                             ATTORNEY GENERAL OF TEXAS
                                          GREG        ABBOTT




                                                August 9, 2011



The Honorable Barbara Cargill                           Opinion No. GA-0871
Chair, State Board of Education
1701 North Congress Avenue                              Re: Pennissible investments of the pennanent
Austin, Texas 78701-1494                                school fund (RQ-0941-GA)

Dear Ms. Cargill:

         Your predecessor asked three questions about the legal authority of the State Board of
Education (the "Board") to invest pennanent school fund ("PSF") capital in a manner intended to
give direct aid to "charter schools in acquiring instructional facilities.'" The request letter explained
that "[t]he Board has established a special asset class for charter schools facilities investment with
its own proposed benchmark for returns .... " Request Letter at 2. "Possible investments ...
include direct acquisition of real estate or real estate mortgages and bonds issued by the non-profit
corporations that hold state charters." Id. For example, the PSF could buy or build "facilities and
then lease them to charter schools." Id.

         These questions concern Texas Constitution article VII, section S(t), which provides that

                 in managing the assets of the [PSF], the [Board] 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, including investments in the
                 Texas growth fund created by Article XVI, Section 70, of this
                 constitution, 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 pennanent disposition of their funds, considering the
                 probable income as well as the probable safety of their capital.

TEX. CONST. art. VII, § S(t). The first question asked is whether the Board must,


         'Letter from Honorable Gail Lowe, Former Chair, State Board of Education, to Honorable Greg Abbott,
Attorney General of Texas at 2 (Jan. 21, 2011), https:iiwww.oag.state.tx.usiopinlindexJq.shtml ("Request Letter").
The Honorable Barbara Cargill - Page 2         (GA-0871)



                consistent with the "prudent person" standard adopted in Article VII,
                Section S(f) of the Texas Constitution, determine the asset classes in
                which it will invest with the sole purpose of maximizing the future
                value of the PSF, or may the Board also consider benefits to a state
                policy in making an investment as outlined above which may not
                have an expected return as high as the expected return of the likely
                highest returning class of assets within the PSF?

Request Letter at 4. No provision of article VII, section S(f) contains language that authorizes the
Board to consider a potential investment's general benefits other than the sound financial
management of PSF assets when it makes investment decisions. See TEX. CONST. art. VII, § S(f).
C! Request Letter at 4 (suggesting that the Board may consider benefits to a public policy in making
PSF investments). The text of section S(f) provides that the Board may consider the "probable
income" produced by, and the "probable safety" of, the capital invested in PSF assets. TEX. CONST.
art. VII, § S(f). It also provides that the Board makes investment decisions for the purpose of
"managing the assets of the [PSF] ... in regard to the permanent disposition of [PSF] funds." Id.
Thus, the Constitution requires that the Board's PSF investment decisions be made in regard to the
permanent disposition ofPSF assets and be based on financial considerations like income production
and capital preservation. Id. See also Stringerv. Cendant Mortg. Corp., 23 S.W.3d 3S3, 3SS (Tex.
2000) (holding that courts construe the Texas Constitution by relying heavily on its literal text and
giving effect to its plain meaning).

