While amendment D looks to close a loophole in the Constitution, Constitutional Amendment E appears to be opening a loophole. I admit that there is potential to increase the funds available for public education if we allow some of those funds to be invested in private company stocks or bonds. The problem is that this amendment provides no guidelines or safeguards to such a practice and therefore the only guarantee that we have from this amendment is that we increase the risk attached to the funds available for public education.
If the legislature wants to take public money and make use of stocks and bonds to increase the value of our tax revenues I could be pursuaded to accept that, but they had better put some safeguards on the ways our public funds are invested in the Constitution, rather than relying on future statutes to define any protective measures – the original prohibition serves to safeguard public money, when making such a large exception we should be sure that there are some limitations in place.
Although there are no safeguards in the constitution, there are considerable safeguards in statute – the beneficairies of the trust and the education community as a whole has worked with the legislature for the last few years to install safeguards that ensure the funds are invested wisely. Legislation passed in the 2006 legislative session required that the State Treasurer be held to a higher standard when investing this money; the Prudent Investor Rule. This rule, with a substantial body of case law outlining what is prudent, is a significant legal protection. At the same time, an Investment Advisory Committee was created. This committee is comprised of some of Utah’s brightest investors and reviews all investments quarterly. Members of the committee are appointed by representatives from the education community.
The State Retirement Fund has been investing safely in private equity for years. I do not believe there are constitutional safeguards protecting the retirement fund.
We are shortchanging our children and their education if we do not demand that this fund be invested well and wisely. Waiting for an additional change in the constitution is unnecessary.
Thanks for sharing that Natalie. I agree that any investments of education funds should be done “well and wisely” which is why I was against this amendment. I was unaware of the performance of the State Retirement Fund but I know that there are no Constitutional safeguards for those investments as the exception allowing those investments is the same section of the Constitution that this would be amending.
If the State Retirement Fund is doing well and if the education funds would be invested with equal prudence then I would have little reason to oppose this amendment.
Passing Amendment E is very important. The permanent State School Fund is almost at $1 billion in balance, and the school children of Utah need this money to be invested in the same manner as any other large institutional or endowment fund would be.
Any other fund that size can, and does, put a small portion in private equity and venture capitol index type fund products, offered by Vanguard or whoever. It is the best growth area that can be invested in, but archaic 19th century prohibitions have been preventing it.
Safeguarding the fund (and school trust lands) against mismanagement is always an issue, but that doesn’t mean we should mandate an imprudent approach to investing. To safeguard the fund the Treasurer’s decisions and performance need to be monitored by the Investment Advisory Committee, by the Legislature, and especially by the schools and other beneficiaries.
The fund needs to keep up with inflation AND rapid Utah growth of students, and wisely diversified investments- like those which Amendment E would allow, would only help that.
Paco,
Highlighting the fact that non-investment is just a form of imprudent investment really changes my perspective on this issue. Considering that investing the funds badly so that they only break even is no worse than what we have now, and any investment fund that can’t do better than break even is not going to stay in business, so with any prudence at all, we should be better off by allowing for investment than by prohibiting it.
Thanks for the perspective.
David,
great post. you beat me to it. i am voting no on amendment e. the reasons are on my blog: politicalcivility.com/blog8.
keep up the good work!
lyall
Lyall,
Thanks for sharing those reasons. It’s important for people to recognize that a prohibition against subscribing to private company stocks is not a prohibition against investing the money in lower-risk vehicles.
David,
are you still voting against Amendment E or have you switched sides?
here’s a few follow-up items to consider in voting against:
1) Let me re-emphasize that the “risk is mitigated by the investor rule and safeguards” notion is simply naive and UNTRUE. Any time you move into private markets you increase your risk. This is one of the first principles we covered in MBA school finance class.
For example if 25% of the fund had been invested in stocks or $250 Million, given the performance of the market, the education fund would have lost in excess of $100 million or 10% of its current value. So much for giving more to our children.
2) Private investments are not subject to the same reporting rules as public securities (which the fund shouldn’t invest in either, btw). This opens the door for a host of conflicts of interest and companies lobbying for fund dollars. I don’t care how “Good” the investment board is, this amendment opens the door for back room dealing. I thought the public school folks were all about accountability (given their voucher opposition) and now they turn a blind eye to the concept of accountability when you see potential jackpot $$’s.
