Must a Texas public university invest its endowment funds only in the limited investments allowed by the Public Funds Investment Act?

TX AG Opinion GA-0768: Is a public university's endowment limited to Public Funds Investment Act investments?

Plain-English summary

Midwestern State University received a monetary bequest that, apart from $350,000, was to be transferred into an endowment fund usable for any lawful purpose, including scholarships. The university's president asked the Attorney General a focused question: when those undesignated bequest funds are used to create an endowment, must the university invest them only in the investments allowed by the Texas Public Funds Investment Act (the PFIA, chapter 2256 of the Government Code)? The opinion's answer was no.

The PFIA does limit the kinds of investments a governmental entity may make with public funds. But the PFIA also says, in section 2256.024(a), that its authority is in addition to or cumulative of investment authority "granted by other law," and that it does not prohibit an investment specifically authorized by other law. So the opinion turned to the university's investment authority outside the PFIA. Education Code section 51.0031(a) gives a governing board three separate options for funds under its control: deposit them under section 51.003; invest them in accordance with the PFIA; or, with regard to donations, gifts, and trusts, establish endowment funds that operate as trusts and are managed under prudent person standards. Chapter 51 does not list every investment a board may pick when managing an endowment; instead it imposes the prudent person standard, requiring reasonable care, skill, and caution in light of the fund's purposes and circumstances, considering the whole portfolio rather than any single investment.

Reading those provisions together, the opinion concluded that a board managing an endowment fund under section 51.0031(a) is not restricted solely to PFIA investments. The opinion was careful about what it did not decide: it did not construe the will or the donor's intent (a fact question outside an AG opinion), it did not resolve whether the bequest funds are "public funds" under the PFIA (it could answer without that), and it did not reach the university's separate question about counting funds held by ancillary 501(c)(3) organizations toward a $25 million threshold.

Currency note

This opinion was issued in 2010. 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.

Chapter 2256 of the Government Code and chapter 51 of the Education Code may have been amended since 2010. Confirm the current statutory text before relying on anything below.

Who this opinion affected (as of 2010)

Public university governing boards: The opinion told them that establishing and managing an endowment fund under Education Code section 51.0031(a), under prudent person standards, was a separate option from investing under the PFIA, and did not confine the endowment to PFIA-listed investments.

University finance and investment officers: The opinion described the PFIA as cumulative of other investment authority (section 2256.024(a)), so the PFIA's limits did not override a board's separate endowment-management authority under the Education Code.

Donors and estate planners giving to state universities: The opinion explained that it would not construe a will or determine donor intent, and that it assumed the endowment would remain under the university's control and management; questions about a particular gift's terms remained fact questions outside the opinion.

Common questions

Can a Texas public university put endowment money into investments the PFIA doesn't list?
According to the opinion, yes, when the board manages the endowment under Education Code section 51.0031(a) prudent person standards. The PFIA's investment list does not bind that endowment management.

Why isn't the university stuck with the PFIA's investment menu?
Because the PFIA says its authority is in addition to or cumulative of authority granted by other law (section 2256.024(a)), and the Education Code separately authorizes endowment management under prudent person standards.

What is the "prudent person" standard the board must follow?
The opinion quoted section 51.0031(d): managing the fund with the reasonable care, skill, and caution a prudent investor would use, in light of the fund's purposes, terms, and circumstances, considering all the fund's assets rather than a single investment.

Did the AG decide whether the will allowed an endowment, or what the donor intended?
No. The opinion said will construction and donor intent require a fact-based inquiry that cannot be resolved in an AG opinion.

