Can the Texas State Board of Education lend out permanent school fund securities to earn a return?

Plain-English summary

The permanent school fund is a large state endowment that helps pay for Texas public schools. How its money may be invested is set by the Texas Constitution. Back in 1982, the Attorney General had concluded that a statute letting the State Board of Education run a securities-lending program for the fund, Education Code section 15.14, was unconstitutional, because the constitution at the time put the investing power elsewhere and required the State itself to be responsible for all investments. The Commissioner of Education asked whether a 1987 constitutional amendment, which added section 5(d) to article VII, fixed the problem.

The Attorney General gave a layered answer. First, the new section 5(d) does supersede the 1982 opinion. Section 5(d) says that, notwithstanding any other provision of the constitution, the State Board of Education may acquire, manage, or retain any kind of investment for the permanent school fund under a prudent-person standard. That language puts the investing power with the Board, even though another part of article VII (section 4) appears to give it to the treasurer, and it overrides the old "the State shall be responsible for all investments" language. So the constitutional objection from 1982 is gone.

Second, though, the specific statute, section 15.14, is still void. The legislature passed it in 1979, when it did not have the authority to do so, and a constitutional amendment does not bring a void statute back to life unless the amendment expressly adopts or ratifies that statute. Section 5(d) did not mention section 15.14, so it did not revive it. Third, and importantly, that does not stop the Board from running a securities-loan program. Section 5(d) by itself gives the Board authority to make any prudent investment in managing the fund, and a securities-loan program is such an investment. So the Board could run the program directly under the constitution, without waiting for new enabling legislation, as long as the program met the constitution's prudent-person standard.

Currency note

This opinion was issued in 1992. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. Article VII of the Texas Constitution and chapter 15 of the Education Code have been amended and recodified since 1992 (the permanent school fund investment provisions and the Education Code's school fund chapter have both changed), so confirm the current constitutional and statutory provisions before relying on anything described here.

Background and statutory framework

Chapter 15 of the Education Code governed the permanent school fund and the available school fund, both established by article VII, section 5 of the Texas Constitution. Section 15.14(a) authorized the State Board of Education to contract with a commercial bank to serve as custodian of the securities in which the permanent school funds are invested and to lend those securities, under conditions set out in subsection (b), to securities brokers and dealers on short-term loans. Subsection (b) set various requirements for the program, including protections against losses.

In Attorney General Opinion MW-429 (1982), the office had concluded that section 15.14 violated article VII, sections 4 and 5, in two ways: it let the Board of Education perform an investment function that could be performed only by the official designated in section 4, and it contravened the requirement that "the State shall be responsible for all investments" by delegating the investing function to a commercial bank.

In 1987, article VII, section 5 was amended to add subsection (d). Subsection (d) provides that, notwithstanding any other provision of the constitution, the State Board of Education, in managing the assets of the permanent school fund, may acquire, exchange, sell, supervise, manage, or retain any kind of investment (including investments in the Texas Growth Fund created by article XVI, section 70), through procedures and subject to restrictions it establishes and in amounts it considers appropriate, that persons of ordinary prudence, discretion, and intelligence would acquire or retain for their own account, considering probable income as well as probable safety of capital. The Attorney General concluded this subsection supplanted MW-429: its plain language gives the Board of Education the power to manage and invest the permanent school fund's assets, a securities-loan program is an investment of those assets, and the subsection expressly prevails over any contrary constitutional provision, including section 4's apparent grant of investing power to the treasurer and its "responsible for all investments" language.

The opinion then drew two further conclusions. Article VII, section 5(d) did not revive section 15.14. Constitutional provisions operate prospectively, and an amendment does not revive an unconstitutional statute unless it expressly adopts or ratifies it; neither section 5(d) nor the other amendments adopted at the same time contained any language ratifying section 15.14, so the statute (which the legislature had lacked authority to adopt in 1979) remained void. On the other hand, the opinion concluded that section 5(d), by itself, gives the Board the authority to make the type of investment the legislature tried to authorize in section 15.14. Because section 5(d) expressly lets the Board make any prudent investment in managing the fund, and a securities-loan program is such an investment, the Board could use the program without additional enabling legislation, provided it is a prudent investment as defined by article VII, section 5(d).

Common questions

Could the State Board of Education lend the permanent school fund's securities?
The opinion concluded yes, under article VII, section 5(d) of the Texas Constitution, as long as the program met the constitution's prudent-person standard. The Board did not need separate enabling legislation.

Did the 1987 amendment fix Education Code section 15.14?
No. The opinion concluded section 15.14 was void because the legislature lacked authority to adopt it in 1979, and the 1987 amendment did not revive it, because a constitutional amendment does not revive an unconstitutional statute unless it expressly ratifies that statute.

Then what gave the Board its authority?
The constitution itself. The opinion concluded that article VII, section 5(d) directly authorizes the Board to make any prudent investment in managing the permanent school fund, which includes a securities-loan program, so the Board's power came from section 5(d) rather than from section 15.14.

Did section 5(d) change who controls the fund's investments?
Yes. The opinion concluded that section 5(d) gave the Board of Education the investing authority and that it prevails over section 4, which had appeared to give the treasurer that power and to make the State responsible for all investments.

Citations

• Tex. Const. art. VII, §§ 4, 5, 5(d)
• Tex. Const. art. XVI, § 70 (Texas Growth Fund)
• Education Code § 15.14(a), (b)
• Attorney General Opinion MW-429 (1982)
• Ex parte Sheppard, 548 S.W.2d 414 (Tex. Crim. App. 1977)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0175
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1992/dm0175.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain. The linked PDF is authoritative.