3) Endowments lead to lack of accountability. I don’t want the state creating a huge endowment for education, because that means they don’t have to rely on and be accountable to the taxpayer. I can see why legislators like it. If the endowment gets big they don’t have to make hard choices about education. Public ed likes it because then they don’t have to ask for money and can do whatever they want.
Harvard’s endowment, for example, has allowed a certain few to steer Harvard far afoot from the initial donor intent and mission of that school. I would rather pay more in taxes so that schools are accountable to me and my children.
This is just bad policy all the way around.
I left this basic comment at Lyall’s post, but I am expanding on it here.
First of all, thank you to Lyall for asking for my position again. My opposition to amendment E had slackened as a result of some of the comments over here – namely the safeguards in place to ensure prudent investing – but I had never come to support the amendment because of the nagging in the back of my brain that this was not wise. Had I changed my position (as I have on other issues in the past) I would have put an update (not simply a comment) on my post and/or written a new post reflecting my new position.
I addressed the financial reasons for opposition in my post and those have been fairly addressed but as I look at the reasons for the initial prohibition it was not a matter of financial safety – it was a matter of influence and objectivity between private interests and public interests.
Lyall brings up the voucher debate which, as a great example of the lowest sides of politics, I would prefer to leave in the past. His example does serve to remind us that conflicts of interest and government behind closed doors to affect issues and money related to public education are not a matter of theory but a proven reality in our system. Education proponents would undoubtedly be among those working for companies that would benefit from investment from public funds – we simply do not need the uncertainty and the high probability of exploitation that this carries.
Though my opposition was wavering at one point, I never supported this amendment. Though the reasons for opposition that I originally articulated have been answered with some degree of satisfaction I have now articulated more important reasons for opposition that leave me even more adamantly in opposition to this amendment that I was at the beginning.
I am frustrated by Lyall’s oposition to the school trust. Land was granted to the state at statehood because the federal gov’t was keeping so much of the land, and we couldn’t tax it. So, the endowment is there. It is called the permanent State School Fund, and it has almost a billion dollars in it right now, and the trust also has 3.5 million acres of land. The proceeds are coming to our schools through the School LAND Trust program. And, if the state had been managing the land and investing the money the right way since statehood, we’d be closer to the $27 billion in the Texas fund, which distributed $974 million to public schools last year.
The permanent State School Fund is already invested in publicly traded stocks and bonds, and it has taken a hit recently, but the investments still are in the positive – worth more than the state paid for them. The treasurer doesn’t invest in individual companies, but invests in funds. And, Lyall must have missed the day they talked about diversification, because although private equity is considered more risky than other investments, in times like this, it is best to have your eggs spread out into a lot of baskets. So, investing a small portion (defined as 7-12% by prudent investor standards) in a fund that invests in private equity would actually mitigate the risks.
The Tribune stated in it’s endorsement of Amendment E that if people took enough time to get their questions answered, they would support it, too. You can read the entire editorial here http://www.sltrib.com/ci_10788589
I’ve read the entire editorial and it doesn’t sway me. My opposition based on the financial risk is minimal and independent of the current market. Also, I’d like to know how you figure that we should have a fund anywhere near the size of the Texas fund. They have been a state half a century longer than Utah and undoubtedly receive more money from the Federal government for their School LAND Trust program.
I have to completely agree with Natalie on this one.
Our schools face a demographic wave of new students in upcoming years with no significant source of new funding to help pay for the increasing costs we’ll face.
To sit back and argue that we don’t need to take these very prudent steps to increase our funding without increasing taxes is irresponsible.
It is frustrating to feel the impossibility of arguing that money is not the primary cause or solution to our education problems without being painted as out of touch or anti-education (or in this case irresponsible).
David,
It isn’t a matter of money being the primary cause or solution to our education problems. It is a matter of opposing the likely increase of non-taxpayer money for education without addressing how to pay for the huge increase in student population we know is coming.
I think that position could fairly be described as irresponsible. You should note that I never described you personally as irresponsible…you’re one of the most responsible bloggers I have on my list of daily reads.
Thank you for making that distinction. I see your point about how that can fairly be considered irresponsible. I am still not comfortable with the non-financial risks of allowing money from the education trust fund to be invested directly in private enterprises. I see it as an invitation for manipulation (probably not until people got comfortable with the new rules).