ATTORNEY GENERAL OF TEXAS GREG ABBOTT

The Honorable Don McLeroy Chair, State Board ofEducation 1701 North Congress Avenue Austin, Texas 78701-1494

Dear Mr. McLeroy: April 13, 2009

Opinion No. GA-0707
Re: Calculation ofthe "total return on all investment assets ofthe permanent school fund" for purposes of article VII, subsection 5(a)(2), Texas Constitution (RQ-0758-GA)

Article VII, section 5 ofthe Texas Constitution authorizes the State Board of Education ("SBOE") to determinethe amountto 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 distributionmade ineachyearto notmore than "six percent ofthe average ofthe market value ofthe [PSF]

... on the last day ofeach ofthe 16 state fiscal quarters preceding the regular session ofthe legislature that begins before that state fiscal biennium." 

### !d. art. VII, 

### § 5(a)(1). Second, under subsection 5(a)(2), the total amount distributed "overthe 1O-year period consisting ofthe current state fiscal year andthe nine preceding state fiscal years may not exceed the total return on all investment assets ofthe permanent school fund overthe same 10-yearperiod." 

### Id. art. VII, 

### § 5(a)(2).
Youexplainthat, dueto "therecent dramatic declinesinthefinancial markets,"anyproposed distribution "from the PSF to the ASF could exceed the total return on all investments ofthe PSF over the relevant lO-year period." Request Letter at 2. You therefore ask a number ofquestions concerning the proper application of subsections 5(a)(1) and 5(a)(2) as they relate to the SBOE's distribution offunds 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 athttp://www.texasattomeygeneral.gov). Subsequentto 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

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Your first and second questions ask us to confirm the appropriateness of the current methodology used by the SBOEto calculate the "totalreturn on all investment assets ofthe [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 ofthe 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 subjectto the investmentcontrolandmanagementofthe Board,"whichexcludesthePSF 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 ofthe [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 ofthe [PSF], the [SBOE] may ... supervise, manage or retain, through procedures and subjectto restrictions itestablishes and inamounts it considers appropriate, anykindofinvestment" that a prudentperson 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 SBOEmust, 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 ofthe PSF. See Tex. Att'y Gen. Op. No. JC-0449 (2002) at 1, 7 (requiring Lottery Commission, as agency charged with application and enforcementof thelaw, todeterminewhether "gamblingdevice"includesvideopokergames); Supp. Req. at 2 (stating that the SBOE acts as a fiduciary over the PSF). The courts will generally defer to a reasonable constructionbythe administrative agencycharged withthe application ofa 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' ofthe investment assets as the net appreciation or decline in value, plus income." Request Letter at 2. You also note that the SBOE doesnotinclude "investmentmanagementfees" or "totaladministrationexpenses"inthe calculation oftotal 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 thatthe "expenses ofmanaging [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. § 184.101(e )(3)(F) (Vernon 2006) (requiring a state trust companyThe Honorable Don McLeroy

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Legislative Council did not provide a clear definition, in explaining the proposed constitutional amendment to article VII, section 5, it statedthat the amendment "would change the composition ofthe PSF andthe ASF byproviding that the ASF

... would consist of a portionofthe 'totalreturn' on investment assets ofthe PSF-inother words, a portion ofthe 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 ofassets. Courts will give "greatweight" to a contemporaneous construction given bythe 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]

... overthe 10-year period consisting ofthe current state fiscal year andthe nine preceding state fiscal years may not exceedthe total return on all investment assets ofthe [PSF] overthe same 1O-yearperiod." 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 ofPublic 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, ifany, ofthese alternatives you believe to be legally appropriate. 5
The languageofsubsection5( a) andthe statutoryprovisionsimplementingthatconstitutional provision speakto and limitdistributions fromthePSFto theASF ineach state fiscal year. See TEx. CONST. art. VII, 

### § 5. Subsection 5(a) provides that the amount distributed in each year ofa state fiscal biennium over the ten-year period consisting ofthe current state fiscal year and the nine preceding state fiscal years may not exceedthe total return on all investment assets ofthe 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 ofeach month in a state fiscal year, ... [to] transfer from the [PSF] to the [ASF] an amount equal to one-twelfth ofthe annual distribution[.]" TEx. EDUC.

to consider "the expectedtotal retnm ofthe portfolio" in making investment decisions). The Comptrollerhas 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 of the Attorney General didnotreceive briefing fromthe SBOE orany other interestedparties 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 ofthe [PSF] over the same ten-year period" has been calculatedutilizing the fiscal year-end values for the preceding nine fiscal years and aprojectedyear-end value for the current fiscal year. TEx. CONST. art. VII, § 5(a)(2).The Honorable Don McLeroy

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CODE ANN. 

