How should the Texas General Land Office report the Permanent School Fund as nonspendable in its annual financial statements?

Plain-English summary

The Commissioner of the Texas General Land Office asked the AG an accounting question about the Permanent School Fund, the perpetual endowment that supports the state's public schools. The fund is established by the Texas Constitution and consists of land set aside for public schools, other properties belonging to the fund, and the revenue from those holdings and their investment. Each year the State Board of Education and the General Land Office make limited distributions from it to the Available School Fund, and the fund is also used to guarantee certain school district and state bonds. The Commissioner wanted to know how much of the fund his office should report as "nonspendable" in its annual financial report, and how to figure that amount.

State agencies have to file an annual financial report with the Comptroller using procedures that comply with generally accepted accounting principles set by the Governmental Accounting Standards Board (GASB). GASB Statement No. 54 sorts a governmental fund's balance into five classifications based on how tightly the government is bound in how it may spend the money: nonspendable, restricted, committed, assigned, or unassigned. Money is "nonspendable" if it cannot be spent because it is not in spendable form or is legally or contractually required to be kept intact. The corpus of a permanent fund is the textbook example of the latter.

The Commissioner had raised the possibility that, because the Legislature never expressly said the fund's corpus is nonspendable, one might argue the whole fund is spendable but merely restricted. The AG rejected that reading. Article VII, section 5 of the Constitution expressly forbids the Legislature from appropriating any part of the Permanent School Fund except as that section provides, and Article VIII, section 6 bars spending treasury money without a specific appropriation. Together, those provisions require the fund to remain intact, which makes it nonspendable except for the distributions and payments the Constitution itself authorizes.

The AG then identified what the Constitution does allow to be spent: a distribution to the Available School Fund capped at a set percentage of the fund, an appropriation to cover the expenses of managing the fund's land and investments, and a separate General Land Office distribution to the Available School Fund of up to $300 million a year from revenue. Those authorized amounts are not nonspendable. Because the constraint on them comes from a constitutional provision, GASB Statement No. 54 directs that they be reported as "restricted" rather than nonspendable. That treatment also matched how the Texas Education Agency had been reporting the fund. As for the exact dollar amount that is nonspendable, the AG said it had no way to know the fund's balance or revenue at any given time; the General Land Office, working with the Comptroller and the State Board of Education, is in the best position to determine the figures.

Currency note

This opinion was issued in 2019. 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.

What the opinion meant for those who asked

The General Land Office and other agencies reporting the fund: The AG concluded that the Permanent School Fund should be classified as nonspendable except for the specific distributions and payments article VII, section 5 authorizes, and that those authorized amounts should be reported as restricted.

Accountants and auditors applying GASB Statement No. 54: The opinion explained why the constitutional bar on appropriating the corpus makes it "legally required to be maintained intact," and therefore nonspendable, while constitutionally authorized spending is "restricted."

Anyone needing the exact nonspendable dollar figure: The AG declined to set it, saying the General Land Office, in consultation with the Comptroller and the State Board of Education, is best positioned to determine the amounts.

Common questions

Is the Texas Permanent School Fund spendable?
At the time of the opinion, no, except for the limited distributions and payments article VII, section 5 of the Constitution authorizes. The AG concluded the Constitution requires the fund to remain intact, making it nonspendable.

Why is part of the fund reported as "restricted" rather than nonspendable?
The AG explained that the amounts the Constitution lets the State Board of Education and General Land Office distribute or spend each year are not nonspendable, and because the constraint comes from a constitutional provision, GASB Statement No. 54 directs reporting them as restricted.

What spending does the Constitution allow from the fund?
The AG identified a capped distribution to the Available School Fund, an appropriation for managing the fund's land and investments, and a separate General Land Office distribution to the Available School Fund of up to $300 million a year from revenue.

Did the AG say how many dollars are nonspendable?
No. The AG said it lacked the information to determine the fund's balance and that the General Land Office, with the Comptroller and State Board of Education, should determine the amounts.

Background and statutory framework

The Permanent School Fund is "a perpetual endowment for the public schools of this state" (Tex. Educ. Code § 43.001(a)), established by the Constitution and made up of land and properties belonging to the fund and the revenue they generate (Tex. Const. art. VII, §§ 2, 4, 5(a); Tex. Educ. Code § 43.001(a)(1)-(6)). The Constitution authorizes limited annual distributions to the Available School Fund (Tex. Const. art. VII, § 5(a), (c), (g)) and use of the fund to guarantee school district and state bonds (Tex. Const. art. VII, § 5(d)).

