The SBOE Committee on School Finance/Permanent School Fund met on April 7 take up a number of items. The agenda can be found here.

This report is intended to give you an overview and highlight of the discussions on the various topics taken up. It is not a verbatim transcript of the discussions but is based upon what was audible or understandable to the observer and the desire to get details out as quickly as possible with few errors or omissions.

 

Item 1: Proposed Amendment to 19 TAC Chapter 109, Budgeting, Accounting, and Auditing, Subchapter C, Adoptions By Reference, §109.41, Financial Accountability System Resource Guide

  • First rating filing authorization for FASRG, funding for ISDs & charters, incl. state comp ed & module on what to expect from an audit
  • Needs updating fairly regularly to keep up with accounting changes, incl. update on leases, HB 3 new program intent codes, and clean up
  • all modules it is close to 2k pages
  • Also incorporates GASB and FASB
  • Tom Maynard SBOE Member – What is the relation of this rule text to financial accountability rating system?
    • No real connection, some of the adopted rule ends up affecting FIRST, but FIRST is not included as part of this
  • Chair Maynard – For first reading & filing authorization
  • Motion to approve proposed amendments for first reading & filing authorization passes

 

Item 2: Report by the State Auditor’s Office on the Audit of the Permanent School Fund’s Financial Statements and Certification of the Bond Guarantee Program for the Fiscal Year Ending August 31, 2021

  • Clean opinion issued, financial statements were materially correct in accordance with generally accepted standards; tested financial investments, amounts reported, and investment income, internal controls, etc.
  • No significant findings as a result of testing, bond program certified, bonds within established limits, $15.8b remaining available for ISDs & Charters
  • Chair Maynard – Had some discussion over last few years in making sure we had internal controls, sounds like we have those & you feel pretty good about them?
    • Yes
  • Audit staff highlights that GASB 87 is a pretty significant change to government accounting and auditing, refers to “contracts” instead of “leases;” intended to cover agreements that have not typically been identified as leases, e.g. software portions of IT agreements

 

Item 3: Report on Permanent School Fund Securities Transactions and the Investment Portfolio and Ratification of Purchases and Sales for the Months of December 2021 and January 2022

  • Highlights charts reporting values at Jan 31st, 2022; total fair value was $41.8b, year-to-year increase of $3.5b
  • Presents written material covering last 12 years, asset class values, GLO revenues, etc.
  • $1.6b total calls, $1.9b in distributions, net realized gain of $738.3m over last financial period
  • $1.7b total income over last period, $700m expenditures
  • Remaining capacity $9.4b on Jan 31st, charter district reserve balance was $72.3b
  • Motion to ratify purchases and sales passes

 

Item 4: Report on Permanent School Fund Liquid Account and Ratification of Purchases and Sales for the Months of December 2021 and January 2022

  • Highlights chart detailing asset values, realized gains up to Jan 31st, 2022
  • Chair Maynard – Purchases on pg 54? Lot of movement in equities it looks like, are we fully deployed in that? It’s all transitory, trying to wring as much as we can out of it
    • When you look at the liquid account, it’s met its purpose; 2-3% returns
  • Chair Maynard – but we can do better, can’t we?
    • We will
  • Motion to ratify PSF liquid account purchases and sales at $1.4b passes

 

Item 5: Adoption of an Annual Report on the Status of the Bond Guarantee Program

  • Motion to adopt annual report as of Aug 31st, 2021, passes

 

Item 6: Fourth Quarter 2021 Permanent School Fund Performance Report

  • Slowest growth quarter since 2020 when measures were put into place to contain COVID-19, unemployment fell to lowest point since 2020
  • S&P 500 outperformed the S&P 1000, IT sector did the best
  • Global markets declined along with emergence of Omicron and new lockdowns, earlier withdrawals than expected created inflation risk
  • Markets were negatively affected by inflation and central bank policy over the quarter
  • PSF returned 4.04% over quarter, outperforming benchmark, attributed primarily to non-core real estate, private equity, and returning market debt
  • Presents chart detailing PSF performance against funds greater than $1 billion, greater than 30th percentile, for over $5 billion greater than 60th percentile
  • PSF has outperformed benchmark in 27 out of the last 40 quarters
  • Highlights comparisons of PSF to other funds categories, incl. US large, small, and mid cap equity, international equity, etc.; highlights cumulative return of internal S&P 500 is 18 basis points, S&P 1000 is 27 basis points
  • Real estate, private equity, and domestic equity continue to provide the highest return, total fund returns continue to be more correlated to equities
  • Realty and private equity
  • Maynard – Diversification of fund is important, originally only stocks & bonds, but currently have many more tools to provide risk management
    • Yes, were at one point 75% into public market equities
  • PSF is overweight primarily in private equity and international emerging markets relative to strategic asset allocation
  • Risk return over last 10 years placed PSF slightly below risk seen by other public funds over $1b, has placed below median return of over $5b universe
  • PSF is at 2.94% return over quarter, 4.7% over year, above benchmark
  • Chair Maynard – A few things have happened since December 31st of 2021, especially in the emerging international debt sector, had some assets with Russia and can’t even trade them, can you?
    • No, we cannot; in 2020 Russia’s economy was 11th largest in the world and we had exposure; $95m in February and about 60% down since December
  • Chair Maynard – Emerging international debt portfolio; had investment with Russia and can those assets be traded?
    • PSF Corporation CEO Holland Timmins – No, cannot execute trades; Russia has been removed from TCI and JP Morgan indexes
    • Timmins – Whatever is able to sell,
    • Staff – There is no liquidity in these funds right now, no one to sell them to
  • Hardy, Timmins and Staff discuss Russia’s GDP
  • Chair Maynard – Moving into the corporate environment, will gives these funds more agility; ability to get more recent data complied?
    • Timmins – Have to plan on a quarterly basis
    • Chair Maynard – May need to discuss the timing of this
    • Staff – Current timing is what it is, could compile data without illiquid assets; a certain portfolio earned 15% the last calendar year

 

Item 7: Report of the Permanent School Fund Executive Administrator and Chief Investment Officer

  • Timmins – Hired an individual in Washington D.C. to increase capacity for the Bond Guarantee Program; have spoken with the Treasury and chose to make change through the regulatory environment