Texas Oil Funds Local Schools

The Texas State Board of Education last week decided against a proposal to dedicate public school endowment dollars to finance charter school facilities. The proposal was to invest up to $100 million of the $23 billion Permanent School Fund into developing and leasing Texas charter schools.

The vote last week was split down the middle with seven members of the board in favor of the proposal and seven against.  A final vote will be taken this week.

If the final vote reinforces last week’s decision, the proposal could still be resurrected if the Texas Attorney General decides that the charter school investment is appropriate. Based upon recommendations by the board’s legal adviser, Chairwoman Gail Lowe, R-Lampasas, agreed to seek the Attorney General’s opinion, despite her own concerns about the proposal.

Board member David Bradley, R-Beaumont, feels the ongoing discussion of the proposal may encourage legislators to address the lack of state assistance for charter schools, which are privately-managed public schools.  Texas legislators could extend to charter schools a debt guarantee similar to the benefit that the Permanent School Fund provides traditional school districts. The state-backed guarantee significantly reduces the districts’ borrowing costs by allowing the districts to acquire lower interest rates.

Another legislative suggestion up for debate would be to provide a lower property tax for landlords who lease space to charter schools.  The property owner would then be required to pass on the savings to the schools, said David Dunn, Executive Director of the Texas Charter School Association. The estimated cost to Texas in lost tax revenue would be between $2 million to $3 million a year.

Both the debt guarantee proposal as well as the lowered property tax proposal could require voters to approve changes to the Texas state constitution.

The charter school allocation discussion is a small part of a larger decision to be made by The Texas Board of Education as to how the full Permanent School Fund should be invested.  The Permanent School Fund is an endowment created in 1876 to benefit Texas public schools.  Although the $100 million charter school allocation dominated much of last week’s discussion, it would be an extremely small portion of the fund to be invested.

It was generally agreed upon by the Texas Board of Education that all of the decisions concerning the investment of the fund must be based on achieving a rate of return that is commensurate with the risk involved. The board’s investment adviser, Rhett Humphreys of NEPC LLC, said it was “very tricky business” to calculate an accurate risk-return expectation for a charter school investment because there is very little history of the performance for such an investment.  The NEPC analysis calculated that investment of the fund at a high risk level could provide a return of 4.75%.  Conversely, NEPC estimated the return for non-investment grade bonds, also known as junk bonds, was 8% with much lower risk.

Opponents to such an investment feel that it would not be a prudent use of the Texas Permanent School Fund dollars.  However, Bradley and others maintain that the board members’ opposition to investment was based upon an adverse attitude to providing privately-managed charter school options to traditional public school education.