Each state agency must submit an annual financial report to the Comptroller detailing assets, liabilities, and fund balances (Tex. Gov't Code § 2101.011(b), (c); § 403.013(a)(1)), using procedures that comply with generally accepted accounting principles set by GASB (Tex. Gov't Code § 2101.012(b)(1)). GASB Statement No. 54 classifies fund balances as nonspendable, restricted, committed, assigned, or unassigned, treating the corpus of a permanent fund as nonspendable because it is legally or contractually required to be maintained intact, and treating amounts constrained by constitutional provisions or enabling legislation as restricted.

The AG concluded that because article VII, section 5 prohibits the Legislature from appropriating any part of the fund except as provided there, and because Article VIII, section 6 forbids spending treasury money without an appropriation, the Constitution requires the fund to remain intact and renders it nonspendable except for the authorized distributions and payments (Tex. Const. art. VII, § 5; § 5(b), (c), (g); art. VIII, § 6). The constitutionally authorized amounts should be reported as restricted, and the General Land Office, in consultation with the Comptroller and the State Board of Education, should determine the dollar figures.

Citations

Constitutional and statutory provisions:

• Tex. Const. art. VII, §§ 2, 4, 5(a); § 5(a), (c), (g); § 5(b); § 5(c); § 5(d); § 5(g); § 5
• Tex. Const. art. VIII, § 6
• Tex. Educ. Code § 43.001(a); § 43.001(a)(1)-(6)
• Tex. Gov't Code § 2101.011(b); § 2101.011(c); § 2101.012(b)(1); § 403.013(a)(1)

Referenced standard:

• GASB Statement No. 54 (Governmental Accounting Standards Board)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0229
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2019/kp-0229.pdf

Original opinion text

KEN PAXTON
ATTORNEY GENERAL OF TEXAS

January 7, 2019

The Honorable George P. Bush Opinion No. KP-0229
Commissioner
Texas General Land Office Re: Whether and to what extent the Permanent
Post Office Box 12873 School Fund should be classified as
Austin, Texas 78711-2873 nonspendable in annual financial reporting
(RQ-0231-KP)

Dear Commissioner Bush:

     You request an opinion concerning to what extent your office should report the Permanent

School Fund as nonspendable in its annual financial reporting. [1] The Permanent School Fund "is
a perpetual endowment for the public schools of this state." TEX. EDUC. CODE § 43.001(a).
Established by the Texas Constitution, it consists of all land appropriated for public schools by the
Constitution or state laws, other properties belonging to the fund, and all revenue derived from the
land, other properties, or investment of properties belonging to the fund. TEX. CONST. art. VII,
§§ 2, 4, 5(a); TEX. EDUC. CODE § 43.001(a)(1)-(6). The Constitution authorizes the State Board
of Education and the General Land Office to make limited annual distributions from the Permanent
School Fund to the Available School Fund for the support of the public schools. TEX. CONST. art.
VII, § 5(a), (c), (g). The Permanent School Fund is also used "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." Id. § 5(d).

    Section 2101.011 of the Government Code requires each state agency, including the

General Land Office, to submit an annual financial report to the Comptroller. TEX. GOV'T CODE
§ 2101.011(b); id. § 403.013(a)(1) (defining "state agency" to include an office in the executive
branch of state government). That report "must include a detailed statement of all assets, liabilities,
and fund balances." Id. § 2101.011(c). The financial reporting procedures used by state agencies
must "comply with generally accepted accounting principles as established by the Governmental
Accounting Standards Board," among others. [2] Id. § 2101.012(b)(1). Consistent with those
principles, state agencies must report on the fund balances of governmental funds using a
classification system based on "the extent to which the government is bound to honor constraints
on the specific purposes for which amounts in those funds can be spent." GASB Statement No.
54, ¶ 5, at 3. That system requires reporting the funds in one of the following classifications:
(1) nonspendable, (2) restricted, (3) committed, (4) assigned, or (5) unassigned. Id. ¶¶ 6-18, at 3-

7. An individual fund could include amounts in more than one of these classifications. Id. ¶ 18,
   at 7-8.

   Related to these requirements, you ask specifically about which amounts in the Permanent
   

   School Fund qualify as nonspendable. Request Letter at 1, 3. Funds should be classified as
   nonspendable if they "cannot be spent because they are either (a) not in spendable form or
   (b) legally or contractually required to be maintained intact." GASB Statement No. 54, ¶ 6, at 3.
   "The corpus (or principal) of a permanent fund is an example of an amount that is legally or
   contractually required to be maintained intact." Id. ¶ 6, at 3-4.

