                                ATTORNEY GENERAL OF TEXAS
                                              GREG        ABBOTT




                                                  April 13, 2009




The Honorable Don McLeroy                              Opinion No. GA-0707
Chair, State Board of Education
1701 North Congress Avenue                            Re: Calculation of the "total return on all investment
Austin, Texas 78701-1494                              assets of the permanent school fund" for purposes of
                                                      article VII, subsection 5(a)(2), Texas Constitution
                                                      (RQ-0758-GA)

Dear Mr. McLeroy:

        Article VII, section 5 of the Texas Constitution authorizes the State Board of Education
("SBOE") to determine the amount to be distributed from the permanent school fund ("PSF") to the
available school fund ("ASF") each year of a fiscal biennium.' See TEX. CONST. art. VII, § 5(a).
Your request focuses on two constraints in article VII, section 5 affecting the amount that may be
distributed? First, subsection 5(a)(1) limits the distribution made in each year to not more than "six
percent of the average of the market value of the [PSF] ... 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." !d. art. VII, § 5(a)(1). Second, under subsection 5(a)(2), the total amount distributed
"over the 1O-year period consisting of the current state fiscal year and the nine preceding state fiscal
years may not exceed the total return on all investment assets of the permanent school fund over the
same 10-year period." Id. art. VII, § 5(a)(2).

        You explain that, due to "the recent dramatic declines in the financial markets," any proposed
distribution "from the PSF to the ASF could exceed the total return on all investments of the PSF
over the relevant lO-year period." Request Letter at 2. You therefore ask a number of questions
concerning the proper application of subsections 5(a)(1) and 5(a)(2) as they relate to the SBOE's
distribution of funds from the PSF to the ASF. See id. at 2-4; Supp. Req. at 1-2.




         lIfthe SBOE does not adopt a distribution rate as authorized in article VII, subsection 5(a), the constitution
allows the Legislature to do so by general law or appropriation. TEx. CONST. art VII, § 5(a)(I)(B).

         2Request Letter at 1-3 (available at http://www.texasattomeygeneral.gov). Subsequent to your initial request,
you also submitted a supplemental request on January 14, 2009, which we will refer to as "Supp. Req."
The Honorable Don McLeroy - Page 2                         (GA-0707)



        Your first and second questions ask us to confirm the appropriateness of the current
methodology used by the SBOE to calculate the "total return on all investment assets of the [PSF],"
including whether "total return should b~ reduced" by investment management fees or total
administrative expenses. Request Letter at 2.3 Specifically, you inquire about the meaning of the
terms "investment assets" and "total return." Id. The terms "investment assets" and "total return"
are not defined in article VII, section 5. See TEx. CONST. art. VII, § 5. However, this office, like
the SBOE, has concluded that "investment assets" as discussed in article VII, section 5 are "the
assets subject to the investment control and management of the Board," which excludes the PSF land
and proceeds from that land that are managed by the School Land Board and the Commissioner of
the General Land Office. Tex. Att'y Gen. Op. No. GA-0516 (2007) at 4-5; see also Request Letter
at 2 n.4. We therefore focus on your questions as they relate to "total return."

         The constitution charges the SBOE with "managing the assets of the [PSF]" and tasks the
SBOE with the responsibility to determine the amounts to be distributed from the PSF to the ASF.
See TEX. CONST. art. VII, § 5(a), (t); Tex. Att'y Gen. Op. No. GA-0293 (2005) at 1-2. In "managing
the assets of the [PSF], the [SBOE] may ... supervise, manage or retain, through procedures and
subject to restrictions it establishes and in amounts it considers appropriate, any kind of investment"
that a prudent person under the prevailing circumstances would acquire or attain. TEx. CONST. art.
VII, § Set). The general authority and responsibility given to the SBOE under subsection S(t)
encompasses the duty to determine the appropriate methodology for calculating the total return on
those assets. See id. art. VII, § Set). As the agency so charged, the SBOE must, in the first instance,
determine the appropriate methodology, consistent with its fiduciary obligations and industry
standards, to calculate the total return on all investment assets of the PSF. See Tex. Att'y Gen. Op.
No. JC-0449 (2002) at 1, 7 (requiring Lottery Commission, as agency charged with application and
enforcement ofthe law, to determine whether "gambling device" includes video poker games); Supp.
Req. at 2 (stating that the SBOE acts as a fiduciary over the PSF). The courts will generally defer
to a reasonable construction by the administrative agency charged with the application of a law. See
Osterberg v. Peca, 12 S.W.3d 31, 51 (Tex. 2000) (stating that "[a] reasonable construction of a
statute by the administrative agency charged with its enforcement is entitled to great weight" and
affirming the Texas Ethics Commission's definition of "direct campaign expenditure").

