AUSTIN, Texas - The long-running saga of the Texas Permanent School Fund soon might have a new leading character.
Two bills have been introduced into the current session of the Legislature to transfer the authority to manage and invest the $22 billion in endowment assets from the Texas State Board of Education to the Texas Education Agency. And a report by the Texas State Auditor's office recommends the Board of Education be replaced by a professional investment oversight board because the current BOE oversight committee lacks substantial investment expertise.
The legislation and auditor's report follow a series of events dating to 1999 that include allegations of board infighting, lying, influence peddling, back-stabbing and conflicts of interests.
The bills would create a Permanent School Fund Investment Board consisting of appointed members, and would require that they have financial or investment experience. The Texas Constitution currently assigns responsibility for investment of the fund to the 15 elected members of the State Board of Education. Five of the board members serve on the finance committee that oversees the fund.
Both the House and Senate versions of the legislation could be brought to floor votes before the current session ends in late May. The House version would require the creation of a nine-member Permanent School Fund Investment Board with three members each appointed by the governor, the lieutenant governor and the speaker of the house.
Both bills would stiffen ethics policies for board members and would require higher levels of disclosure for the board's dealings with outside parties with a "business, commercial, or other relationship that could reasonably be expected to diminish the (board member's) independence of judgment."
But the legislation has encountered unexpected opposition from some of the Permanent School Fund's asset managers, raising eyebrows among some state officials who are growing weary of the goings-on at the fund.
According to reports filed at the Texas Ethics Commission, Harbor Capital Management Co. Inc., Boston, hired Austin lobbyist Kevin O'Hanlon for a fee of $50,000 to about $100,000, and Neal "Buddy" Jones for a fee of $10,000 to $25,000, and two lobbyists in Mr. Jones' firm for $20,000 to $50,000 total. (Lobbyists are required to report only a fee range for their services).
J.&W. Seligman & Co. Inc., New York, according to Ethics Commission reports, is paying San Antonio lobbyist Robert H. Finney about $25,000 to $50,000. MacKay-Shields Financial Corp., New York, is paying Austin lobbyist Clint Hackney $50,000 to about $100,000.
Calls to MacKay-Shields and Harbor Capital were not returned by press time.
A spokesman for J.&W. Seligman said the firm terminated its relationship with Mr. Finney in February and that the relationship "was not to lobby against the (Permanent School Fund) legislation, but to keep an ear to the ground in Texas."
But Porter Wilson, a legislative aide to Sen. Robert Duncan, said the firms were lobbying "hot and heavy" against the bill early in the session. Mr. Duncan introduced the Senate bill to revamp the oversight of the fund. The Senate vote on the legislation is expected to be close, Mr. Wilson said. The measure had wide support after it was introduced early in the session, but heavy lobbying by the money management industry shaved some early support, he said.
The 146-page state auditor's report on the Permanent School Fund slams the current investment oversight and details a number of well-publicized gaffes by board members since 1999. Among the items discussed in the report are several incidents that raise ethical questions about board members in dealing with outside "informal advisers" not hired by the board, charges of lying and dealings with outside parties who profited from those relationships.
`Climate of distrust'
The report said the state board of education "has conducted its business in a manner that impedes the effective management of the permanent school fund. ... In addition, SBOE business has been surrounded by a climate of mistrust due to numerous allegations of wrongdoing directed by some SBOE members and the ("informal adviser") ... some external money managers and some former consultants. Both of these issues impaired SBOE's ability to make prudent, well-reasoned investment decisions."
The disruptive nature of some fund board meetings during the last two years "and other actions it has taken" have "begun to harm SBOE's and PSF's reputations in the investment community," the report said.
The report cited one case in June 2000 in which a Board of Education member told a legislative committee charged with investigating the board's oversight of the fund that he "doesn't know anything about investing."
The board member also claimed that, until May 2000, he wasn't aware of the fund's $15 million annual brokerage commission expense and the discretionary relationship between money managers and brokers. Nevertheless, the report said, records indicate the member voted on at least six brokerage-related issues before May.
On another occasion, the report said, the investment committee voted to remove $300 million from one of the fund's external equity managers rather than a proportional reduction from each of six external managers as recommended by the fund's internal staff.
"By not providing technical justification for its decision, SBOE's action did not dispel concerns that the method it chose to accomplish this rebalancing was motivated by some SBOE members' dislike for this manager, not by considerations of fiduciary prudence," the report said.
Question of professionalism
The auditor's report emphasized repeatedly that many of the problems that have occurred at the fund are related to the board's lack of professional investment expertise.
"We are concerned that the SBOE's decision-making processes in its oversight of the $22 billion permanent school fund have been seriously weakened since our prior audit (in 1996). Numerous problems, some of which are of SBOE's own making, have impaired SBOE's oversight processes. As a result, SBOE might not have made sound decisions concerning contract awards and other issues related to the investment management of PSF," the auditor's report said.
In a written response to the auditor's report, Board of Education President Chase Untermeyer said the incidents mentioned in the report "have indeed embarrassed the entire board." But, he said, "to say that ordinary citizens, elected to the state board of education, not necessarily possessing `substantial investment experience,' are incapable of being wise stewards of a major public fund is refuted by the PSF's performance." He added the incidents mentioned in the report were "indeed embarrassing to the whole board, and ... I will not seek to explain or rationalize them."
Mr. Untermeyer said in a written response to the report that he is "comfortable leaving to the Legislature" the question of whether the state board should be elected or appointed.