Does the Texas Permanent School Fund need a legislative appropriation to cover management fees on mutual funds it invests in?

TX AG Opinion GA-0293: Do PSF mutual fund fees need a legislative appropriation?

Plain-English summary

The chair of the State Board of Education asked the attorney general how a 2003 amendment to the Texas Constitution affected the Board's management of the Permanent School Fund (PSF), the pool of land, bonds, and investments that backs Texas public school funding. The amended provision, article VII, section 5(b), says the expenses of managing PSF land and investments "shall be paid by appropriation from the permanent school fund." The Board wanted to know whether that language meant the amount it could spend on PSF management, including fees paid to outside investment managers, was capped at whatever the legislature specifically appropriated for that purpose.

The harder practical question involved mutual funds and investment companies, since those often deduct their management fee directly from the fund's own assets rather than billing the investor separately, meaning the PSF's return from such an investment is already net of the fee before the Board sees it. The opinion concluded that Board spending on external investment managers and PSF administration generally is capped by whatever the legislature appropriates. But a fee baked into a mutual fund's own assets is not a separate "expense of managing" the PSF at all. It is part of the investment itself, the same way a lower net return is part of any investment. So the Board did not need a specific legislative appropriation to let the PSF invest in mutual funds or similar vehicles that charge fees this way; it just had to weigh the effect of those fees on the investment's return when deciding whether to make the investment in the first place.

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)

The State Board of Education: The opinion confirmed the Board could invest PSF assets in mutual funds and similar pooled investment vehicles without needing a separate legislative appropriation to cover fees those funds deduct internally, while its payments to external investment managers hired directly still had to come from the specific appropriation required by article VII, section 5(b).

Legislative budget writers: The opinion clarified that the constitutional appropriation requirement for PSF "management expenses" reached direct payments to outside managers but not indirect fees embedded in fund-level investment products, narrowing what needed a line-item appropriation each session.

Common questions

Did the Texas Constitution require a specific appropriation to pay mutual fund management fees out of the Permanent School Fund?
No, according to this opinion. The 2005 opinion concluded that fees a mutual fund or investment company deducts from its own assets are part of the investment itself, not a separate "expense of managing" PSF investments under article VII, section 5(b), so no specific appropriation was required to cover them.

Did this opinion limit how the State Board of Education could pay outside investment managers hired directly by the Board?
Yes. The opinion found that Board expenditures for managing or administering PSF investments, including payments to external investment managers hired directly, had to come from the legislative appropriation authorized under article VII, section 5(b) as amended in 2003.

What was the Board supposed to do differently because of this opinion?
The opinion said the Board should factor the effect of a mutual fund's internal fee deductions into its evaluation of the investment's expected return under the prudent-investor standard in article VII, section 5(f), rather than treating those fees as a budget item requiring separate appropriated funds.

Background and statutory framework

Article VII, section 2 of the Texas Constitution establishes the "perpetual school fund," and section 5 governs the resulting Permanent School Fund (PSF) and Available School Fund (ASF), with the State Board of Education charged under section 5(f) with managing and investing PSF assets under a prudent-investor standard. Before a 2003 constitutional amendment, only interest and dividend income from the PSF flowed to the ASF; the amendment adopted a "total return" strategy allowing capital-gains distributions as well, and along the way it also rewrote section 5(b) to require that "the expenses of managing permanent school fund land and investments shall be paid by appropriation from the permanent school fund."

The opinion worked through the amended text using ordinary constitutional-construction rules: read the words in their plain and ordinary sense, in context, and construed together with related provisions. It found that "managing" in section 5(b) covers both land and investments, and that mutual funds and investment companies are properly characterized as "investments" under Texas law, citing the Uniform Management of Institutional Funds Act and several other statutes that treat mutual fund holdings as investments rather than as separate management arrangements. Comparing the amended section 5(b) to its predecessor, former section 5(c), and to the Legislative Council's own analysis of the 2003 amendment, the opinion concluded the amendment's core purpose was to change which pot of money (PSF appropriation instead of General Land Office and ASF funds) paid for PSF management costs, particularly the fees the Board paid to outside investment managers it had examined in earlier legislative interim reports.