Background and statutory framework

The Public Funds Investment Act authorizes the investment of public funds under the control of certain governing bodies and limits investments to specified kinds (Tex. Gov't Code Ann. §§ 2256.001-.055 (Vernon 2008 & Supp. 2009); id. § 2256.003 (Vernon 2008)). Institutions of higher education are among the entities that may invest under the PFIA, but the Act is cumulative: it is "in addition to" investment authority "granted by other law" and does not prohibit an investment specifically authorized by other law (id. § 2256.024(a) (Vernon 2008)). The PFIA also excludes certain institutions with large endowments from parts of its scheme (id. § 2256.004(a)(3) (Vernon 2008)).

Under the Education Code, an institution of higher education retains control of donations and gifts (Tex. Educ. Code Ann. § 51.002(a)(1)-(10) (Vernon 2006); see id. § 61.003(3)-(4), (8) (Vernon Supp. 2009) (defining institution of higher education to include MSU)). Section 51.0031(a) grants a governing board three options for funds under its control: deposit under section 51.003; invest in accordance with the PFIA; or, with regard to donations, gifts, and trusts, establish endowment funds that operate as trusts and are managed under prudent person standards (id. § 51.0031(a) (Vernon 2006)). Chapter 51 does not enumerate every permissible endowment investment; it imposes the prudent person standard of section 51.0031(d). Because PFIA authority is cumulative of other law, the opinion concluded that a board establishing an endowment under section 51.0031(a) is not restricted solely to PFIA investments when managing that endowment.

Citations

Statutes:

• Tex. Gov't Code Ann. §§ 2256.001-.055, 2256.003, 2256.024(a), 2256.004(a)(3) (Vernon 2008 & Supp. 2009)
• Tex. Educ. Code Ann. §§ 51.002(a)(1)-(10), 51.0031(a) (Vernon 2006); § 61.003(3)-(4), (8) (Vernon Supp. 2009)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/greg-abbott/ga-0768
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2010/ga0768.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

April 6, 2010

Jesse W. Rogers, Ph.D.
President, Midwestern State University
Office of the President
3410 Taft Boulevard
Wichita Falls, Texas 76308

Opinion No. GA-0768

Re: Whether certain endowment funds of a state university may be invested only in investments authorized under the Texas Public Funds Investment Act, chapter 2256, Government Code (RQ-0830-GA)

Dear Dr. Rogers:

You ask whether certain endowment funds of a state university may be invested only in investments authorized under the Texas Public Funds Investment Act (the "PFIA").[1] TEX. GOV'T CODE ANN. §§ 2256.001-.055 (Vernon 2008 & Supp. 2009). You inform us that Midwestern State University ("MSU" or the "University") has received a monetary bequest which, with the exception of $350,000, will be transferred to establish an endowment fund to be used for any lawful purpose, including scholarships. Request Letter at 1. You ask specifically: "To what extent must the investments of undesignated funds received under a will bequest to Midwestern State University, 'for its general use', be restricted only to investments permitted under the Texas Public Funds Investment Act, if the funds are used to create an endowment fund?" Id.

You do not ask and we do not address whether the terms of the will allow the bequest to be used to create an endowment fund. Will construction and issues concerning a donor's intent cannot be determined in an attorney general opinion. See Tex. Att'y Gen. Op. No. JC-0240 (2000) at 1 (determining that a donor's intent concerning a particular gift would require a fact-based inquiry); Tex. Att'y Gen. LO-93-46, at 2 (declining to construe a will because an attorney general opinion "cannot investigate or evaluate evidence that may be relevant to the intent expressed in a will"). Also, while you do not specify what legal form of management you intend for the endowment fund, we assume for purposes of this opinion that the endowment fund will remain under the control and management of MSU.