### § 43.002(a) (Vernon 2006)(emphasis added). Thus, under the language ofsubsection 5(a)(2) and the statutes implementing it, the amount distributed during the current state fiscal year and the nine preceding state fiscal years mustbe compared against the total return on all investment assets ofthe 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). TheLegislature's consistentfocus onand 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 offunds from the PSF to the ASF exceeded the limits ofsubsection 5(a)(2) for a fiscal year. Request Letter at 3. You explainthat "[a] determination ofthe total return ofthe PSF cannot be made on a monthly basis sooner than roughly the end ofthe following month andannual audited figures are not availableuntil several months following the end ofthe 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 SBOEmay exceedthe subsection5(a)(2) limitwhenthe auditedfigures for thereturnfrom 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 ofan overpayment as you describe. Giventhe complete silence onthe issue and without further instructionfrom the Legislature, wewill 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)] evenifsubsection 5(a)(2) would preclude all orpart ofthat distribution." 

### [d. at 4. Subsection 5(a)(I) directs the SBOE, or the Legislature ifthe SBOE does not act, to determine an amount to be distributed from the PSF to the ASF based onthe "average ofthe market value of the [PSF]

... onthe last day ofeach ofthe 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). Independentofthatcalculation, subsection 5(a)(2) mandatesthatthe "total amount distributed from the [PSF] to the [ASF]

... over the 10-yearperiod consisting ofthe current state fiscal year and the ninepreceding state fiscal years maynotexceedthetotalreturn onall investment assets ofthe [PSF] overthe same 1 O-year period." 

### Id. art. VII, 

### § 5(a)(2). Each ofthese provisions by its terms requires an independent calculation using a different methodology and covering a differenttime period. As aresult, subsection 5(a)(2) does notprohibitthe SBOEfrom adopting apercentageunder subsection

'The current state fiscal year began September I, 2008 and will end Augnst 31, 2009. The eighty-first legislative sessionconvened onJanuary 13,2009. Therefore, in determining a percentage under subsection 5(a)(1), the SBOE considerstheaveragemarketvalue ofthePSFonNovember30,2008 andthefifteenprecedingquarter-endvalues ofthe PSF. See TEX. CONST. art. VII, § 5(a)(J). Any amount distributed by the SBOE in each year ofthe next state fiscal biennium cannot exceed six percent ofthe average ofthose sixteen values. Id.

### The Honorable Don McLeroy

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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 managementresponsibilities under article VII, subsection 5(t). See 

### id. art. VII, § 5(t). As such, the SBOEmustconsiderits fiduciary obligations 

### insettingthe distributionrateunder subsection5(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 inArticle 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 distributionpercentage based onthat 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 ifthe 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 "managingthe assets ofthe [PSF]," it is the duty ofthe SBOE to determine the "total return" ofthe PSF absent express authority by another entity tomake 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 onthe guiding principles ofthe constitutionalprovision, 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 ofsubsection 5(a)(2) to the amount it distributes from the PSF to the ASF.
In your supplemental requestyou explain that the SBOE met in January 2009 and affirmed the 2.5% rate previouslydecided upon, while also adopting a contingencyplan. SUpp. Req. at I n.2. You explainthis contingencyplan as providing that "should any payments during the bienniumnot be made because ofthe 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 underthose circumstances." 

### Id. Undertheplain language ofsubsection 5(a), any amountthatthe SBOE decides to distribute for each year ofthe 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 expresslyrequire thatthe amountthe SBOE de.cides to distribute bethe 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, whenthe 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 5prohibits the SBOE from adopting such a contingency plan.

### The Honorable Don McLeroy

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### 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 BoardofEducationmust establishthe appropriate methodology for calculating the total return on all investment assets ofthe PSF inthe first instance.
The limitation in article VII, subsection 5(a)(2) ofthe Texas Constitutionmustbeapplied onan annual basisto 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 ofthe PSF, is authorized to apply the limits ofsubsection 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 sixpercent ofthe average marketvalue ofthePSF as provided in subsection 5(a)(l) and the subsection 5(a)(2) limitations.

### The Honorable Don McLeroy

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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 (GA-0707)