                                ATTORNEY GENERAL OF TEXAS
                                             GREG        ABBOTT




                                                   April 9, 2008



The Honorable Don McLeroy, D.D.S.                          Opinion No. GA-0617
Chair, State Board of Education
William B. Travis Building                                 Re: Constitutionality of section 51.413, Natural
1701 North Congress Avenue                                 Resources Code, which would authorize the
Austin, Texas 78701-1494                                   School Land Board to transfer proceeds from the
                                                           sale of land in the permanent school fund to the
                                                           available school fund (RQ-0638-GA)

Dear Dr. McLeroy:

        You ask for an opinion on several issues concerning the permanent school fund.! In
particular, you ask about the constitutionality of Natural Resources Code section 51.413, adopted
by House Bill 3699 of the Eightieth Legislature. Request Letter, supra note 1, at 1. 2 This section
would authorize the School Land Board ("SLB") to transfer proceeds from the sale of land in the
permanent school fund ("PSF") to the available school fund ("ASF"). See TEX. NAT. REs. CODE
ANN. § 51.413(1) (Vernon Supp. 2007).

          Your first question is as follows:

                          [W]hether the Perpetual School Fund, the Public Free School
                  Fund and the Permanent School Fund referred to in Sections 2, 4 and
                  5 of Article VII of the Texas Constitution constitute a single fund.

Request Letter, supra note 1, at 1.

        We begin by reviewing the constitutional provisions. Article VII, section 2, which
establishes the "perpetual public school fund," provides as follows:

                         All funds, lands and other property heretofore set apart and
                  appropriated for the support of public schools; all the alternate



         1See Letter from Honorable Don McLeroy, D.D.S., Chair, State Board ofEducation, to Honorable Greg Abbott,

Attorney General of Texas, at 1 (Oct. 11, 2007) (on file with the Opinion Committee, also available at
http://www.oag.state.tx.us) [hereinafter Request Letter].

          2See Act ofMay 25, 2007, 80th Leg., R.S., ch. 1368, § 8, 2007 Tex. Gen. Laws 4664, 4666-67 (codified at TEX.
NAT.   REs. CODE ANN. § 51.413 (Vernon Supp. 2007).
The Honorable Don McLeroy, D.D.S. - Page 2                (GA-0617)




               sections of land reserved by the State. out of grants heretofore made
               or that may hereafter be made to railroads or other corporations ofany
               nature whatsoever; one half ofthe public domain ofthe State; and all
               sums of money that may come to the State from the sale of any
               portion of the same, shall constitute a perpetual public school fund.

TEX. CaNST. art. VII, § 2. Lands dedicated to the fund established by article VII, section 2, become
part of the fund, and neither an error of the Land Commissioner or a legislative act may provide for
a disposition ofthe land except as authorized by the constitution. See Eyl v. State, 84 S.W. 607, 611
(Tex. Civ. App.-Austin 1904, writ refd).

       Section 5 defines the "permanent school fund" as follows:

                      The perm~nent school fund consists of all land appropriated
               for public schools by this constitution or the other laws of this state,
               other properties belonging to the permanent school fund, and all
               revenue derived from the land or other properties.

TEX. CaNST. art. VII, § 5(a). A report on the PSF describes the revenues that go into the PSF:

               Revenues earned by the Fund include gains realized on the sale of
               land and real estate owned by the Fund; lease payments, bonuses and
               royalty income received from oil, gas and mineral leases; commercial
               real estate lease revenues; surface lease and easement revenues;
               revenues from the resale ofnatural and liquid gas supplies; dividends,
               interest, and securities lending revenues; the net increase and or
               decrease' in the fair market value of the investment portfolio and
               externally managed real estate investment funds; and, other
               miscellaneous fees and income.

TEX. EDUCATION AGENCY, TEX. PERMANENT SCHOOL FUND, ANNUAL REpORT, FISCAL YEAR
ENDING AUGUST 31,2007 (2008) at 5, available at http://www.tea.state.tx.us/psf/annualreports.html
(last visited Apr. 7, 2008). Pursuant to the constitutional language placing "all revenue derived from
the land or other properties" into the PSF, the fund will include all funds derived from (1) the sale,
lease and any other disposition ofPSF assets or any interest in those assets, and (2) the investment
ofthe proceeds ofthe sale, lease or disposition ofthe PSF assets or any interest in those assets. TEX.
CaNST. art. VII, § 5(a).

