Maintain the Texas Growth Fund in the Treasury Safekeeping Trust Company

The Texas Growth Fund should be maintained in the Treasury Safekeeping Trust Company.


Background
The Texas Growth Fund was created during the Second Called Session of the 70th Legislature in 1987 and adopted by constitutional amendment in November 1988. Created as a trust fund, the Growth Fund is authorized to make venture capital and other investment s with money contributed by the major endowment and pension funds in t he state. The Employees Retirement System (ERS), the Teachers Retirement System (TRS), the Permanent School Fund (PSF), the Permanent University Fund (PUF) and any other pension system created by the state are each authorized to invest up to 1 percent of t he book value of their assets in the fund.

Participation in the Growth Fund is voluntary. The amount of the investment, subject to the 1-percent ceiling, is made at the discretion of the trustees of each fund. To date, only two of the eligible funds have contributed money. TRS contributed $42 million and PUF contributed $10 million, both amounts being less than the maximum amount that could be invested by each fund. If the four major eligible funds had contributed the maximum amount possible at the time of creation, approximately $285 million could have been invested in the Growth Fund.

Of the amount actually contributed to the Growth Fund, a maximum of 10 percent can be used for venture capital investments. No more than 25 percent of the venture capital p ortion may be used for unilateral investments. The rest of the venture capital investments must be matched at least equally by funds from other sources. That is, only 2.5 percent of all the money contributed to the Growth Fund can be used for high risk inv estments without an equal partner. Overall, at least 50 percent of the Growth Fund must be invested in debt or equity securities which would finance the initial construction, expansion or modernization of business or industrial facilities in Texas. 1

The Board of Trustees of the Growth Fund has the responsibility to manage the investment of the Fund. Texas Growth Fund investments are organized in a series of trusts, or investment pools. The $52 million contributed by TRS and PUF constituted the first trust. No other trusts have been attempted thus far.

The Board of Trustees contracted with a private investment firm, the TGF Management Corporation, for administering or arranging for administration of the business affairs, investments and operations of the 1991 Trust. 2 The TGF Management Corporation was incorporated on June 2, 1992 for the specific purpose of carrying out this contract arrangement. Administrative costs and salaries of the staff are paid by the contributing funds in proportion to their commitment to the Growth Fund. The executive director s base salary of $175,000 per year is supplemented by an incentive bonus of 5 percent of the investment return in excess of the five-year Treasury bill rate. Other investment staff split an equal bonus amount.

The Growth Fund was proposed as a means of using public resources to leverage private capital for investment in the state. Supporters of the Growth Fund amendment argued that the shortage of capital due to the economic downturn fell most heavily on new and small businesses. The Growth Fund is intended to serve as a vehicle for increasing the amount of investment capital available to these types of businesses in Texas. In addition to the economic development argument, supporters claimed that the highe r rates of return potentially available through Growth Fund investments would yield more money for state investments.

Opponents of the Growth Fund argued against its creation based on the uncertainties it posed to the contributing funds. It was argued that speculative investment of retirement money and public endowment money was not appropriate and could be disastrous sho uld any of the money be lost through investments that failed. Additionally, opponents argued the Growth Fund set a precedent for later ra ids on the trust funds. The danger of inappropriate projects being financed by Growth Fund money also worried opponents.

To mitigate some of the concerns of the contributing funds, the Treasury Safekeeping Trust Company could maintain the Texas Growth Fund and provide greater accountability. The State Treasurer maintains the Treasury Safekeeping Trust Company in order to manage, disburse, transfer, safekeep, and invest public funds and securities more efficiently and economically. The Trust Company qualifies as a depository institution and has direct access to services provided by the Federal Reserve System. Access to Trust Company services is available to state agencies, local political subdivisions of the state, and nonprofit corporations, foundations and other charitable organizations created on behalf of the state or local political subdivisions.


Recommendation
The Texas Growth Fund should be maintained by the Treasury Safekeeping Trust Company.

All of the money contributed to the Texas Growth Fu nd comes from state trust and endowment funds and should be placed in the Treasury Safekeeping Trust Company to provide greater accountability over the expenditure and investment of the funds. The Treasury would also ensure proper collateralization of bala nces to avoid losses due to possible future bank failures. Any risks associated with lack of accountability for these funds should be kept at a minimum.

The contract with the TGF Management Corporation, which is binding until November 1998, can be maintai ned under this arrangement. The normal fee structure for the Trust Company should not apply to the Growth Fund since Treasury Department staff usually invests funds held by the Trust Company and the Texas Constitution requires that the Growth Fund be opera ted as a mutual fund. 3


Implications
Requiring the money to pass through the Safekeeping Trust Company would allow for increased accountability over the disbursement and collateralization requirements of these funds. The Board of Trustees would maintain full management authority for the Texas Growth Fund. The terms of the contract with the TGF Management Corporation would be maintained. The benefit to the state, and particularly to the public funds contributing to the Growth Fund, would be that the added scrutiny over the disbursement of Growth Fund money would minimize the risks involved.


Fiscal Impact
No significant administrative costs or savings from this recommendation are anticipated. Minimizing the risks of potential problems due to lack of accountability would be the primary benefit for the state.



Endnotes
1 Texas Constitution, Article XVI, Section 70(j).
2 Management Agreement, Board of Trustees of the Texas Growth Fund and the TGF Management Corp., June 1992, pp. 2-8.
3 Texas Constitution, Article XVI, Section 70(j).