HBA-MSH C.S.H.B. 2414 77(R)BILL ANALYSIS Office of House Bill AnalysisC.S.H.B. 2414 By: Keel Public Education 4/24/2001 Committee Report (Substituted) BACKGROUND AND PURPOSE Under current law, the investment and management of the permanent school fund (fund) is a responsibility of the State Board of Education (SBOE). The members of SBOE are not required to possess any investment expertise, which makes it more difficult to manage the fund with prudence and avoid conflicts of interest regarding advice from investment consultants. A proposed constitutional amendment provides for the transfer of authority to invest and manage the fund from SBOE to a permanent school fund investment board. C.S.H.B. 2414 clarifies and strengthens the conflict of interest and disclosure requirements and, contingent on the adoption by the voters of the constitutional amendment, creates the Permanent School Fund Investment Board to manage the fund. If the constitutional amendment fails adoption, the bill creates a permanent school fund advisory committee to advise SBOE regarding the management of the fund. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that this bill expressly delegates rulemaking authority to the Permanent School Fund Investment Board in SECTION 1.08 (43.005, Education Code) of this bill. ANALYSIS C.S.H.B. 2414 amends the Education Code relating to the investment and management of the permanent school fund (fund). If the constitutional amendment relating to the investment and management of the fund is passed by the voters of the state, then the bill creates the Permanent School Fund Investment Board (board) to direct the Texas Education Agency (TEA) in managing and investing the fund (SECTION 1.01, Sec. 43.0012 and SECTION 1.33). The bill transfers the duties, authority, and contracts of the State Board of Education (SBOE) relating to the fund to the board (SECTIONS 1.12-1.22, Secs. 43.007-43.019 and SECTIONS 1.26 and 1.27). The bill applies existing provisions relating to conflicts of interest, ethics in the operation of the fund, and reporting of expenditures to the board and persons who apply for or receive anything of value as a direct or indirect result of permanent fund investment (interested person) (SECTIONS 1.021.04, Secs. 43.0031-43.0033). The bill sets forth provisions relating to contracts with a consultant, advisor, broker, money manager, investment manager, dealer, or other person (consultant) who agrees to provide services to the board relating to the management or investment of the fund (SECTION 1.09, Sec. 43.0051). The bill provides that if an interested person serves as a consultant and fails to disclose a potential conflict of interest, the arrangement is voidable by the board and the board or the comptroller of public accounts may declare the person ineligible to contract for business relating to the management or investment of the permanent school fund (SECTION 1.05, Sec. 43.0035). The bill requires the board to maintain a listing of each interested person on an Internet website (SECTION 1.05, Sec. 43.0036). The bill requires the comptroller to provide to certain organizations any information relating to disciplinary actions taken by the board against a consultant (SECTION 1.09, Sec. 43.0052). The bill provides that an interested person may be barred from contracting with the board for violating an ethics policy or conflict of interest restriction. The bill provides for hearings conducted by the State Office of Administrative Hearings concerning such violations (SECTION 1.05, Sec. 43.0035 and SECTION 1.11, Secs. 43.0062 and 43.0063). The bill requires the legislative audit committee (LAC) to select a qualified independent firm to evaluate investment management practices and performance relating to the fund as often as LAC determines necessary (SECTION 1.11, Sec. 43.0064). The bill amends the Education and Government codes to require the board and the state auditor to enter into a contract for the state auditor to investigate any written allegation to the board raising the issue of malfeasance or misfeasance relating to the management or investment of the fund (SECTION 1.11, Sec. 43.0061 Education Code and SECTION 1.25, 321.013 Government Code). If the constitutional amendment relating to the investment and management of the fund is not passed by the voters of the state, then H.B. 2414 amends the Education Code to create the permanent school fund advisory committee (committee) composed of nine members appointed by the governor, the lieutenant governor, and the speaker of the house to advise SBOE regarding the management and investment of the fund. The bill provides that a person appointed to the committee must possess substantial experience and expertise in investments (SECTION 2.02, Sec. 43.0012 and SECTION 2.21). The bill extends existing provisions relating to the ethics policy of the SBOE, conflicts of interest, and reporting of expenditures to the committee and interested persons (SECTIONS 2.03-2.05, Secs. 43.0031-43.0033). The bill provides that if an interested person serves as a consultant and fails to disclose a potential conflict of interest, the arrangement is voidable and SBOE or the comptroller may declare the person ineligible to contract for business relating to the management or investment of the fund (SECTION 2.06, Sec. 43.0035). The bill requires SBOE to maintain a listing of each interested person on an Internet website (SECTION 2.06, Sec. 43.0036). The bill sets forth provisions relating to contracts with a consultant who agrees to provide services to SBOE relating to the management or investment of the fund (SECTION 2.06, Sec. 43.0051). The bill provides that an interested person may be barred from contracting with SBOE for violating an ethics policy or conflict of interest restriction (SECTION 2.08, Sec. 43.0061). The bill provides for hearings conducted by the State Office of Administrative Hearings concerning such violations (SECTION 2.08, Sec 43.0062). The bill requires LAC to select a qualified independent firm to evaluate investment management practices and performance relating to the fund as often as LAC determines necessary (SECTION 2.08, Sec. 43.0063). The bill amends the Education and Government codes to require SBOE and the state auditor to enter into a contract for the state auditor to investigate any written allegation to SBOE raising the issue of malfeasance or misfeasance relating to the management or investment of the fund (SECTION 2.01, Sec. 7.113, Education Code and SECTION 2.15, Sec. 321.013, Government Code). The bill amends the Education Code to repeal provisions governing the investment of the fund in certain types of securities (SECTION 3.01). EFFECTIVE DATE September 1, 2001. The provisions contingent on the passage or failure to pass of the constitutional amendment relating to the investment and management of the fund take effect January 1, 2002. COMPARISON OF ORIGINAL TO SUBSTITUTE C.S.H.B. 2414 differs from the original by providing that an appointment made to the Permanent School Fund Investment Board (board) is not subject to senate confirmation and that a vacancy on the board is filled in the same manner as an original appointment (SECTION 1.01, Sec. 43.0012, Education Code).