Can the Texas State Board of Education invest the Permanent School Fund to help charter schools instead of for the best financial return?

Plain-English summary

The Permanent School Fund is a large state endowment whose earnings help support Texas public schools. The question here, submitted by former State Board of Education Chair Gail Lowe and answered to her successor, Chair Barbara Cargill, was whether the Board could steer PSF investments toward helping charter schools acquire buildings, even if that investment would not earn as much as the highest-returning alternative. The Board had set up a special asset class for charter-school facilities, and the request described possible investments such as buying real estate, holding real-estate mortgages, or buying bonds issued by the nonprofit corporations that hold state charters, then leasing facilities back to charter schools.

The opinion concluded that the Board's investment authority is financial, not policy-driven. Article VII, section 5(f) of the Texas Constitution applies a "prudent person" standard: the Board may make any investment that a person of ordinary prudence, discretion, and intelligence would make in managing their own affairs, not for speculation but for the permanent disposition of funds, weighing the probable income and the probable safety of the capital. The opinion found nothing in section 5(f), or in the Education Code provisions governing PSF investments, that authorizes the Board to weigh general benefits other than the sound financial management of fund assets. So the Board could not, the opinion said, make investment decisions for a nonfinancial purpose, and could not restrict investment within an asset class to a group of entities to further a public policy unrelated to financial management.

The opinion was careful about what this did and did not forbid. It did not say the Board was barred from investments that happen to help charter schools acquire instructional facilities. It said the opposite: the Board could make such investments, but only if a prudent investor would make them on their financial merits, considering probable income and probable safety, and not as a way of advancing charter schools or education policy. The deciding factor had to be the financial soundness of the investment, not the policy benefit.

Currency note

This opinion was issued in 2011. Subsequent statutory amendments, court decisions, or later Attorney General 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.

What the opinion meant for those who asked

The State Board of Education (as the opinion held for them): The opinion told the Board that its PSF investment decisions had to rest on financial considerations under the prudent-person standard, and that it could not choose or limit an asset class in order to advance a public policy that was not itself about sound financial management of the fund.

Permanent School Fund management (as the opinion described it): The opinion read the Constitution and Education Code to confine the Board to weighing probable income and probable safety of capital, the financial attributes of an investment, when managing fund assets.

Charter schools and their facility financing (where the opinion landed): The opinion did not close the door on PSF investments that help charter schools acquire buildings. It held that such investments were permissible if, and only if, a prudent investor would make them for financial reasons. Helping charter schools could not itself be the justification.

Common questions

Can Texas's Permanent School Fund be invested to help charter schools get buildings?
Yes, but only if the investment makes financial sense on its own. The opinion said the Board could make investments that directly help charter schools acquire instructional facilities only if a prudent investor would make the same investment considering probable income and probable safety, not because it benefits charter schools.

Does the State Board of Education have to maximize financial return?
The opinion required the Board to invest under the prudent-person standard, weighing the probable income and probable safety of the fund's capital, and said it could not make decisions for a nonfinancial purpose.

Can the Board favor an asset class to advance a state policy?
No. The opinion concluded the Board may not restrict investment within an asset class to a group of entities in furtherance of a public policy other than sound financial management.

What rule governs Permanent School Fund investing?
The opinion pointed to the "prudent person" standard in article VII, section 5(f) of the Texas Constitution, reinforced by the Education Code provisions on PSF investment objectives and the duty of prudence.

Background and statutory framework

Article VII, section 5(f) of the Texas Constitution provides that, in managing PSF assets, the Board may acquire or retain any kind of investment that persons of ordinary prudence, discretion, and intelligence acquire or retain for their own account, 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. Tex. Const. art. VII, § 5(f). The same provision references the Texas growth fund created by article XVI, section 70 of the constitution. The opinion read section 5(f) to authorize only financial considerations, probable income and probable safety, and to make investment decisions for the permanent disposition of fund assets.

