BOISE, Idaho -- Investment management of Idaho's $650 million public endowment and its $3.25 billion land endowment could be consolidated.
An 1890 law -- restricting investment of public funds in Idaho -- will come under scrutiny in the Idaho Legislature in 1998 and could result in major changes in the way the state manages its land and fund endowments.
The legislative review comes on the heels of a report by a special task force that focused on how to increase the returns of the state's land endowment.
"Our committee made four broad recommendations in our report to the governor," said Douglas Dorn, principal at consultant Dorn, Helliesen & Cottle and a task force member. Although his firm is based in California, Mr. Dorn is a resident of Idaho.
"However, the final decision to change the management of the endowments would require a constitutional amendment, a supermajority in the state Legislature and majority voter approval," he added.
Mr. Dorn said the four actions recommended were:
*Consolidate oversight and management of the two endowments under one body;
*Establish a land bank to sell real property and bank the money for re-investment;
*Create an earnings reserve to develop spending rules, inflation-proof the funds and provide steady and increasing flow of funds; and
*Remove the legal barriers that prohibit land endowment investment in equity (only fixed-income investment is now allowed) or put the fiduciaries on the "prudent man" standard;
'Real' and 'financial' assets
Mr. Dorn said the state's Land Board of Commission, made up of five constitutional officers including the governor and attorney general, currently manage the land endowment's "real assets, its land;" an appointed body of the endowment fund board manages the fund's financial assets, known as a "cash trust."
Mr. Dorn said his committee put forward the question: "Why are we treating these as two trusts when they have a common set of beneficiaries?"
But, he added the committee "was unable to put forth a recommendation as to who that overseeing body ought to be."
Over the course of the summer, a joint committee of the state House and Senate held several meetings with Mr. Dorn and his task force and examined the four proposals.
"We told them that the bottom line was that we were investing money, about $3.25 billion, under rules that were written in 1890," Mr. Dorn said. "These lands came to the state as state-endowed lands, through a covenant with the federal government. Clearly, today we have a different notion of what constitutes wealth and prudent investment than they did back then."
The state's land endowment is divided into two categories, the $2.8 billion land trust and a cash trust valued at about $660 million. Approximately 80% of the income generated by the cash trust, in which investments are limited by law to fixed-income vehicles, are distributed to Idaho's public school system.
Generating more income
Another member of the task force, Idaho Controller J.D. Williams, shares Mr. Dorn's enthusiasm for merging the state's two endowment funds.
"Such a move would certainly generate more income," Mr. Williams said. "We had a study that showed it would take about $700 million to bring our school facilities up to where they should be. This is a way to increase revenues to the schools without raising taxes."
How much more income would be generated by a consolidation? "For example, if in the last fiscal year the cash trust -- which is now basically all invested in bonds -- had invested in the same manner as the Public Employee Retirement System of Idaho, it would have made $78 million more than it did," Mr. Williams said.
"Of course, Idaho is a very conservative state. And we manage our (public pension assets) very conservatively. But when you look at how much better the returns are just following that model, and people know that what we're proposing is still a conservative way to manage the trust assets, (the Legislature) will support the measure. We're just leaving too much money on the table right now."
Mr. Dorn predicted the proposal to merge the financial management of the funds will "definitely be a big issue on the 1998 ballot,"
Should the proposal to consolidate fiscal management of the endowments pass the Legislature and attain voter approval next year, Mr. Williams said, consolidation probably would take place in the year 2000.
Mr. Williams doesn't expect any major changes in the operation of the state endowment fund, once the consolidation is complete.
The state endowment fund "would basically be managed the way it is now, but they would report to the land board," he said. "Of course, with the 'prudent man' investment rule, we would have experts advising them and us. Management of the endowment fund would be pretty much the same, except they would have a different portfolio." The endowment fund's assets now are internally managed.
Merger seen as 'doable'
Unleashing the chains on the cash trust's investments would be welcome news to Stan Hamilton, director of the state's department of lands and secretary to the State Board of Land Commissioners.
He added that he had "no criticism of the returns that the board has been able to provide, although it always seemed to us that they were low relative to what they could have been if they were investing in equity rather than just debt instruments.
"I also think that the proposal for a 'land bank' would be very useful for us. It would enable us to take some of the money from land sales and put it back into other lands that would generate a higher return for us. We haven't been in the land sale business now for at least 15 years, but there are some parcels that are remote and don't generate much revenue for us."
Mr. Hamilton also embraced the task force proposal to create an "earnings reserve."
"The task force's idea of an earnings reserve is also very interesting and innovative and would allow us to combine the funds from the land and cash trust, put it in one pot, and then decide where to send different pieces of it," he said.
Better late than never
From a money manager's perspective, a move into equities comes better late than never, said Scott Pape, vice president of Loomis, Sayles & Co., Boston.
"There are a number of reasons why it's advantageous to have legislative authority to invest in stocks, as opposed to solely fixed income," Mr. Pape said.
"First, no matter what time frame you want to use, there's a distinct advantage to stocks vs. bonds in terms of returns. Data show that over the last 70 years, S&P-type stocks would have provided an annualized return of around 12%, whereas bonds were more in the area of 6.5% It may not sound like all that much, but compounded over 70 years you're talking about a great deal of money."
Using more recent figures, Mr. Pape said, $100 invested solely in S&P stocks in 1974 would now be worth $3,346, but that amount invested in bonds would be worth only $859. He also mentioned the benefits of diversification and an inflation hedge offered by equity investments.