        Article VII, section 5(a) defines the available school fund:

               The available school fund consists ofthe distributions made to it from
               the total return on all investment assets ofthe permanent school fund,
               the taxes authorized by this constitution or general law to be part of
               the available school fund, and appropriations made to the available
The Honorable Don McLeroy, D.D.S. - Page 3                 (GA-0617)




               school fund by the legislature. The total amount distributed from the
               permanent school fund to the available school fund [in each year of
               a state fiscal biennium shall be determined under subsections 5(a)(1)
               and (2) of this article].

Id. (emphasis added); see also id § 3(a) ("One-fourth of the revenue derived from the State
occupation taxes shall be set apart annually for the benefit of the public free schools."); ide §§ 5(b)
("expenses ofmanaging permanent school fund land and investments shall be paid by appropriation
from the [PSF]'~); 5(d) (Legislature may provide for using PSF to guarantee bonds issued by school
district or by state for certain purposes).

        Section 5(a) was amended in 2003 to provide for a "total return" investment management
strategy, which allows a portion of the market value increases of the PSF to be distributed and
included in the ASF. See Tex. H.R.J. Res. 68, § 2, 78th Leg. R.S., 2003 Tex. Gen. Laws 6236,
6237- 38 (proposed amendment). A comptroller's report recommending a constitutional amendment
to adopt the total return concept for the PSF stated as follows:

               Barron's financial guides define total return as "the annual return on
               an investment including appreciation and dividends or interest."
               [John Downes and Jordan Elliot Goodman, Dictionary ofFinance
               and Investment Terms, 5th ed. (Hauppauge, New York: Barron's
               Educational Series Inc., 1998), at 654]. Under the total return
               spending policy, a certain amount ofthe total annual return is held in
               the corpus of the fund to offset inflation and other factors; the
               remainder of the return ·is paid to the fund's beneficiaries after
               management expenses are paid. This policy, then, makes a portion of
               the annual growth in the fund's total market value, as well as its
               income, available for distribution. This gives fund managers the
               ability to distribute some portion ofeach part ofan investment's total
               return-interest, dividends, and market value increases.

See TEX. COMPTROLLER OF PUBLIC ACCOUNTS, TEX. PERFORMANCE REVIEW, LIMITED
GOVERNMENT, UNLIMITED OPPORTUNITY, ED 9 (2003) at 1-2, available at http://www.window.state
.tx.us/etexas2003/ (last visited Apr. 7, 2008). Legislative history states that the 2003 amendment
"would change the composition of the PSF and the ASF by providing that the ASF, rather than
consisting in part of the interest and income on the PSF assets, would 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." TEX. LEGISLATIVE COUNCIL,
ANALYSES OF PROPOSED CONSTITUTIONAL AMENDMENTS, SEPTEMBER 13,2003 (2003) at 58,
available at http://www.tlc.state.tx.us/pubsconamend/pubsconamend.html (last visited Apr. 7,2008).

       Article VII, section 4 provides for selling the lands set apart by section 2 and investing the
proceeds:
The Honorable Don McLeroy, D.D.S. - Page 4                        (GA-0617)



                The lands herein set apart to the Public Free School fund, shall be
                sold under such regulations, at such times, and on such terms as may
                be prescribed by law . . .. The proceeds of such sales must be used
                to acquire other land for the Public Free School fund as provided by
                law or' the proceeds shall be invested by the comptroller of public
                accounts, as may be directed by the Board of Education herein
                provided for,3 in the bonds ofthe United States, the State ofTexas, or
                counties in said State, or in such other securities, and under such
                restrictions as may be prescribed by law; and the State shall be
                responsible for all investments.

