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S1306......................................................by STATE AFFAIRS
PERMANENT FUNDS - Amends existing law relating to the investment of
permanent endowment funds to clarify market value allocation between the
permanent endowment funds and the earnings reserve funds; to establish
benchmark values to be annually modified for comparison with the current
market value of the permanent endowment fund; to provide for making up
losses to the Public School Permanent Endowment Fund; to provide for
reducing transfers or appropriations which exceed a benchmark value; and to
revise the definition of "earnings."
02/12 Senate intro - 1st rdg - to printing
02/13 Rpt prt - to St Aff
02/19 Rpt out - rec d/p - to 2nd rdg
02/20 2nd rdg - to 3rd rdg
02/25 3rd rdg - PASSED - 32-1-2
AYES -- Andreason, Bailey, Brandt, Bunderson, Burkett, Burtenshaw,
Cameron, Compton, Darrington, Davis, Gannon, Goedde, Hill, Ingram,
Kennedy, Keough, Little, Lodge, Malepeai, Marley, McKenzie,
McWilliams, Noble, Noh, Richardson, Schroeder, Sorensen, Stegner,
Stennett, Sweet, Werk, Williams
NAYS -- Calabretta
Absent and excused -- Geddes, Pearce
Floor Sponsor - Cameron
Title apvd - to House
02/26 House intro - 1st rdg - to St Aff
03/02 Rpt out - rec d/p - to 2nd rdg
03/03 2nd rdg - to 3rd rdg
03/09 3rd rdg - PASSED - 54-12-4
AYES -- Andersen, Barraclough, Bedke, Bell, Black, Block, Boe, Bolz,
Bradford, Campbell, Cannon, Collins, Crow, Deal, Denney, Douglas,
Ellsworth, Eskridge, Field(18), Field(23), Gagner, Garrett, Henbest,
Jaquet, Jones, Lake, Langford, Langhorst, Martinez, McGeachin, Meyer,
Miller, Mitchell, Moyle, Naccarato, Pasley-Stuart, Raybould,
Ridinger, Ring, Ringo, Roberts, Robison, Rydalch, Sayler, Shepherd,
Shirley, Skippen, Smith(30), Smith(24), Smylie, Snodgrass, Stevenson,
Trail, Mr. Speaker
NAYS -- Bauer, Bayer, Clark, Cuddy, Eberle, Harwood, Kellogg,
Kulczyk, McKague, Nielsen, Sali, Schaefer
Absent and excused -- Barrett, Edmunson, Wills, Wood
Floor Sponsor - Deal
Title apvd - to Senate
03/10 To enrol
03/11 Rpt enrol - Pres signed
03/12 Sp signed
03/15 To Governor
03/19 Governor signed
Session Law Chapter 132
Effective: 03/19/04 Secs 1 & 2;
Section 3, 07/01 of the year that Endowment
Fund Investment Bd certifies to Sec of State
that specific provisions have been met
]]]] LEGISLATURE OF THE STATE OF IDAHO ]]]]
