SBOE

SLB
Myth VS.
Fact

chairs

Statutory Authority

In 2001, the Texas Legislature authorized the School Land Board (SLB) to deposit the proceeds from land sales, mineral leases, and mineral royalties in the Real Estate Special Fund Account (RESFA) and to use those amounts to invest in real property on behalf of the Permanent School Fund (PSF). By 2007, the SLB's investment authority had expanded to encompass real estate, energy, infrastructure, and "other interests." Since receiving the original investment authority in 2001, the fair market value of SLB investments, not including cash, has grown to approximately $3.7 billion at September 30, 2018. Including cash-equivalents invested by the Treasury Safekeeping Trust Company on behalf of the SLB, the total amount of real assets investments and cash equivalents was approximately $7.5 billion at September 30, 2018. Since Commissioner Bush assumed the stewardship of the RESFA in January 2015, the SLB has generated approximately $5.5 billion in revenue, approximately 25% of the total amount of revenue received since the fund began in 1854.

Myth

The State Board of Education and School Land Board have the same investment structures.

FACT: The School Land Board (SLB) invests only in private-markets real assets investments. While SLB investments focus exclusively on private-markets investments in energy, infrastructure, and commercial real estate, the State Board of Education (SBOE) invests in a more diversified portfolio of publicly-traded equity and fixed-income investments, hedge funds and other alternative investments, and maintains a small exposure to private equity and private real estate investments.

Texas Schoolchildren
Our young Texans are the future of this great state. There is no question that the PSF is performing better today than at any moment in its history. -George P. Bush

Myth

SLB private equity investments led to amassed cash holdings (about 40% of total assets).

FACT: The assertion has been made that the SLB is "sitting on" $4 billion in cash and that this money should be released to the SBOE for investment in the PSF. Such an assertion ignores the fact that approximately $3 billion of that cash is already contractually committed to the SLB's external investment managers, and the remaining $1 billion is part of a $1.5 billion target for new capital commitments to external investment managers during calendar year 2019. Such an assertion also demonstrates a general lack of understanding about both the unique capital deployment process related to the specific types of investments that the SLB makes and the requirements of the legislation that currently governs the SLB's investment of RESFA assets.

To be clear, the SLB does not choose to hold large amounts of cash for investment purposes. The amount of cash that accumulates in the RESFA is rather an unavoidable byproduct of the specific types of investments that the SLB executes and the legislation that governs the SLB's investment process. Private-markets real assets investments require the SLB to make capital commitments to external investment managers that specialize in these types of assets. Investment periods vary, but typically average 3-5 years in length. Therefore, even though the SLB commits capital for specific investment purposes, it can take 3-5 years before those commitments are fully called and invested by the SLB's external investment managers. State law currently requires that the SLB hold this cash in the State Treasury where it is invested by the Texas Safekeeping Trust Company (TSTC) in a large, highly-liquid investment pool until the SLB calls it to satisfy capital calls from its external investment managers for investment in real assets investments. The SLB's external investment managers can call capital at any time and in any amount, up to the full amount of their individual capital commitments. While it is unlikely that all of the SLB's committed capital would be called at once, it is theoretically possible. Since most of the $4 billion in cash is already contractually committed to SLB external investment managers, permanently releasing it to the SBOE for investment in the PSF would be imprudent because it could potentially cause the SLB to be unable to fund capital calls from its investment managers, which could lead to a default on its capital commitments. Either of those potential events are completely unacceptable.

PSF

Myth

If the SBOE invested the SLB's cash on hand, it could make more money for education.

FACT: This assertion is based upon the assumption that the SBOE can temporarily invest the SLB's cash in a pro-rata fashion across its existing diversified portfolio and generate a higher investment return than the Texas Safekeeping Trust Company currently earns on the SLB's cash (on March 13, 2019, the yield on the SLB's cash invested by TSTC was 2.55%). This is a flawed assumption because the SBOE's investment portfolio is not structurally liquid, and the SLB needs the liquidity necessary to fund capital calls from its external investment managers at any time and in any amount, up to the full amount of its existing capital commitments.

Therefore, the SBOE would need to temporarily invest the SLB's cash in a highly liquid format, which would generate returns lower than its existing diversified portfolio. While it is possible that the SBOE could generate a rate of return on the SLB's cash through a portfolio of highly liquid investments that exceeds that generated by TSTC, it is doubtful that it would be meaningfully higher, and unless segregated into an account separate from the SBOE's diversified portfolio, it would likely produce a "cash drag" effect on the overall SBOE portfolio that would significantly reduce the SBOE's overall investment returns.

 

Myth

If the SLB gave the cash directly to the SBOE they would make more money for the PSF, and they would then be able to give additional money to the Available School Fund.

FACT: False, there is no support for this statement. Under the past four years of Commissioner Bush's leadership, the SLB agreed to release 6% of the trailing 16-quarter average market value of its investment portfolio either to the SBOE for investment in the PSF or directly to the Available School Fund. In contrast, the SBOE has historically released approximately 3% of the trailing 16-quarter average market value of its investment portfolio to the Available School Fund. However, the SBOE is allowed to release up to 6%, so if it wants to release more to the ASF, it can easily do so without receiving more from the SLB. The attached chart shows the SLB's total contributions to the SBOE and ASF since 2002.

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chart
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Myth

A comparison of 10-year average annual investment returns shows the SBOE's return at 7 percent compared to the SLB's 4.23 percent (including cash).

FACT: The stated returns came from the Texas Permanent School Fund Comprehensive Annual Financial Report for the Fiscal Year Ending August 31, 2018. The average annual return for the SBOE for the 10-year period is actually 6.92%, and while the SLB's average annual return was indeed 4.23% (including cash) for the period, the SLB's return without cash was 7.40% - higher than the SBOE. It is no secret that there is a significant cash drag effect on the SLB's investment returns caused by the amount of cash awaiting capital calls for investment by the SLB's external investment managers. That is why a more appropriate barometer of the SLB's actual investment performance are its returns excluding cash. Also, the SLB's investment portfolio is only a little over 10 years old, and for much of the portfolio's early existence, the SLB could only invest in real estate. In addition, the beginning of that 10-year period was characterized by the worst recession in U.S. history, producing significantly negative real estate investment returns during the period. Therefore, for both of those reasons, that particular 10-year period is not an appropriate comparison tool. It is more appropriate to instead to compare returns over the last 5-year period. As the chart below demonstrates, the SLB's returns for the last 1-year, 3-year, and 5-year periods at September 30, 2018 are higher than the SBOE's at August 31, 2018, both excluding and including cash in the calculations.

chart 2
Sources: 1TXGLO PSF Quarterly Investment Report for the Periods Ending September 30, 2017 and 2018, p. 2. 2Texas Permanent School Fund Comprehensive Annual Financial Report for Fiscal Years Ending August 31, 2017 and 2018, p. 70 and 76, respectively.

The SLB also reports the Net Rate of Return each year. Net Rates for 2017 without cash equivalents: 1 year- 20.6%, 3 year- 14.4%, 5 Year- 13.2%. Net Rates for 2017 with cash equivalents: 1 year- 10.3%, 3 year- 7.7%, 5 Year- 6.9%. Net Rates for 2018 without cash equivalents: 1 year- 15.6%, 3 year- 10.6%, 5 Year- 11.8%. Net Rates for 2018 with cash equivalents: 1 year- 9.1%, 3 year- 6.0%, 5 Year- 6.6%.