ATTORNEY GENERAL OF TEXAS 

GREG ABBOTT 

The Honorable Don McLeroy 

Chair, State Board of Education 

1701 North Congress Avenue 

Austin, Texas 78701-1494 

Dear Mr. McLeroy: 

April 13, 2009 

Opinion No. GA-0707 

Re: Calculation of the "total return on all investment 

assets of the permanent school fund" for purposes of 

article VII, subsection 5(a)(2), Texas Constitution 

(RQ-0758-GA) 

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 1 O-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 of the 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 

3 Article 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 1 O-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 of the 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 1 O-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 

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)