At a meeting on August 2, 2013, the Utah State Board of Education voted unanimously to seek legislation that would change how the $1.6 billion trust fund is managed, moving management from the Utah Treasurer’s office to an independent board of financial professionals.
What if you heard someone say “If Utah had run this trust the way it should have been managed from statehood on, we would not have any state income tax, corporate or personal today.”
Wouldn’t you want to know what happened to blow such a large financial resource? And how it could be managed better? That’s what Tim Donaldson quoted Mel Brown as saying about Utah’s state trust lands and associate fund.
At a meeting on August 2, 2013, the Utah State Board of Education voted unanimously to seek legislation that would change how the trust fund portion is overseen, moving management from the Utah Treasurer’s office to an independent board of financial professionals.
The “Fund” in question is the permanent State School Fund, a trust fund set up for public school beneficiaries in the late 1800s. It has grown from $19 million in 1983 to $1.6 billion today from income earned by state trust lands. While that’s a more than a decent increase, it’s nothing compared to what it might have been if the Fund had not been raided by the Utah legislature or if it had been managed as well as some states have managed their public school lands.
Set up by Congress when Utah became a state in the 1890s and granted six million acres of land to support public schools, the state of Utah is the trustee, while Utah’s current and future students are the beneficiaries of the lands and the Fund. In a report created by a Utah Board of Education task force purposed to examine how the Fund should have been managed from the beginning, and whether changes to current management are appropriate (find it embedded below), the Task Force explains that the Fund is intended,by law, to be used only for public school beneficiaries.
In 1937 the state legislature actually passed legislation to cancel some debts owed to the permanent State School Fund. Audit reports in 1916, 1929, 1931, 1944, and 1946 pointed to definite losses sustained by the Fund and recommended legislation to reimburse the funds and prevent further losses, under the Constitutional provision that provided for the fund to be “guaranteed against loss or diversion.” One audit report mentioned records “…so maliciously mutilated with intent to defraud…” that it was “impossible” to give an accurate accounting.
Why change management of the Fund?
If you were to aim an imaginary line along the trajectory that the graph above shows on the first quarter of the graph, I think it’s easy to see where the Fund might be today. Instead of just now climbing past the $1B mark in 2006, the Fund might have passed a billion dollars in market value sometime between 1946 and 1950…maybe later, if there were some fluctuations in the market or income from the land. Instead, it was the 1980s before serious growth occurred, in large part due to the history of mismanagement spelled out in the report.
Poor growth alone is not itself a sufficient reason to make a change in who manages the Fund. After all, the Fund has had more than decent growth since it was moved under the control of the Utah State Treasurer, an office currently held by Richard Ellis. Another major reason is to insulate the Fund–our students’ money, really–from political risk.
While there are no allegations against the management of the Fund by current Ellis, one cannot look at the Utah’s history of management of the Fund (or the current scandal of another constitutional office holder, John Swallow) and not be concerned about what might happen in the future when political expediency or corrupt self-dealers might make decisions at odds with the interests of the students.
In fact, a brief history, accounted in the Task Force report, provides a litany of “trust-violating” proposals in recent years for Fund use
- finance the construction of the Lake Powell Pipeline,
- facilitate relocating the prison and developing the current site,
- assist with state costs related to the UEP land trust (polygamous) litigation settlements,
- build an office building for non-beneficiaries, such as SITLA and the USOE,
- fund litigation against the federal government, and
- lend funds to the state to offset falling tax revenues.
All worthy public projects (or not), but none of which are under the purview of the Fund’s mission to protect intergenerational equity: “The trust lands and trust funds must be managed with the single focus of financially supporting public education.”
That’s an important responsibility, and with neighboring state Idaho managing to grow their state trust land fund faster, it’s one that probably merits more expertise than the bare minimum constitutional requirements for State Treasurer: that he or she be 25 years old, a legal resident of the state for 5 years, and a registered voter.
Not only that, there are reporting and audit requirements are next to non-existent, with the Treasurer under almost no obligation to tell who is lobbying him to invest the Fund in their company or project, sending him on expensive vacations, or how investment decisions are made.
How, then, should the State Trust Land’s Fund be managed? And how should it have been managed from the beginning?
With this question in mind, the Task Force proposed the following recommendations (again, the full report is below, and you should read it. It’s fascinating):
1. Create an independent board over an independent office as the governance structure for the permanent State School Fund.
2. Study changing the distribution policy from “interest and dividends” to a percentage of a rolling average of market value.
3. Enhance the reporting requirements.
4. Preserve the prudent investor rule for the board in statute.
5. Exclude the trust from the “subscription to stock” prohibition.
6. Require an annual audit under the appropriate authority and standards.
7. Take steps to require that assets be held by an independent third party custodian.
It’s telling that the only party that seems to be opposing the proposed changes is the Treasurer’s office. The PTA, UEA, and others showed up at the August 2 meeting to voice their support for the change. A minority report expressed some concern for a potential cost addition by moving the Fund to the management of an independent board, estimated to be any where from $750,000 a year or more for the staff required to manage the billion dollar fund. However, given that the recommendations largely follow Idaho’s example, adding finance professionals to the oversight and management of the Fund has the potential to also significantly increase the Fund’s growth, better manage investment risks, and provide more protection from political influences, a consolation we cannot now expect.
There’s one more reason to make then change: the because the Fund has been depleted in the past, we don’t really have a way to replenish what has been lost. As Utah State Board of Education member Jennifer Johnson put it, “It isn’t solely the wisdom here to choose to prevent rather than repair, it is also that there is no source of funds for remedy. Otherwise such possible funds could be used in our schools already.”
Until money grows on trees, managing the resources we have with best practices is all we can do. And as the unanimous vote of the Board demonstrated on August 2, this is a step that few people disagree is in the best interests of the beneficiaries of the Fund: today’s and tomorrows students.
For more on this issue, check out a couple articles in the Salt Lake Tribune, as well as the full report below.
The Utah State Board of Education site on the topic is found here:
Utah State Board of Education, School Trust Investment Task Force: Report and Recommendations
photo credit Ken Lund