Due to Likely Pandemic Induced State Budget Shortfalls
Fears that the Legislature Could “Raid” PSF
Dominate Joint SBOE/Land Board Meeting
Fears that the Legislature will view the principal of the $48.3 billion Permanent School Fund (PSF) as a source of easily accessible cash to help shore up the state’s expected pandemic-decimated finances permeated discussion during the first joint meeting (June 4) of the State Board of Education (SBOE) and the School Land Board (SLB).
(agenda/webcast/handouts)
- Note: Joint annual SBOE/SLB meetings are mandated by 2019’s SB608, which also expanded the SLB from three members (General Land Commissioner George P. Bush plus two citizen members) to five members (Bush plus four citizen members, including two members appointed by the governor from a list nominated by the SBOE).
The addition of SBOE nominees to the SLB, plus other legislation
(HB4388) from last session involving the Available School Fund, was designed to end the turf battles that erupted going into the session in 2018.The SBOE designated its five-member School Finance/PSF Committee, chaired by SBOE member
Tom Maynard, R-Florence, to meet with the SLB. Several other SBOE members attended the meeting, which was held virtually.
The concerns over protecting the principal of the PSF from being raided next session by the Legislature were primarily voiced by SBOE member Ken Mercer, R-San Antonio, a former Texas House member.
Mercer noted that each session, legislators want more money from the SBOE and SLB when times are good and they want more money when times are bad, and that the issue of dipping into the otherwise untouchable PSF typically comes up each session.
Mercer said it would be “bad precedent” if — such as was asked during a Senate Finance Committee hearing last session — $3 billion to $5 billion could be taken out of the PSF.
The Negatives
“We don’t want to go there,” Mercer said as he and others during the meeting ticked off the negatives that included:
- Once lawmakers tap into the PSF’s principal, a precedent will be set and they will likely do it again.
- Dipping into the PSF principal would have adverse financial consequences for ISDs and charters that depend on PSF bond guarantees to back their school bonds in order to receive top bond ratings and the lowest possible interest payments. Less money in the PSF’s principal will reduce the total amount available to guarantee school bonds.
TEA PSF Chief Investment Officer Holland Timmins reported that the latest available data reflects that the PSF Bond Guarantee Program has the capacity to guarantee about $117 billion in school bonds and is guaranteeing 3,300 individual school district and charter bond issues totaling about $82.5 billion, resulting in a net savings to districts and charters of about $200 million annually.
Mercer added that charter schools alone are saving $10 million to $12 million a year through bond guarantees — money that is redirected into the classrooms.
No ISD or charter has ever defaulted on a PSF-backed school bond since the program was created (for ISDs in 1983 and in 2011 for charters), leaving the PSF’s principal untouched while generating savings for charters and districts. (Charters receiving bond guarantees pay into a special interest bearing reserve fund that can be tapped first in cases of default.)
- PSF investment decisions are made over “rolling” (continuously updated) 16-month quarters — to minimize risk while earning a positive return over the long term.
- The PSF differs from other endowments and education investment funds in that it has to take into consideration that funding will be needed for all K-12 students, now and as enrollments increase in the future. University funds and endowments, on the other hand, can be tweaked via tuition increases and expanding or reducing maximum enrollments.
State Funding “Haircut”
Turning to the effects of the pandemic on school investments managed by the two funds, Commissioner Bush took note of the “all kinds of rumors” about the state funding “haircut that we’ll all have to take,” but added that even in light of the reported declines in sales taxes, oil and gas production taxes, etc., there’s a need to wait for the Comptroller’s upcoming revised budget estimate to get a better picture.
Due to timing issues, staff of the two funds said it won’t be known until the next few months what the full impact of the pandemic has been thus far on the investment funds.
It was reported that of the PSF’s $48.3 billion total value as of Dec. 31, 2019 (the latest data available), the SBOE manages approximately $36 billion of the fund’s portfolio, and the rest is managed by the SLB.
The meeting ended with pledges that the two boards might meet more frequently than once a year, and that the two staffs would continue to meet, as they do now, on an informal basis.