         You explain that the SBOE has "calculated 'total return' of the investment assets as the net
appreciation or decline in value, plus income." Request Letter at 2. You also note that the SBOE
does not include "investment management fees" or "total administration expenses" in the calculation
of total return. Id. at 2-3. Article VII, section 5 does not define "total return," nor do we find any
applicable Texas statutes or administrative regulations that define the term. 4 Although the


         3Article VII, subsection 5(b) requires that the "expenses of managing [the PSF] land and investments shall be
paid by appropriation from the [PSF]." TEX. CONST. art. VII, § 5(b). However, the provision does not specifY whether
those expenses are to be deducted before or after calculating the total return. See id.

        'Other Texas statutes similarly use the phrase "total return" without defining it. See, e.g., TEX. EDue. CODE
ANN. § 62.026(d) (Vernon 2006) (directing the Comptroller to invest the Higher Education Fund "in a manner that
maximizes the total return"); TEX. FIN. CODE ANN. § 184.10 1(e)(3 )(F) (Vernon 2006) (requiring a state trust company
The Honorable Don McLeroy - Page 3                           (GA-0707)




Legislative Council did not provide a clear definition, in explaining the proposed constitutional
amendment to article VII, section 5, it stated that the amendment "would change the composition
of the PSF and the ASF by providing that the ASF ... 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 capita!
gains, of stocks and bonds held by the PSF." TEXAS LEGISLATIVE COUNCIL, ANALYSES OF
PROPOSED CONSTITUTIONAL AMENDMENTS, Sept. 13, 2003, at 58. Thus, the Legislative Council
similarly understood total return to include income plus the increased value of assets. Courts will
give "great weight" to a contemporaneous construction given by the Legislature. Walker v. Baker,
196 S.W.2d 324,327 (Tex. 1946). Furthermore, within the investment industry, "total return" is
commonly defined as the "annual return on an investment including appreciation and dividends or
interest." JOHN DOWNES AND JORDAN ELLIOT GOODMAN, DICTIONARY OF FINANCE AND
INVESTMENT TERMS 654 (5th ed. 1998). Based on the industry definition and the Legislative
Council's description of the term "total return," we believe a court would likely conclude that the
SBOE's construction oftota! return is reasonable.

        You next ask when the limit expressed in subsection 5(a)(2) should be applied to a transfer
from the PSF to the ASF. Request Letter at 3. Subsection 5(a)(2) states that "[t]he total amount
distributed from the [PSF] to the [ASF] ... over the 10-year period consisting of the current state
fiscal year and the nine preceding state fiscal years may not exceed the total return on all investment
assets of the [PSF] over the same 1O-year period." TEx. CONST. art. VII, § 5(a)(2). You suggestthat
the subsection 5(a)(2) test could be applied in at least three points in time: (1) monthly, when the
Texas Comptroller of Public Accounts makes a transfer from the PSF to the ASF; (2) at the end of
each fiscal year; or (3) before each state fiscal biennium. See Request Letter at 3. You do not
suggest which, if any, of these alternatives you believe to be legally appropriate. 5

        The language of subsection 5(a) and the statutory provisions implementing that constitutional
provision speak to and limit distributions from the PSF to the ASF in each state fiscal year. See TEx.
CONST. art. VII, § 5. Subsection 5(a) provides that the amount distributed in each year of a state
fiscal biennium over the ten-year period consisting of the current state fiscal year and the nine
preceding state fiscal years may not exceed the total return on all investment assets of the PSF over
the same ten-year period. Id. art. VII, § 5(a). Consistently, the Legislature has directed the
Comptroller, "[o]n the first working day of each month in a state fiscal year, ... [to] transfer from
the [PSF] to the [ASF] an amount equal to one-twelfth of the annual distribution[.]" TEx. EDUC.



to consider "the expected total retnm of the portfolio" in making investment decisions). The Comptroller has suggested
that "total retnrn" is defined as the "annual retnrn on an investment including appreciation and dividends or interest."
E-TEXAS 2001, Recommendations from the Texas Comptroller (available at http://www.window.state.tx.us
letexas200 I/recommend/ch06Ied02.html).