Id. art. VII, § 4. Thus, the SBOE is responsible for directing the investment of proceeds from PSF
land sales. See id; see also TEX. EDUC. CODE ANN. § 43.003 (Vernon 2006) (investment ofPSF by
SBOE). The SLB has been delegated responsibility for selling the lands that article VII, section 2
sets apart for public school purposes. See TEX. NAT. REs.. CODE ANN. § 32.061(1)-(2) (Vernon
2001); see also ide § 51.011 (Vernon Supp. 2007). Article VII, section 4 requires the proceeds of
the land sales to (1) be used to acquire other land for the PSF or (2) be invested by the State Board
of Education ("SBOE") in the securities described in section 4. See TEX. CaNST. art. VII, § 4.

        In answer to your first question, we conclude that the perpetual school fund, the public free
school fund, and the permanent school fund referred to in Sections 2, 4, and 5 of article VII, Texas
Constitution, constitute a single fund. Article VII, section 2 provides that certain state lands and
revenues shall constitute "a perpetual public school fund," and section 5(a) gives the name
"permanent school fund" to the fund created by article VII, section 2. The Education Code describes
the permanent school fund as "a perpetual endowment for the public schools." TEX. EDUC. CODE
ANN. § 43.001(a) (Vernon 2006); see also Tex. Att'y Gen. Ope No. DM-316 (1995) at 2 (equating
"perpetual school fund" with "permanent school fund"). A court has used the term "public free
school fund" to mean the fund created by section 2. See Hall v. Rushing, 54 S.W. 30, 32 (Tex. Civ.
App.-Fort Worth 1899, no writ) (effect of article VII, section 2 of the Texas Constitution was to
constitute certain land as land belonging to the public free school fund of this state). The term
"permanent school fund" was used in place of "public free school fund" in a recodified statute
because "permanent school fund" is the term "most commonly used of the several different names
used for this fund." TEX. OCC. CODE ANN. § 1071.002 revisors note 2 (Vernon Supp. 2007).
Accordingly, the terms "perpetual school fund," "public free school fund," and "permanent school
fund" are simply different names for the same fund. We will use the name "permanent school fund"
or PSF to refer to this fund.

        You next ask "whether the SBOE and/or the SLB may consider the investments made by the
other body when executing their investment activities under their respective fiduciary standards."
Request Letter, supra note 1, at 2. Ifthis authority exists, you wish to know whether the two boards
are required by their fi,duciary standards to consider the overall holdings ofthe PSF managed by the
other entity in making investments within their respective portfolios. See id


        3See TEX. CONST. art. VII, § 8 ("The Legislature shall provide by law for a State Board of Education ....").
The Honorable Don McLeroy, D.D.S. - Page 5                      (GA-0617)



        We reiterate that the constitution provides that the lands set apart to the PSF shall be sold and
"[t]he proceeds of such sales must be used to acquire other land for the Public Free School fund as
provided by law or the proceeds shall be invested by the comptroller of public accounts, as may be
directed by the Board of Education herein provided for ...." TEX. CONST. art. VII, § 4 (emphasis
added). Article VII, section 5(a) provides that the PSF "consists of all land appropriated for public
schools by this constitution or the other laws of this state, other properties belonging to the [PSF],
and all revenue derivedfrom the land or other properties." Id. art. VII, § 5(a) (emphasis added).
The proceeds of the land sales are thus part of the PSF, whether they are used to acquire other land
for the PSF or invested in securities. See ide art. VII, § 4.

          Article VII, section 5(t) ofthe Texas Constitution provides that the SBOE, in managing PSF
assets,

                 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 . . . 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 oftheir 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.

Id. art. VII, § 5(t). The SBOE's investment policy statement must "document that the SBOE is
fulfilling its responsibilities for managing PSF investments solely in the interests ofthe PSF." 19
TEX. ADMIN. CODE § 33.10(b)(5) (2007) (Tex. Educ. Agency, Statement of Investment Policy)
(emphasis added). Pursuant to its investment policy statement, the SBOE would be well advised to
keep in mind the interests of the PSF as a whole when it makes investments. In addition, under
article VII, section 4 the proceeds of land sales may in the future become subject to investment at
the SBOE's direction. See TEX. CONST. art. VII, § 4. When the SBOE invests PSF funds, it would
be appropriate, and may even be essential, for it to consider the effect of SLB investments on the
income and safety of the PSF as a whole.

