TEXAS PERMANENT SCHOOL FUND (TPSF)



TEXAS STATE BOARD OF EDUCATION

TEXAS PERMANENT SCHOOL FUND

CHARTER FACILITIES PROGRAM

DEVELOPMENT PLAN

Presented by

David Bradley, Chairman

Committee on Finance and Permanent School Fund

TABLE OF CONTENTS

History of the Permanent School Fund

Development of mission statement

Summary of Action Steps

Action Steps-Discussion

EXHIBITS to PROPOSAL

1. Letter from Fiduciary Counsel

2. UTIMCO Articles of Incorporation

3. Proposed Certificate of Formation

4. UTIMCO Bylaws

5. Proposed Bylaws

History of the PERMANENT SCHOOL FUND

The PSF was created with a $2,000,000 appropriation by the Texas Legislature (the "Legislature") in 1854 expressly for the benefit of the public schools of Texas. The Constitution of 1876 stipulated that certain lands and all proceeds from the sale of these lands should also constitute the PSF. Additional acts later gave more public domain land and rights to the PSF. In 1953, the U.S. Congress passed the Submerged Lands Act that relinquished to coastal states all rights of the U.S. navigable waters within state boundaries. If the state, by law, had set a larger boundary prior to or at the time of admission to the Union, or if the boundary had been approved by Congress, then the larger boundary applied. After three years of litigation (1957 – 1960), the U. S. Supreme Court, on May 31, 1960, affirmed Texas' historic three marine leagues (10.35 miles) seaward boundary. Texas proved its submerged lands property rights to three leagues into the Gulf of Mexico by citing historic laws and treaties dating back to 1836. All lands lying within that limit belong to the PSF. The proceeds from the sale and the mineral-related rental of all dedicated Permanent School Fund lands, including, bonuses, delay rentals and royalty payments, became the corpus of the Fund.

The land grant is set forth in Article VII § 2 of the Texas Constitution which provides as follows:

PERPETUAL SCHOOL FUND.

All funds, lands and other property heretofore set apart and appropriated for the support of public schools; all the alternate sections of land reserved by the State out of grants heretofore made or that may hereafter be made to railroads or other corporations of any nature whatsoever; one half of the public domain of the State; and all sums of money that may come to the State from the sale of any portion of the same, shall constitute a perpetual public school fund.

Management of the Texas Permanent School Fund is vested in the State Board of Education under the provisions of Article VII § 5 of the Texas Constitution which provides as follows:

PERMANENT SCHOOL FUND; AVAILABLE SCHOOL FUND; USE OF FUNDS; DISTRIBUTION OF AVAILABLE SCHOOL FUND.

(a)  The permanent school fund consists of all land appropriated for public schools by this constitution or the other laws of this state, other properties belonging to the permanent school fund, and all revenue derived from the land or other properties. The available school fund consists of the distributions made to it from the total return on all investment assets of the permanent school fund, the taxes authorized by this constitution or general law to be part of the available school fund, and appropriations made to the available school fund by the legislature. The total amount distributed from the permanent school fund to the available school fund:

(1)  in each year of a state fiscal biennium must be an amount that is not more than six percent of the average of the market value of the permanent school fund, excluding real property belonging to the fund that is managed, sold, or acquired under Section 4 of this article, on the last day of each of the 16 state fiscal quarters preceding the regular session of the legislature that begins before that state fiscal biennium, in accordance with the rate adopted by:

(A)  a vote of two-thirds of the total membership of the State Board of Education, taken before the regular session of the legislature convenes; or

(B)  the legislature by general law or appropriation, if the State Board of Education does not adopt a rate as provided by Paragraph (A) of this subdivision; and

(2)  over the 10-year period consisting of the current state fiscal year and the nine preceding state fiscal years may not exceed the total return on all investment assets of the permanent school fund over the same 10-year period.

(b)   The expenses of managing permanent school fund land and investments shall be paid by appropriation from the permanent school fund.

(c)   The available school fund shall be applied annually to the support of the public free schools. Except as provided by this section, the legislature may not enact a law appropriating any part of the permanent school fund or available school fund to any other purpose. The permanent school fund and the available school fund may not be appropriated to or used for the support of any sectarian school. The available school fund shall be distributed to the several counties according to their scholastic population and applied in the manner provided by law.

(d)   The legislature by law may provide for using the permanent school fund to guarantee bonds issued by school districts or by the state for the purpose of making loans to or purchasing the bonds of school districts for the purpose of acquisition, construction, or improvement of instructional facilities including all furnishings thereto. If any payment is required to be made by the permanent school fund as a result of its guarantee of bonds issued by the state, an amount equal to this payment shall be immediately paid by the state from the treasury to the permanent school fund. An amount owed by the state to the permanent school fund under this section shall be a general obligation of the state until paid. The amount of bonds authorized hereunder shall not exceed $750 million or a higher amount authorized by a two-thirds record vote of both houses of the legislature. If the proceeds of bonds issued by the state are used to provide a loan to a school district and the district becomes delinquent on the loan payments, the amount of the delinquent payments shall be offset against state aid to which the district is otherwise entitled.

(e)   The legislature may appropriate part of the available school fund for administration of a bond guarantee program established under this section.

(f)   Notwithstanding any other provision of this constitution, in managing the assets of the permanent school fund, the State Board of Education may acquire, exchange, sell, supervise, manage, or retain, through procedures and subject to restrictions it establishes and in amounts it considers appropriate, any kind of investment, including investments in the Texas growth fund created by Article XVI, Section 70, of this constitution, that persons of ordinary prudence, discretion, and intelligence, exercising the judgment and care under the circumstances then prevailing, acquire or retain for their own account in the management of their affairs, not in regard to speculation but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of their capital.

The major constitutional obligations in the above quoted provisions can be summarized as follows:

Subsection (a) establishes the Permanent School Fund and defines the Available School Fund as including the total return on all investment assets of the Permanent School Fund. The definition of the Available School Fund as including the total return on PSF investments is a relatively new concept. It was changed as of September 13, 2003. Previous to this amendment, the Available School Fund was defined as including income from investments of the Permanent School Fund.

Subsection (b) provides that PSF expenses and expenses of managing permanent school fund land shall be paid by appropriation from the permanent school fund.

Subsection (c) provides for the allocation of the Available School Fund to support public education in the State.

Subsections (d) and (e) provide authorization and necessary funding for the Guarantee Program for School District Bonds administered under State Board of Education Rules set forth at 19 Texas Administrative Code § 33.65.

