The oil boom is generating big profits for energy companies and record tax revenue for Texas, and it's created a billion-dollar windfall for the state's giant Permanent University Fund.
But the extra gains won't result in more money for colleges served by the $31.8 billion endowment, at least not in the near term.
That's because annual payouts are limited to a set percentage of fund assets, usually around 5%. The fund's aim is to provide a stable, inflation-adjusted payment while preserving the endowment's value so it can support higher education for generations.
In addition to the cap on payouts, the fund's total value has declined slightly this year. That's because investment returns were down 5% from January through May, echoing the broader decline in stocks and bonds.
The PUF, as it's known, paid out $1.1 billion last year to support the University of Texas and Texas A&M University systems. UT gets two-thirds of the fund's annual distributions and Texas A&M gets one-third, as stipulated in the Texas constitution.
Much of the money goes to pay down debt on capital projects. Over the past decade, PUF funding helped pay for many local college improvements, including a bioengineering and sciences building at UT-Dallas and a science and engineering research building at UT-Arlington.
Land grants helped establish the fund in 1876, and those holdings grew to over 2.1 million acres in West Texas. The acreage generates most proceeds from oil and gas leases, which are projected to top $2 billion in fiscal 2022 -- twice as much as the year before.
"As we sit right here in this fiscal year, we'll have the highest oil production that PUF lands have ever had," said William "Billy" Murphy, CEO of University Lands, which oversees the West Texas acreage.
He was addressing the UT Board of Regents in early May and showed a slide projecting $1.9 billion in contributions from mineral rights. As oil and gas prices continued to climb, he said, the contribution to the permanent fund was on pace to be over $2 billion.
"This isn't the first time we've seen pricing this high," Murphy told the board. "It's just the first time we've seen pricing this high along with production levels that are as high as they are."
In addition to the record haul from oil and gas, University Lands expects $84 million from surface rights for grazing, wind farms and easements for power lines and pipelines. That goes to another university fund.
While contributions from the West Texas land is significant for the PUF, its investment income is usually much larger. In fiscal year 2021, which ended in August, oil and gas on the lands contributed $979 million, more than its annual average over the previous decade.
But investment income in 2021 topped $7.8 billion, according to the fund's audited financial statement. For the year ended in August, investment returns topped 31%, which followed returns of 9.5% the year before.
The University of Texas/Texas A&M Investment Management Company, known as UTIMCO, manages the fund and invests in a wide array of holdings. The biggest contributors to last year's huge returns were investments in infrastructure, private equity and public equity, including emerging markets, the financial statement said.
In 10 of the previous 12 years, investment gains by the PUF surpassed contributions from oil and gas leases in West Texas.
"It's like a 401(k) in that you're putting money in every month or year based on current income. But over time, what really matters is the return on investment of what you've already accumulated," said Dick Lavine, senior fiscal analyst at Every Texan, an Austin advocacy group formerly known as the Center for Public Policy Priorities.
While the record haul from oil and gas helps the endowment, there are other consequences.
"The irony," Lavine said, is "that high oil prices are a cause of the inflation that is forcing the [Federal Reserve] to raise interest rates, tanking the stock market."
The endowment has had some difficult years. In 2008 and 2009, during the Great Recession, the PUF lost a combined $1.8 billion on investments. It recovered over the next two years and returns were strong for much of the past decade.
The fund was valued at $31.8 billion at the end of May, up from just under $10 billion in 2009.
"Most of the gains are reinvested, as opposed to being spent, and that's the way endowments are supposed to work," said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University.
Over time, the fund will have some banner years, which usually more than offset down periods -- as long as annual payouts are proportional, he said.
Payouts have grown sharply because the value of the fund has soared. In 2010, the PUF paid out just over $516 million to the university systems; in 2019, payouts started topping $1 billion annually.
Over that time, the fund's value more than doubled -- and has kept climbing.
"Most universities are very conservative in spending policies" on endowments, Bullock said. "They're creating a sustainable system."
Annual payouts are determined by a complicated formula that considers inflation and the average net value of the fund over the previous 20 quarters. In addition, payouts cannot be increased unless the purchasing power of PUF investments for any rolling 10-year period has been preserved, according to financial statements.
For fiscal 2021, the payout was 5.5% of assets over the trailing 20 quarters.
"That's a very reasonable way to make sure you don't take out too much in the good times," Lavine said.