHOOL FUND.

All funds, lands and other property heretofore set apart and appropriated for the support of public schools; all the alternate sections of land reserved by the State out of grants heretofore made or that may hereafter be made to railroads or other corporations of any nature whatsoever; one half of the public domain of the State; and all sums of money that may come to the State from the sale of any portion of the same, shall constitute a perpetual public school fund.

Management of the Texas Permanent School Fund is vested in the State Board of Education under the provisions of Article VII § 5 of the Texas Constitution which provides as follows:

PERMANENT SCHOOL FUND; AVAILABLE SCHOOL FUND; USE OF FUNDS; DISTRIBUTION OF AVAILABLE SCHOOL FUND.

(a) The permanent school fund consists of all land appropriated for public schools by this constitution or the other laws of this state, other properties belonging to the permanent school fund, and all revenue derived from the land or other properties. The available school fund consists of the distributions made to it from the total return on all investment assets of the permanent school fund, the taxes authorized by this constitution or general law to be part of the available school fund, and appropriations made to the available school fund by the legislature. The total amount distributed from the permanent school fund to the available school fund:

(1)in each year of a state fiscal biennium must be an amount that is not more than six percent of the average of the market value of the permanent school fund, excluding real property belonging to the fund that is managed, sold, or acquired under Section 4 of this article, on the last day of each of the 16 state fiscal quarters preceding the regular session of the legislature that begins before that state fiscal biennium, in accordance with the rate adopted by:

(A)a vote of two-thirds of the total membership of the State Board of Education, taken before the regular session of the legislature convenes; or

(B)the legislature by general law or appropriation, if the State Board of Education does not adopt a rate as provided by Paragraph (A) of this subdivision; and

(2)over the 10-year period consisting of the current state fiscal year and the nine preceding state fiscal years may not exceed the total return on all investment assets of the permanent school fund over the same 10-year period.

(b) The expenses of managing permanent school fund land and investments shall be paid by appropriation from the permanent school fund.

(c) The available school fund shall be applied annually to the support of the public free schools. Except as provided by this section, the legislature may not enact a law appropriating any part of the permanent school fund or available school fund to any other purpose. The permanent school fund and the available school fund may not be appropriated to or used for the support of any sectarian school. The available school fund shall be distributed to the several counties according to their scholastic population and applied in the manner provided by law.

(d) The legislature by law may provide for using the permanent school fund to guarantee bonds issued by school districts or by the state for the purpose of making loans to or purchasing the bonds of school districts for the purpose of acquisition, construction, or improvement of instructional facilities including all furnishings thereto. If any payment is required to be made by the permanent school fund as a result of its guarantee of bonds issued by the state, an amount equal to this payment shall be immediately paid by the state from the treasury to the permanent school fund. An amount owed by the state to the permanent school fund under this section shall be a general obligation of the state until paid. The amount of bonds authorized hereunder shall not exceed $750 million or a higher amount authorized by a two-thirds record vote of both houses of the legislature. If the proceeds of bonds issued by the state are used to provide a loan to a school district and the district becomes delinquent on the loan payments, the amount of the delinquent payments shall be offset against state aid to which the district is otherwise entitled.

(e) The legislature may appropriate part of the available school fund for administration of a bond guarantee program established under this section.

(f) Notwithstanding any other provision of this constitution, in managing the assets of the permanent school fund, the State Board of Education may acquire, exchange, sell, supervise, manage, or retain, through procedures and subject to restrictions it establishes and in amounts it considers appropriate, any kind of investment, including investments in the Texas growth fund created by Article XVI, Section 70, of this constitution, that persons of ordinary prudence, discretion, and intelligence, exercising the judgment and care under the circumstances then prevailing, acquire or retain for their own account in the management of their 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.

The major constitutional obligations in the above quoted provisions can be summarized as follows:

Subsection (a) establishes the Permanent School Fund and defines the Available School Fund as including the total return on all investment assets of the Permanent School Fund. The definition of the Available School Fund as including the total return on PSF investments is a relatively new concept. It was changed as of September 13, 2003. Previous to this amendment, the Available School Fund was defined as including income from investments of the Permanent School Fund.

Subsection (b) provides that PSF expenses and expenses of managing permanent school fund land shall be paid by appropriation from the permanent school fund.