Subsection (f) authorizes investment in the Texas Growth Fund and establishes the so-called prudent person rule as the fiduciary standard for the State Board of Education’s management of the Permanent School Fund. Issues relating to the implications of this fiduciary duty to the proposed program will be discussed below in greater detail.

The Role of the Texas General Land Office

From the earliest days of the Republic, the Texas General Land Office (GLO) has been involved with the management of public lands belonging to the State of Texas. The Republic of Texas Congress established the General Land Office in 1836 shortly after Texas won its independence from Mexico. The General Land Office was originally responsible for managing the public domain by collecting and keeping records, providing maps and surveys and issuing land titles. Since then the GLO's duties have evolved, but its core mission is still the management of state lands and mineral-right properties totaling 20.3 million acres. Included in that portfolio are the beaches, bays, estuaries and other "submerged" lands out to 10.3 miles in the Gulf of Mexico, institutional acreage, grazing lands in West Texas, timberlands in East Texas, and commercial sites in urban areas throughout the state.

In managing that property, the land office now leases drilling rights for oil and gas production on state lands, producing revenue and royalties that are funneled into the state's Permanent School Fund. Since the Permanent School Fund was established in 1854, the Texas General Land Office has deposited into it more than $6.8 billion, mostly from oil and gas leases and real estate trades and sales. Since this proposal concerns the potential acquisition of real estate using assets of the Permanent School Fund, implications of the GLO’s management responsibilities will be discussed below in detail.

DEVELOPMENT OF A Mission Statement

Charter schools have become a stable component of the educational landscape in Texas. Since 1999., under the provisions of Chapter 12 of the Texas Education Code, the State Board has approved ___ charters throughout the state of Texas. To be sure, some of the charter operations have not been successful and have closed, either voluntarily or through intervention by the Texas Education Agency. Notwithstanding those closures, most charter schools have become a vibrant and viable component of the educational delivery system in the State of Texas. Currently, the system of charter school serves approximately ___ Texas schoolchildren throughout the State of Texas.

Notwithstanding their successes, charter schools suffer from a lack of investment capital, and as a result, they are often operated in less than optimal facilities. The Texas Foundation School Program defined in Chapter 42 of the Texas Education Code provides the financial means for charter schools to compete with traditional school districts in the area of maintenance and operations funding. However, the State’s educational funding formulas do not provide a way for charter schools to access capital funding such as is available to Texas school districts under the provisions of Chapter 46 of the Texas Education Code.

In each of the last two legislative sessions, there have been efforts made by Senator Florence Shapiro, Chair of the Senate Education Committee, to even the playing field. Senator Shapiro’s efforts underscored the need for a long-term solution to the issue of charter facilities funding. However, Legislative attempts to resolve the problem proved difficult because, while there was an apparent interest in considering formula funding, the legislative appropriations process was not the proper source of long term investment capital..

The Texas State Board of Education has previously discussed, and determined that it would explore the utilization of the Texas Permanent School Fund which, at a market value of in excess of $22 Billion is an ample source of investment capital. The concept is not a new one. Under Texas constitution Article XVI, § 70, the Texas Legislature created the authority for the creation of the Texas Growth Fund whose stated objective was to leverage the investment capital of the four large Texas investment funds to promote economic growth within the State of Texas, while simultaneously earning a substantial return on investment. The current proposal to support an effort to develop a capital funding model for the development of charter school facilities is similar in concept to the Texas Growth Fund. However, the purpose of this new enterprise would be support of a charter facilities program to enhance public education in Texas, instead of an effort to nurture developing commercial start-up companies.

It will be argued by some that the State of Texas, under the auspices of the State Board of Education, should not be involved in the provision of facilities because they are, in essence, private entities. This argument is misplaced because it is the policy of the State of Texas that charter school properties are indisputably in the public domain. Texas Education Code §12.128 expressly provides:

PROPERTY PURCHASED OR LEASED WITH STATE FUNDS.  

(a)  Property purchased or leased with funds received by a charter holder under Section 12.106 after September 1, 2001:

(1)  is considered to be public property for all purposes under state law;

(2)  is held in trust by the charter holder for the benefit of the students of the open-enrollment charter school; and

(3)  may be used only for a purpose for which a school district may use school district property.

(b)  If at least 50 percent of the funds used by a charter holder to purchase real property are funds received under Section 12.106 before September 1, 2001, the property is considered to be public property to the extent it was purchased with those funds.

(c)  The commissioner shall:

(1)  take possession and assume control of the property described by Subsection (a) of an open-enrollment charter school that ceases to operate; and

(2)  supervise the disposition of the property in accordance with law.

(d)  The commissioner may adopt rules necessary to administer this section.

(e)  This section does not affect a security interest in or lien on property established by a creditor in compliance with law if the security interest or lien arose in connection with the sale or lease of the property to the charter holder.

A review of this provision makes it absolutely clear the all facilities used for the education of public school students, including those students enrolled in charter schools, are and will continue to be educated in facilities that, in one form or another, are being publically provided. Should the State Board of Education desire to further the expansion of charter school education within the State of Texas, the limited amount of investment capital available to help finance both existing and new charter schools will remain an issue.

The State Board of Education has an opportunity to create an investment fund dedicated to investing in charter schools. Through the proposed Charter Facilities Program, the SBOE will allocate PSF capital with an eye towards meeting the goals of the following proposed Mission Statement.

The Mission of the Permanent School Fund- Charter School Program shall be to, within the current statutory and constitutional constraints governing the operation of the Texas Permanent School Fund, leverage a portion of the Fund’s constitutionally provided capital to provide for the efficient financing and development of adequate facilities to house successful charter school programs with limited access to investment capital in the State of Texas, as a method to enhance public education in the State of Texas.

SUMMARY OF ACTION STEPS

In order to implement a charter facilities program, the State Board of Education will be required to take a number of specific action steps. The list below outlines each step that will be required for consideration and action by the State Board of Education. This section of the development plan lists the action steps as a quick reference. Subsequent sections of this plan will discuss each of the listed action steps in detail.

In order to establish a specific fund that will be used to provide Charter School Operators with competitive physical/real estate facilities, the following action steps will be necessary.

A. Establish Financial Parameters:

1. Determine whether the proposed investment is consistent with the Board policy, i.e. whether the investment is consistent with the SBOE’s investment objectives.

2. Review asset allocation and determine whether there is a place for this type of specialized investment within PSF’s most current asset allocation.

3. Establish an annual cash return benchmark for the funds that is comparable to a generally accepted and appropriate index.

