Can a Texas county hire a bank to manage its permanent school fund?

TX AG Opinion GA-0388: Can a county hire a bank to manage its permanent school fund?

Plain-English summary

This opinion answers a practical management question with a hard constitutional limit. Chambers County still holds the public school lands the Republic of Texas granted to it (most counties sold theirs long ago), and it leases that land for oil and gas, grazing, and hunting to generate revenue for its schools. By 2005 the county's permanent school fund was worth about $6 million, and the county was struggling to keep up with the leases, interest-rate swings, record keeping, and accounting. So the county attorney asked whether the county could contract with a bank to invest and manage the fund.

The Attorney General said it could not. Article VII, section 6 of the Texas Constitution vests title to county school lands in the county, makes the county hold the lands and their proceeds "as a trust for the benefit of public schools," and provides that "the counties shall be responsible for all investments." Texas courts and prior Attorney General opinions have long read that provision as creating an express trust with the county as trustee, and as a matter of settled law a commissioners court cannot delegate its discretionary authority over either the land or the non-land assets of the fund. The county pointed to the Public Funds Investment Act (Government Code chapter 2256), which lets a local government contract with an investment management firm to invest funds under its control. But the opinion held that neither that Act nor any other statute can override the constitutional requirement. Until the constitution is amended, the county itself is the only entity that may invest and manage its permanent school fund.

The opinion left one door open. Nothing stops a county from buying an investment expert's services, including a bank's, so long as two conditions hold: the expert's compensation does not come out of the permanent school fund or the available school fund, and the county keeps its own decision-making authority. In other words, the county can get advice, but it cannot hand off the trustee's judgment. Because two of the county's follow-up questions assumed the county could delegate its trustee duties, the opinion did not need to reach them.

Currency note

This opinion was issued in 2005. 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.

Who this opinion affected (as of 2005)

Counties that still hold school lands or a permanent school fund: The opinion told them the commissioners court, as constitutional trustee, had to make the fund's investment and land-management decisions itself and could not contract that discretion away to a bank or other firm.

Banks and investment firms: It told them they could be hired by a county for advisory or expert services, but only if their fees did not come from the permanent or available school fund and the county retained the decision-making authority. They could not be given control of the fund.

Chambers County specifically: Holding roughly $6 million in fund assets and active oil-and-gas, grazing, and hunting leases, the county learned it had to keep managing the fund in-house absent a constitutional amendment.

Common questions

Why can't a county just hire a bank to run the fund?
Because Article VII, section 6 of the Texas Constitution makes the county the trustee and says "the counties shall be responsible for all investments." Courts read that as barring the commissioners court from delegating its discretionary investment and land-management authority.

Doesn't the Public Funds Investment Act let local governments hire investment managers?
The Act does let a local government contract with an investment management firm for funds under its control. But the opinion held the Act cannot override the constitution's specific command that counties remain responsible for permanent school fund investments.

Can a county get any outside help at all?
Yes. The opinion said a county may employ an investment expert's services, including a bank's, as long as the expert is not paid out of the permanent or available school fund and the county keeps its own decision-making authority. Advice is allowed; delegation of the decision is not.

What is the county permanent school fund?
It is the fund made up of the public school lands granted to a county and the proceeds from selling those lands. Revenue from leasing or investing the fund goes into the county available school fund, which supports the county's public schools.

Could this change?
The opinion framed the bar as constitutional, so it said that until Texas amends the constitution to let counties delegate their trustee duties, the county is the only entity authorized to invest and manage its permanent school fund.

Background and statutory framework

The Republic of Texas began granting land to counties for school purposes in 1838 (Tex. Const. art. VII, § 6 interp. commentary (Vernon 1993)). Article VII, section 6 vests title to those lands in the counties, lets each county sell or dispose of its lands as its commissioners court provides, and directs that the lands and their proceeds "shall be held by said counties alone as a trust for the benefit of public schools therein," with proceeds invested in specified securities "under such restrictions as may be prescribed by law" and the counties "responsible for all investments." Counties may lease or sell their school lands (Falls County v. De Laney, 11 S.W. 492 (Tex. 1889)). The Education Code provisions tied to article VII, section 6 make the school lands and sale proceeds the county permanent school fund and limit its investments, while revenues go to the county available school fund (Tex. Educ. Code Ann. tit. 2, §§ 17.81-App., 17.82(b), 17.82-App. (Vernon 1996); Tex. Const. art. VII, § 6; Tex. Att'y Gen. Op. No. O-2111 (1940) at 3). Those provisions were repealed in 1995, but Education Code section 11.301 continues their application to county public school lands (Act of May 27, 1995, 74th Leg., R.S., ch. 260, § 58, 1995 Tex. Gen. Laws 2207, 2498; Tex. Educ. Code Ann. tit. 2, § 11.301-App. (Vernon 1996)). Commissioners courts may dispose of county school lands only as provided by law (Tex. Loc. Gov't Code Ann. § 263.003(b) (Vernon 1999); Act of June 2, 1969, 61st Leg., R.S., ch. 889, § 1, secs. 17.81-.83, 1969 Tex. Gen. Laws 2735, 2846-47).