Applying that framework, the opinion drew a line between two kinds of cost: fees the Board pays directly to an external manager it hires, which count as "expenses of managing" PSF investments and must come from the section 5(b) appropriation, and fees a mutual fund or investment company deducts internally from its own pooled assets before the PSF ever receives its return, which the opinion treated as part of the investment's own economics rather than a distinct management expense. Because the second question made the third question (about the PSF's separate constitutional authority to invest in the Texas growth fund under article XVI, section 70) moot, the opinion did not reach it.

Citations

Statutes:

• Tex. Const. art. VII, § 2
• Tex. Const. art. VII, § 4
• Tex. Const. art. VII, § 5
• Tex. Const. art. VII, § 5(a)
• Tex. Const. art. VII, § 5(b)
• Tex. Const. art. VII, § 5(c)
• Tex. Const. art. VII, § 5(f)
• Tex. Const. art. III, § 5(b)
• Tex. Const. art. III, § 35(a)
• Tex. Const. art. VIII, § 6
• Tex. Const. art. XVI, § 6(a)
• Tex. Const. art. XVI, § 70
• Tex. Educ. Code Ann. § 7.102(c)(31) (Vernon Supp. 2004)
• Tex. Educ. Code Ann. § 43.003 (Vernon 1996)
• Tex. Educ. Code Ann. § 43.006 (Vernon Supp. 2004)
• Tex. Educ. Code Ann. § 43.006(a) (Vernon Supp. 2004)
• Tex. Gov't Code Ann. § 311.011 (Vernon 1998)
• Tex. Gov't Code Ann. § 311.011(a) (Vernon 1998)
• Tex. Prop. Code Ann. § 163.001 (Vernon 1995)
• Tex. Prop. Code Ann. § 163.002(b) (Vernon 1995)
• Tex. Prop. Code Ann. § 163.004(a) (Vernon Supp. 2004)
• Tex. Prop. Code Ann. § 163.005(4) (Vernon 1995)
• Tex. Prop. Code Ann. § 113.056(d) (Vernon Supp. 2004)
• Tex. Rev. Civ. Stat. Ann. art. 6243e.1, § 11.01(2) (Vernon 2003)
• Tex. Fin. Code Ann. § 34.104(a) (Vernon 1998)
• Tex. Fin. Code Ann. §§ 181.001-.002(a)(31) (Vernon Supp. 2004)
• Tex. Gov't Code Ann. § 404.024(b)(11) (Vernon Supp. 2004)
• Tex. Gov't Code Ann. § 2256.014(b) (Vernon 2000)
• 15 U.S.C. §§ 80a-1 - 80a-64 (2000)
• 15 U.S.C. §§ 77a-77aa
• 15 U.S.C. § 80a-3(a)(1) (2000)

Cases:

• Spradlin v. Jim Walter Homes, Inc., 34 S.W.3d 578, 580 (Tex. 2000)
• Booth v. Strippleman, 61 Tex. 378 (1884)
• Rooms With A View, Inc. v. Private Nat'l Mortgage Ass'n, Inc., 7 S.W.3d 840, 844 (Tex. App.-Austin 1999, pet. denied)
• Tex. Att'y Gen. Op. No. GA-0213 (2004)
• Stringer v. Cendant Mortgage Corp., 23 S.W.3d 353, 355 (Tex. 2000)
• Republican Party of Tex. v. Dietz, 940 S.W.2d 86, 89 (Tex. 1997)
• Doody v. Ameriquest Mortgage Co., 49 S.W.3d 342, 344 (Tex. 2001)
• Purcell v. Lindsey, 314 S.W.2d 283, 284 (Tex. 1958)
• McCombs v. Dallas County, 136 S.W.2d 975, 981 (Tex. Civ. App.-Dallas 1940, writ ref'd)
• Hasley v. State, 222 S.W. 579, 580 (Tex. Crim. App. 1920)
• Ferguson v. Wilcox, 28 S.W.2d 526, 530 (Tex. 1930)
• Harris v. City of Fort Worth, 180 S.W.2d 131, 133 (Tex. 1944)