4. Determine amount of investment.

5. Determine investment timeline.

A. Establish Operational Parameters:

1. Determine appropriate structure for fund.

2. Create corporation as appropriate investment vehicle.

3. Set eligibility criteria for charter schools.

4. Determine underwriting criteria.

5. Review and set appropriate building specifications, both minimum and maximum.

6. Determine geographic dispersal priorities.

7. Determine Board’s role in individual project approval.

8. Select investment manager for program.

Each of the foregoing items will be discussed in detail in the following sections.

Action steps-discussion

The following sections outline the action steps necessary to accomplish the mission of developing and implementing the Charter School Program outlined in the foregoing mission statement. In order to establish a specific fund that will be used to provide Charter School Operators with competitive physical/real estate facilities, the following action steps will be necessary.

A. Establish Financial Parameters:

1. Determine whether the proposed investment is consistent with the Board policy, i.e. whether the investment id consistent with the SBOE’s investment objectives.

2. Review asset allocation and determine whether there is a place for this type of specialized investment within PSF’s most current asset allocation.

3. Establish an annual cash return benchmark for the funds that is comparable to a generally accepted and appropriate index.

4. Determine investment amount.

5. Determine investment timeline.

B. Establish Operational Parameters:

1. Determine appropriate structure for fund.

2. Create corporation as appropriate investment vehicle.

3. Set eligibility criteria for charter schools.

4. Determine underwriting criteria.

5. Review and set appropriate building specifications, both minimum and maximum.

6. Determine geographic dispersal priorities.

7. Determine Board’s role in individual project approval.

8. Select investment manager for program

Each of the foregoing items will be discussed in detail in the following sections.

FINANCIAL PARAMETERS

1. Consistency with Investment Objectives

The State Board of Education has operationally defined its investment objectives at 19 Tex. Admin. Code § 33.15. The Board’s investment objectives have been formulated on the following specifically articulated considerations:

a.   the anticipated financial needs of the Texas public free school system in light of expected future contributions to the Texas Permanent School Fund (PSF);

b.  the need to preserve capital;

c. the risk tolerance set by the State Board of Education (SBOE) and the need for diversification;

d. observations about historical rates of return on various asset classes;

e. assumptions about current and projected capital market and general economic conditions and expected levels of inflation;

f. the need to invest according to the prudent person rule; and

g. the need to document investment objectives, guidelines, and performance standards.

The articulated investment objectives represent desired results and are long-term in nature, covering typical market cycles of three to five years. The Board has also established the preservation of capital as a primary consideration in determining appropriate PSF investments. Any shortfall in meeting the objectives should be explainable in terms of general economic and capital market conditions and asset allocation. The foregoing standards were adopted to be consistent with generally accepted standards of fiduciary responsibility.

a. Anticipated Future Needs

The first task in the adoption of a Charter Facilities Program is for the State Board of Education to determine whether or not such a program would be consistent with the Board’s investment objectives. The program, as conceived, would assist in meeting the anticipated financial needs of the Texas public free school system in light of expected future contributions to PSF by producing, in the form of annual rents produced by the investments, a steady, long term stream of income for distribution via the Available School Fund. Since rents can be assumed to increase over time, the investment would also provide a suitable hedge against inflation. In addition to viewing the investment from a purely financial point of view, the investment would also assist the long term development of the Texas public school system by assisting successful Texas charter schools in the creation of better learning environments for Texas students by providing a much needed funding source to charter entities that have historically had difficulties with capital projects.

b. Preservation of Capital

By directly investing in real estate projects, as opposed to participating in securitized investments through other established markets, the Charter School Facilities Program would meet the Board’s preservation of capital requirement. It is axiomatic that real estate investments, unlike investments in securities, are never worth zero dollars. Land, together with improvements thereon, have an underlying intrinsic value. This is particularly true in Texas where underlying real estate values have proven to be considerably more resilient then real estate values in other states. This is not to say that there will never be value fluctuations in the prices of real estate investments. There will be. It is simply that investments in buildings designed for, and leased to, charter schools are not as likely to fluctuate in value. Schools are a necessary element of our society. Notwithstanding economic conditions, schools will continue to operate. As direct government supported entities, charter schools will be less prone to economic downturns that private business. Their ability to pay rents will not be as subject to economic fluctuations. An occupied, rent paying tenant adds to the value of a real estate investment. The entire cycle supports the preservation of the PSF’s invested capital.

c. Risk Tolerance/Diversification

Investment in the Charter School Program meets requirements for risk tolerance set by the State Board of Education, as well as the Board’s stated need for diversification. The previous paragraph described the risk of capital loss and the Charter School Program’s ability to control the risk of capital loss. Board policy § 33.15(c)(3) dictates that the primary means of achieving such a risk profile are: A.) a broad diversification among asset classes that, as nearly as possible, react independently through varying economic and market circumstances; B.)  careful control of risk level within each asset class by avoiding over-concentration and not taking extreme positions against the market averages; and C.)  a degree of emphasis on stable growth However, there is another type of risk associated with investing.

The foregoing policy statement was enacted to control “risk” that is associated with volatility. Board policy § 33.15(c)(4) provides that “Over time, the volatility of returns (or risk) for the total fund, as measured by standard deviation of investment returns, should be comparable to investments in market indices in the proportion in which the PSF invests.” The single most important measure of investment risk or volatility is the investment’s beta.  Beta can provide serious stock analysts with insights into the movements of a particular stock relative to market movements. Stated simply, beta is a measure of individual stock risk relative to the overall market risk.  It's sometimes referred to as financial elasticity.  An investment’s beta value is calculated using price movements of the investment and comparing those movements to an overall market indicator, such as a market index, over the same period of time. If an investment’s price movements, or swings, are less than those of the market then the beta value will be less; it is considered to be a less risky investment. The purpose of investing in a diversified array of asset classes is to reduce beta or volatility in the investment portfolio as a whole.

As proposed the Charter Facilities Program would be a type of real estate investment for which there is a current asset allocation. As discussed above, an investment in public school facilities would be most likely to be counter cyclical to both bond and stock investment market cycles. Because its return would not vary in conformance with other market cycles, it would reduce beta, or risk in the overall fund. In so doing, the investment would enhance the Board’s expectation of diversification and risk reduction.

d. Rates of Return 

In general, SBOE Investment Policy requires that PSF investments earn, over time, an average annual total rate of return that meets or exceeds that of a representative benchmark index, combining income and capital appreciation, while maintaining an acceptable risk level compared to that of the representative benchmark index. Where possible, investment rates of return should adhere to the Chartered Financial Analyst (CFA) Institute Global Investment Performance Standards (GIPS) guidelines in calculating and reporting investment performance return information.