The PFIA generally authorizes the investment of public funds under the control of the governing body of certain entities. TEX. GOV'T CODE ANN. § 2256.003 (Vernon 2008).[2] Institutions of higher education and nonprofit corporations acting on behalf of institutions of higher education are among the entities that may invest according to the PFIA. Id. §§ 2256.002(4), (13); .003(a)(3).[3] The PFIA authorizes public fund investment only in specified kinds of investments. Id. §§ 2256.003(a); .009-.0205 (Vernon 2008 & Supp. 2009). However, while the kinds of investments authorized by the PFIA are limited, the PFIA is generally in addition to or cumulative of a governmental entity's investment authority "granted by other law." Id. § 2256.024(a) (Vernon 2008). With limited exceptions not pertinent here, the PFIA "does not . . . prohibit an investment specifically authorized by other law." Id. § 2256.024(a)(1). Thus, we next consider MSU's investment authority outside of the PFIA to invest funds under its control.

Under chapter 51 of the Education Code, an institution of higher education is entitled to retain control of certain sums of money it receives, including "donations and gifts to the institution." TEX. EDUC. CODE ANN. § 51.002(a)(1)-(10) (Vernon 2006); see also id. § 61.003(3)-(4), (8) (Vernon Supp. 2009) (including MSU in the definition of "[i]nstitution of higher education"). Section 51.0031(a) of the code grants the governing board of an institution of higher education authority for three different actions with respect to funds in its control:

A governing board may [1] deposit funds under its control as provided in Section 51.003 [concerning terms of deposit] of this code, [2] invest funds under its control in accordance with Chapter 2256, Government Code [the PFIA] and, [3] with regard to donations, gifts, and trusts, may establish endowment funds that operate as trusts and are managed under prudent person standards.

Id. § 51.0031(a) (Vernon 2006). By its terms, section 51.0031(a) provides that investing under the PFIA and, with regard to donations, gifts and trusts, establishing an endowment fund to be managed under prudent person standards are separate options available to the University. Id. Further, chapter 51 of the Education Code does not purport to enumerate all of the kinds of investments a governing board may select when managing endowment funds under section 51.0031(a). Rather, section 51.0031 imposes prudent person standards on a governing board, requiring it to manage endowment funds exercising the "reasonable care, skill, and caution" that a prudent investor would exercise, "in light of the purposes, terms, distribution requirements, and other circumstances of the fund then prevailing, taking into consideration the investment of all the assets of the fund rather than a single investment." Id. § 51.0031(d).

As discussed above, the investment authority granted by the PFIA is in addition to or cumulative of investment authority granted under other law. Consequently, a governing board of an institution of higher education, exercising its authority to establish an endowment fund under Education Code section 51.0031(a), is not restricted solely to investments permitted under the PFIA when managing the endowment fund.[4]

SUMMARY

A governing board of an institution of higher education, exercising its authority to manage an endowment fund under Education Code section 51.0031(a), is not restricted solely to investments permitted by the Texas Public Funds Investment Act when managing the endowment fund.

Very truly yours,

GREG ABBOTT
Attorney General of Texas

ANDREW WEBER
First Assistant Attorney General

JONATHAN K. FRELS
Deputy Attorney General for Legal Counsel

NANCY S. FULLER
Chair, Opinion Committee

William A. Hill
Assistant Attorney General, Opinion Committee

[Footnote 1: See Request Letter at 1 (available at http://www.texasattorneygeneral.gov).]

[Footnote 2: Your question appears to assume that an endowment fund created from a monetary bequest for general purposes constitutes "public funds" under the PFIA. See generally Tex. Att'y Gen. Op. No. DM-489 (1998) (discussing meaning of "public funds" as the term is used in the PFIA). As we are able to answer your question without assessing that assumption, we do not address that issue.]

[Footnote 3: But cf. TEX. GOV'T CODE ANN. § 2256.004(a)(3) (Vernon 2008) (excluding "institution[s] of higher education having total endowments of at least $95 million in book value on May 1, 1995").]

[Footnote 4: You also inquire as to whether funds held by "ancillary 501(c)(3) organizations" could be counted toward the $25 million threshold established in Education Code section 51.0031(c). Request Letter at 3. Because we have concluded that a governing board is not restricted to investments authorized by the PFIA when managing an endowment fund established under section 51.0031(a), we need not address your second question.]