Office of the Attorney General
State of Texas

DAN MORALES
ATTORNEY GENERAL

October 21, 1992

Mr. Lionel R. Meno
Commissioner of Education
Texas Education Agency
1701 North Congress Avenue
Austin, Texas 78701-1494

Opinion No. DM-175

Re: Whether article VII, section 5(d) of the Texas Constitution permits the State Board of Education to lend securities owned by the permanent school fund in the manner and for the purpose set forth in section 15.14 of the Education Code (RQ-425)

Dear Commissioner Meno:

You have requested an opinion regarding the constitutionality of section 15.14 of the Education Code. In 1982, this office concluded that this section violated article VII, sections 4 and 5 of the Texas Constitution. See Attorney General Opinion MW-429 (1982). Since that time, however, both sections 4 and 5 have been amended. You ask whether the amendment that added section 5(d) to article VII now makes section 15.14 of the Education Code constitutional. We conclude that article VII, section 5(d) supersedes Attorney General Opinion MW-429. However, because the legislature did not have the authority to adopt section 15.14 in 1979, it is void and is not revived by the adoption of the constitutional amendment in 1987. On the other hand, article VII, section 5(d), by itself, gives the Board of Education the authority to make the type of investment the legislature tried to authorize in section 15.14, if the investment meets the prudent-person standard.

Chapter 15 of the Education Code governs the permanent school fund and the available school fund, both established by article VII, section 5 of the Texas Constitution. Section 15.14(a) provides:

The State Board of Education is authorized and empowered to contract with a commercial bank or banks to serve both as a custodian of securities in which the state permanent school funds are invested and to lend these securities, under the conditions set out in Subsection (b) of this section, to securities brokers and dealers on short-term loan.

Educ. Code § 15.14(a). Subsection (b) establishes various requirements for the securities-loan program, including requirements designed to protect against losses.

In Attorney General Opinion MW-429, this office concluded that section 15.14 violated article VII, sections 4 and 5 of the Texas Constitution in two ways. First, section 15.14 unconstitutionally permitted the Board of Education to perform an investment function that could be performed only by the official designated in section 4. Second, section 15.14 contravened the phrase "the State shall be responsible for all investments" by delegating the investment function to a commercial bank.

In 1987, however, article VII, section 5 was amended to include subsection (d). Subsection (d) states:

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.

This subsection effectively supplants the decision in Attorney General Opinion MW-429. Although the legislative history of the amendments does not clearly indicate the intent to make the Board of Education, as opposed to the treasurer, responsible for investing the assets of the permanent school fund, the plain language of the subsection clearly leads to this result: the subsection states that the Board of Education has the power to manage and invest the assets of the permanent school fund. The securities-loan program under section 15.14 constitutes an investment of these assets. Attorney General Opinion MW-429 at 3. The subsection also specifically states that it prevails over any contrary constitutional provisions. Therefore, the Board of Education has the authority to make investments under article VII, section 5(d) even though article VII, section 4 appears to give the treasurer the power to invest the assets of the permanent school fund. In addition, the Board of Education's investment authority prevails over the language in article VII, section 4 that purports to make the state responsible for all investments.

Article VII, section 5(d) does not, however, revive section 15.14 of the Education Code. Constitutional provisions operate prospectively. Ex parte Sheppard, 548 S.W.2d 414, 415 (Tex. Crim. App. 1977). An amendment to the constitution does not revive an unconstitutional statute unless that amendment expressly adopts or ratifies the statute. Attorney General Opinion MW-40 (1979) at 2; see also Hutchinson v. Pershing, 126 S.W. 1107, 1108 (Tex. 1910) (holding a statute constitutional when it was expressly ratified by a constitutional amendment). Neither article VII, section 5(d) nor any of the other constitutional amendments adopted at the same time contain any language that could be interpreted as expressly adopting or ratifying section 15.14 of the Education Code.

On the other hand, we conclude that article VII, section 5(d), by itself, gives the Board of Education the authority to make the type of investment the legislature tried to authorize in section 15.14, assuming that the investment meets the prudent-person standard. Article VII, section 5(d) expressly gives the Board of Education the authority to make any kind of prudent investment in managing the assets of the permanent school fund. Because the securities-loan program constitutes an investment of these assets, article VII, section 5(d) permits the Board of Education to use it even without additional enabling legislation, provided that the program is a prudent investment as defined by article VII, section 5(d).

SUMMARY

Article VII, section 5(d) of the Texas Constitution supersedes Attorney General Opinion MW-429 (1982). However, because the legislature did not have the authority to adopt section 15.14 in 1979, it is void and is not revived by the adoption of the constitutional amendment in 1987. On the other hand, article VII, section 5(d) gives the Board of Education the authority to make any kind of prudent investment in managing the assets of the permanent school fund. This authority includes the authority to make an investment like the securities-loan program that the legislature attempted to authorize in section 15.14, provided that this program meets the prudent-person standard set out in article VII, section 5(d).

Very truly yours,

DAN MORALES
Attorney General of Texas

WILL PRYOR
First Assistant Attorney General

MARY KELLER
Deputy Assistant Attorney General

RENEA HICKS
Special Assistant Attorney General

MADELEINE B. JOHNSON
Chair, Opinion Committee

Prepared by Margaret A. Roll
Assistant Attorney General