Subsection (c) provides for the allocation of the Available School Fund to support public education in the State.

Subsections (d) and (e) provide authorization and necessary funding for the Guarantee Program for School District Bonds administered under State Board of Education Rules set forth at 19 Texas Administrative Code § 33.65.

Subsection (f) authorizes investment in the Texas Growth Fund and establishes the so-called prudent person rule as the fiduciary standard for the State Board of Education’s management of the Permanent School Fund. Issues relating to the implications of this fiduciary duty to the proposed program will be discussed below in greater detail.

The Role of the Texas General Land Office

From the earliest days of the Republic, the Texas General Land Office (GLO) has been involved with the management of public lands belonging to the State of Texas. The Republic of Texas Congress established the General Land Office in 1836 shortly after Texas won its independence from Mexico. The General Land Office was originally responsible for managing the public domain by collecting and keeping records, providing maps and surveys and issuing land titles. Since then the GLO's duties have evolved, but its core mission is still the management of state lands and mineral-right properties totaling 20.3 million acres. Included in that portfolio are the beaches, bays, estuaries and other "submerged" lands out to 10.3 miles in the Gulf of Mexico, institutional acreage, grazing lands in West Texas, timberlands in East Texas, and commercial sites in urban areas throughout the state.

In managing that property, the land office now leases drilling rights for oil and gas production on state lands, producing revenue and royalties that are funneled into the state's Permanent School Fund. Since the Permanent School Fund was established in 1854, the Texas General Land Office has deposited into it more than $6.8 billion, mostly from oil and gas leases and real estate trades and sales. Since this proposal concerns the potential acquisition of real estate using assets of the Permanent School Fund, implications of the GLO’s management responsibilities will be discussed below in detail.

DEVELOPMENT OF A Mission Statement

Charter schools have become a stable component of the educational landscape in Texas. Since 1999., under the provisions of Chapter 12 of the Texas Education Code, the State Board has approved ___ charters throughout the state of Texas. To be sure, some of the charter operations have not been successful and have closed, either voluntarily or through intervention by the Texas Education Agency. Notwithstanding those closures, most charter schools have become a vibrant and viable component of the educational delivery system in the State of Texas. Currently, the system of charter school serves approximately ___ Texas schoolchildren throughout the State of Texas.

Notwithstanding their successes, charter schools suffer from a lack of investment capital, and as a result, they are often operated in less than optimal facilities. The Texas Foundation School Program defined in Chapter 42 of the Texas Education Code provides the financial means for charter schools to compete with traditional school districts in the area of maintenance and operations funding. However, the State’s educational funding formulas do not provide a way for charter schools to access capital funding such as is available to Texas school districts under the provisions of Chapter 46 of the Texas Education Code.

In each of the last two legislative sessions, there have been efforts made by Senator Florence Shapiro, Chair of the Senate Education Committee, to even the playing field. Senator Shapiro’s efforts underscored the need for a long-term solution to the issue of charter facilities funding. However, Legislative attempts to resolve the problem proved difficult because, while there was an apparent interest in considering formula funding, the legislative appropriations process was not the proper source of long term investment capital..

The Texas State Board of Education has previously discussed, and determined that it would explore the utilization of the Texas Permanent School Fund which, at a market value of in excess of $22 Billion is an ample source of investment capital. The concept is not a new one. Under Texas constitution Article XVI, § 70, the Texas Legislature created the authority for the creation of the Texas Growth Fund whose stated objective was to leverage the investment capital of the four large Texas investment funds to promote economic growth within the State of Texas, while simultaneously earning a substantial return on investment. The current proposal to support an effort to develop a capital funding model for the development of charter school facilities is similar in concept to the Texas Growth Fund. However, the purpose of this new enterprise would be support of a charter facilities program to enhance public education in Texas, instead of an effort to nurture developing commercial start-up companies.

It will be argued by some that the State of Texas, under the auspices of the State Board of Education, should not be involved in the provision of facilities because they are, in essence, private entities. This argument is misplaced because it is the policy of the State of Texas that charter school properties are indisputably in the public domain. Texas Education Code §12.128 expressly provides:

PROPERTY PURCHASED OR LEASED WITH STATE FUNDS.

(a)Property purchased or leased with funds received by a charter holder under Section 12.106 after September 1, 2001:

(1)is considered to be public property for all purposes under state law;