       We also consider whether the SLB, when it invests the PSF assets entrusted to it, mayor
must consider the investments made by the SBO~~4 The SLB is the agency authorized by legislative
delegation under article VII, section 4 to sell PSF·land and to acquire other land for the PSF. See
TEX. CONST. art. VII, § 4; TEX. NAT. REs. CODE ANN. §§ 51.402-.406 (Vernon 2001 & Supp. 2007).
The SLB, created by Natural Resources Code section 32.011, is composed of the Commissioner of
the General Land Office and two other persons, one appointed by· the Governor and the other
appointed by the Attorney General. See ide §§ 32.011, .012(a) (Vernon 2001). Section 51.401
authorizes the SLB to designate funds received from lands and other interests "for deposit in the real


        4In addressing this question, we do not consider the SLB's constitutional or statutory authority to make
investments.
The Honorable Don McLeroy, D.D.S. - Page 6                         (GA-0617)



estate special fund account of the permanent school fund in the State Treasury to be used by the
[SLB] as provided by this subchapter." Id. § 51.401(a). "The real estate special fund account must
be an interest-bearing account, and the interest received on the account shall be deposited in the
State Treasury to the credit of the real estate special fund account of the permanent school fund."
Id. § 51.401(b). The SLB may use the money in the real estate special fund account for various
purposes, including the following:

                         (1) to add to a tract of public school land to form a tract of
                 sufficient size to be manageable;

                          (2) to add contiguous land to public school land;

                          ... or

                         (8) to acquire, sell, lease, trade, improve, .maintain, protect,
                 or use land, mineral and royalty interests [and certain other interests]
                 at such prices and under such terms and conditions the board
                 determines to be in the best interest ofthe permanent school fund.

Id. § 51.402(a) (emphasis added). Section 51.402(a)(8) expressly requires the SLB to make
transactions at the prices and under the terms and conditions that "the board determines to be in
the best interest of the permanent school fund," which includes the assets invested by the SBOE.
Id. § 51.402(a)(8). Section 51.402(b) moreover provides that the SLB, before using funds under
section 51.402(a), "must determine, using the prudent investor standard, that the use ofthe funds for
the intended purpose is authorized by Subsection (a) and in the best interest ofthe permanent school
fund." Id. § 51.402(b) (emphasis added).5 The Legislature has thus expressly directed the SLB to
consider the best interest of the PSF when it invests or otherwise spends the real estate special fund
 account. The PSF includes the assets managed and invested by the SBOE; thus, when the SLB
 invests or otherwise expends money in the real estate special fund account, its consideration of the
 best interest of the PSF must include the SBOE's investments ofPSF assets.

        You finally ask "whether the SLB may constitutionally transfer funds to the ASF under the
authority of Section 51.413 or any other provision of law." Request Letter, supra note 1, at 5.
Section 51.413 of the Natural Resources Code provides in part:

                         The [SLB] may, by a resolution adopted at a regular meeting,
                 release from the teal estate special fund account funds previously
                 designated under Section 51.401 ofthis chapter or managed, used, or
                 encumbered under Section 51.402 or Section 51.4021 ofthis chapter
                 to be deposited in the State Treasury to the credit of:


        5Natural Resources Code section 51.402(b) also provides that "[a] determination by the board on the use of
funds under this section is conclusive unless the determination was made as a result of fraud or obvious error." TEX.
NAT. REs. CODE ANN. § 51.402(b) (Vernon Supp. 2007).
The Honorable Don McLeroy, D.D.S. - Page 7                (GA-0617)



                       (1) the available school fund ....

TEX. NAT. REs. CODE ANNo § 51.413(1) (Vernon Supp. 2007).

        In addressing the constitutionality ofthis provision, we presume that legislative enactments
are constitutional and, ifpossible, interpret them "in a manner to avoid constitutional infirmities."
Barshop v. Medina County Underground Water Conservation Dist., 925 S.W.2d 618,629 (Tex.
1996). "[A] law will not be declared unconstitutional unless it is clearly so." City ofDallas Vo Tex.
Prudential Ins. Co., 291 S.W.2d 693,696 (Tex. 1956); see also Ex parte Granviel, 561 S.W.2d 503,
511 (Tex. Crim. App. 1978). However, the Legislature may not authorize an action that the
constitution prohibits. Tex. Mun. League Intergov'tl Risk Pool v. Tex. Worker's Compo Comm 'n,
74 SoW.3d 377, 381 (Tex. 2002).