Other authorities:

• Act of June 1, 2003, 78th Leg., R.S., Tex. H.R.J. Res. 68, 2003 Tex. Gen. Laws 6236
• Act of Apr. 28, 1983, 68th Leg., R.S., Tex. S.J. Res. 12, 1983 Tex. Gen. Laws 6680
• Texas Legislative Council, Analyses of Proposed Constitutional Amendments, September 13, 2003, Election, at 57-59 (2003)
• Texas House of Representatives Committee on General Investigating, Interim Report to the 78th Texas Legislature, at 3.1-3.2 (2003)
• Texas House of Representatives Committee on General Investigating, Interim Report to the 77th Texas Legislature, at 2.1 (2000)
• S.E.C., Invest Wisely: An Introduction to Mutual Funds (2004)
• S.E.C., Investment Companies (2001)
• S.E.C., Mutual Fund Fees and Expenses (2000)
• Black's Law Dictionary 275 (7th ed. 1999)
• Uniform Management of Institutional Funds Act, 7A, pt. 2 U.L.A. 475, 491 (1972)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/greg-abbott/ga-0293
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2005/ga0293.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

January 11, 2005

The Honorable Geraldine Miller
Chair, State Board of Education
1701 North Congress Avenue
Austin, Texas 78701-1494

Opinion No. GA-0293

Re: Effect of amended article VII, section 5(b) of the Texas Constitution on the State Board of Education's management of the permanent school fund (RQ-0249-GA)

Dear Ms. Miller:

You request advice about the effect of a 2003 amendment to article VII, section 5(b) of the Texas Constitution.[1] See Act of June 1, 2003, 78th Leg., R.S., Tex. H.R.J. Res. 68, 2003 Tex. Gen. Laws 6236, 6237 (proposing amendments to article III, section 49-b and article VII, section 5). We will briefly summarize the constitutional provisions relevant to your inquiry.

Article VII, section 2 establishes the "perpetual school fund" consisting of various funds and lands allocated to support public schools. See TEX. CONST. art. VII, § 2. The lands are to be sold and the proceeds to be invested pursuant to article VII, section 4. See id. art. VII, § 4. Article VII, section 5 governs the "permanent school fund" (the "PSF") and the "available school fund" (the "ASF"). See id. art. VII, § 5. The PSF consists of the funds, bonds, dedicated lands, and investment and sale proceeds of the bonds and lands set apart to the school fund by article VII, section 2. See id. art. VII, § 5(a). The ASF, to be used annually to support Texas public schools, consists of distributions from the PSF and taxes collected for school purposes. See id. The State Board of Education (the "Board") is charged with managing and investing the PSF assets. See id. § 5(f); TEX. EDUC. CODE ANN. §§ 7.102(c)(31) (Vernon Supp. 2004); 43.003 (Vernon 1996); 43.006 (Vernon Supp. 2004). In managing the PSF assets, the Board may make any investment

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).

Before the 2003 amendment, only interest and dividend income on the PSF was distributed to the ASF. See Act of Apr. 28, 1983, 68th Leg., R.S., Tex. S.J. Res. 12, 1983 Tex. Gen. Laws 6680 (article VII, section 5(a) prior to 2003 amendment).[2] See also TEXAS LEGISLATIVE COUNCIL, ANALYSES OF PROPOSED CONSTITUTIONAL AMENDMENTS, SEPTEMBER 13, 2003, ELECTION, at 57-58 (2003). Article VII, section 5, as amended, authorizes a capital-gains distribution from the PSF to the ASF at a rate determined according to procedures set out in section 5(a). See TEX. CONST. art. VII, § 5(a). Thus, the amendment implements a "total return" strategy for the PSF. See TEXAS LEGISLATIVE COUNCIL, ANALYSES OF PROPOSED CONSTITUTIONAL AMENDMENTS, SEPTEMBER 13, 2003, ELECTION, at 58 (2003).

