By Jeff Horwitz Special Contributor to The Dallas Morning News
The Texas State Board of Education has courted controversy in recent years by promoting intelligent design debating whether minorities like Csar Chvez and Thurgood Marshall are overrepresented in social studies lessons and balking at approving a high school health textbook that mentioned the word condom. But its financial management of the Texas Permanent School Funds investments has largely gone unnoticed.
Over the past year board members have twice spurned the investment advice of the school funds professional staff by hiring consultants that cost hundreds of thousands of dollars more than their competitors.
Staffs reservations
In May members of the school funds executive staff refused to state that they had no personal knowledge of ethics violations. Now some board members are concerned they werent told of the staff members reservations.
The second largest educational endowment in the country the school fund is a $19 billion pool of public money used to pay for textbooks and other school supplies for the states children. It also serves to guarantee bonds issued by local school districts.
Worth more than $26 billion at its peak its investments have suffered the same heavy losses that recently have afflicted other such funds. This spring the Texas House voted to take the management of the school fund away from the 15-member elected board. The proposal did not pass the Senate.
In July the board fired its general investment consultant R.V. Kuhns & Associates. Responsible for shaping the funds investment strategy and contracting decisions Kuhns was replaced with a rival Massachusetts-based NEPC.
The action was taken directly contrary to the recommendation of the school funds state staff. Not only did NEPC rank lower than Kuhns in the Texas Education Agencys evaluation it also cost more $1.05 million compared with Kuhns bid of $398000 for the same work. (In its final proposal NEPC lowered its fee to $580000 though it remained the high bidder.)
The decision to hire NEPC raised concern among state officials because it was championed by board member Rick Agosto D-San Antonio. As a marketer for institutional investment firms in his private career Agosto had prior business contacts with NEPC.
He acknowledged in a July interview that he had tried to persuade NEPC to recommend its clients invest in a fund with which he had an affiliation. Board records show that he met last year with NEPC while representing the Townsend Group a real estate consulting firm.
Some board members questioned the arrangements.
People havent been forthright in their disclosure said Pat Hardy R-Fort Worth one of four board members to vote against NEPCs selection. How could you come along throw out the rankings and just pick the firm you want? Its so clear there are shenanigans here.
Very comfortable
Agosto said he has done nothing improper. NEPC was the most qualified and we needed a change he said. I feel very comfortable.
He added According to my lawyers I didnt violate any rules of the board.
In an interview NEPC president Dick Charlton said that his firm had won the contract because it was better than other bidders. We think that decision stands on its merits he said. You wont find any firm with a better ethical reputation. Thats an unqualified statement.
Now NEPC is poised to reshape the funds portfolio. And it is seeking another contract from the board this time for handling the funds performance management.
TEA staffers discovered Agostos prior business contacts with NEPC in disclosure documents submitted by the firm. Afterward the funds top five employees including its chief investment officer each refused in May to execute routine ethics statements vouching for the ethical integrity of the selection process.
Identical statements
Normally the officials would check a box affirming that they have no personal knowledge of any violation of the Code of Ethics. But all five left the form blank. Below in a part of the page reserved for Description of Violations the five staffers submitted identical statements declaring that a board member had failed to disclose a business relationship that may require
disclosure.
Board member Bob Craig R-Lubbock said he was disappointed that the board had not been told by its finance committee about staff members ethical concerns at the time of the contract vote.
And he said he was worried that multiple board members may have had questionable contacts with companies that had applied for an upcoming real estate investing contract.
Disclosure documents that the TEA has he said show that the companies have provided some of his board colleagues with entertainment campaign contributions and things of that nature.
Because the contract has not been awarded the documents have not been released publicly.
We have a fiduciary duty to be above board Craig said. If there are any concerns about conflict of interest by any board member they need to be handled appropriately.
Although Kuhns & Associates school fund contract was not set to expire until 2010 Agosto and his colleagues voted to put out a public call for replacements. But well before that process was finished Agosto appeared to have made up his mind.
New direction
NEPC has demonstrated to me their ability to move things forward in taking over the responsibilities of our current consultant he wrote in a February e-mail to David Bradley chairman of the boards school fund committee. We need to move in a new direction with some pros that will diversified our fund sic.
Agostos urging of NEPCs hiring came after the board re-shuffled its finance committee promoting Agosto to vice chairman.
You might as well have put me on the basket-weaving committee said Mary Helen Berlanga D-Corpus Christi who had served on the permanent school fund in prior terms but ended up on the charter school committee her last choice. Maybe I should bring my knitting.
Agosto said his background in the fund management world helps him make good financial decisions. I am in the business he said at a board meeting. I travel the circuit scene as far as raising capital for my companies and I run into just about everybody that probably will come through here.
He said in an interview that he has made millions of dollars as a marketer for institutional investment companies.
Texas State Securites Board records show Agosto is a fairly recent arrival to the institutional investment world. He holds no formal investment credentials though he has registered to take the basic stockbrokers license examination known as the Series 7 eight times.
Securities Board records show he didnt show up or arrived late on six occasions and failed the test on the other two.
After working as a manager at a San Antonio restaurant for most of the 1990s he was hired in 2000 as a vice president by Harbor Capital then a money manager for the school fund. He launched his own institutional investment marketing business Aureus Partners four years later.
Jeff Horwitz is a freelance writer based in New York. He can be reached at jhorwitz24@ yahoo.com.
The Texas State Board of Education has courted controversy in recent years by promoting intelligent design debating whether minorities like Csar Chvez and Thurgood Marshall are overrepresented in social studies lessons and balking at approving a high school health textbook that mentioned the word condom. But its financial management of the Texas Permanent School Funds investments has largely gone unnoticed.
Over the past year board members have twice spurned the investment advice of the school funds professional staff by hiring consultants that cost hundreds of thousands of dollars more than their competitors.
Staffs reservations
In May members of the school funds executive staff refused to state that they had no personal knowledge of ethics violations. Now some board members are concerned they werent told of the staff members reservations.
The second largest educational endowment in the country the school fund is a $19 billion pool of public money used to pay for textbooks and other school supplies for the states children. It also serves to guarantee bonds issued by local school districts.
Worth more than $26 billion at its peak its investments have suffered the same heavy losses that recently have afflicted other such funds. This spring the Texas House voted to take the management of the school fund away from the 15-member elected board. The proposal did not pass the Senate.
In July the board fired its general investment consultant R.V. Kuhns & Associates. Responsible for shaping the funds investment strategy and contracting decisions Kuhns was replaced with a rival Massachusetts-based NEPC.
The action was taken directly contrary to the recommendation of the school funds state staff. Not only did NEPC rank lower than Kuhns in the Texas Education Agencys evaluation it also cost more $1.05 million compared with Kuhns bid of $398000 for the same work. (In its final proposal NEPC lowered its fee to $580000 though it remained the high bidder.)