        We consider whether Natural Resources Code section 51.413(1) is consistent with the
constitutional provision governing distributions from the PSF to the ASF. Texas Constitution article
VII, section 5(a) provides as follows:

               (a) ... The available school fund consists of the distributions made
               to it from·the total return on all investment assets of the permanent
               school fund, the taxes authorized by this constitution or general law
               to be part ofthe available school fund, and appropriations made to the
               available school fund by the legislature. The total amount distributed
               from the permanent school fund to the available school fund:

                        (1) in each year ofa state fiscal biennium must be an amount
               that is not more than [an amount based on the market value of the
               P~F, computed at specific times], excluding real property belonging
               to the fund that is managed, sold, or acquired under Section 4 of this
               article, ... in accordance with the rate adopted by:

                            (A) a vote of two-thirds of the total membership of the
               State Board of Education, taken before the regular session of the
               legislature convenes; or

                           (B) the legislature by general law or appropriation, if
               the State Board of Education does not adopt a rate as provided by
               Paragraph (A) of this subdivision; and

                       (2) [limit in distributions based on a 10-year period].

TEX. CONST. art. VII, § 5(a). This provision defines the ASF as consisting of"the distributions made
to it from the total return on all investment assets ofthe permanent school fund, the taxes authorized
by this constitution or general law to be part of the available school fund, and appropriations made
The Honorable Don McLeroy, D.D.S. - Page 8                          (GA-0617)




to the available school fund by the legislature." Id. Nothing in this definition includes in the ASF
the proceeds of land sales deposited in the real estate special fund and managed by the SLB. 6

         Section 5(a)(1) also limits the amount that will be distributed each year from the PSF to
the ASF, and no constitutional provision other than section 5 of article VII authorizes a distribution
of money from the PSF to the ASF. Section 5(a)(1) requires either the SBOE or the Legislature
adopt a rate to be used in computing the .annual distribution from the PSF to the ASF. See ide
§ 5(a)(l )(A)-(B). The constitution does not authorize any other state officer or governmental body
to compute the rate required by section 5 or to distribute funds from the PSF to the ASF. 7 Any
statute authorizing the distribution ofmoney from the PSF to the ASF must be consistent with article
VII, section 5.

        Natural Resources Cod~ section 51.413(1) allowsthe SLB to transfer the proceeds of land
sales to the ASF. Such proceeds are not components ofthe ASF as described by article VII, section
5(a). Moreover, nothing in section 5 or any other applicable constitutional provision authorizes the
SLB to transfer the proceeds ofland transactions to the ASF. Accordingly, section 51.413(1) appears
to be inconsistent with Texas Constitution article VII, section 5.

       Article VII, section 4 provides that the proceeds of land sales "must be used to acquire other
land for the Public Free School fund as provided by law or the proceeds shall be invested by the
comptroller of public accounts, as may be directed by the Board of Education." Id. § 4. Section
51.413(1) attempts to allocate the proceeds ofland sales to the ASF, an allocation that is inconsistent
with section 4. Given that Natural Resources Code section 51.413(1) appears to be inconsistent with
Texas Constitution, article VII, sections 4 and 5, we believe that a court would probably find it
unconstitutional.

        A brief submitted on behalf ofthe General Land Office argues that Natural Resources Code
section 51.413 provides the only current mechanism for funds to flow from the real estate fund to
the PSF or the ASF, because House Bill 3699 repealed a provision that formerly required the
proceeds of the sale ofPSF land to be deposited in the PSF if the SLB did not use them to acquire
interests in land within two years. 8 See Act ofMay 17,2001, 77th Leg., R.S., ch. 900, § 1,2001 Tex.