Although the main purpose of the 2003 amendment was to adopt a "total return" strategy, it also affected other provisions of section 5. See id. at 59. You inquire about the amendment to section 5(b), which now reads as follows:

The expenses of managing permanent school fund land and investments shall be paid by appropriation from the permanent school fund.

TEX. CONST. art. VII, § 5(b). You ask whether "the amount the Board may spend on PSF management expenses, including external investment managers, [is] limited to amounts specifically appropriated by the Texas Legislature." Request Letter, supra note 1, at 2.

We read the term "appropriation" in section 5(b) according to its usual meaning. See Spradlin v. Jim Walter Homes, Inc., 34 S.W.3d 578, 580 (Tex. 2000) (the courts rely on the constitution's literal text and construe its words as they are generally understood). We also read this term in its context in section 5 and in the constitution as a whole. See TEX. GOV'T CODE ANN. § 311.011(a) (Vernon 1998). See generally Booth v. Strippleman, 61 Tex. 378 (1884) (the construction of constitutional provisions is generally governed by the same rules as those governing the interpretation of statutes and codes); accord Rooms With A View, Inc. v. Private Nat'l Mortgage Ass'n, Inc., 7 S.W.3d 840, 844 (Tex. App.-Austin 1999, pet. denied); Tex. Att'y Gen. Op. No. GA-0213 (2004) at 3.

Article VII, section 5(c) states:

The available school fund shall be applied annually to the support of the public free schools. Except as provided by this section, the legislature may not enact a law appropriating any part of the permanent school fund or available school fund to any other purpose.

TEX. CONST. art. VII, § 5(c) (emphasis added). The Texas Constitution generally uses the term "appropriation" to mean an appropriation by the legislature. See id. art. III, § 5(b) (the legislature shall act upon emergency appropriations during the first thirty days of the regular session), 35(a) (general appropriation bills may include the subjects and accounts for which funds are appropriated); id. art. VIII, § 6 (no money shall be drawn from the treasury except by specific appropriation made by law); id. art. XVI, § 6(a) (no appropriation for private or individual purposes shall be made unless authorized by the constitution). Section 5(b) creates an exception to section 5(c) by authorizing the legislature to appropriate PSF money for management expenses and requiring the Board to pay those expenses from the appropriation. The amount the Board may spend on PSF management expenses, including external investment managers, is limited to amounts specifically appropriated by the Texas Legislature.

You refer to a section of Property Code chapter 163, the "Uniform Management of Institutional Funds Act." See Request Letter, supra note 1, at 2; TEX. PROP. CODE ANN. § 163.001 (Vernon 1995); see also UNIF. MGMT. OF INST. FUNDS ACT, 7A, pt. 2 U.L.A. 475 (1972). This statute was adopted "to provide guidelines for the management, investment, and expenditure of endowment funds of publicly and privately supported educational, religious, and charitable organizations." TEX. PROP. CODE ANN. § 163.002(b) (Vernon 1995). The Board is authorized to contract for investing the PSF to the same extent as a governing board of an institution of higher education under Property Code chapter 163. See TEX. EDUC. CODE ANN. § 43.006(a) (Vernon Supp. 2004). Property Code section 163.004(a) provides that "[a] governing board may appropriate for expenditure" the appreciation in the fair market value of an endowment fund's assets. TEX. PROP. CODE ANN. § 163.004(a) (Vernon Supp. 2004) (emphasis added). You suggest that this provision may be relevant to the Board's authority to pay investment managers.

