The state’s Education Enhancement Trust Fund has lost as much as $10 million in value over the past two months, the state’s top investment officers said last week.
“That’s what the market delivered,” said Tammy Otten, the state’s deputy investment officer.
The state set up the fund in 2002 using securities sold on payments from the 1998 tobacco settlement. The South Dakota Investment Council manages the state’s three trust funds, as well as the money in the state’s retirement system and a variety of other investments.
In December of 2007, the education enhancement trust – the largest of the trust funds – was worth $410 million.
As long that figure stays above the $329.3 million principal, the fund pays four percent of its value annually for K-12 education. The disbursement – $15.45 million this year – is paid in June.
The fund’s balance as of July 31 – $368 million – is between $5 million and $10 million lower now, Otten said.
The fund was set up with a long-term goal of a seven percent return. The three percent cushion between the return and payout was designed to allow the fund to keep up with inflation.
Fluctuations in the stock market are testing the viability of that cushion.
“This is a test, yes,” said Chief Investment Officer Matt Clark. “We don’t yet know how bad the markets will be, so we don’t yet know whether we’ll have more cushion than we needed or not enough.”
The fund is a source of debate during each legislative session.
The legislature could increase the payout percentage with a majority vote. It requires a three-quarters majority in both houses to spend the principal. The law also dictates the funds be used for education.
Some argue the fund should pay five percent or that the state should aim to earn more.
“There has been a lot of discussion over time as to whether it should be should be changed to something else,” Clark said. “Some say our expectations are too low.”
Scott Heidepriem, a senator running for re-election in District 13, has introduced legislation to increase the amount paid from the fund. If the fund is set up to keep up with inflation, he said, so its buying power will never grow.
“What are we waiting for,” Heidepriem asked. “I don’t know how big they want it to get before we actually use it.”
If the fund merely holds steady, he said, taking it in small pieces does little to actually enhance education. Currently, he said, the fund only helps to pay the bills.
“We could invest in education today or we invest in T-Bills (treasury bills),” Heidepriem said. “It’s a question of priorities.”
Heidepriem also said the state’s investment office would manage the fund based on the priorities the legislature sets.
Rep. Jerry Apa, R-Lead, said the cushion is essential to keep the fund viable. Apa was the House Chair of the Joint Appropriations Committee, the committee that gets the first look at the governor’s proposed budget each year.
Apa said if the payout was increased and programs began to rely on funds from the trust, the state would be forced to dip into the principal.
Moving the mark would set a precedent he believes is a step toward spending away the fund.
“Once you break that barrier, it’s easy to surmount again,” Apa said.
The Investment Council does not take a position on how the fund or its returns is spent.
“We don’t take an opinion on that,” Clark said.
As to how the fund will fare in the face of the current financial crisis, Otten said she has faith that time will even out the returns.
“Hopefully, people won’t get too excited when we’re up big or too excited when we’re down big,” she said. “Over time, we just hope to average.”