         6The fiscal note attached to House Bill 3699, which enacted Natural Resources Code section 51.413(1), stated
that without a related constitutional amendment, a distribution made to the ASF from the real estate special fund does
not appear to qualify as one of the constitutional components of the ASF. See Fiscal Note, Tex. H.B. 3699, 80th Leg.,
R.S. (May 25, 2007) (enrolled version). Therefore, the fiscal note assumed that the transfer of funds would not occur
and the bill would have' no fiscal impact. See ide A constitutional amendment authorizing Natural Resources Code
section 51.413(1) was introduced but not adopted. See Tex. S.J. Res. 66, 80th Leg. R.S. (2007) (introduced).

         7Texas Constitution article VII, section 5 provides that the expenses of managing permanent school fund land
and investments shall be paid by appropria~ion from the PSF and that the Legislature may provide for using the PSF to
guarantee bonds issued by school districts or by the state for certain purposes. See TEX. CONST. art. VII, § 5(b), (d).
We fmd no other constitutional provision authorizing any other distribution of the PFS.

        8See Brieffrom William F. Warnick, General Counsel, Texas General Land Office, to Honorable Greg Abbott,

Attorney General of Texas, at 5 (Dec. 7,2007) (on file with the Opinion Committee).
The Honorable Don McLeroy, D.D.S. - Page 9               (GA-0617)



Gen. Laws 1794, repealed by Act of May 25,2007, 80th Leg., R.S., ch. 1368, § 10,2007 Tex. Gen.
Laws 4664, 4667. As we have noted, article VII, section 4 of the Texas Constitution requires the
proceeds of land sales to be used to acquire other land for the "Public Free School fund" or to be
invested by the Comptroller of Public Accounts, as directed by the SBOE. TEX. CONST. art. VII,
§ 4. We do not believe that the Legislature may authorize the SLB to thwart the constitutionally
mandated use of PSF land proceeds. Moreover, if an amendment to a statute is declared
unconstitutional and invalid, the original statute remains in full force and effect. See State v.
Standard Oil Co., 107 S.W.2d 550, 557 (Tex. 1937). We do not find the briefer's argument
persuasive.

        We finally point out that our conclusion is consistent with a prior opinion ofthis office. In
Attorney General Opinion M-347 (1969), this office considered proposed legislation that would have
transferred the royalties on leases ofpermanent school land to the ASF. See Tex. Att'y Gen. Ope No.
M-347 (1969) at 1. It reviewed the authorities and determined that consideration received by the
state for oil taken from PSF lands is part of the purchase price for the sale of such lands, and that
"such proceeds must be placed in the permanent school fund." Id. at 5. It concluded that the
proposed legislation would violate article VII, sections 2, 4, and 5 by attempting to place the
proceeds of land sales in the ASF instead of in the PSF. See ide Natural Resources Code section
51.413(1) likewise attempts to place in the ASF revenues that belong in the PSF and appears to
violate the constitution for the reasons set out in Attorney General Opinion M-347. We conclude
in answer to your final question that a court would probably find Natural Resources Code section
51.413(1) unconstitutional.
The Honorable Don McLeroy, D.D.S. - Page 10              (GA-0617)



                                      SUMMARY

                      The perpetual school fund, the public free school fund, and
              the permanent school fund referred to in Texas Constitution sections
              2, 4, and 5 of article VII constitute the same fund, most commonly
              known as the permanent school fund. When the State Board of
              Education invests assets of the permanent school fund, it should
              consider the School Land Board's investments and their potential
              impact on the probable income and the probable safety of the
              permanent school fund. When the School Land Board engages in
              transactions with interests in the real estate special fund account, it
              must consider the best interest of the permanent school fund
              including investments by the State Board of Education. Natural
              Resources Code section 51.413(1), which attempts to place the
              proceeds of land sales in the available school fund, appears to be
              inconsistent with Texas Constitution article VII, sections 4 and 5.
              A court would probably find section 51.413(1) unconstitutional.




KENT C. SULLIVAN
First Assistant Attorney General

ANDREW WEBER
Deputy Attorney General for Legal Counsel

NANCY S. FULLER
Chair, Opinion Committee

Susan L. Garrison
Assistant Attorney General, Opinion Committee