Since the funding of facilities for charter schools would constitute a unique investment position within the real estate allocation within the PSF portfolio, there is no ready index for comparison of the proper rates of return for the Charter Facilities Program. Therefore, as a matter of policy, it will be necessary for the SBOE to select an appropriate performance benchmark. The selection of an appropriate performance benchmark is an important and necessary policy determination for the State Board of Education to make in the establishment of the Charter Facilities Program. It will be discussed as a separate action step in the implementation strategy under Item A(5), below.

e. Projected Capital Market, General Economic Conditions, and Inflation

Assumptions about current and projected capital market and general economic conditions and expected levels of inflation are routinely presented to the State Board of Education by its consultants. They are taken into consideration in making the Board’s asset allocation decisions. Board policy requires that all PSF administrators shall hedge against inflation. An investment in Texas commercial real estate has the capacity to easily meet the Board’s existing test for rate of return. Over the last twenty years, the value of commercial real estate in Texas has greatly exceeded the rate of inflation as determined by the Consumer Product Index. Even in the most resent economic downturn, the commercial property values in Texas have performed better than the national average. When coupled with the fact that a well managed selection process will provide stable rent paying tenants to rent the properties, the properties should provide a steady, and stable return to the PSF. In addition, the obligation to educate students, imposed upon the State Legislature by Article VII § 1 of the Texas Constitution, is not subject to economic cycles. Charter schools leasing property under this program will not be subject to the vagaries imposed upon the real estate market by variations economic conditions. In considering these general factors and how they may relate to the Board’s adoption of a Charter Facilities Program, there appears to be a good fit in assisting the PSF to meet its overall objectives from an economic perspective.

f. The Prudent Person Rule

The standard for evaluation of all PSF investments is the so-called prudent person rule. It is expressed in Article VII, § 5(f) of the Texas Constitution as follows:

Notwithstanding any other provision of this constitution, in managing the assets of the permanent school fund, the State Board of Education may acquire, exchange, sell, supervise, manage, or retain, through procedures and subject to restrictions it establishes and in amounts it considers appropriate, any kind of investment, including investments in the Texas growth fund created by Article XVI, Section 70, of this constitution, that persons of ordinary prudence, discretion, and intelligence, exercising the judgment and care under the circumstances then prevailing, acquire or retain for their own account in the management of their affairs, not in regard to speculation but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of their capital.

The text of Article VII, § 5(f) is fairly self explanatory. The State Board of education is constitutionally required in investing the PSF assets, to use care and judgment in considering the probable income and safety of such investments. The investment guidelines being discussed in this Section are the method by which the State Board of Education implements the prudent person standard. It is clear from the constitutional text that the purchase of real estate is clearly a “kind of investment” that is authorized. The only additional requirement is that the Board must determine that such an investment is not unduly risky, and that it will produce a reasonable return on investment.

There are those who will argue that this is simply another form of socially responsible investing. The State Board of Education has adopted a policy position on socially responsible investing. It is set forth at 19 Tex. Admin. Code § 33.50, and provides as follows:

Socially and Politically Responsible Investment Policy.

Investments shall be considered based on the prudent person rule and the provisions of this chapter. Investments shall provide the highest return commensurate with the lowest risk and shall be diversified.

From the text of the rule the Board’s policy position is clear. Socially or politically responsible investing is not prohibited or encouraged. However motivated, all investments are held to the same test, i.e. a reasonable rate of return commensurate with risk.

Because this is a new type of investment, the Board must consider its position carefully. The Board has previously retained fiduciary counsel to advise the Board in matters such as the Board’s consideration of this Charter Facilities Program. Attached to this report as Exhibit 1 is a letter opinion from ____________________ the Board’s fiduciary counsel concerning this proposed investment.

g. Need to Document Investment Objectives, Guidelines, & Performance Standards.

It is axiomatic that the investment objectives, guidelines, and performance standards will have to be critically analyzed, developed, and expressly articulated as a part of the development of the Charter Facilities Program. The following portions of this outline are being written to form a starting point for the discussion and adoption of potential future guidelines and standards. Recommendation:

The State Board of Education should make the determination that investment in the proposed Charter Facilities Program is consistent with the investment guidelines previously established by the State Board of education, and would constitute a prudent investment class in which to commit Permanent School Funs assets.

2. Review Asset Allocation

It is the policy and practice of the State Board of Education to develop and have in continuous place an asset plan as a precursor for all of its investment decisions. The policy is set forth at 19 Tex. Admin Code §33.15(d) which provides:

(d)  Asset allocation policy.

(1)  The SBOE shall adopt and implement a strategic asset allocation plan based on a well diversified, balanced investment approach that uses a broad range of asset classes indicated by the following characteristics of the PSF:

(A)  the long-term nature of the PSF;

(B)  the spending policy of the PSF;

(C)  the relatively low liquidity requirements of the PSF;

(D)  the investment preferences and risk tolerance of the SBOE;

(E)  the rate of return objectives; and

(F)  the diversification objectives of the PSF, specified in the Texas Constitution, Article VII, §5(d), the Texas Education Code, Chapter 43, and the provisions of this chapter.

(2)  The strategic asset allocation plan shall contain guideline percentages, at market value of the total fund's assets, to be invested in various asset classes. The target mix may not be attainable at a specific point in time since actual asset allocation will be dictated by current and anticipated market conditions, as well as the overall directions of the SBOE.

(3)  The SBOE Committee on School Finance/Permanent School Fund, with the advice of the PSF investment staff, shall review the provisions of this section at least annually and, as needed, rebalance the assets of the portfolio according to the asset allocation rebalancing procedure specified in the PSF Investment Procedures Manual. The SBOE Committee on School Finance/Permanent School Fund shall consider the industry diversification and the percentage allocation within the following asset classes:

(A)  domestic equities;

(B)  international equities;

(C)  domestic fixed income;

(D)  real estate;

(E)  private equity;

(F)  absolute return;

(G)  real return; and

(H)  cash.

(4)  Investments shall not exceed the strategic ranges the SBOE establishes for each asset class.

(5)  Periodically, the SBOE shall allocate segments of the total fund to each investment manager and specify guidelines, investment objectives, and standards of performance that apply to those assets.

