                                  ATTORNEY GENERAL OF TEXAS
                                               GREG.      ABBOTT



                                                 February 13,2007



     The Honorable Geraldine “Tincy”‘Miller               Opinion No. GA-0516
     Chair, State Board of Education
     1701 North Congress Avenue                           Re: Appropriate calculation of the market value of
     Austin, Texas 78701-1494                             the permanent school fund for making distributions
                                                          to the available school fund (RQ-0448-GA)

     Dear Ms. Miller:

              Under article VII, section 5 of the Texas Constitution, the State Board of Education (the
     “Board”) manages and invests the permanent school fund (the “PSF”), which consists of land and
     revenues dedicated to the support of public schools. See TEX. CONST.art. VII, 5 5(a), (f); TEX.
     EDUC. CODEANN. 5s 7.102(c)(31),43.003,43.006(Vernon2006).               ArticleVII, section5 directsthat
     “distributions made       from the total return on all investment assets of the [PSF]” be deposited in
     the available school fund (the “A%“), which fund is “applied annually to the support of the public
CT   free schools.” TEX. CONST. art. VII, § 5(a), (c).’ The Board has authority to determine the amount
     to be distributed from the PSF to the ASF, but the distribution is limited to “not more than six
     percent of the average of the market value of the [PSF], excluding real property.         managed, sold,
     or acquired under Section 4 of this article, on the last day of each of the 16 state fiscal quarters
     preceding the regular session of the legislature that begins before that state fiscal biennium.” TEX.
      CONST. art. VII, 5 5(a)(l); see also id. art. VII, 5 5(a)(2) (providing additional restriction that over
     the preceding ten-year period, the distribution may not exceed the total return over that ten-year
     period). You ask three questions regarding the interpretation of this constitutional limitation:

                     1.    May the          Board administratively adopt the accounting
                     methodology to determine the “market value” of the PSF? If so, what
                     limits (if any) exist on that discretion?

                     2.    Does Article [VII], Section S(a)(l) of the Texas Constitution
                     require funds held by the [General Land Office] in the Treasury for


               ‘Thisprovisionwas amendedin 2003to provide for a“total return”investmentmanagementstrategythat allows
     a portion ofthe market value increasesofthe PSF to be distributedand included in the ASF. See Tex. H.R.J. Res. 68,
     78th Leg., R.S., $ 2, 2003 Tex. Gen. Laws 6236, 6237; TEXASLEGISLATIVE          COUNCIL, ANAI.YSES   OFPROPOSED
     CONSTITUTIONALAMENDMENTS,        SEPTEMBER   13,2003EL~C’rlON, at 57-58 (July2003)(statingthatthe ASF,“ratherthan
     consisting. of the interest and income on PSF assets,would [under the amendment] consist of a portion of the ‘total
     return’on investment assets of the PSF-in other words, a portion of the market value increases, or capital gains, of
     stocks and bonds held by the PSF”), available at http://www.tlc.state.tx.us/pubsconamend/analysesO3/analysesO3.pdf
     (last visited Feb. 5, 2007).
The Honorable Geraldine “Tincy” Miller - Page 2                       (GA-0516)




                  the purchase of additional real property that will be managed, sold or
                  acquired under Article VII, Section 4 to be included in the market
                  value of the PSF for purposes of that section?

                  3.    Does Article [VII], Section 5(a)(l) of the Texas Constitution
                  require the market value of the PSF be determined in the same
                  manner as the total value of the PSF in its audited financial
                  statements?’

I.      Accounting      Methodology

          Because your first and third questions ask about the appropriate accounting methodology to
determine the PSF’s market value, we consider them together. See Request Letter, supra note 2,
at 3. Article VII, section 5 is silent on the appropriate accounting methodology for determining the
PSF’s market value for the purposes ofcalculating the ASF distribution. By its terms, neither article
VII, section 5(a)(l) directing the calculation and distribution to the ASF nor another provision in
section 5 authorizes or requires the Board to use a particular accounting methodology or requires that
the PSF’s market value be determined under section 5(a)(l) in the same manner as the total value
of the PSF in its audited financial statements. TEX. CONST. art. VII, 5 5(a)(l); see also Stringer v.
CendantMortgage Coup., 23 S.W.3d 353,355 (Tex. 2000) (citing Republican Party of Tex. v. Dietz,
940 S.W.2d 86, 89 (Tex. 1997)) (stating that when interpreting the state constitution, we must look
at its literal text and give effect to its plain language).

