2004 Legislation
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SENATE BILL NO. 1306 – Permanent endowment funds, invest

SENATE BILL NO. 1306

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Bill Status



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

Bill Text


                                                                        
                                                                        
  ]]]]              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 / Fiscal Impact


                      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