Fifty-seventh Legislature Second Regular Session - 2004
IN THE SENATE
SENATE BILL NO. 1306
BY STATE AFFAIRS COMMITTEE
1 AN ACT
2 RELATING TO THE INVESTMENT OF PERMANENT FUNDS; AMENDING SECTION 57-720, IDAHO
3 CODE, TO CLARIFY MARKET VALUE ALLOCATION BETWEEN THE PERMANENT ENDOWMENT
4 FUNDS AND THE EARNINGS RESERVE FUNDS; AMENDING SECTION 57-724, IDAHO CODE,
5 TO ESTABLISH BENCHMARK VALUES TO BE ANNUALLY MODIFIED FOR COMPARISON WITH
6 THE CURRENT MARKET VALUE OF THE PERMANENT ENDOWMENT FUND, TO PROVIDE FOR
7 MAKING UP LOSSES TO THE PUBLIC SCHOOL PERMANENT ENDOWMENT FUND AND TO PRO-
8 VIDE FOR REDUCING TRANSFERS OR APPROPRIATIONS WHICH EXCEED A BENCHMARK
9 VALUE; AMENDING SECTION 57-724A, IDAHO CODE, TO REVISE THE DEFINITION OF
10 "EARNINGS"; DECLARING AN EMERGENCY FOR SECTIONS 1 AND 2 OF THIS ACT; AND
11 PROVIDING AN EFFECTIVE DATE FOR SECTION 3 OF THIS ACT.
12 Be It Enacted by the Legislature of the State of Idaho:
13 SECTION 1. That Section 57-720, Idaho Code, be, and the same is hereby
14 amended to read as follows:
15 57-720. PERMANENT ENDOWMENT FUNDS -- EARNINGS RESERVE FUNDS -- INCOME
16 FUNDS -- INVESTMENT POLICY REGULATIONS -- ANNUAL AUDIT. The investment board
17 or its investment manager(s) may, and are hereby authorized to, invest the
18 permanent endowment funds and the earnings reserve funds of the state of
19 Idaho. Earnings reserve funds shall be accounted for separately from permanent
20 endowment funds. Prior to the annual calculation of gGains and losses as
21 defined in pursuant to section 57-724, Idaho Code, the investment board shall
22 be annually allocated allocate the end of fiscal year market value between the
23 permanent endowment funds and the earnings reserve funds. at the end of each
24 fiscal year. This allocation shall be made based upon the proportion that the
25 market value of the permanent endowment funds and the market value of the
26 earnings reserve funds bear to the combined market value of both sets of
27 funds, at the end of the fiscal year. The investment board shall formulate
28 investment policy regulations governing the investment of permanent endowment
29 funds and earnings reserve funds. The regulations shall pertain to the types,
30 kinds or nature of investment of any of the funds, and any limitations, condi-
31 tions or restrictions upon the methods, practices or procedures for invest-
32 ment, reinvestments, purchases, sales or exchange transactions, provided such
33 regulations shall not conflict with nor be in derogation of any Idaho consti-
34 tutional provision or of the provisions of this act.
35 Annually, the investment board shall cause an audit to be conducted of the
36 investment of permanent endowment funds and earnings reserve funds, such audit
37 to be conducted by a recognized certified public accountant. The certified
38 public accountant conducting the audit shall not be an employee of the state.
39 The expense of such audit shall be paid from the appropriation to the invest-
40 ment board.
41 The state treasurer shall invest the income funds of the respective endow-
42 ments and distribute the moneys in the income funds according to legislative
43 appropriation.
2
1 SECTION 2. That Section 57-724, Idaho Code, be, and the same is hereby
2 amended to read as follows:
3 57-724. DETERMINATION OF GAINS AND LOSSES. (1) Gains. Gains and losses
4 to permanent endowment funds shall be determined by comparing the investment
5 board when the current market value of the permanent endowment fund as of the
6 end of the fiscal year, excluding funds transferred to the permanent endowment
7 fund from the earnings reserve fund or funds deposited as a result of land
8 sales or mineral royalties, to exceeds the gain benchmark market value of the
9 permanent endowment fund. at the end of the prior fiscal year The gain
10 benchmark market value shall begin with the market value of the permanent
11 endowment fund calculated as it existed on June 30, 2000, and shall be modi-
12 fied on June 30 of each subsequent fiscal year by the percentage change in the
13 average of the immediately preceding three (3) fiscal years of the unadjusted
14 consumer price index for all urban consumers as issued by the United States
15 department of labor, and by the addition of funds deposited as a result of
16 land sales and mineral royalty payments.
17 (2) Losses. Losses to permanent endowment funds shall be determined by
18 the investment board when the market value of the permanent endowment fund as
19 of the end of the fiscal year is less than the loss benchmark market value of
20 the permanent endowment fund. The loss benchmark market value shall begin with
21 the market value of the permanent endowment fund calculated as it existed on
22 June 30, 2000, and shall be modified on June 30 of each subsequent fiscal year
23 by the addition of funds deposited as a result of land sales and mineral roy-
24 alty payments. Losses to permanent endowment funds other than the public
25 school permanent endowment fund shall be made up from earnings reserve fund
26 moneys that the state board of land commissioners determines will not be
27 needed for administrative costs or scheduled distributions to each endowment's
28 respective income fund. Losses to the public school permanent endowment fund
29 shall be made up as follows:
30 (1a) The state board of land commissioners may annually transfer any
31 funds in the public school earnings reserve fund that it determines will
32 not be needed for administrative costs or scheduled distributions to the
33 public school income fund in the following fiscal year to the public
34 school permanent endowment fund, to make up for any prior losses in value.
35 (2b) If funds transferred from the earnings reserve fund are insufficient
36 to make up any losses in value to the public school permanent endowment
37 fund, and the market value of the public school permanent endowment fund
38 at the end of each fiscal year remains below the loss benchmark market
39 value of the preceding ten (10) consecutive fiscal years, then the remain-
40 ing legislature shall make up the loss shall be made up, within four (4)
41 years, by legislative transfer or appropriation. If subsequent gains, as
42 determined pursuant to the provisions of this section, or transfers from
43 the earnings reserve fund, make up for any remaining loss before this four
44 (4) year period expires, then no legislative transfer or appropriation
45 shall be necessary.
