In Texas, Prop. 6 Would Tap Trust Fund for Education

Facing $4 billion in education cuts over the next two years, voters will decide whether to authorize dipping deeper into the state’s $25 billion education trust fund to make up some of the difference.
by , | November 2, 2011 AT 1:30 PM

By Ben Wieder, Stateline Staff Writer

For years, Rob Orr has found something puzzling about the massive trust fund Texas has set aside to help fund its K-12 schools. As the endowment kept growing in value -- at $25 billion, the fund is by far the nation’s largest of its kind -- the annual payout to schools has remained relatively flat.

It was one thing to see the fund pile up with money when budget times were good. But Texas lawmakers this year passed a budget that will cut funding for education by $4 billion over the next two years. That sent Orr, a Republican state representative from an area just south of Fort Worth, looking for ways to turn to the fund as a way to make up for some of the education funding losses. “I felt like they had all this cash sitting there that wasn’t doing what it was intended to do,” Orr says.

The result of Orr’s quest is a ballot measure that Texas voters will decide on at the polls next week. Proposition 6 would amend the state’s constitution to alter the way money goes in and out of the state’s Permanent School Fund. In the short term, the change would mean $75 million more for schools in Texas each of the next two years and possibly hundreds of millions more down the road.

Texas isn’t the only state looking at the possibility of tapping trust funds to pay for education. Most notably, Arizona’s new Republican state treasurer, Doug Ducey, the former CEO of Cold Stone Creamery, has commissioned a study of the most effective way to distribute money from the state’s nearly $3 billion school endowment. While changing Arizona’s current system of distribution would require approval from both voters and Congress, the treasurer’s office says it would push to change the formula if the study suggests it would benefit education in the long run.

“In these economic times, everybody wants to be creative,” says Kevin Donnellan a spokesman for the treasurer’s office.

History of the funds

At least 20 states, mostly in the West, have trusts set aside for education, according to the most recent data available from the Children’s Land Alliance Supporting Schools, or CLASS, an organization that advocates for greater protection of and awareness of state education funds. Most of the funds draw their income from an arrangement that goes all the way back to the granting of statehood: The states were given the land with explicit instructions to use any proceeds to support education. Revenue comes from economic uses of the land such as grazing, logging and energy extraction.

Nearly every state had a state school fund at some point, says Margaret Bird, director and founder of CLASS. Texas, which entered the United States as an independent republic, set aside lands itself in its 1876 constitution. While it’s unclear what happened to the endowment funds of many states in the Northeast, Bird says that the funds of many Southern states were wiped out when the states converted them to Confederate currency. Of states with known remaining endowments, fewer than half top $1 billion. The Texas fund is by far the largest, nearly three times as valuable as New Mexico’s $9.5 billion Land Grant Permanent Fund.

Orr’s measure, which state legislators sent to the November 8 ballot, would make two major changes to how the Texas permanent fund is managed. First, it would expand the base from which current fund distributions are made, to include the fund’s cash and discretionary real estate holdings in addition to its investments. Applying the current distribution formula to that expanded base would result in the additional $75 million each of the next two years.

Second, it would open up a new channel for distributing money to the education budget. Those distributions are currently handled by the state’s board of education, which oversees the fund and decides how much of it to pay out to schools each year. The state land office manages the land itself, and can either hand its income over to the board of education or use it to buy more land. Proposition 6 would give the land office a third option: It could also put up to $300 million in land-related revenue directly into the education budget.

The plan received broad support in the legislature, where it was seen as a way to increase revenue without increasing taxes. The Dallas Morning News, among other newspapers, favors the proposition’s passage. But opposition has been building leading up to the election. The state’s branch of the American Federation of Teachers opposes the change, arguing that the endowment funds will be used to replace traditional state funds for education, rather than augmenting them. Others have argued that it could ultimately cause the fund to shrink, withering away a resource intended for perpetuity.

Orr says that the $300 million cap on direct payments would ensure that the fund’s base remains secure. The land office typically takes in $500 million or more in revenue from the permanent fund lands each year, he says, more than enough to keep growing the fund even if it chooses to max out its contribution to the education budget. Opponents worry that diverting any money from the endowment will inevitably cannibalize its base, costing students in the long run. The Fort Worth Star-Telegram came out against the proposition, as did a former member of the state’s board of education, in a letter to The Dallas Morning News. “This threatens the endowment and the future needs of our growing student population,” Geraldine “Tincy” Miller wrote in her letter.

New Mexico's cautionary tale

For an example of what Miller is concerned about, it’s worth looking at New Mexico. There, an endowment set up to support the state’s general fund with revenues from severance taxes paid by energy companies is worth less now than it was in 2000, according to the former legislators who created it.

In a presentation last week to New Mexico’s State Investment Council, Bob Grant and John Bigbee, who advocated starting the fund in the early 1970s, said that the state has increasingly been diverting tax revenues from the endowment to use on state construction projects. The situation has “broken” the “permanent fund’s bank vault,” they said.

“This is real depletion,” Bigbee later told Stateline in an interview. “Our natural resources really belong to future generations, too.”

When the fund was established, half of the tax revenues from oil and gas extraction went to the fund, while the other half went to bond payments on public construction projects across the state. Now, 95 percent of the incoming money goes to capital projects, much of it at schools. In part, that change came in response to a 1999 lawsuit that found the state’s school funding to be unfair.

That change has made it difficult for the state’s investment council to grow the fund, says spokesman Charles Wollmann, as the fund is required to pay out 4.7 percent of its five-year average value each year to the general fund, regardless of how much money is put in. Still, he stresses that the capital spending is a legitimate use of tax revenues.

“It’s not like they’re being wasted,” he says. “They’re being deployed in an important manner.”

The amount paid out by the state’s education fund, which is three times the size of the severance fund, has also been increased, to 5.8 percent, although Wollmann says the payout is slated to gradually decrease back down to 5 percent over the next several years.

John Arthur Smith, who chairs the state Senate Finance Committee, says people both in and out of education have been eyeing the state’s education endowment as a potential source of future funding.

“The attack is on for that,” says the Democratic senator. “When they want to touch the education fund, I say look at the severance fund.”

In Texas, Orr worries that voters might see his proposal in similar terms. “It’s really a complex situation,” he says. Despite what some opponents of Proposition 6 have said in Texas, Orr says he’s committed to preserving the fund’s principal.

“I’m a conservative,” he says. “I’m not trying to do crazy stuff. I just want [the fund] to do what it’s designed to do.”

Stateline | Nonpartisan, Nonprofit News Service of the Pew Charitable Trusts |  |  @pewstates
Stateline | Nonpartisan, Nonprofit News Service of the Pew Charitable Trusts |  |  @pewstates