The asset allocation policy was most recently amended to be effective October 15, 2006. See, 31 Tex. Register 8347. Currently, there is an asset allocation for PSF real estate investments under which the Charter Facilities Program can be managed by a real estate manager. No amendment to SBOE investment policy is necessary. It would be appropriate for the Board to consider the Charter Facilities Program as a specialized asset sub-class within the real estate class of investments. Should the Board wish to view the Charter Facilities Program as a separate asset sub-class, a new specific asset allocation would be necessary and a specific new performance benchmark would have to be established for the real estate sub-class. The proposed Charter Facilities Program would constitute a unique subcategory within the current real estate portfolio. Because it is a different type of investment a sub-allocation within the real estate portfolio would be an appropriate action for the SBOE to consider.

Recommendation:

The State Board of Education should consider and adopt a new sub-allocation within the previously approved real estate class of investments within the Board’s asset allocation currently set forth at 19 Tex. Admin Code §33.15(d)(3)(d).

3. Determine Appropriate Benchmark

In the event that the SBOE chooses to define the Charter Facilities Program as a separate asset class, an appropriate benchmark should be set. Section 1(g) above discusses some of the considerations to be considered in setting the appropriate benchmark. In accordance with previous Board practice the benchmark definition should be added to the list of benchmarks set forth at 19. Tex. Admin. Code § 33.15.

Since the major source of return to the Charter Facilities Program will be rental income from the charter school tenant, each tenant will need to be charged a rental rate based on the required capital investment by the Program. The higher the required benchmark, the higher the rent will have to be to meet the return on investment target. To this end the rental rate will be determined by using an interest rate and amortization period based on the following factors: a. the total Amount of capital investment;

b. the amount of capital invested versus total project cost;

c. the location characteristics (market, site location);

d. new construction vs. renovation;

e. the reversionary Value of site.

The foregoing factors should be weighted and evaluated based on project to project basis.

Recommendation:

It is recommended that the State Board of Education, based on the investment profile of the Charter Facilities Program, and the investment strategy that has created below in the operational profile for the program, that the Charter Facilities Program be benchmarked in the same manner as the Fixed Income portion of the PSF.

4. Determine Investment Amount

In making a determination of the proper amount of capital to dedicate to the Charter Facilities Program, the State board of education should consider a number of factors. Since the Charter Facilities Program would constitute a new investment class, and one with which the State board of education has limited experience, some restraint in determining the amount of the initial investment should be considered. On the other hand, once the SBOE has gotten to the point of considering an asset allocation, the Board has determined to proceed. If the Board proceeds it should proceed with sufficient capital to fund more than a single project. Additionally, the program should be sufficiently large so as to induce a competent and experienced fund manager to desire to manage the program. Sufficient size is also necessary so as to generate interest among the charter schools which are the intended tenants.

Recommendation:

It is recommended that, in order to effectively navigate between the conflicting issues, and to adequately test the efficacy of the program in multiple educational settings, the SBOE consider an initial funding allocation in the amount of one-half of one percent of the total PSF investment portfolio be set aside for the asset class. This amount compares conservatively to the considerably larger amounts of initial SBPE funding to previous experimental allocations to such asset categories as international equities, high yield bonds, and the emerging manager programs when each of those investment categories were initially launched.

5. Determine Investment Timeline

Once the SBOE has hetermined Invest to proceed with the development of a Charter Facilities Program, it must also determine an investment timeline.

Recommendation:

It is recommended that immediately upon the selection of a qualified investment manager to administer the program, that thee entire initial allocation be immediately funded. This funding will assure potential tenant applicants that participation in the program would be a worthwhile endeavor. Upon funding, the investment manager be instructed to implement an application review process of no longer than six months, so that program funds can be speedily deployed, and the SBOE can develop a feel for whether tenant rental revenues expectations can be met.

Establish Operational Parameters

Once the State Board of Education has considered the strategic implications of the Charter Facilities Program, it will become necessary to consider and establish operational parameters for the program. Required action steps for the actual creation of the Charter facilities Program are discussed below.

1. Determine Appropriate Structure for Fund

The first step to take in making the Charter Facilities Program operational will be the creation of a structure in which to make the investments. The matter will take some deliberation and Board action. As an initial matter it is important to note that by directly investing in real property, the Charter Facilities Program will be engaging in a slightly different form of investment than is typically made with the balance of the Permanent School Fund. As it is currently constituted, most forms of PSF investments are made through the purchase and sale of securities. Securities are defined by Section 4A of the Texas Securities Act as:

The term “security” or “securities” shall include any limited partner interest in a limited partnership, share, stock, treasury stock, stock certificate under a voting trust agreement, collateral trust certificate, equipment trust certificate, preorganization certificate or receipt, subscription or reorganization certificate, note, bond, debenture, mortgage certificate or other evidence of indebtedness, any form of commercial paper, certificate in or under a profit sharing or participation agreement, certificate or any instrument representing any interest in or under an oil, gas or mining lease, fee or title, or any certificate or instrument representing or secured by an interest in any or all of the capital, property, assets, profits or earnings of any company, investment contract, or any other instrument commonly known as a security, whether similar to those herein referred to or not. The term applies regardless of whether the “security” or “securities” are evidenced by a written instrument. Provided, however, that this definition shall not apply to any insurance policy, endowment policy, annuity contract, optional annuity contract, or any contract or agreement in relation to and in consequence of any such policy or contract, issued by an insurance company subject to the supervision or control of the Texas Department of Insurance when the form of such policy or contract has been duly filed with the Department as now or hereafter required by law.

In surveying the current financial landscape for charter school facilities funding, it is clear that facilities funding has largely been accomplished through individual loans. While there have been several charter school bond issues, instances of such financing have proven to be rare and significantly expensive to issue. As a result, there is simply no securities market in which the PSF can invest.

Since there is no securities market, in order to participate in a charter school financing it will be necessary for the State Board of Education to deploy PSF capital to directly invest in real estate transactions. This practical requirement does not have any constitutional implications since, as was discussed above, the constitutional authorization set forth in Article VII §5(f) is for the State Board of Education to make “any kind of investment.” However, when real estate is purchased it, creates a direct ownership interest which must, of necessity, be reflected in the deed to the property. Currently PSF securitized PSF assets and cash are held by the Fund’s custodial depository bank in the name of the Fund itself. While this practice works for a custodial account, it would be cumbersome for real property since the Permanent School Fund is not a legal entity.

The State Board of Education has been granted the specific statutory authority to invest the Permanent School Fund to the limits of the authority created by the Section 5, Article VII of the Texas Constitution and Chapter 43. Texas Education Code § 7.102(31) provides:

(31)  The board [State Board of Education] may invest the permanent school fund within the limits of the authority granted by Section 5, Article VII, Texas Constitution, and Chapter 43.

