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Understanding PUF: What is the Permanent University Fund?

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This week marks the 93rd anniversary of an important, if somewhat obscure, milestone in UT System history. On August 24, 1923, the first royalty payment was made to the Permanent University Fund after the Santa Rita No. 1 well struck oil. Santa Rita sat on West Texas land set aside, way back in 1876, by the Texas Constitution to support the University of Texas and Texas A&M systems of higher education.

For longer than I’ve been alive, the oil and gas business has been integral to our state’s economy and identity. But in the late 19th and early 20th centuries, there was no expectation that the arid brush land bestowed on the UT and A&M systems would become a phenomenal revenue generator. The thinking at the time was that the land would be sold at some point, and the proceeds of the sale would be invested to create an endowment.

Striking oil changed everything, and that once-unpromising brush land has been generating revenue for the Permanent University Fund (PUF) ever since.

That’s the Reader’s Digest version. Now let me walk you through some of the details, which are a bit more complex.

First, the Texas Constitution stipulates that Texas A&M gets one-third of the benefits of the PUF and the University of Texas gets two-thirds.

The PUF consists of two pieces – the 2.1 million acres of land that are dedicated to it, and the return on investment of the revenue produced on those lands.

The revenue that gets the most attention, understandably, comes from the production of oil and gas. Tracts of land are leased to oil companies that pay royalties on whatever oil they produce. The Texas Constitution stipulates that this money flow directly into the PUF, which functions as a permanent endowment. This endowment is managed by a 501(c)(3) corporation, the University of Texas Investment Management Company (UTIMCO), under the authority of the UT System Board of Regents.

The Permanent University Fund Lands also generate a smaller but significant amount of “surface” revenue by leasing tracts for grazing, hunting, wind farms and other purposes such as easements for pipelines and electricity distribution lines. Unlike the oil and gas revenue, this money goes straight into the Available University Fund (AUF). I’ll discuss the difference between PUF and AUF in a moment.

But let’s stick with PUF for now, and the ways – prescribed by the Texas Constitution – we are able to use it on behalf of our institutions and the people of Texas. When you think of PUF, think of bonds – a bond, of course, being a financial instrument a company, municipality, or some other institution uses to borrow money. The Constitution allows the UT System to issue bonds guaranteed by the PUF in an amount equal to 20 percent of the book value of the PUF. Because the PUF is, as the name suggests, a permanent fund and is very large, creditors see our bonds as extremely safe, and that enables us to secure our bonds (borrow money) at very low interest rates, saving us millions of dollars each year. It’s important to emphasize the money in the PUF is not expended – it simply guarantees that our bonds are good, and that the money we borrow will be paid back.

PUF bonds may be issued for the benefit of all 14 institutions of the UT System, but may only be used to finance capital expenditures – generally speaking, that means the construction or acquisition of new buildings or land, or the purchase of long term durable equipment (an MRI, for example).

So, let’s say UT El Paso wants to build a new research building. Subject to the approval of the Board of Regents, the UT System will finance the building’s construction through a bond (loan). Now you might be wondering, how does the money for the loan get paid back? In finance-speak, how do the bonds get serviced? That’s where the Available University Fund (AUF) comes in.

The AUF consists primarily of annual distributions by the Board of Regents from the total return on investment (revenue plus capital gains) of the PUF. The size of the distribution – at the discretion of the Regents within constitutional constraints – is usually less than 5 percent and cannot exceed 7 percent of the market value of the PUF’s investments. The AUF also includes, as I mentioned, the surface revenue earned on University Lands.

The Texas Constitution requires that AUF first be used to pay principal and interest on PUF bonds, but the remainder may be used to support and maintain UT Austin – which helps provide its excellence – and to support and maintain System Administration (including system-wide contracts and services). The constitution does not allow AUF to be used for operational expenses for the other System institutions. Within constitutional limits, the UT System Board of Regents seeks to use the AUF strategically, in a manner that benefits System institutions and all of Texas higher education.

The 2016 distribution from the PUF to the AUF was $773 million, or 5 percent of the market value of the PUF’s investment. That’s more than three quarters of a billion dollars’ worth of support for our universities that didn’t come from students, parents, taxpayers, or donors.

I know this blog is a bit longer and a bit denser than usual. But I think it’s important that everybody with an interest in the UT System – and presumably that includes you – have an understanding of this funding stream, which is unlike any other in American higher education.

We owe it to our state, and to the pioneers who created this unique funding mechanism, to be careful, responsible stewards of the PUF. But in my mind, we have an equal obligation to use the resources at our disposal in ways that are bold, creative, and innovative. To make a real difference for Texas. And that’s what we intend to do.

Just think, it all started with a gusher, 93 years ago this week.

Here’s to the next 93 years!

Thanks as always for reading. I’ll write again soon.