Courts and this office have construed article VII, section 6 as creating an express trust with the county as trustee, and the county invests and manages the fund and lands as an exercise of its own judgment and discretion (Comanche County v. Burks, 166 S.W. 470 (Tex. Civ. App.-Fort Worth 1914, writ ref'd); Logan v. Stephens County, 83 S.W. 365 (Tex. 1904); Delta County v. Blackburn, 93 S.W. 419 (Tex. 1906); County Sch. Trs. v. Brazoria County, 240 S.W. 675 (Tex. Civ. App.-Galveston 1922, no writ); Tex. Att'y Gen. Op. Nos. JC-0004 (1999), H-506 (1975)). It is settled that the commissioners court has no power to delegate its discretionary authority over the land, and for the same reasons cannot delegate authority to invest and manage the fund's non-land assets (Williams v. Pure Oil Co., 78 S.W.2d 929 (Tex. 1935); Potter County v. C.C. Slaughter Cattle Co., 254 S.W. 775 (Tex. Comm'n App. 1923, judgm't adopted); Tex. Att'y Gen. Op. No. JC-0399 (2001) at 5). The Public Funds Investment Act permits a county, as a local government, to contract with an investment management firm to invest its public funds (Tex. Gov't Code Ann. §§ 2256.001-.055, 2256.001, 2256.002(7), 2256.003(b) (Vernon 2000)), but no statute overcomes article VII, section 6's constitutional requirement. A county may still employ an investment expert so long as the expert is not paid from the school funds and the county retains decision-making authority (Matagorda County v. Casey, 108 S.W. 476 (Tex. Civ. App.-Fort Worth 1908, writ ref'd)). Most counties long ago sold their school lands and invested the proceeds (36 David B. Brooks, Texas Practice: County and Special District Law § 30.2 (2002)).

Citations

Constitution and statutes:

• Tex. Const. art. VII, § 6
• Tex. Educ. Code Ann. tit. 2, § 17.81-App., 17.82(b), 17.82-App., 11.301-App. (Vernon 1996)
• Tex. Loc. Gov't Code Ann. § 263.003(b) (Vernon 1999)
• Tex. Gov't Code Ann. §§ 2256.001-.055, 2256.001, 2256.002(7), 2256.003(b) (Vernon 2000) (Public Funds Investment Act)
• Act of June 2, 1969, 61st Leg., R.S., ch. 889, § 1, secs. 17.81-.83, 1969 Tex. Gen. Laws 2735, 2846-47
• Act of May 27, 1995, 74th Leg., R.S., ch. 260, § 58, 1995 Tex. Gen. Laws 2207, 2498

Cases:

• Falls County v. De Laney, 11 S.W. 492 (Tex. 1889)
• Comanche County v. Burks, 166 S.W. 470 (Tex. Civ. App.-Fort Worth 1914, writ ref'd)
• Logan v. Stephens County, 83 S.W. 365 (Tex. 1904)
• Delta County v. Blackburn, 93 S.W. 419 (Tex. 1906)
• County Sch. Trs. v. Brazoria County, 240 S.W. 675 (Tex. Civ. App.-Galveston 1922, no writ)
• Williams v. Pure Oil Co., 78 S.W.2d 929 (Tex. 1935)
• Potter County v. C.C. Slaughter Cattle Co., 254 S.W. 775 (Tex. Comm'n App. 1923, judgm't adopted)
• Matagorda County v. Casey, 108 S.W. 476 (Tex. Civ. App.-Fort Worth 1908, writ ref'd)

Other authorities:

• Tex. Att'y Gen. Op. Nos. O-2111 (1940), JC-0004 (1999), H-506 (1975), JC-0399 (2001)
• 36 David B. Brooks, Texas Practice: County and Special District Law § 30.2 (2002)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/greg-abbott/ga-0388
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2005/ga0388.pdf