Although the SBOE was given full authority to invest the PSF there is no specific authorization for the State Board of education to directly acquire real estate. As an example the Texas Board of Criminal Justice has been given the authority to acquire real estate by the provisions of Texas Government Code § 496.001, which provides:

ACQUISITION OF REAL PROPERTY.  

The board may acquire real property through purchase, subject to specific appropriative authority in the General Appropriations Act, or through the acceptance of a gift, grant, or donation for a facility.

Title to real property can be held in the name of the State of Texas. However, when title to “land” is held in the name of the Permanent School Fund, a different rule may apply. Under Texas Natural Resources Code § 32.001(4)(A) “land dedicated to or acquired on behalf of the permanent school fund and the asylum funds under the constitution and laws of this state” are generally administered by the School Land Board under the provisions of Title 2, Subtitle C, Chapter 32 of the Texas Natural Resources Code.

As a result of the foregoing it would seem that if land purchased for charter schools was directly purchased in the name of the Permanent School Fund, the land would have to be administered by the School land Board. However, the express provisions of Texas Education Code § 7.102(31) also authorize the State Board of Education to invest PSF assets under the provisions of Chapter 43 of the Texas Education Code. Among the several provision contained in Chapter 43 of the Texas education Code is Tex. Educ. Code § 43.006, added by Acts 1995, 74th Leg., ch. 260, Sec. 1, eff. May 30, 1995. The Section provides:

Sec. 43.006.  INVESTMENT MANAGEMENT.  

a)  The State Board of Education may delegate investment authority for the investment of the permanent school fund to the same extent as an institution with respect to an institutional fund under Chapter 163, Property Code.

(b)  The board may enter into a contract with a nonprofit corporation for the corporation to invest funds under the control and management of the board, including the permanent school fund, as designated by the board. The corporation may not engage in any business other than investing funds designated by the board under the contract.

(c)  The board must approve the:

(1)  articles of incorporation and bylaws of the corporation and any amendment to the articles of incorporation or bylaws;

(2)  investment policies of the corporation, including changes to those policies;

(3)  audit and ethics committee of the corporation; and

(4)  code of ethics of the corporation.

(d)  The board of directors of the corporation must be members of the State Board of Education.

(e)  If an investment contract entered into under Subsection (b) includes the permanent school fund within the scope of funds under the control and management of the State Board of Education to be invested by the corporation, the board shall provide for an annual financial audit of the permanent school fund. Subject to the legislative audit committee's approval of including the audit in the audit plan under Section 321.013(c), Government Code, the audit shall be performed by the state auditor.

(f)  The corporation shall file quarterly reports with the State Board of Education concerning matters required by the board.

(g)  The corporation is subject to the Texas Non-Profit Corporation Act (Article 1396-1.01 et seq., Vernon's Texas Civil Statutes).

(h)  The corporation may not enter into an agreement or transaction with a:

(1)  director, officer, or employee of the corporation acting in other than an official capacity on behalf of the corporation;

(2)  business entity in which a director, officer, or employee of the corporation has an interest;

(3)  former director, officer, or employee of the corporation on or before the second anniversary of the date the person ceased to be a director, officer, or employee of the corporation; or

(4)  business entity in which a former director, officer, or employee of the corporation has an interest on or before the second anniversary of the date the person ceased to be a director, officer, or employee of the corporation.

(i)  An agreement or transaction entered into in violation of Subsection (h) is void.

(j)  For purposes of this section, a person has an interest in a business entity if:

(1)  the person owns five percent or more of the voting stock or shares of the business entity;

(2)  the person owns five percent or more of the fair market value of the business entity; or

(3)  money received by the person from the business entity exceeds five percent of the person's gross income for the preceding calendar year.

(k)  In this section, "institution" and "institutional fund" have the meanings assigned by Chapter 163, Property Code.

Subsection g of § 43.06 declares that“[t]he corporation is subject to the Texas Non-Profit Corporation Act (Article 1396-1.01 et seq., Vernon's Texas Civil Statutes).” That means that Board of Directors of this newly created the statutory non-profit investment management corporation would have all of the powers and duties authorized for other non-profit corporations under Texas law. Some of those general powers and duties are articulated by VATS Art. 1396-2.02 as follows:

Subject to the provisions of Sections B and C of this Article, each corporation shall have power:

(4) To purchase, receive, lease, or otherwise acquire, own, hold, improve, use, or otherwise deal in and with, real or personal property, or any interest therein, wherever situated, as the purposes of the corporation shall require, or as shall be donated to it.

(5) To sell, convey, mortgage, pledge, lease, exchange, transfer, and otherwise dispose of all or any part of its property and assets.

The meaning of these statutes when construed together is unambiguous. If the State Board of Education desires to participate in a charter schools program, it could purchase a securitized interest in these properties in the name of the Permanent school Fund. If the opportunity for a securitized investment did not present itself, the Board could constitutionally consider direct investment. However, if the SBOE determined that it would make a direct investment in land in the name of the Permanent School Fund, it appears that the investment would have to be made through the School Land Board. However, if the State Board of Education wished to have a more direct say in the investment process, it is specifically authorized to create a non-profit investment management company. Under the terms of the Non-Profit Corporation Act, the Board would have independent statutory authority to directly invest in real estate.

Recommendation

It is recommended that the State Board of Education choose to directly supervise the operation of the Charter Facilities Program by operating the program under the statutory auspices of Tex. Educ. Code § 43.06 through the creation of a non-profit investment management company.

2. Creation of a Non-Profit Corporation

As discussed above, Texas Education Code § 43.006(a) authorizes the State Board of Education to delegate investment authority and contract for the investment of the Permanent School Fund to the same extent as the governing board of an institution of higher education with respect to an institutional fund under Chapter 163, Property Code. Chapter 163 of the Property Code is the Uniform Prudent Management of Institutional Funds Act. Among its provisions is Section 163.006 which expressly authorizes the delegation of management and investment decisions in the following terms:

DELEGATION OF MANAGEMENT AND INVESTMENT FUNCTIONS

(a)  Subject to any specific limitation set forth in a gift instrument or in law other than this chapter, an institution may delegate to an external agent the management and investment of an institutional fund to the extent that an institution could prudently delegate under the circumstances. An institution shall act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, in:

(1)  selecting an agent;

(2)  establishing the scope and terms of the delegation, consistent with the purposes of the institution and the institutional fund; and

(3)  periodically reviewing the agent's actions in order to monitor the agent's performance and compliance with the scope and terms of the delegation.