          'The Office ofthe Attorney General did not receive briefing from the SBOE or any other interested parties with
respect to the Request or Supplemental Request. Based on our conversations with David Anderson, General COUllsel
for the SBOE, we understand that the "total retnrn on all investment assets of the [PSF] over the same ten-year period"
has been calculated utilizing the fiscal year-end values for the preceding nine fiscal years and a projected year-end value
for the current fiscal year. TEx. CONST. art. VII, § 5(a)(2).
The Honorable Don McLeroy - Page 4                         (GA-0707)



CODE ANN. § 43.002(a) (Vernon 2006)(emphasis added). Thus, under the language of subsection
5(a)(2) and the statutes implementing it, the amount distributed during the current state fiscal year
and the nine preceding state fiscal years must be compared against the total return on all investment
assets of the PSF over that same ten-year period, an amount that includes the return for the current
fiscal year. See TEx. CONST. art. VII, § 5(a)(2). The Legislature's consistent focus on and discussion
of annual distributions from the PSF to the ASF demonstrate that the limitation in article VII,
subsection 5(a)(2) should be applied on an annual basis to determine whether the scheduled annual
distribution will comply with the constitutional requirement.

         You also ask what actions are necessary if, after final or audited numbers become available,
it is determined that a transfer of funds from the PSF to the ASF exceeded the limits of subsection
5(a)(2) for a fiscal year. Request Letter at 3. You explain that "[a] determination of the total return
of the PSF cannot be made on a monthly basis sooner than roughly the end of the following month
and annual audited figures are not available until several months following the end of the state fiscal
year." [d. Thus, although the SBOE may have estimates ofthe total return on the PSF when it is
required to make its distribution decision, it is possible that the annual distribution decided by the
SBOE may exceed the subsection 5 (a)(2) limit when the audited figures for the return from the fiscal
year become available. See id. If the annual distribution exceeds the amount allowed under
subsection 5(a)(2), you ask whether repayment from the ASF to the PSF is required and whether
such repayments could be made in a subsequent fiscal year. See id. Neither article VII, section 5
nor the statutory provisions relating to it address the situation of an overpayment as you describe.
Given the complete silence on the issue and without further instruction from the Legislature, we will
not speculate about what remedies, if any, are required in such a situation or when any remedial
action must be taken.

         Your final question asks whether "the SBOE may adopt a percentage distribution [under
subsection 5(a)(I)] even if subsection 5(a)(2) would preclude all or part of that distribution." [d. at
4. Subsection 5(a)(I) directs the SBOE, or the Legislature if the SBOE does not act, to determine
an amount to be distributed from the PSF to the ASF based on the "average of the market value of
the [PSF] ... 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."6 TEx. CONST. art. VII, § 5(a)(I).
Independent ofthat calculation, subsection 5(a)(2) mandates that the "total amount distributed from
the [PSF] to the [ASF] ... over the 10-year period consisting of the current state fiscal year and the
nine preceding state fiscal years may not exceed the total return on all investment assets ofthe [PSF]
over the same 1O-year period." Id. art. VII, § 5(a)(2). Each of these provisions by its terms requires
an independent calculation using a different methodology and covering a different time period. As
a result, subsection 5(a)(2) does not prohibit the SBOE from adopting a percentage under subsection



          'The current state fiscal year began September I, 2008 and will end Augnst 31, 2009. The eighty-first
legislative session convened on January 13,2009. Therefore, in determining a percentage under subsection 5(a)(1), the
SBOE considers the average market value ofthePSF on November 30, 2008 and the fifteen preceding quarter-end values
of the PSF. See TEX. CONST. art. VII, § 5(a)(J). Any amount distributed by the SBOE in each year of the next state
fiscal biennium cannot exceed six percent of the average of those sixteen values. Id.
The Honorable Don McLeroy - Page 5                  (GA-0707)



5(a)(l). However, subsection 5(a)(2) would operate to prevent a distribution from the PSF to the
ASF if a distribution would violate the limitation contained in subsection 5(a)(2). Further, the
determination of the amount to be distributed from the PSF to the ASF is part of the SBOE's
management responsibilities under article VII, subsection 5(t). See id. art. VII, § 5(t). As such, the
SBOE must consider its fiduciary obligations in setting the distribution rate under subsection 5(a)(l).