         But we must also consider chapter 43 of the Education Code, which regulates investment of
the PSF and use of the ASF. See TEX. EDUC. CODE ANN. ch. 43 (Vernon 2006); see also id.
§ 7.102(~)(3 1) (authorizing the Board to invest the PSF “within the limits of the authority granted
by Section 5, Article VII, Texas Constitution, and Chapter 43”). Section 43.020 of the Education
Code provides that “[a]11interest and dividends accruing from the investments of the [PSF] shall be
deposited to the credit of the [ASF] in accordance with the accrual~basis of accounting”3 and that
“[fjunds recognized under this section are considered part of the [ASF] and may be appropriated as
provided by” article VII, section 5. Id. 3 43.020; see also id. § 43.001(b) (as amended by Act of June
 1,2003,7Sth Leg., ch. 201, § 36,2003 Tex. Gen. Laws 812, 823) (stating that the ASF consists of
“the interest and dividends arising from any securities or funds belonging to the [PSF], as determined
in accordance With the accrual basis of accounting”). Section 43.020 plainly requires investment
income to be recognized as part of the ASF and deposited to the ASF using an accrual basis of


        ‘See Letter from Honorable Geraldine “T&y” Miller, Chair, State Board of Education, to Honorable Greg
Abbott, Attorney General of Texas, at 3 (Feb. 9, 2006) (on file with the Opinion Committee, also available at
http://www.oag.state.tx.us)[hereinafterRequest Letter].

          ‘Inthe federalincometax context,“[kleepingaccountsand makingreturnsonthe accrualbasis, as distinguished
from the cash basis, import that it is the right to receive and not the actual receipt that determines the inclusion of the
amount in gross income.” SpringCity Foundry Co. Y. Comm’r oflnternalRevenue, 292 U.S. 182, 184(1934). More
generally,the accrual accountingmethod “recordsentries ofdebits and credits whenthe liabilityarises,ratherthan when
the income or expense is received or disbursed”in contrastto the cash-basisaccountingmethod “thatconsidersonly cash
actually received as income and cash actually paid out as an expense.” BLACK’LAW     S DKTIONARY        20 (7th ed. 1999).
    The Honorable Geraldine “Tincy” Miller - Page 3                      (GA-0516)




    accounting. Id. § 43.020; see also FISCALNOTE,T~X H.B. 3459,78th Leg., RX (2003) (“Sections
    36 [Education Code section 43.001(b)] and 37 [section 43.0201 move the accounting for the [PSF]
    from a cash to an accrual basis by redefining the fund to include unrealized interest and
    dividends.“)“; Lenz v. Lenz, 79 S.W.3d 10, 19 (Tex. 2002) (stating that the goal of statutory
    construction is to effect the legislative intent, and courts accomplish this by looking to the plain and
    common meaning of the words and terms the Legislature uses). Under article VII, section 5(a)(l),
    the market value of the PSF determines the ASF distribution. See TEX. CONST.art. VII, § 5(a)(l).
    Using the cash accounting method to calculate the PSF market value under section 5(a)(l) would
    result in the exclusion from the PSF’s value of amounts that section 43.020 of the Education Code
    requires be included in the PSF. In response to your first and third questions, because section43.020
    ofthe Education Code requires the Board to use the accrual accounting method to determine the ASF
    distribution, we conclude that the Board does not have the discretion to adopt another accounting
    method to determine the PSF’s market value for calculating the ASF distribution under article VII,
    section 5(a)(l).’

    II.     General Land Office Held Funds

             In your second question, you ask whether article VII, section 5(a)(l) of the Texas
    Constitution requires the PSF’s market value to include funds held by the General Land Office in
    the state treasury for the purchase of additional real property. See Request Letter, supra note 2,
    at 3. Article VII, section 5 limits the annual total distribution from the PSF to the ASF to “an

c   amount that is not more than six percent of the average of the market value of the [PSF], excluding
    real property belonging to the fund that is managed, sold, or acquired under Section 4 of this
    article.” TEX. CONST.art. VII, 5 5(a)(l) (em ph asis added). Article VII, section 4 authorizes the sale
    of PSF land as prescribed by the Legislature and provides that the sale proceeds be,used to acquire
    other land or be invested in authorized securities by the Comptroller of Public Accounts as directed
    by the Board. See id art. VII, 5 4. As prescribed by the Legislature, the article VII, section 4 lands



             ‘Section43.020was adopted by the Seventy-eighthLegislature,which also approved the 2003 amendmentsto
    article VII, section 5 providing for the “total return”investment strategy for the PSF and distributionto the ASF of a
    portion ofthe PSF’s market value. See Tex. H.R.J.Res. 68,78thLeg., R.S., 5 2,2003 Tex. Gen. Laws6236,6237; Act
    ofJune 1,2003,78thLeg., R.S., ch. 201,s 37,2003 Tex. Gen. Laws 812, ~~~;FIscALNoTE,T~x.H.B.3459,78thLeg.,
    R.S. (2003) (“Movingthe accounting for certain assets of the [PFS] from cash to accrual would result in an estimated
    one-time ASF revenue increase of $100 million, and a corresponding savings to general revenue of $90 &lion
    [A] move to total return for the PSF would significantlyreduce the revenue gain.“).