The Education Code reinforces that reading. Section 43.003 allows the Board to invest the PSF in securities it must carefully examine and find safe and proper; section 43.004(a) requires the Board to set investment objectives addressing desired rates of return, risks, time frames, and other relevant considerations; and section 43.007(b) restates the prudent-person duty. Tex. Educ. Code Ann. §§ 43.003, 43.004(a), 43.007(b) (West 2006). The Board's authority is only what the Constitution and the Education Code grant it. Id. § 7.102 (West 2006); see Pub. Util. Comm'n v. GTE-Sw., Inc., 901 S.W.2d 401, 407 (Tex. 1995) (agencies have only those powers expressly granted by law and those necessarily implied). Courts construe the Texas Constitution by relying heavily on its literal text and giving effect to its plain meaning. Stringer v. Cendant Mortg. Corp., 23 S.W.3d 353, 355 (Tex. 2000).

Citations

Statutes:

• Tex. Const. art. VII, § 5(f)
• Tex. Const. art. XVI, § 70
• Tex. Educ. Code Ann. § 7.102 (West 2006)
• Tex. Educ. Code Ann. § 43.003 (West 2006)
• Tex. Educ. Code Ann. § 43.004(a)
• Tex. Educ. Code Ann. § 43.007(b)
• Tex. Educ. Code Ann. §§ 43.003-.020 (West 2006 & Supp. 2010)

Cases:

• Stringer v. Cendant Mortg. Corp., 23 S.W.3d 353, 355 (Tex. 2000)
• Pub. Util. Comm'n v. GTE-Sw., Inc., 901 S.W.2d 401, 407 (Tex. 1995)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/greg-abbott/ga-0871
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2011/ga0871.pdf

Original opinion text

Best-effort transcription from the official PDF. Minor extraction artifacts were corrected; the linked PDF is authoritative.

ATTORNEY GENERAL OF TEXAS
GREG ABBOTT

August 9, 2011

The Honorable Barbara Cargill Opinion No. GA-0871
Chair, State Board of Education
1701 North Congress Avenue Re: Permissible investments of the permanent
Austin, Texas 78701-1494 school fund (RQ-0941-GA)

Dear Ms. Cargill:

Your predecessor asked three questions about the legal authority of the State Board of Education (the "Board") to invest permanent school fund ("PSF") capital in a manner intended to give direct aid to "charter schools in acquiring instructional facilities."[1] The request letter explained that "[t]he Board has established a special asset class for charter schools facilities investment with its own proposed benchmark for returns ...." Request Letter at 2. "Possible investments ... include direct acquisition of real estate or real estate mortgages and bonds issued by the non-profit corporations that hold state charters." Id. For example, the PSF could buy or build "facilities and then lease them to charter schools." Id.

These questions concern Texas Constitution article VII, section 5(f), which provides that

in managing the assets of the [PSF], the [Board] 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.

TEX. CONST. art. VII, § 5(f). The first question asked is whether the Board must, consistent with the "prudent person" standard adopted in Article VII, Section 5(f) of the Texas Constitution, determine the asset classes in which it will invest with the sole purpose of maximizing the future value of the PSF, or may the Board also consider benefits to a state policy in making an investment as outlined above which may not have an expected return as high as the expected return of the likely highest returning class of assets within the PSF? Request Letter at 4.

No provision of article VII, section 5(f) contains language that authorizes the Board to consider a potential investment's general benefits other than the sound financial management of PSF assets when it makes investment decisions. See TEX. CONST. art. VII, § 5(f). Cf. Request Letter at 4 (suggesting that the Board may consider benefits to a public policy in making PSF investments). The text of section 5(f) provides that the Board may consider the "probable income" produced by, and the "probable safety" of, the capital invested in PSF assets. TEX. CONST. art. VII, § 5(f). It also provides that the Board makes investment decisions for the purpose of "managing the assets of the [PSF] ... in regard to the permanent disposition of [PSF] funds." Id. Thus, the Constitution requires that the Board's PSF investment decisions be made in regard to the permanent disposition of PSF assets and be based on financial considerations like income production and capital preservation. Id. See also Stringer v. Cendant Mortg. Corp., 23 S.W.3d 353, 355 (Tex. 2000) (holding that courts construe the Texas Constitution by relying heavily on its literal text and giving effect to its plain meaning).