   You suggest that because the Legislature has not expressly stated its intent to delineate the
   

   Permanent School Fund corpus as nonspendable, an argument could be made that the entire
   Permanent School Fund is spendable but restricted. [3] Request Letter at 3. The Constitution
   expressly prohibits the Legislature from enacting a law appropriating any part of the Permanent
   School Fund except as provided by article VII, section 5. TEX. CONST. art. VII, § 5(c). And funds
   in the state treasury may not be expended without a legislative appropriation. Id. art. VIII, § 6
   ("No money shall be drawn from the Treasury but in pursuance of specific appropriations made
   by law .... "). Thus, the Constitution requires that the fund remain intact, making it nonspendable
   except for distributions and payments therein authorized. [4] Id. art. VII, § 5.

   Article VII, section 5 of the Texas Constitution authorizes certain specific distributions and
   payments, meaning a portion of the Permanent School Fund qualifies as something other than
   nonspendable. First, it authorizes a distribution to the Available School Fund in an amount not to
   exceed a certain percentage of the Permanent School Fund as determined by either the State Board
   of Education or the Legislature. See id. art. VII, § 5(a). It also authorizes the Legislature to make
   an appropriation from the Permanent School Fund to cover "expenses of managing permanent
   school fund land and investments." Id. art. VII, § 5(b). Finally, it authorizes your office to make
   a separate distribution to the Available School Fund each year:

             Notwithstanding any other provision of this constitution or of a
             statute, the General Land Office or an entity other than the State
             Board of Education that has responsibility for the management of
             permanent school fund land or other properties may in its sole
             discretion distribute to the available school fund each year revenue
             derived during that year from the land or properties, not to exceed
             $300 million each year.
   

Id. art. VII, § 5(g). In each of these provisions, the Constitution expressly authorizes spending
from the Permanent School Fund of a limited amount for specific purposes in a given year.
Amounts available to fund such expenses and distributions should not be classified as
nonspendable, as the Constitution authorizes their use for specific purposes. Instead, "when
constraints placed on the use of resources are . . . [i]mposed by law through constitutional
provisions or enabling legislation," those amounts should be reported as "restricted." GASB
Statement No. 54, ¶ 8(b), at 4. Because article VII, section 5 establishes the limited extent to which
the Permanent School Fund may be spent, those authorized amounts should be classified as
restricted.

    You also ask what specific dollar amount is nonspendable and how it should be determined.

Request Letter at 1. We have no information to determine the amount currently in the Permanent
School Fund or the revenue derived from that fund at any given time. In consultation with the
Comptroller and the State Board of Education, the General Land Office is in the best position to
determine the appropriate amounts to include as nonspendable or restricted in the fund balances
on the annual financial report of the General Land Office.

                                 SUMMARY

                  Article VII, section 5 of the Texas Constitution expressly
          prohibits the Legislature from enacting a law appropriating any part
          of the Permanent School Fund except as therein provided. Funds in
          the state treasury may not be expended without a legislative
          appropriation. The Constitution thereby makes the Permanent
          School Fund nonspendable except for specific distributions and
          payments authorized by the Constitution, and it should be so
          classified on annual financial reports.

                                        Very truly yours,

                                        KEN PAXTON
                                        Attorney General of Texas

JEFFREY C. MATEER
First Assistant Attorney General

BRANTLEY STARR
Deputy First Assistant Attorney General

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

[1] Letter from Honorable George P. Bush, Comm'r, Tex. Gen. Land Office, to Honorable Ken Paxton, Tex. Att'y Gen. at 1 (May 10, 2018), http://www2.texasattorneygeneral.gov/opinion/requests-for-opinion-rqs ("Request Letter").

[2] The Governmental Accounting Standards Board ("GASB") is a private, independent organization "that establishes accounting and financial reporting standards for U.S. state and local governments that follow Generally Accepted Accounting Principles." https://www.gasb.org ("About Us").

[3] If a governmental unit possesses authority to use resources but "constraints placed on the use of resources are ... [i]mposed by law through constitutional provisions or enabling legislation," those amounts should be reported as "restricted." GASB Statement No. 54, ¶ 8(b), at 4.

[4] Such classification is consistent with previous Permanent School Fund annual financial reporting by the Texas Education Agency. See TEX. EDUC. AGENCY, TEX. PERMANENT SCH. FUND, COMPREHENSIVE ANNUAL FIN. REPORT FOR THE FISCAL YEAR ENDING AUG. 31, 2017, at 18 ("[T]he entire fund balance is classified as nonspendable except for that portion explicitly allowed to be expended by the Texas Constitution, which is classified as restricted."), https://tea.texas.gov/Finance_and_Grants/Texas_Permanent_School_Fund/Texas_Permanent_School_Fund_Annual_Report/.