(b)  In performing a delegated function, an agent owes a duty to the institution to exercise reasonable care to comply with the scope and terms of the delegation.

(c)  An institution that complies with Subsection (a) is not liable for the decisions or actions of an agent to which the function was delegated.

(d)  By accepting delegation of a management or investment function from an institution that is subject to the laws of this state, an agent submits to the jurisdiction of the courts of this state in all proceedings arising from or related to the delegation or the performance of the delegated function.

(e)  An institution may delegate management and investment functions to its committees, officers, or employees as authorized by law of this state other than this chapter.

The University of Texas/ Texas A & M have a parallel fund to the Permanent School Find. It is known as the Permanent University Fund. The Permanent University Fund is operated under constitutional and statutory provisions that are strikingly similar to the constitutional provisions under which the Permanent School Fund is operated. For comparison purposes, the parallel provisions are set forth below.

|Permanent School Fund |Permanent University Fund |

|Texas Constitution Article 7, section 5(d) |Texas Constitution Article 7, Section 11(b) |

| | |

|(d) Notwithstanding any other provision of this constitution, in |(b) Notwithstanding any other provision of this constitution, in |

|managing the assets of the permanent school fund, the State Board of |managing the assets of the permanent university fund, the Board of |

|Education may acquire, exchange, sell, supervise, manage, or retain, |Regents of The University of Texas System may acquire, exchange, sell,|

|through procedures and subject to restrictions it establishes and in |supervise, manage, or retain, through procedures and subject to |

|amounts it considers appropriate, any kind of investment, including |restrictions it establishes and in amounts it considers appropriate, |

|investments in the Texas growth fund created by Article XVI, Section |any kind of investment, including investments in the Texas growth fund|

|70, of this constitution, that persons of ordinary prudence, |created by Article XVI, Section 70, of this constitution, that prudent|

|discretion, and intelligence, exercising the judgment and care under |investors, exercising reasonable care, skill, and caution, would |

|the circumstances then prevailing, acquire or retain for their own |acquire or retain in light of the purposes, terms, distribution |

|account in the management of their affairs, not in regard to |requirements, and other circumstances of the fund then prevailing, |

|speculation but in regard to the permanent disposition of their funds,|taking into consideration the investment of all the assets of the fund|

|considering the probable income as well as the probable safety of |rather than a single investment |

|their capital. | |

|Texas Education § 43.006(a) |Texas Education Code § 66.08(a) |

| | |

|(a) The State Board of Education may delegate investment authority and|(a) The board may delegate investment authority and contract for the |

|contract for the investment of the permanent school fund to the same |investment of the permanent university fund to the same extent as the |

|extent as the governing board of an institution of higher education |governing board of an institution of higher education with respect to |

|with respect to an institutional fund under Chapter 163, Property |an institutional fund under Chapter 163, Property Code. |

|Code. | |

Both the constitutional and statutory authority authorizing the creation of investment management companies are virtually identical for both constitutional funds. The University of Texas System has previously exercised the authority it has been given under statute. It did so by creating the University of Texas Investment Management Company (UTIMCO) on November 15, 1995.

A copy of UTIMCO Articles of Incorporation is attached to this Proposal as Exhibit 2. Since the authority for the creation of the investment management companies is so similar, and the university investment management has successfully operated in excess of fourteen years, it would seem that the UTIMCO model should form the basis for SBOE to create its investment management company. A copy of a new Certificate of Formation for the proposed PSF investment management company is attached to this proposal as Exhibit 3. A copy of UTIMCO Bylaws is attached to this Proposal as Exhibit 4. Again, since the authority for the creation of the investment management companies is so similar, and the university investment management has successfully operated for in excess of fourteen years. It would seem that the UTIMCO model should form the basis for SBOE to create its investment management company. A copy of new Bylaws for the proposed PSF investment management company is attached to this proposal as Exhibit 5.

Recommendation

It is the recommendation that the State Board of Education choose to create and operate the proposed Charter Facilities Program under the auspices of the Permanent School Fund Investment Management Company, by adopting and causing the filing of the draft Certificate of Formation and Bylaws as set forth in Exhibit 3 and Exhibit 5, respectively.

3. Determine Eligibility Criteria

One of the most integral phases in the development of the Charter Facilities Program will be the development and articulation of specific eligibility criteria for charter schools wishing to participate in the program. As was set forth in the section on resource allocation, the program’s initial level of funding will obviously be insufficient to underwrite facilities for every State Board of Education approved charter school. As a result, it will likely be necessary to screen prospective applicants. This screening process should, if executed thoughtfully, enhance the potential success of the program by selecting, as a part of the process, those schools which are most likely to remain as both academic and financial success stories. In a way the award of facilities funding under this program can be seen as a reward for the most successful programs, but it is also smart investing. By selecting the best and most stable charter schools, the Program will be selecting the types of tenants most likely to be stable business partners.

While the selection of quality programs should be a goal of the Program, care must be given in arriving at the definition of “quality” so as not to exclude those charter school programs which have taken on the responsibility to educate Texas students most in need of educational opportunities. Finally, geographic and socioeconomic variation among applicant programs must be encouraged, so that the widest possible dispersal of investment capital is achieved.

In order to achieve these ends, at a minimum, the following selection criteria should be adopted:

1. Eligible charter schools must have been in operation for a period of not fewer than (2) two years prior to the date of application. Schools in operation for a period of two years may apply for funding for a new campus location prior to the campus location has been approved, so long as an expansion amendment has been filed at the time of the facilities funding application.

2. Charter Schools must have an accreditation rating of acceptable or better for the year prior to the date of application.

3. Charter schools must have a Financial Integrity Rating System for Texas (FIRST) rating of acceptable or better for the year prior to the date of application.

4. Charter schools must have a pattern of stable or growing enrollment in the period prior to application.

Recommendation:

It is the recommendation that the State Board of Education adopt, at a minimum, the foregoing (Items 1-4) applicant eligibility criteria for prospective Charter Facilities Program participants.