The word "appropriate" in this context means to set apart for expenditure. See McCombs v. Dallas County, 136 S.W.2d 975, 981 (Tex. Civ. App.-Dallas 1940, writ ref'd); see also UNIF. MGMT. OF INST. FUNDS ACT, § 2 cmt., 7A, pt. 2 U.L.A. 491 (1972) (paraphrasing "appropriate for expenditure" as "expend"). Section 163.004 does not purport to delegate the legislature's appropriation authority to the educational, religious, and charitable organizations affected by chapter 163. Chapter 163 does not change our answer to your first question.

You next ask whether the Board may invest in assets such as mutual funds or investment trusts where a management fee is typically deducted from the assets under management instead of the investor paying a separate fee. "Mutual funds" are equity securities of an investment company registered under the Investment Company Act of 1940, see 15 U.S.C. §§ 80a-1 - 80a-64 (2000), and the Securities Act of 1933, see id. §§ 77a-77aa; see also TEX. FIN. CODE ANN. §§ 181.001-.002(a)(31) (Vernon Supp. 2004). An "investment trust" is also known as an investment company. See BLACK'S LAW DICTIONARY 275 (7th ed. 1999). See 15 U.S.C. § 80a-3(a)(1) (2000) (defining "investment company").

The United States Securities and Exchange Commission (the "SEC") has provided definitions of these terms. An investment company "issues securities and is primarily engaged in the business of investing in securities." S.E.C., INVEST WISELY: AN INTRODUCTION TO MUTUAL FUNDS, at 17 (2004). An investment company invests money received from investors on a collective basis, and each investor shares in the profits and losses in proportion to his interest in the company. See S.E.C., INVESTMENT COMPANIES, at 1 (2001). A mutual fund is one of three basic types of investment company recognized by federal securities law. See id. (mutual funds are "legally known as 'open-end companies'"). The SEC has defined "mutual fund" as "a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments." S.E.C., INVEST WISELY: AN INTRODUCTION TO MUTUAL FUNDS, at 2 (2004). Each share in these combined holdings, or portfolio, represents an investor's proportionate ownership of the fund's holdings and the income those holdings generate. See id.

Mutual funds have "regular, recurring, fund-wide 'operating expenses,'" including management fees paid to the fund's investment adviser for managing the portfolio. Id. at 8, 17. Funds typically pay these expenses from fund assets, which means that investors indirectly pay these costs. See id. at 8. The investment company's prospectus discloses management fees as a percentage of the fund's average net assets. See S.E.C., MUTUAL FUND FEES AND EXPENSES, at 1-2 (2000). Thus, an investor usually cannot know the dollar amount of management fees when he purchases the investment. Instead, their payment will be reflected in the returns of the investment in mutual funds.

We assume that you inquire about mutual funds and investment companies that deduct management fees from the funds' assets. You are concerned that management fees on such investments would be "expenses of managing permanent school fund land and investments" within section 5(b), required to "be paid by appropriation from the permanent school fund." TEX. CONST. art. VII, section 5(b); see Request Letter, supra note 1, at 3. If so, the price of shares would have to be allocated between the ASF assets being invested and the funds appropriated to pay management fees, a task that would not be possible at the time of purchase.

We turn to the meaning of section 5(b). When the courts interpret the state constitution, they rely on its literal text and give effect to its plain language. See Stringer v. Cendant Mortgage Corp., 23 S.W.3d 353, 355 (Tex. 2000); see also Republican Party of Tex. v. Dietz, 940 S.W.2d 86, 89 (Tex. 1997). Words and phrases are to be read in context and construed according to common usage unless they have acquired a technical meaning by legislative definition or otherwise. See TEX. GOV'T CODE ANN. § 311.011 (Vernon 1998). Constitutional provisions and amendments that relate to the same subject matter are construed together and considered in light of each other. See Doody v. Ameriquest Mortgage Co., 49 S.W.3d 342, 344 (Tex. 2001); Purcell v. Lindsey, 314 S.W.2d 283, 284 (Tex. 1958).