         Neither our legal review nor the legal briefing submitted to this office has uncovered legal
authority that would authorize the Board to make PSF investment decisions for any other purpose
or to consider any other nonfinancial factor. See TEX. EDUC. CODE ANN. §§ 43.003 (West 2006)
(allowing the Board to invest the PSF in securities that the Board must carefully examine and find
to be safe and proper), 43.004(a) (requiring the Board to promulgate PSF investment objectives
addressing "desired rates of return, risks involved, investment time frames, and any other relevant
considerations"), 43.007(b) (stating that "the [Board] shall exercise the judgment and care under the
circumstances then prevailing that persons of ordinary prudence, discretion, and intelligence exercise --
in the management of their own 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"). Accordingly, we conclude that the Texas Constitution and Education Code require the
Board to make investment decisions in regard to the permanent disposition of PSF assets and to
consider a potential investment's financial attributes. See id. § 7.102 (stating that the Board's
authority is only what the Texas Constitution and Education Code provide that it is); Pub. Uti!.
Comm'n v. GTE-Sw., Inc., 901 S.W.2d 401, 407 (Tex. 1995) (explaining that agencies have only
those powers expressly granted by law and those necessarily implied therefrom); Tex. Att'y Gen.
Op. No. GA-0848 (2011) at 1-2 (noting that the Board is an agency). The Texas Constitution and
Education Code do not authorize the Board to base PSF investment decisions for a nonfinancial
purpose and do not authorize the Board to consider nonfinancial factors. See TEX. CONST. art. VII,
§ S(f); TEX. EDUC. CODEANN.§§ 7.102 (West 2006), 43.003-.020 (West 2006 & SUpp. 2010).
The Honorable Barbara Cargill - Page 3         (GA-0871)




         The second question is whether the Board may "restrict investment within [an asset] class
to a group of entities in furtherance of a state policy." Request Letter at 4. We have not found a
provision of the Texas Constitution or Education Code that authorizes the Board to restrict PSF
investments to asset classes that would further any public policy other than the sound financial
management of PSF assets. See generally TEX. CONST. art. VII, § 5(f); TEX. EDUC. CODE ANN.
§§ 7.102 (West 2006), 43.003-.020 (West 2006 & Supp. 2010). Additionally this office did not
receive any legal briefing purporting to identify such a statute or constitutional provision. See, e.g.,
Request Letter. Because the Texas Constitution and Education Code do not authorize the Board to
restrict investment within an asset class to a group of entities in furtherance of a public policy other
than sound financial management, the Board may not do so. TEX. CONST. art. VII, § 5(f); TEX.
EDUC. CODE ANN. § 7.102 (West 2006).

        The third question is "whether the Board has any greater authority to select an asset class
... if the purpose of that decision is to benefit an educational entity or education policy within
Texas." Request Letter at 5. The Board's authority is strictly limited to the powers that the Texas
Constitution and Education Code grant to it. TEx. EDUC. CODE ANN. § 7.102 (West 2006).

        Accordingly, we conclude that Texas law would authorize the Board to make investments that
directly help charter schools acquire instructional facilities, but only if persons of ordinary prudence,
discretion, and intelligence do so for their own account, 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); TEX. EDUC. CODE ANN. §§ 7.102 (West 2006),
43.003-.020 (West 2006 & Supp. 2010). Texas law does not authorize the Board to make PSF
investments in regard to any other objective or to consider any other kind of factor in managing PSF
assets. TEx. CONST. art. VII, § 5(f); TEX. EDUC. CODE ANN. §§ 7.102 (West 2006), 43.003-.020
(West 2006 & SUpp. 2010). See also StriTfger, 23 S.W.3d at 355 (holding that courts construe the
Texas Constitution by relying heavily on its literal text and giving effect to its plain meaning); Pub.
Uti!. Comm 'n, 901 S.W .2d at 407 (explaining that agencies have only those powers expressly granted
by law and those necessarily implied from the powers expressly granted).
The Honorable Barbara Cargill - Page 4        (GA-OS71)



                                       SUMMARY

                       The text of article VII, section S(f) of the Texas Constitution,
               provides that the State Board of Education may make any investment
               that persons of ordinary prudence, discretion, and intelligence make
               in the management of their own 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.
               The text of article VII, section S(f) does not authorize the Board to
               make investments in regard to any other objective or to consider any
               other kind of factor in managing permanent school fund assets.

                                              Very truly yours,




DANIEL T. HODGE
First Assistant Attorney General

DAVID J. SCHENCK
Deputy Attorney General for Legal Counsel

JASON BOATRIGHT
Chair, Opinion Committee

Jason Boatright
Assistant Attorney General, Opinion Committee
