                              ATTORNEY GENERAL                     OF   TEXAS
                                           GREG        ABBOTT




                                              January 11,2005



The Honorable Geraldine Miller                             Opinion No. GA-0293
Chair, State Board of Education
1701 North Congress Avenue                                 Re: Effect of amended article VII, section
Austin, Texas 78701-1494                                   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.’ 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. VJI, 5 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 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 5(f); TEX.
EDUC. CODE ANN. $5 7.102(~)(31)         (V emon 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


         ‘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 availa& nf http://www.oag.state.tx.us)
[hereinafter Request Letter].

          ‘The amendment toarticleVI1, sectionS(b)wasadoptedonSeptember     13,2003.   See http://elections.sos.state
.tx.us/elchist.exe.
The Honorable Geraldine Miller - Page 2                       (GA-0293)




                  of their affairs, not in regard to speculation but in regard to the
                  permanentdispositionoftheirfunds,consideringtheprobableincome
                  as well as the probable safety of their capital.

TEX.CONST.art. W, 5 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).’ See also TEXASLEGISLATIVECOUNCIL,
ANALYSESOFPROPOSEDCONSTITUTIONALAMENDMENTS,SEPTEMBER~~,~OO~,ELEC~ON,~~                        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 5(a). Thus, the amendment implements a “total return” strategy for the PSF. See TEXAS
LEGISLATIVE    COUNCIL,ANALYSES     OFPROPOSED   CONSTITUTIONAL     AMENDMENTS,      SEPTEMBER   13,
2003, ELECTION,    at 58 (2003).s

         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 bepaidby appropriation from the permanent school
                  fund.

TEX. CONST. art. VII, 5 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.3” Request Letter, supra note 1, at 2.

          We read the term “appropriation” in section 5(b) according to its usual meaning.              See
Sprudlin v. Jim Wulter 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’TCODEANN.
5 311.011(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 ‘IMortgage
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.



          ‘This amendment was approved by the voters onNovember 8,1983. See GENERALAND     SPECIALLAWSOFTHE
STATEOF    TEXAS, 1985, VOL. 3, “Votes On Proposed Amendments to the Texas Constitution, 1875-1985,” at C-19.

          4Available af http://www.tlc.state.tx.us/rese~c~p~~ysCo~t.pdf.
The Honorable Geraldine Miller - Page 3               (GA-0293)




       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. CON%. art. VII, 8 5(c) (emphasis added). The Texas Constitution generally uses the term
“appropriation” to mean an appropriation by the legislature. See id. art. III, $5 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, 5 6 (no money shall be drawn from the treasury except by specific appropriation made
by law); id. art. XVI, 5 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 thorn 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.CODEANN. 5 163.001
(Vernon 1995); see also UNIF. MGMT.OF INST.FUNDSACT, 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.CODEANN. 5 163.002(b) (V emon 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.CODEANN.9 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.
CODEANN. 5 163.004(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. FUNDSACT, $ 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 t?om 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. $5 8Oa-l - 80a-64 (2000), and
the Securities Act of 1933, see id. $9 77a-77aa; see also TEX. FIN. CODE ANN. $5 181.001-
The Honorable Geraldine Miller - Page 4               (GA-0293)




.002(a)(3 1) (Vernon Supp. 2004). An “investment trust” is also known as an investment company.
See BLACK’SLAWDICTIONARY275 (7th ed. 1999). See 15 U.S.C. $ SOa-3(a)(l) (2000) (defining
“investment company’).

         The United States Securities and Exchange Commission (the “SEC”) has provided
definitions of these terms. An investment company “issues secur$ies and is primarily engaged in
the business of investing in securities.” S.E.C., INVESTWISELY:AN INTRODUCTION             TO MUTUAL
FUNDS, at 17 (2004).6 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).7 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 t?om 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 MUTUALFUNDS,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 fbnd’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., MUTUALFUND FEES AND EXPENSES,
at I- 2 (2000).9 Thus, an investor usually cannot know the dollar amount ofmanagement 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 inveshnent companies that deduct
management fees thorn 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 f?om 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 Ten v. Dietz, 940 S.W.2d 86, 89
The Honorable Geraldine Miller - Page 5               (GA-0293)




(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’TCODEANN. 5 311 ,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. Am&quest Mortgage Co., 49 S.W.3d 342,344 (Tex. 2001); Purcell v. Lindsey, 3 14 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 Husky v. State, 222 SW. 579, 580 (Tex. Crim. App. 1920). “Manage” has
been defined to mean to “be in charge of’ or “administer.” See THE NEW OXFORDAMERICAN
DICTIONARY1036 (2001).

        We also construe the term “investments” in section 5(b) according to ordinary usage. See
TEX.GOV’TCODEANN.5 311.011 (Vernon 1998); Stringer, 23 S.W.3d at 355 (plainmeaningrule);
Ferguson v. B?vilcox,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.CODEANN. § 163.005(4) (Vernon 1995) (emphasis added). This statute describes the
placement of funds in a mutual fund, investment fLnd, 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 &om the investment. Other Texas statutes identify
mutual funds and investment companies as “investments.” See TEX. REV.Crv. STAT.ANN.art.
6243e. 1, $11 .01(2) (Vernon 2003) (trustees of firefighters relief and retirement fund in certain cities
may invest surplus fimds in “short-term investment funds, mutual funds, or their equivalent”); TEX.
FIN. CODEANN. $34.104(a) (Vernon 1998) (state bank may invest for its own account in equity
securities of an investment company); TEX. GOV’TCODEANN. 5 404.024@)(11) (Vernon Supp.
2004) (certain mutual funds are authorized investments for state funds not deposited in state
depositories); id. 9 2256.014(b) (Vernon 2000) (no-loadmutual fund is an authorizedinvestment for
governmental bodies); TEX.PROP.CODEANN.$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
The Honorable Geraldine Miller - Page 6            (GA-0293)




deducted fiam 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 5(b). Section 5(b) does not require such management fees to be paid horn
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. CityofFort Worth, 180 S.W.2d 131,133 (Tex. 1944) (inconstruingaconstitutional      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 schoolfind or of a bond
               guarantee program established under tbis section.

Act of Apr. 28, 1983,68th Leg., R.S., Tex. S.J. Res. 12, 4 5(c), 1983 Tex. Gen. Laws 6680,668l
(emphasis added).” See TEX. CONST. art. VII, 9 5(e) (funding the administrative cost of the bond
guarantee program). Legislative history treats the amended section S(b) as primarily affecting the
source of appropriations. An analysis of the proposed amendment states that

                       the amendment provides that the costs ofmanaging 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 horn 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,
SEPTEMBER13,2003, 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 REPRESENTATIVESCOMMITTEE ON GENERAL INVESTIGATING,
INTERIMREPORTTO THE 78~~ TEXAS LEGISLATURE,at 3.1-3.2 (2003);‘* TEXAS HOUSE OF
REPRESENTATIVESCOMMITTEE ON GENERAL INVESTIGATING,INTERIMREPORTTO THE77~~ TEXAS
LEGISLATURE, at   2.1 (2000).‘3
The Honorable Geraldine Miller - Page 7              (GA-0293)




        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,
sapra note 1, at 4. See TEX. CONST. art. VII, 4 5(f) (Boards 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.
The Honorable Geraldine Miller - Page 8           (GA-0293)




                                     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 t?om 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