Original opinion text

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

ATTORNEY GENERAL OF TEXAS

GREG ABBOTT

December 28, 2005

The Honorable Cheryl Swope Lieck
Chambers County Attorney
Post Office Box 1200
Anahuac, Texas 77514

Opinion No. GA-0388

Re: Whether Chambers County has authority to contract with a bank to invest and manage its permanent school fund (RQ-0364-GA)

Dear Ms. Lieck:

You ask whether Chambers County has authority to contract with a bank to invest and manage its permanent school fund.[1]

Your questions concern the public school lands granted to Chambers County for the benefit of the county's public schools. See Request Letter, supra note 1, at 2. The Republic of Texas began making land grants to counties for these purposes in 1838. See TEX. CONST. art. VII, § 6 interp. commentary (Vernon 1993). Article VII, section 6 of the Texas Constitution provides for the county school lands' ownership and disposition:

             All lands heretofore, or hereafter granted to the several counties of this State for educational purposes, are of right the property of said counties respectively, to which they were granted, and title thereto is vested in said counties, and no adverse possession or limitation shall ever be available against the title of any county. Each county may sell or dispose of its lands in whole or in part, in manner to be provided by the Commissioners Court of the county. Said lands, and the proceeds thereof, when sold, shall be held by said counties alone as a trust for the benefit of public schools therein; said proceeds to be invested in bonds of the United States, the State of Texas, or counties in said State, or in such other securities, and under such restrictions as may be prescribed by law; and the counties shall be responsible for all investments; the interest thereon, and other revenue, except the principal shall be available fund.

Id. art. VII, § 6 (emphasis added).[2] Counties may lease or sell their school lands. See Falls County v. De Laney, 11 S.W. 492, 492 (Tex. 1889). A provision in the Education Code related to article VII, section 6 provides that county school lands and the proceeds from their sale constitute the county permanent school fund. See TEX. EDUC. CODE ANN. tit. 2, § 17.81-App. (Vernon 1996).[3] County permanent school fund investment opportunities are limited. See id. § 17.82(b) (enumerating approved permanent school fund investments); see also TEX. CONST. art. VII, § 6 ("said proceeds to be invested in bonds of the United States, the State of Texas, or counties in said State, or in such other securities, and under such restrictions as may be prescribed by law"). The revenues generated either by lease or investment of the county permanent school fund are placed in the county available school fund. See TEX. CONST. art. VII, § 6; TEX. EDUC. CODE ANN. tit. 2, § 17.82-App. (Vernon 1996); Tex. Att'y Gen. Op. No. O-2111 (1940) at 3.

Most counties have sold their county school lands and invested the proceeds in authorized securities. See 36 DAVID B. BROOKS, TEXAS PRACTICE: COUNTY AND SPECIAL DISTRICT LAW § 30.2 (2002). Chambers County, however, still holds its land, which it uses to generate revenue for its available school fund by leasing the land for oil and gas production, grazing and hunting. See Request Letter, supra note 1, at 2. You note that Chambers County's permanent school fund has assets currently worth about $6,000,000. See id. You also note that "[w]ith the increase in the size of the permanent school fund, the complexities with oil and gas leases and negotiation, the rapid market fluctuation in the interest rates, record keeping, accounting, and other general oversight responsibilities, Chambers County is having a difficult time keeping up with the school land and school funds." Id. Thus, you ask whether Chambers County has the authority to hire a professional investment entity, like a bank, to manage the land and other assets of its permanent school fund. Id. at 1.

Texas Constitution article VII, section 6 has been construed in numerous court opinions and in this office's opinions as creating an express trust for which the county is trustee.[4] The county holds the proceeds as an express trust and invests these funds as an exercise of its judgment and discretion. See Comanche County v. Burks, 166 S.W. 470, 473 (Tex. Civ. App.-Fort Worth 1914, writ ref'd). Similarly, county school land management is an exercise of judgment and discretion by the county as trustee over the land. See Logan v. Stephens County, 83 S.W. 365, 366 (Tex. 1904).