4. Determine Project Approval Criteria

Operation of the Charter Facilities Program will also require that the Board adopt individual project approval criteria in order to ensure that the Board’s priorities are being considered and met by the program investment manager. At a minimum, the project approval criteria should include a review of the following elements:

1 Identify the prospective tenant. Identify Charter Schools candidates based upon criteria established by SBOE. (See foregoing Section)

a. School Mission, Vision and Education Philosophy

b Market Area and Market Demographics

c. Charter contract

d. Governance, Leadership & Administration, Staffing

e.. Enrollment & Demand

f. Competition

g Academic Achievement Indicators

2. Site Selection/Valuation (Note: the above will be done with input from the Charter School Operator after the Operator has been identified to maximize compatibility of location and operation of school.)

a. Identify the generally targeted neighborhood/location of the Charter School.

b. Delineate the growth corridors within the generally targeted locations

c. Target several sites within the growth corridors for the possible location of the Charter School.

d. Consider/Identify alternative uses for the sites being considered.

e. Negotiate Purchase Prices.

f. Substantiate Purchase Price with appraisals that consider both the intended use and alternative uses

3. Underwriting Memorandum. For each project an underwriting memorandum should be prepared containing the following elements:

a. Executive Summary

b. Project Specifics

c. Financial Analysis

d. Market Analysis

e. Discussion of Alternative Uses

f. Analysis of Charter School Operator

g. Lease Agreement

h. Contractor/Construction Contract

i. Appraisal

j. Exit Strategy

4. Prefunding Requirements. For each project the following items will be required prior to final project funding approval:

a. Acceptable Texas Title Insurance Policy Binder

b. ALTA Survey of the property

c. Stage 1 environmental report

d. Acceptable USPAP – conforming appraisal that substantiates the Investment.

e. Acceptable SPE Operating Agreement.

f. Acceptable ID verification forms in compliance with the Patriot Act.

g. Signed Letter of Intent.

h. Proof of necessary insurance, including Builder’s Risk and General Liability, Property and Flood (if applicable).

i. Acceptable Guaranteed Maximum Price Construction Contract.

j. A performance and payment bond for the full amount of the construction contract for the project.

k. Plans and Specifications for the project.

l. Final Budget for the project.

m. Acceptable Soils/Topographical report.

n. Acceptable Land purchase agreements, if applicable.

o. Acceptable Lease with Tenant.

Recommendation:

It is the recommendation that the State Board of Education adopt, at a minimum, the foregoing (Items 1-4, with subparts) project approval criteria for prospective Charter Facilities Program projects.

5. Review and Set Appropriate Building Specifications

As a part of the development process, it will be incumbent upon the Board to determine the types of facilities it is willing to fund. For example, will gyms and sports/extracurricular facilities be eligible for funding under the Charter Facilities Program? Will the Board insist upon minimum and/or maximum classroom and library sized as a part of any program? How many and what kinds of labs will be required, if any? Or, will the Board leave all decisions on need to the discretion of the charter applicant? All of these questions will arise at one time or another over the course of the Charter Facilities Program.

Notwithstanding the potential answers to the foregoing questions, there are certain minimum building requirements that the Board should insist upon. These recommendations deal less with educational policy issues, and more with building quality. What follows is a prospective list of building quality issues.

1. Adhere to 'best practices' for sustainability and energy efficiency.

This objective is established to recognize the enormous impact real estate has on the environment, that properly construction or renovated buildings can provide significant savings operationally, and that additional sources of funds may be available to further this initiative and provide operational cost savings.

The Charter Facilities Program must implement truly value added practices to provide the lowest possible life-cycle costs associated with sustainability. and will bring that experience to bear on as the REIM for CSIF.

2. Maintain tight financial controls for cost containment to avoid waste.

The best way to maximize its return on investment is to maintain tight financial controls and cost containment. This is achieved through good analysis, underwriting and ultimately execution. Critical to this is the use of established, institutional level processes and procedures. The Charter Facilities Program must maintain the necessary systems, processes and controls to ensure that financial, contract and liability is effectively managed and the best efficiencies are created.

3. Utilize local vendors and contractors as possible.

The Charter Facilities Program should, wherever possible and practical, utilize local vendors and professionals. This local participation is not only good policy economically, but will help leverage the CFP investment in each community by investing directly in that community.

4. Operate and maintaining the facilities in a first-class manner.

Beyond the initial capital investment is the proper management and maintenance of the facilities to maintain value and keep future required investment in check. Such an approach will add years on to equipment and keep operating costs manageable and predictable.

In order to ensure that Board priorities are being met, immediately after retention the investment manager in charge of the Charter Facilities Program should be assigned the task of drafting and presentation for Board review, specific project management checklists which discuss, at a minimum the following issues:

5. Construction management, including:

a. the role of the project team

b a planning manual

c. a project checklist

d. a development planning checklist

e. a draft Architect-Engineer Contract

f. a draft Construction Contract

g. draft inspection forms

6. Facilities management, including:

a. specification of services needed

b. identification/selection criteria for vendors

c. a draft expense reimbursement mechanism for charter school operator

d. procedures for periodic engineering audits of facility to determine maintenance needs

e. draft facilities lease language

Recommendation:

It is the recommendation that the State Board of Education adopt, at a minimum, the foregoing (Items 1-6, with subparts) as minimum building/maintenance for prospective Charter Facilities Program projects.

6. Determine geographic/programmatic dispersal priorities.

In order to ensure that PSF funds are not overly concentrated in specific geographic areas or in limited types of charter operations, the Board should establish guidelines, as a part of the program development process, which instruct the investment manager to attempt when considering applications to consider both program and geographic diversity in making investment recommendations.

Recommendation:

The Board should establish guidelines which instruct the investment manager to ensure both program and geographic diversity in making investment recommendations.

7. Determine Board’s Role in Individual Project Approval.

Having created both applicant and project criteria under the preceding two paragraphs, the Board’s role should be confined to reviewing the project approval documentation prepared by the investment manager, and where appropriate, vote for individual approval where the criteria are substantially met in the application process.

Recommendation:

It is recommended that the Board retain final approval of investment projects, but that Board input should be limited to a review of whether the Board’s funding criteria have been substantially met.

8. Select Investment Manager

As a part of operating the Charter Facilities program, the Board will necessarily have to select an investment manager to operate the program. While this task is the last one in the list, it is not necessarily the last step to be taken in the development of the Charter Facilities Program. A carefully selected investment manager could be of great assistance to the Board in the development of many of the other operational parameters set forth above.

Recommendation:

Currently, the state Board of Education has an approved list of approximately sixty (60 approved real estate managers. The Board’s real estate investment advisor should be instructed to review the list of currently approved vendors, and select a group of investment managers from that list with the most relevant experience. That group can then be interviewed by the SBOE Finance/PSF Committee for possible selection by the Board to operate the Charter Facilities Program.,as set forth above.

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