             ‘It has been suggested that section 43.020 may be~ineffectivebecause it limits the broad discretion grantedto
    the Board by article VII, section 5(f) of the Texas Constitution. See Telephone Conversationwith David Anderson,
    General Counsel,Texas EdudationAgency (May 12,2006). By its terms, article VII, section 5(f) authorizesthe Board
    to buy, hold, and sell investments in the same manner as would a prudent person. See TEX.CONST.     art. VII, 5 5(f); see
    also Stringer, 23 S.W.3d at 355 (statingthat when interpretingthe state constitution,we must look at its literaltext and
    give effect to its plain language). Section 5(f) grants the Board broad investment authority. See TEX.CONST.    art. VII,
    8 S(f);see also Tex. Att’y Gen. Op. No. DM-175(1992) at 4 (statingthat “[a]rticleVII, section (S)(M) expresslygives
    the Board the authorityto make any kind of prudent investmentin managingthe assets of the”PSF). But section
    5(t) does not address calculation of the PSF’s market value or the accounting methodology to be used in making that
    calculationfor purposes of distributionsto the ASF. Thus, section 43.020 does not limit the Board’s discretionunder
    article VII, section 5(f).
The Honorable Geraldine “Tincy” Miller - Page 4                (GA-0516)




are managed by the School Land Board6 and the Commissioner of the General Land Office
(collectively, the “Land Office”). TEX.NAT. RES. CODE ANN. 5 51 ,011 (Vernon Supp. 2006). You
note that “[a]t any time, a large portion of these funds [held by the Land Office] may be encumbered
for the settlement of [Land Office] real estate transactions at a future date.” See Request Letter,
supru note 2, at 3. And in 2004, the Board excluded from the PSF’s market value these funds based
on the Board’s understanding that “investment assets” as used in article VII, section 5 referred only
to the Board-managed PSF assets. See id.

         In interpreting article VII, section 5(a)(l), we consider the amendment’s literal text and the
common meaning of “real property.” See Stringer, 23 S.W.3d at 355 (stating that when interpreting
the state constitution, we must look at its literal text and give effect to its plain language); Spradlin
v. Jim Walter Homes, Inc., 34 S.W.3d 578,580 (Tex. 2000) (stating thatpresumingthe          constitutional
language is carefully selected, its words must be construed as they are generally understood). The
well-established meaning of the term “real property” is “land, and generally whatever is erected or
growing upon it or affixed to land.” San Antonio Area Found. v. Lang, 35 S.W.3d 636, 640 (Tex.
2000) (quoting Chustuinv. Koonce, 700 S.W.2d 579, 584 (Tex. 1985) (Gonzalez, J., concurring)).

         But “real property” is followed by the additional language “belonging to the fund that is
managed, sold, or acquired under Section 4 of this article” to which we must give meaning and
purpose. See TEX. CONST. art. VII, fj 5(a)(l); see also Spradlin, 34 S.W.3d at 580 (stating that
consistent with fundamental principles of constitutional construction, “we give effect to all the words
of a statute and do not treat any statutory language as surplusage, if possible”); Hanson v. Jordan,
198 S.W.2d 262,263 (Tex. 1946) (stating that courts “should avoid a construction that renders any
provision meaningless” and “must lean in favor of a construction which will render every word
operative”). Reading section 5(a)(l) to exclude only real property from the PSF’s market value
would render “real property       sold     under Section 4 of this article” superfluous because, under
this reading, excluding from the PSF’s market value “real property sold” is meaningless-there         is
no real property belonging to the fund to exclude once it is sold. We cannot presume that the
Legislature intended this redundancy. See Spradlin, 34 S.W.3d at 580 (stating that we must give
effect to all words of a statute and not treat any statutory language as surplusage if possible).
Presuming that the Legislature intended all the language it used to be effective, “real property sold”
can only mean the proceeds of the sale, which must thus be excluded from the market value of the
PSF for the purposes of calculating the ASF.