46 Losses to permanent endowment funds other than the public school permanent
47 endowment fund shall be made up from earnings reserve fund moneys that the
48 state board of land commissioners determines will not be needed for adminis-
49 trative costs or scheduled distributions to each endowment's respective income
50 fund authorized during one (1) or both of the next succeeding two (2) regular
51 sessions of the legislature. Such loss to be made up shall be the lesser of
52 the:
53 (i) Current cumulative loss; or
54 (ii) Annual loss determined in the first year of the preceding con-
3
1 secutive ten (10) years.
2 (c) Any transfers or appropriations authorized by the legislature for
3 deposit into the public school permanent endowment fund shall take place
4 at the end of the fiscal year, after the determination of gains and
5 losses. If the market value of the public school permanent endowment fund
6 exceeds the loss benchmark market value at the end of any fiscal year in
7 which legislative transfers or appropriations are authorized to the public
8 school permanent endowment fund, then such transfers or appropriations
9 shall be reduced by the lesser of the:
10 (i) Amount that the market value of the public school permanent
11 endowment fund would exceed the loss benchmark market value at the
12 end of the fiscal year if all authorized legislative transfers or
13 appropriations were to be made; or
14 (ii) Amount of the legislative transfers or appropriations autho-
15 rized for deposit in the public school permanent endowment fund for
16 the fiscal year.
17 SECTION 3. That Section 57-724A, Idaho Code, be, and the same is hereby
18 amended to read as follows:
19 57-724A. EARNINGS DEFINED. "Earnings" shall mean all revenues generated
20 from the management of endowment lands and their related endowment funds
21 including, but not limited to, timber sale proceeds, lease fees, interest,
22 dividends, and gains as defined determined in section 57-724, Idaho Code.
23 "Earnings" does not include mineral royalties or land sale proceeds.
24 SECTION 4. An emergency existing therefor, which emergency is hereby
25 declared to exist, Sections 1 and 2 of this act shall be in full force and
26 effect on and after passage and approval.
27 SECTION 5. Section 3 of this act shall be in full force and effect on and
28 after July 1 of the year in which the Endowment Fund Investment Board certi-
29 fies to the Secretary of State that gains, as determined by the provisions of
30 Section 57-724, Idaho Code, have been paid from the Public School Permanent
31 Endowment Fund to the Public School Earnings Reserve Fund for the fiscal year
32 ending June 30 of the same year.
STATEMENT OF PURPOSE
RS13956
The purpose of this legislation is to adjust the time period by which investment losses
incurred by the Public Schools Permanent Endowment Fund must be repaid. The
current four-year repayment horizon was originally established at a time when
endowment funds were invested in interest-bearing instruments with lower variability of
capital gains and losses. In addition, all revenue from timber receipts was deposited in
the Permanent Fund, more than making up for any potential loss of value.
The new, more diversified investment structure, made possible by voter approval of two
constitutional amendments in 1998, requires a longer timeline to make up for potential
losses in the 70% of the portfolio that now consists of equity investments. This is
because equities, while being half as likely to lose value as bonds in any given year,
also exhibit much greater short-term volatility between highs and lows. In short, highs
are higher and lows are lower. As a result, the larger losses experienced during the
2000-2002 market downturn require a longer timeline to repay than would have been
necessary under the old, short-term oriented structure.
A further change will make it possible for the Permanent Fund to retain interest and
dividend earnings during a market-loss year, rather than having such moneys
automatically transferred out to the Earnings Reserve Fund, and in doing so, widening
the losses incurred by the Permanent Fund.
FISCAL NOTE
This legislation could save the General Fund $119,359,000 over the next several fiscal
years. Extending the time period within which Public School Endowment losses must be
repaid dramatically decreases the likelihood that the state will have to repay the
investment losses of FY 2001 through FY 2003 from subsequent investment gains. The
repayment costs avoided by the General Fund are listed as follows:
Amount of Loss Date of Loss Current Repayment Date New Repayment Date
$46,013,300 6/30/2001 6/30/2005 (FY05) 2012/13 Legislatures
$71,461,300 6/30/2002 6/30/2006 (FY06) 2013/14 Legislatures
$1,884,400 6/30/2003 6/30/2007 (FY07) 2014/15 Legislatures
$119,359,000 TOTAL
Sen. Dean Cameron
Rep. Bill Deal
Telephone: 332-1000
Statement of Purpose/Fiscal Note S 1306