DALLAS -- The Texas Senate Finance Committee is considering legislation that would allow the use of capital gains from the state's Permanent School Fund to help close a projected $4.8 billion budget shortfall over the next two years.

The measure calls for a constitutional amendment that -- if approved by voters -- would let the state divert certain capital gains that are now invested in the fund. While Texas Comptroller John Sharp estimates that the measure could mean $46 million per year for the budget, critics have called the plan shortsighted.

Two weeks into a summer special session to draft the next budget, lawmakers are considering scores of small proposals that collectively would avert the need for a major tax measure to balance the $59 billion budget for fiscal years 1992-1993, which begins Sept. 1.

So far, the measure remains in the Senate Finance Committee, where thebill's sponsore, state Sen. John Montford, D-Lubbock, is chairman. Legislative aides said they are not certain when a vote will be taken and declined to discuss the measure.

According to the measure's critics, similar one-shot proposals were rejected because they were a bad precedent that could change the ability of the fund to provide a guaranteed triple-A rating to Texas school bonds.

Bond lawyers said it also might prompt the Internal Revenue Service to rethink its year-old ruling to exempt the multibillion-dollar trust -- created in 1854 -- from arbitrage rebate regulations.

"I think it's an extraordinarily bad idea," said David Thompson, the former general counsel to t he Texas Education Agency, which oversees the fund. "Policymakers have been willing to take a long-term view of the fund ... and have not been willing to raid the fund for what is a short-term problem."

Even though the measure would not directly affect the $7.5 billion corpus of the fund -- the key to the bond guarantee program -- critics said the proposal violates the long-standing belief that the fund was untouchable.

"Historically, we have always said that the Permanent School Fund was untouchable, that it was constitutionally protected," said Mr. Thompson, who is now a lawyer at Bracewell & Patterson in Houston. "I don't know whether the rating agencies would view this as a first crack in the door."

Wall Street analysts were tentative in their view of the proposal.

"It doesn't look like it's going to impair the outstanding corpus," said Hyman Grossman, managing director at Standard & Poor's Corp.

But Robert Stanley, vice president and assistant managing director at Moody's Investors Service, added, "It would cause us to examine the impact of the law."

Both agencies provide an automatic triple-A rating for hundreds of Texas schools that qualify to have their debt service payments guaranteed by the Permanent School Fund.

Walter Arellano, chief investment officer of the fund, said the triple-A program -- which as already secured $2.4 billion of local school debt -- would not be in jeopardy if the proposal were adopted.

He added that many times the amount guaranteed is available.

One Texas bond lawyer, who asked not to be identified, said the IRS would likely restudy its decision to exampt the fund from arbitrage rebate regulations.

"I don't think there is any question that they would want to revisit their ruling," he said. "Whether the IRS would change its mind is hard to say, but when they make a decision like the one involving the Permanent School Fund, it is usually very narrowly applied."

The IRS did not return phone calls.

Mr. Thompson, who worked for five years to secure the ruling from the IRS, said he was uncertain whether the agency would change its view and added, "I certainly hope not."

He said state officials, however, have long viewed the capital gains -- profits from the sale of equity investments -- as part of the growing corpus. If the Montford proposal passes, it would slow the growth of the corpus.

But lobbyists and investment bankers say lawmakers have long viewed some parts of the Permanent School Fund as a source of funding but resisted tapping it to solve budget problems, even during the worst years of the recent energy recession.

"There's been legislation like this introduced evey time they meet, and they haven't passed any yet," Mr. Arellano said. "Every time the legislators meet, they need money, and this is a source of money,"

Certainly that view was reflected by Mr. Sharp when his auditors recommended recapturing the fund's capital gains.

"It is arguable that just as the federal Internal Revenue Service considers capital gains as income for regular taxpayers, the state should consider the capital gains on certain trusts as income," the auditors said.

The comptroller's office concluded that the fund could generate $46 million each of the next two fiscal years and $265.3 million over five years.

But Mr. Thompson said that because capital gains are not predicable, the revenue would be difficult for the state to forecast.

"I suppose you can put numbers on paper, but I'm not sure it means anything," he said. "There's no way they can budget and spend this."

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