         Construing real property sold to mean sale proceeds that are thus excluded from the
PSF’s market value is consistent with the other provisions of article VII, section 5 and article VII,
section 4. See Doody v. Ameriquest Mortgage Co., 49 S.W.3d 342, 344 (Tex. 2001) (stating that
constitutional provisions and amendments that relate to the’ same subject matter are construed
together and considered in light of each other). Section 5(a) first describes in general terms the PSF
component of the ASF: “The [ASF] consists of the distributions made to it from the footalreturn on
all investment assets of the [PSF]” and then directs’specifically      how that distribution is to be


         6&zT~~.N~~. RES.CODEANN.$5 32.011 (creatingSchool LandBoard), 32.012(providingthat SchoolLand
Board is composed of the Commissionerof the GeneralLand Office and two citizens, one appointed by the Governor
and the other by the Attorney Generalwith the advice and consent ofthe.Senate) (Vernon 2001).
    The Honorable Geraldine “Tincy” Miller - Page 5              (GA-0516)




    calculated: no more than six percent of the PSF’s average market value excluding real property
    managed under article VII, section 4. See TEX. CONST.art. VII, 5 5(a)(l) (emphasis added). And
    section 5(a)(2) provides that “over the 1O-year period consisting of the current state fiscal year and
    the ,nine preceding state fiscal years,” the AFS distribution, “may not exceed the total return on all
    investmentassets of the [PSF] over the same IO-year period.” Id. § 5(a)(2) (emphasis added). The
    meaning ofthe term “investment assets” in section 5 is revealed by section 5(l), which provides that
    “in managing the assets of the [PSF], the [Board] may acquire, . . sell       , or retain     any kind
    of investment” that a prudent person under the prevailing circumstances would acquire or retain,
    Id. 5 5(f) (emphasis added). “Investment assets” with respect to which the ASF distribution is
    calculated and generally addressed by article VII, section 5 are thus the assets subject to the
    investment control and management of the Board.

            Funds held by the Land Office in the state treasury for the purchase of additional real property
    are simply not under the Board’s investment management and control. Under the article VII, section
    4 scheme, the Land Office controls and manages the proceeds from the sale of land designated
    for the purchase of additional lands. See TEX. CONST.art. VII, 5 4; TEX. NAT. RES. CODEAm.
    $5 51.011, ,401, ,402, .4021 (Vernon Supp. 2006). Section 4 provides a separate scheme for the
    ongoing sale of land and purchase of additional land with the sale proceeds .as authorized by the
    Legislature. See TEX. CONST.art. VII, 5 4. The Legislature has granted the Land Office the “sole
    and exclusive” authority to manage and control these lands. See TEX. NAT. RES. CODE ANN.
    5 Sl.Oll(Vemon        Supp. 2006). And the Legislature has given the Land Office two years within

e   which to use the proceeds of the sale of land and proceeds of mineral leases and royalties-held
    a “special fund account” of the PSF-to acquire other land or mineral interests in land. See id.
    95 5 1.401 (a), (c), .402(a). The Land Office may contract with professional investment managers to
                                                                                                            in



    invest the designated funds. See id 5 5 1.4021(a). Interest earned on the proceeds during the two-
    year period is “deposited in the State Treasury to the credit of the” PSF. See id. § 51.401(b). But
    only the proceeds remaining after this two-year period that are not used to purchase land or interest
    in land (or used for related purposes) must be “deposited            to the credit of the” PSF. See id
    5 51.401(d). Thus for the two-year period, land proceeds are designated for the purchase of
    additional lands or interests in land by the Land Office and are not “deposited      to the credit ofthe”
    PSF.

             Construing the PSF’s market value in section 5(a)(l) to exclude the proceeds of the sale of
    real property, which is not under the investment and control of the Board, is therefore consistent with
    the other provisions of article VII, section 5 that deal only with the PSF assets under the investment
    management and control of the Board.

            Favoring a construction that gives effect to all the article VII, section 5(a)(l) language and
    reading it in light of related provisions, dictates construing “real property        managed, sold, or
    acquired under Section 4 of this article” to include proceeds from the sale of land held in a “special
    fund account” of the PSF to acquire other land or mineral interests in land. Accordingly, in answer
    to your second question, we conclude that article VII, section 5(a)(l) of the Texas Constitution
    requires the PSF’s market value to exclude both real property held by the PSF and funds held by the
    Land Office in the state treasury for the purchase of additional real property.
The ,Honorable Geraldine “Tincy” Miller - Page 6        (GA-0516)




                                      SUMMARY

                      Because section 43.020 of the Education Code requires the
              State Board of Education to use the accrual accounting method to
              determine distributions to the available school fund, the Board may
              not administratively adopt another accounting method to determine
              the permanent school fund’s market value to calculate the available
              school fund distribution under Texas Constitution article VII, section
              5(a)(l). Article VII, section S(a)(l) requires the permanent school
              fund’s market value to exclude funds held by the School Land Board
              in the state treasury for purchasing additional real property.

                                             Very truly yours,




                                             Attorn w    eneral of Texas



KENT C. SULLIVAN
First Assistant Attorney General

ELLEN L. WITT
Deputy Attorney General for Legal Counsel

NANCY S. FULLER
Chair, Opinion Committee

Sheela Rai
Assistant Attorney General, Opinion Committee