Section 5(b) refers to the expense of managing "land and investments." TEX. CONST. art. VII, § 5(b) (emphasis added). "Managing" is thus used in a general sense that refers to land as well as investments. "Management" in the usual sense of the word means to control, govern, and have authority over. See Hasley v. State, 222 S.W. 579, 580 (Tex. Crim. App. 1920). "Manage" has been defined to mean to "be in charge of" or "administer." See THE NEW OXFORD AMERICAN DICTIONARY 1036 (2001).

We also construe the term "investments" in section 5(b) according to ordinary usage. See TEX. GOV'T CODE ANN. § 311.011 (Vernon 1998); Stringer, 23 S.W.3d at 355 (plain meaning rule); Ferguson v. Wilcox, 28 S.W.2d 526, 530 (Tex. 1930) (words of the constitution are presumed to have been employed in their natural and ordinary meaning). Texas law ordinarily characterizes mutual funds and investment companies as "investments." For example, Property Code chapter 163, the Uniform Management of Institutional Funds Act, provides that, subject to limitations in the gift instrument or applicable law, the governing board responsible for managing an institutional fund may

invest all or any portion of an institutional fund in a pooled or common fund, including shares or interests in regulated investment companies, mutual funds, common trust funds, investment partnerships, real estate investment trusts, or similar organizations in which funds are commingled and investment determinations are made by persons other than the governing board.

TEX. PROP. CODE ANN. § 163.005(4) (Vernon 1995) (emphasis added). This statute describes the placement of funds in a mutual fund, investment fund, or other pooled fund as an investment, and even though it indicates that investment determinations will be made by fund managers, it does not treat the indirect management costs as distinct from the investment. Other Texas statutes identify mutual funds and investment companies as "investments." See TEX. REV. CIV. STAT. ANN. art. 6243e.1, § 11.01(2) (Vernon 2003) (trustees of firefighters relief and retirement fund in certain cities may invest surplus funds in "short-term investment funds, mutual funds, or their equivalent"); TEX. FIN. CODE ANN. § 34.104(a) (Vernon 1998) (state bank may invest for its own account in equity securities of an investment company); TEX. GOV'T CODE ANN. § 404.024(b)(11) (Vernon Supp. 2004) (certain mutual funds are authorized investments for state funds not deposited in state depositories); id. § 2256.014(b) (Vernon 2000) (no-load mutual fund is an authorized investment for governmental bodies); TEX. PROP. CODE ANN. § 113.056(d) (Vernon Supp. 2004) (under Texas Trust Act trustee may invest in investment company or investment trust). Construing "investments" in section 5(b) in the usual sense of the word, we conclude that a mutual fund or other investment company is an "investment" within that provision. Moreover, the indirect management costs deducted from the assets of a mutual fund or other investment company are an aspect of the investment itself and not separate "expenses of managing permanent school fund . . . investments." TEX. CONST. art. VII, § 5(b). Section 5(b) does not require such management fees to be paid from appropriated funds, and the Board may accordingly invest PSF assets in mutual funds and similar investments.

The legislative history of the 2003 amendment to article VII, section 5 moreover supports our conclusion that the management fees on PSF investments in mutual funds are not "expenses of managing" PSF investments for purposes of section 5(b). See Stringer, 23 S.W.3d at 355; Harris v. City of Fort Worth, 180 S.W.2d 131, 133 (Tex. 1944) (in construing a constitutional amendment, we may consider its legislative history). Former section 5(c), the predecessor of section 5(b), provided as follows:

The legislature may appropriate part of the available school fund for administration of the permanent school fund or of a bond guarantee program established under this section.

