The state Constitution of 1876, the current charter of Texas law, established the Permanent School Fund. The purpose of the fund is to assist public education. The importance of the fund is that it provides money for public education from a source other than taxes, thus easing the tax burden of the state's citizens. The Texas constitution states that the money from the fund is to be distributed to the state's school districts on the basis of average daily attendance per district. The money is distributed to the school districts periodically throughout the year. The predecessor of the Permanent School Fund was the Special School Fund, established by the School Law of 1854. The Third Texas Legislature funded the Special School Fund with $2 million in United States treasury bonds left over from the $10 million settlement the United States government had given Texas in exchange for surrender of land claims on parts of the future New Mexico, Colorado, and Oklahoma, dating from the days of the republic. On its admission to the Union in 1845, Texas had considerable public debts, which the settlement helped pay. Although the original purpose of the Special School Fund had been to provide the state with a public school system, almost as soon as it established the fund, the legislature began to seek ways to use it for purposes other than educational. First, railroad stock was purchased by the principal to encourage railroad construction in Texas. Second, the legislature used the money to build state prisons. The Civil War in 1861 initiated the largest raid on the Special School Fund, as the Confederate state of Texas used the highly negotiable United States Treasury Bonds to purchase weapons for the Confederacy in the international arms markets of London and Paris. Fortunately for the fund the Civil War ended before the bonds were exhausted. At the end of the war, unsettled economic conditions and the occupation of the state by federal troops made public school issues a matter of secondary importance. Later, however, when the Democrats gained power over the state government in 1873 and Reconstruction ended in Texas, the legislature turned its hand to writing a constitution that would preserve the Special School Fund. They renamed it the Permanent School Fund. The Constitution of 1876 restricted the fund's use to disbursement of interest only and placed strict guidelines on the fund's investment.
From 1876 to the present the administrative framework of the Permanent School Fund has changed, but the purpose of the fund has not. Before the turn of the twentieth century, school-land sales and leases produced the revenue added to the Permanent School Fund, but more recent years have seen fuel taxes and leases of off-shore oil lands generate the revenue that goes into the fund. The amount of interest drawn from the Permanent School Fund and paid into the Available School Fund rose from just under $100 million or $40.60 per student expenditure in 1978 to more than $550 million or $117.42 per student expenditure nine years later. By 1989, through taxes, land sales, land leases, and investments, the Permanent School Fund had grown to more than $8 billion. In 1989 the interest amounted to a dividend of $620 million.