Neither our legal review nor the legal briefing submitted to this office has uncovered legal authority that would authorize the Board to make PSF investment decisions for any other purpose or to consider any other nonfinancial factor. See TEX. EDUC. CODE ANN. §§ 43.003 (West 2006) (allowing the Board to invest the PSF in securities that the Board must carefully examine and find to be safe and proper), 43.004(a) (requiring the Board to promulgate PSF investment objectives addressing "desired rates of return, risks involved, investment time frames, and any other relevant considerations"), 43.007(b) (stating that "the [Board] shall exercise the judgment and care under the circumstances then prevailing that persons of ordinary prudence, discretion, and intelligence exercise in the management of their own 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"). Accordingly, we conclude that the Texas Constitution and Education Code require the Board to make investment decisions in regard to the permanent disposition of PSF assets and to consider a potential investment's financial attributes. See id. § 7.102 (stating that the Board's authority is only what the Texas Constitution and Education Code provide that it is); Pub. Util. Comm'n v. GTE-Sw., Inc., 901 S.W.2d 401, 407 (Tex. 1995) (explaining that agencies have only those powers expressly granted by law and those necessarily implied therefrom); Tex. Att'y Gen. Op. No. GA-0848 (2011) at 1-2 (noting that the Board is an agency). The Texas Constitution and Education Code do not authorize the Board to base PSF investment decisions for a nonfinancial purpose and do not authorize the Board to consider nonfinancial factors. See TEX. CONST. art. VII, § 5(f); TEX. EDUC. CODE ANN. §§ 7.102 (West 2006), 43.003-.020 (West 2006 & Supp. 2010).

The second question is whether the Board may "restrict investment within [an asset] class to a group of entities in furtherance of a state policy." Request Letter at 4. We have not found a provision of the Texas Constitution or Education Code that authorizes the Board to restrict PSF investments to asset classes that would further any public policy other than the sound financial management of PSF assets. See generally TEX. CONST. art. VII, § 5(f); TEX. EDUC. CODE ANN. §§ 7.102 (West 2006), 43.003-.020 (West 2006 & Supp. 2010). Additionally this office did not receive any legal briefing purporting to identify such a statute or constitutional provision. See, e.g., Request Letter. Because the Texas Constitution and Education Code do not authorize the Board to restrict investment within an asset class to a group of entities in furtherance of a public policy other than sound financial management, the Board may not do so. TEX. CONST. art. VII, § 5(f); TEX. EDUC. CODE ANN. § 7.102 (West 2006).

The third question is "whether the Board has any greater authority to select an asset class ... if the purpose of that decision is to benefit an educational entity or education policy within Texas." Request Letter at 5. The Board's authority is strictly limited to the powers that the Texas Constitution and Education Code grant to it. TEX. EDUC. CODE ANN. § 7.102 (West 2006). Accordingly, we conclude that Texas law would authorize the Board to make investments that directly help charter schools acquire instructional facilities, but only if persons of ordinary prudence, discretion, and intelligence do so for their own account, 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. TEX. CONST. art. VII, § 5(f); TEX. EDUC. CODE ANN. §§ 7.102 (West 2006), 43.003-.020 (West 2006 & Supp. 2010). Texas law does not authorize the Board to make PSF investments in regard to any other objective or to consider any other kind of factor in managing PSF assets. TEX. CONST. art. VII, § 5(f); TEX. EDUC. CODE ANN. §§ 7.102 (West 2006), 43.003-.020 (West 2006 & Supp. 2010). See also Stringer, 23 S.W.3d at 355 (holding that courts construe the Texas Constitution by relying heavily on its literal text and giving effect to its plain meaning); Pub. Util. Comm'n, 901 S.W.2d at 407 (explaining that agencies have only those powers expressly granted by law and those necessarily implied from the powers expressly granted).

SUMMARY

The text of article VII, section 5(f) of the Texas Constitution provides that the State Board of Education may make any investment that persons of ordinary prudence, discretion, and intelligence make in the management of their own 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 text of article VII, section 5(f) does not authorize the Board to make investments in regard to any other objective or to consider any other kind of factor in managing permanent school fund assets.

Very truly yours,

DANIEL T. HODGE
First Assistant Attorney General

DAVID J. SCHENCK
Deputy Attorney General for Legal Counsel

JASON BOATRIGHT
Chair, Opinion Committee

Jason Boatright
Assistant Attorney General, Opinion Committee

[1] Letter from Honorable Gail Lowe, Former Chair, State Board of Education, to Honorable Greg Abbott, Attorney General of Texas at 2 (Jan. 21, 2011), https://www.oag.state.tx.us/opin/index_rq.shtml ("Request Letter").