Act of Apr. 28, 1983, 68th Leg., R.S., Tex. S.J. Res. 12, § 5(c), 1983 Tex. Gen. Laws 6680, 6681 (emphasis added). See TEX. CONST. art. VII, § 5(e) (funding the administrative cost of the bond guarantee program). Legislative history treats the amended section 5(b) as primarily affecting the source of appropriations. An analysis of the proposed amendment states that

the amendment provides that the costs of managing PSF land and investments would be paid out of the PSF. Under current law, [section 5(c)], the costs of managing PSF land are paid from amounts appropriated to the General Land Office, and the costs of managing investments are paid from the ASF.

TEXAS LEGISLATIVE COUNCIL, ANALYSES OF PROPOSED CONSTITUTIONAL AMENDMENTS, SEPTEMBER 13, 2003, ELECTION, at 59 (2003). This description does not distinguish between the term "administration" used in former section 5(c) and the term "managing" used in section 5(b) as amended in 2003. The term "managing," however, may have been used in the 2003 amendment because the legislature had examined the management fees that the Board paid to external investment managers. See TEXAS HOUSE OF REPRESENTATIVES COMMITTEE ON GENERAL INVESTIGATING, INTERIM REPORT TO THE 78TH TEXAS LEGISLATURE, at 3.1-3.2 (2003); TEXAS HOUSE OF REPRESENTATIVES COMMITTEE ON GENERAL INVESTIGATING, INTERIM REPORT TO THE 77TH TEXAS LEGISLATURE, at 2.1 (2000).

Accordingly, under section 5(b) as amended in 2003, Board expenditures for managing or administering PSF investments, including payments to external investment managers, must be paid from the legislative appropriation authorized by that section. Section 5(b) as amended in 2003 does not require the Board to pay from appropriated PSF funds the indirect management costs deducted from the assets of a mutual fund or other investment company in which PSF funds have been invested. In deciding whether to invest PSF funds in a particular investment company under the standard stated in section 5(f), the Board should consider the effect of such deductions on the investment return.

Your third question relates to the Board's express constitutional authority to invest the PSF in the Texas growth fund created by Texas Constitution article XVI, section 70. See Request Letter, supra note 1, at 4. See TEX. CONST. art. VII, § 5(f) (Board's authority to invest in Texas growth fund). This question is asked on the premise that a specific appropriation is required to pay the management fees deducted from mutual funds or other investment companies in which PSF assets are invested. See Request Letter, supra note 1, at 4-5. In view of our answer to question two, we need not address your third question.

SUMMARY

Texas Constitution article VII, section 5 charges the State Board of Education with managing and investing the assets of the Permanent School Fund (PSF). Section 5(b) requires the Board to pay the expenses of managing PSF investments, including fees to external investment managers, from funds appropriated by the legislature from the PSF. The Board is not required to pay from appropriated PSF funds the indirect management costs attributable to mutual funds or other investment companies in which it invests PSF funds.

Very truly yours,

BARRY R. McBEE
First Assistant Attorney General

DON R. WILLETT
Deputy Attorney General for Legal Counsel

NANCY S. FULLER
Chair, Opinion Committee

Susan L. Garrison
Assistant Attorney General, Opinion Committee

Footnotes

[1] See Letter from Honorable Geraldine Miller, Chair, State Board of Education, to Honorable Greg Abbott, Texas Attorney General (July 13, 2004) (on file with Opinion Committee, also available at http://www.oag.state.tx.us) [hereinafter Request Letter].

[2] The amendment to article VII, section 5(b) was adopted on September 13, 2003. See http://elections.sos.state.tx.us/elchist.exe.

[3] This amendment was approved by the voters on November 8, 1983. See GENERAL AND SPECIAL LAWS OF THE STATE OF TEXAS, 1985, VOL. 3, "Votes On Proposed Amendments to the Texas Constitution, 1875-1985," at C-19.

[4] Available at http://www.tlc.state.tx.us/research/masyCommt.pdf.