          Your supplemental request, received on January 14,2009, asks "whether the Board, acting
in its fiduciary role over the PSF," is authorized to determine that the "limit in Article VII, Section
5(a)(2) has been reached." Supp. Req. at 2. Unlike subsection 5(a)(I), which expressly directs the
SBOE to calculate the market value of the PSF for the preceding sixteen quarters and adopt a
distribution percentage based on that calculation, subsection 5(a)(2) is silent as to the entity charged
with applying the limits therein required. See TEx. CONST. art. VII, § 5(a). Aside from the SBOE,
or the Legislature if the SBOE does not act, "[t]he 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." Tex. Att'y Gen. Op. No. GA-0617 (2008) at 8. As the agency tasked with
"managing the assets of the [PSF]," it is the duty of the SBOE to determine the "total return" of the
PSF absent express authority by another entity to make that determination. Having found no legal
authority giving that duty to another agency, it is presumed that the SBOE must fulfill that duty in
the first instance. Thus, based on the guiding principles of the constitutional provision, we conclude
that the SBOE, as the entity charged with ensuring the perpetual existence of the PSF, would
reasonably appear to be the entity authorized to apply the limits of subsection 5(a)(2) to the amount
it distributes from the PSF to the ASF.

        In your supplemental request you explain that the SBOE met in January 2009 and affirmed
the 2.5% rate previously decided upon, while also adopting a contingency plan. SUpp. Req. at I n.2.
You explain this contingency plan as providing that "should any payments during the biennium not
be made because of the limitation in Article VII, Section 5(a)(2), and should sufficient total return
later become available, subsequent payments during the biennium would be increased to make up
the shortfall." Id at 1. Your supplemental request asks whether "the [SBOE] may adopt such a
contingency and appropriately transfer funds from the PSF to the ASF under those circumstances."
Id.

        Under the plain language of subsection 5(a), any amount that the SBOE decides to distribute
for each year of the upcoming fiscal biennium carmot exceed the limitations within that provision.
See TEx. CONST. art. VII, § 5(a). While the constitution and the statutory provisions enacting it do
not expressly require that the amount the SBOE de.cides to distribute be the same for each fiscal year
of the biennium, they only provide for armual distributions. Thus, the only time at which a
contingency rate could be used to alter the distribution and correct a shortfall would be armually,
when the subsection 5(a)(2) limitation is applied. So long as the SBOE contingency plan complied
with this armual approach, and so long as the amounts distributed each fiscal year would not exceed
six percent of the average market value of the PSF as provided in subsection 5(a)(I) and the
subsection 5(a)(2) limitations, we conclude that nothing in article VII, section 5 prohibits the SBOE
from adopting such a contingency plan.
The Honorable Don McLeroy - Page 6             (GA-0707)




                                   SUMMARY

                    As the agency charged with determining the amount to be
            distributed from the permanent school fund ("PSF") to the available
            school fund ("ASF"), the State Board of Education must establish the
            appropriate methodology for calculating the total return on all
            investment assets of the PSF in the first instance.

                   The limitation in article VII, subsection 5(a)(2) of the Texas
            Constitution must be applied on an annual basis to determine whether
            the annual distribution for a given fiscal year complies with the
            requirements therein established.

                    Distributions made from the PSF to the ASF must comply
            with both subsection 5(a)(l) and subsection 5(a)(2).            The
            constitutional provisions and related statutes are silent as to any
            remedies required for an overpayment under either provision.

                    The calculations in subsections 5(a)(l) and 5(a)(2) are
            independent. The plain language of subsection 5(a)(2) does not
            prevent the SBOE from adopting a rate under subsection 5(a)(I). A
            distribution authorized under subsection 5(a)(I) must also satisfy
            subsection 5(a)(2).

                    The SBOE, as the entity charged with ensuring the perpetual
            existence of the PSF, is authorized to apply the limits of subsection
            5(a)(2) to the amount it distributes from the PSF to the ASF.

                    Nothing in article VII, section 5 prohibits the SBOE from
            adopting a contingency plan for distributing the funds under article
            VII, section 5 provided the amounts distributed during each fiscal
            year do not exceed six percent ofthe average market value ofthe PSF
            as provided in subsection 5(a)(l) and the subsection 5(a)(2)
            limitations.
The Honorable Don McLeroy - Page 7              (GA-0707)



ANDREW WEBER
First Assistant Attorney General

JONATHAN K. FRELS
Deputy Attorney General for Legal Counsel

NANCY S. FULLER
Chair, Opinion Committee

Virginia K. Hoelscher
Assistant Attorney General, Opinion Committee