It is well settled that the commissioners court has no power to delegate to another person or entity its discretionary authority over the land it owns as an asset of its permanent school fund. See Williams v. Pure Oil Co., 78 S.W.2d 929, 931 (Tex. 1935); accord Potter County v. C.C. Slaughter Cattle Co., 254 S.W. 775, 777-78 (Tex. Comm'n App. 1923, judgm't adopted). For the same reasons, the county has no power to delegate to another person or entity its discretionary authority to invest and manage the non-land assets of its county permanent school fund. See Tex. Att'y Gen. Op. No. JC-0399 (2001) at 5 (opining that a provision in the Texas Property Code, which allows trustees of a trust to delegate investment decisions to an investment agent, does not overcome article VII, section 6's constitutional mandate that county permanent school fund investment decisions be made by the county); see also TEX. CONST. art. VII, § 6 ("and the counties shall be responsible for all investments").

You nevertheless direct us to Government Code chapter 2256, the Public Funds Investment Act, as relevant to this discussion. See Request Letter, supra note 1, at 4-7; see also TEX. GOV'T CODE ANN. §§ 2256.001-.055 (Vernon 2000); id. § 2256.001 ("This chapter may be cited as the Public Funds Investment Act."). The Public Funds Investment Act, among its provisions, permits a county as a local government to "contract with an investment management firm . . . to provide for the investment and management of its public funds or other funds under its control." Id. § 2256.003(b); see also id. § 2256.002(7) (defining "local government" to include counties). This section, you assert, authorizes Chambers County to contract with a bank to manage Chambers County's permanent school fund. See Request Letter, supra note 1, at 5. However, neither the Public Funds Investment Act nor any other statutory authority overcomes article VII, section 6's constitutional requirement that counties shall be responsible for the county public school land and investments. Thus, the Public Funds Investment Act's language notwithstanding, until Texas amends the constitution to authorize counties to delegate their permanent school fund trustee duties, Chambers County is the only entity authorized to invest and manage its permanent school fund. Of course, nothing would prohibit a county from employing an investment expert's services, like a bank's, so long as the expert's compensation does not come from the county's permanent school fund or available school fund and so long as the county maintains its decision-making authority. See Matagorda County v. Casey, 108 S.W. 476, 477 (Tex. Civ. App.-Fort Worth 1908, writ ref'd).

You also ask two related questions the answers to which are premised on an opinion finding authority for Chambers County to delegate its trustee duties over its permanent school fund. Consequently, we need not address them.

                                 SUMMARY

                  Chambers County may not contract with a bank to invest and manage its permanent school fund.

                                        Very truly yours,

GREG ABBOTT
Attorney General of Texas

BARRY R. McBEE
First Assistant Attorney General

NANCY S. FULLER
Chair, Opinion Committee

Daniel C. Bradford
Assistant Attorney General, Opinion Committee

Footnotes

[1] See Letter from Honorable Cheryl Swope Lieck, Chambers County Attorney, to Honorable Greg Abbott, Attorney General of Texas (July 6, 2005) (on file with Opinion Committee, also available at http://www.oag.state.tx.us) [hereinafter Request Letter].

[2] See also TEX. LOC. GOV'T CODE ANN. § 263.003(b) (Vernon 1999) (commissioners court may dispose of county school lands only as provided by law); Act of June 2, 1969, 61st Leg., R.S., ch. 889, § 1, secs. 17.81-.83, 1969 Tex. Gen. Laws 2735, 2846-47, reprinted in TEX. EDUC. CODE ANN. tit. 2, §§ 17.81-.83-App. (Vernon 1996) (former Education Code sections 17.81-.83).

[3] These provisions were repealed in 1995, but Education Code section 11.301 provides for their continued application to county public school lands. See Act of May 27, 1995, 74th Leg., R.S., ch. 260, § 58, 1995 Tex. Gen. Laws 2207, 2498; TEX. EDUC. CODE ANN. tit. 2, § 11.301-App. (Vernon 1996).

[4] See Delta County v. Blackburn, 93 S.W. 419, 420, 422 (Tex. 1906) (counties are trustees for benefit of state's public schools); accord Comanche County v. Burks, 166 S.W. 470, 473 (Tex. Civ. App.-Fort Worth 1914, writ ref'd); County Sch. Trs. v. Brazoria County, 240 S.W. 675, 676 (Tex. Civ. App.-Galveston 1922, no writ); see also, e.g., Tex. Att'y Gen. Op. No. JC-0004 (1999) at 1-2 (stressing the fiduciary nature of a county's duty to invest the county permanent school fund); H-506 (1975) at 2 (county commissioners court acts in fiduciary capacity as school fund trustee); TEX. CONST. art. VII, § 6 ("Said lands, and the proceeds thereof, when sold, shall be held by said counties alone as a trust for the benefit of public schools therein.").