Sale of investment assets is proposed
Senator seeks to cash in $500 million in health-related funds to close budget gap
By Robert Elder Jr.
Thursday, May 8, 2003
The Texas Senate's chief budget writer wants to sell $500 million worth of state investments — holdings set up to provide a long-term money supply for public health efforts — and use the proceeds as a one-time patch for the state budget shortfall.
Senate Bill 1867, sponsored by Finance Committee Chairman Teel Bivins, R-Amarillo, would require an investment fund run by the University of Texas Management Co. to sell the assets and transfer the proceeds to a low-yield state treasury account, available for legislators to spend. The money would be directed to higher education.
Most of the money would come from the state's Permanent Health Fund for Higher Education, which holds part of the $17.3 billion proceeds from the state's 1998 settlement with tobacco companies over the costs of smoking-related illnesses. The fund was created to channel money to health-related higher education institutions, such as the UT Medical Branch at Galveston.
The move would trade the long-term gains the money could earn in the stock market for a short-term budget fix.
Comptroller Carole Keeton Strayhorn called the move another example of the "one-time funding sources" she opposes.
"The money will not be there in the future to pay for general expenses or tobacco-related research at the universities," she said Thursday. "We're trading our kids' future for today's expediency."
Bivins declined to discuss the legislation Thursday. But at a committee hearing Monday, he said the money would be directed to higher education. It would also help lawmakers finance the $9.9 billion deficit the state faces in the two-year budget cycle starting Sept. 1.
UTIMCO, as it is called, manages the $662 million Permanent Health Fund, along with assets for the University of Texas and Texas A&M systems. UTIMCO says the bill would force the sale of $400 million worth of securities under its control, possibly at depressed prices.
The other $100 million would come from the sale of assets in endowments that benefit other public health institutions, including the UT Health Science Center at San Antonio and the M.D. Anderson Cancer Center in Houston.
The $500 million would go into a short-term money-management account run by the comptroller's office. That account currently yields about 1.5 percent a year, said Lita Gonzalez, a lawyer in the office.
At the committee hearing Monday, Gonzalez said moving the money to the state treasury "would be moving away from the endowment concept" of investing state money for the long term. By cashing in the stocks, she warned, the state would not benefit from the historically higher stock returns.
Based on the Finance Committee's brief discussion so far, Bivins' proposal is aimed at raising $500 million for higher education. Bivins said the Senate wants to spend $500 million more than the House on higher education. A spokesman for the UT System said its officials weren't available for comment Thursday.
It's unclear what kind of reception Bivins will get when the bill's details are circulated at the Capitol. Bivins has served in the Senate since 1989, but he is new to the job of finance chairman.
Two members of the Finance Committee said Thursday that most panel members are unclear how the bill would work.
At the Monday committee hearing, Bivins said the bill would give the investment funds until Nov. 1, 2004, to sell assets, "so we will not create a 'fire sale' of the assets within those funds."
But Bivins acknowledged that the state would be selling some of the assets at a loss because the stock market is in a three-year slump. For example, he said, the $1.1 billion in tobacco settlement funds held in various endowments was worth $831 million as of Feb. 28.
The structure of state investment funds creates another problem. The $662 million Permanent Health Fund is part of a larger General Endowment Fund that UTIMCO manages. The $3.2 billion general endowment operates like a mutual fund, selling shares to investors such as the health fund.
If the bill forces the sale of a substantial amount of health fund assets, UTIMCO would have to redeem the health fund's shares. That could force UTIMCO to sell other holdings to pay the health fund for its shares.