Texas $23 Billion School Fund Run by Amateurs Faces Revamp Call for Pros
By - Oct 29, 2010
The Texas Permanent School Fund, which backs $49.3 billion of municipal bonds and is overseen by the same board that fought over how textbooks treat Islam, would be run by professionals if Representative Donna Howard gets her way.
Disclosure a year ago that a board member improperly took gifts and questions about investments in charter schools may help Howard, an Austin Democrat, get her bill to revamp the $23 billion fund’s management past the state legislature next year. The measure didn’t survive a Senate committee in 2009 after getting a two-thirds vote in the Republican-controlled House.
The fund, started with $2 million in 1854, is run by the elected State Board of Education, which includes educators, a newspaper publisher, real-estate broker and dentist. There’s no rule that members possess financial expertise to run the money pool, which generates cash for books, helps plug state budget holes and guarantees billions of dollars in local-school debt.
“It’s a very political thing to give this much power to an elected body,” said Howard, 59. “There is a potential there for abuse and there seems to be no reason to keep it that way.”
Eight seats on the 15-member education board are in play in elections Nov. 2. None of the major-party candidates for the board, currently with 10 Republicans and five Democrats, has financial experience, according to their websites. Most are listed as career educators. One is a software engineer.
The only current member with a financial background -- Rick Agosto, chief executive officer of San Antonio investment company Aureus Partners Inc. -- isn’t seeking re-election.
Outside Staff
Finance experience isn’t necessary for the job because the board hires outside staff, said Agosto, a Democrat who’s vice chairman of the committee that oversees advisers and sets asset allocations for the fund.
“It does what it is supposed to do,” said Agosto, 41. “It provides a revenue stream and provides bond guarantees that save school districts millions of dollars.”
The fund began guaranteeing school bonds in 1983, lending local systems its AAA credit rating to get them the lowest borrowing costs. The fund has never had to pay for a default. If it had to, it can recoup its costs from an issuer’s state aid.
The fund also generates cash for education. In September, the board approved $2.6 billion for textbooks and other materials, freeing money to help balance the state’s budget.
The Board of Education manages $22.6 billion of the Permanent School Fund. About $4.4 billion more, mostly physical assets such as land and energy holdings, is run by the Texas Land Commissioner, who’s also elected. The fund’s total value is about $27 billion, according to a July 31 financial statement.
Benchmarks Exceeded
The part overseen by the school board lost 8.5 percent in the fiscal year that ended Aug. 31, 2009, falling to a market value of $20.6 billion, according to its annual report. It still outperformed its target benchmark by 17 basis points. A basis point is 0.01 percentage point.
“The Permanent School Fund has solid returns,” said Gail Lowe, a Lampasas Republican who chairs the school board. “We’re an independent body and we have a good track record.”
Representative Scott Hochberg, a Houston Democrat who’s vice chairman of the House Committee on Public Education, said professional management is needed so lawmakers can ensure the fund is getting the best returns with the least risk.
“The state has been very fortunate about the results it has gotten, but the returns don’t tell us anything about the risk,” said Hochberg. “How would we know if something is going seriously wrong? The board isn’t in a position to do that.”
Assets in Stocks
David Jaderlund, who works in fixed-income trading and sales for investment adviser Hampstead Group LLC in Dallas, said the 50 percent of the fund allocated to equities exposed it to the stock market’s decline.
The fund stopped backing municipal bonds and cut its contribution to the state last year after board-managed assets shrunk to $17 billion in March 2009 from a peak of $26 billion in mid-2007, a period in which the Standard & Poor’s 500 Index plunged more than 50 percent. It resumed bond guarantees in February, after the S&P 500 reached a 15-month high.
“It was too weighted to equities because all of a sudden it had to stop backing debt,” said Jaderlund, whose firm focuses on Texas-issued municipal bonds. “You’d think there would be more people with financial expertise.”
Standard & Poor’s, which rates the fund AAA, is one of three credit evaluators that give the fund their highest marks. S&P is satisfied that management practices justify the rating, said James Breeding, the analyst who covers the fund.
“We try not to get into the personalities,” he said.
Retaliatory Effort
State lawmakers’ effort to control the fund is retaliation for controversial school-board decisions, Agosto said. The board in September approved a non-binding resolution urging future social studies textbooks provide “fair coverage” of religions after a citizen asserted Islam was treated more favorably than Christianity in earlier books. The seven-to-six vote came with two members absent.
“The problem is the polarization of each of the members,” he said. “Some legislators want to get back at them.”
Howard said the revelation in October 2009 that one board member took a gift from a company seeking advisory work from the fund is a reason why she will resubmit her bill.
The board member, Rene Nunez, an El Paso Democrat, agreed in June to settle with the Texas Ethics Commission for accepting and not disclosing $729 of gifts from AEW Capital Management, a real estate advisory firm trying to get hired by the board.
The commission imposed a $400 penalty on Nunez, who didn’t return a telephone call seeking comment.
Charter School Funds
The board’s July decision to consider using about $100 million from the fund to buy and lease buildings to charter schools also influenced Howard to try again for professional management, she said. The move seemed political rather than a prudent investment because Texas charter schools don’t usually get state funds for facilities, she said.
Howard’s legislation would create the Permanent School Fund Management Council and require members to “have substantial institutional-investment expertise or institutional financial- management experience.”
She said the council would be under the comptroller’s office, which manages other state money. The legislation would require a statewide vote to amend the constitution.
The board needs professionals to keep investment and curriculum decisions separate, said Ryan Valentine, deputy director of the Texas Freedom Network in Austin, which describes itself as a monitor of “far-right issues, organizations and leaders.” It called the board’s September decision on religion in textbooks “anti-Islam.”
“When you have politicians controlling billions of dollars in investments, politics clouds their decisions,” said Valentine. “Billion-dollar investment decisions can complicate decisions on textbooks.”
To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net.
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
Disclosure a year ago that a board member improperly took gifts and questions about investments in charter schools may help Howard, an Austin Democrat, get her bill to revamp the $23 billion fund’s management past the state legislature next year. The measure didn’t survive a Senate committee in 2009 after getting a two-thirds vote in the Republican-controlled House.
The fund, started with $2 million in 1854, is run by the elected State Board of Education, which includes educators, a newspaper publisher, real-estate broker and dentist. There’s no rule that members possess financial expertise to run the money pool, which generates cash for books, helps plug state budget holes and guarantees billions of dollars in local-school debt.
“It’s a very political thing to give this much power to an elected body,” said Howard, 59. “There is a potential there for abuse and there seems to be no reason to keep it that way.”
Eight seats on the 15-member education board are in play in elections Nov. 2. None of the major-party candidates for the board, currently with 10 Republicans and five Democrats, has financial experience, according to their websites. Most are listed as career educators. One is a software engineer.
The only current member with a financial background -- Rick Agosto, chief executive officer of San Antonio investment company Aureus Partners Inc. -- isn’t seeking re-election.
Outside Staff
Finance experience isn’t necessary for the job because the board hires outside staff, said Agosto, a Democrat who’s vice chairman of the committee that oversees advisers and sets asset allocations for the fund.
“It does what it is supposed to do,” said Agosto, 41. “It provides a revenue stream and provides bond guarantees that save school districts millions of dollars.”
The fund began guaranteeing school bonds in 1983, lending local systems its AAA credit rating to get them the lowest borrowing costs. The fund has never had to pay for a default. If it had to, it can recoup its costs from an issuer’s state aid.
The fund also generates cash for education. In September, the board approved $2.6 billion for textbooks and other materials, freeing money to help balance the state’s budget.
The Board of Education manages $22.6 billion of the Permanent School Fund. About $4.4 billion more, mostly physical assets such as land and energy holdings, is run by the Texas Land Commissioner, who’s also elected. The fund’s total value is about $27 billion, according to a July 31 financial statement.
Benchmarks Exceeded
The part overseen by the school board lost 8.5 percent in the fiscal year that ended Aug. 31, 2009, falling to a market value of $20.6 billion, according to its annual report. It still outperformed its target benchmark by 17 basis points. A basis point is 0.01 percentage point.
“The Permanent School Fund has solid returns,” said Gail Lowe, a Lampasas Republican who chairs the school board. “We’re an independent body and we have a good track record.”
Representative Scott Hochberg, a Houston Democrat who’s vice chairman of the House Committee on Public Education, said professional management is needed so lawmakers can ensure the fund is getting the best returns with the least risk.
“The state has been very fortunate about the results it has gotten, but the returns don’t tell us anything about the risk,” said Hochberg. “How would we know if something is going seriously wrong? The board isn’t in a position to do that.”
Assets in Stocks
David Jaderlund, who works in fixed-income trading and sales for investment adviser Hampstead Group LLC in Dallas, said the 50 percent of the fund allocated to equities exposed it to the stock market’s decline.
The fund stopped backing municipal bonds and cut its contribution to the state last year after board-managed assets shrunk to $17 billion in March 2009 from a peak of $26 billion in mid-2007, a period in which the Standard & Poor’s 500 Index plunged more than 50 percent. It resumed bond guarantees in February, after the S&P 500 reached a 15-month high.
“It was too weighted to equities because all of a sudden it had to stop backing debt,” said Jaderlund, whose firm focuses on Texas-issued municipal bonds. “You’d think there would be more people with financial expertise.”
Standard & Poor’s, which rates the fund AAA, is one of three credit evaluators that give the fund their highest marks. S&P is satisfied that management practices justify the rating, said James Breeding, the analyst who covers the fund.
“We try not to get into the personalities,” he said.
Retaliatory Effort
State lawmakers’ effort to control the fund is retaliation for controversial school-board decisions, Agosto said. The board in September approved a non-binding resolution urging future social studies textbooks provide “fair coverage” of religions after a citizen asserted Islam was treated more favorably than Christianity in earlier books. The seven-to-six vote came with two members absent.
“The problem is the polarization of each of the members,” he said. “Some legislators want to get back at them.”
Howard said the revelation in October 2009 that one board member took a gift from a company seeking advisory work from the fund is a reason why she will resubmit her bill.
The board member, Rene Nunez, an El Paso Democrat, agreed in June to settle with the Texas Ethics Commission for accepting and not disclosing $729 of gifts from AEW Capital Management, a real estate advisory firm trying to get hired by the board.
The commission imposed a $400 penalty on Nunez, who didn’t return a telephone call seeking comment.
Charter School Funds
The board’s July decision to consider using about $100 million from the fund to buy and lease buildings to charter schools also influenced Howard to try again for professional management, she said. The move seemed political rather than a prudent investment because Texas charter schools don’t usually get state funds for facilities, she said.
Howard’s legislation would create the Permanent School Fund Management Council and require members to “have substantial institutional-investment expertise or institutional financial- management experience.”
She said the council would be under the comptroller’s office, which manages other state money. The legislation would require a statewide vote to amend the constitution.
The board needs professionals to keep investment and curriculum decisions separate, said Ryan Valentine, deputy director of the Texas Freedom Network in Austin, which describes itself as a monitor of “far-right issues, organizations and leaders.” It called the board’s September decision on religion in textbooks “anti-Islam.”
“When you have politicians controlling billions of dollars in investments, politics clouds their decisions,” said Valentine. “Billion-dollar investment decisions can complicate decisions on textbooks.”
To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net.
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
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