What’s Up with the Amendments? A Close Look at Constitutional Amendment #1

This year there are eight constitutional amendments on the November 8 ballot. Some are a bit complicated, and all require a little homework before you cast your vote. To assist, we’re breaking the list into bite-size chunks. Leading up to the start of early voting on October 25, we will highlight one amendment every few days to give you the background and context you need to understand what they do. And for lagniappe, we offer CABL’s recommendations on each of them.   

Amendment # 1:  Allow Trust Funds to Invest More Revenues in Stocks

What It Does: Increases the cap for investing trust fund revenues in stocks to 65%.

Background: Louisiana is blessed to have about $3.4 billion preserved in permanent trust funds. The largest, the Louisiana Education Quality Trust Fund and the Millennium Trust Fund, have together provided earnings of billions of dollars to help meet critical state needs in areas including health care, education at all levels, university research, and TOPS funding.

But since their inception, most have been able to invest no more than 35% of their portfolio in stocks. Generally, the remainder must be invested in things like certificates of deposit, government and corporate bonds, money market funds, and commercial paper. While those are safe investments, their yields have been minimal over the last decade or more. Passage of this amendment would allow the Treasurer to invest up to 65% of revenues from a total of seven trust funds in stocks.

Comments:  It seems apparent that Louisiana needs to update its investment strategy for the billions of dollars it holds in permanent trust funds. While financial markets of all varieties are in a state of flux at this moment, investments for permanent funds such as these suggest a long-term strategy where greater access to the stock market seems appropriate. It is also worth noting that the income coming into most of these funds is from declining sources, primarily offshore oil and gas royalties and a 1998 settlement with major tobacco companies. That means investment income is critical to maintain or slow the erosion of earnings available for the state to spend.

One example is the Louisiana Quality Education Trust Fund. In 2008 it generated $70 million that was split between the Board of Elementary and Secondary Education and the Board of Regents. This past year it generated only $45 million.

While there seems to be no standard across the country that other states use for managing their investment portfolios, it appears that many large funds managed by state Treasurers’ offices do invest higher percentages in stocks. It’s worth noting that here in Louisiana, passage of this amendment would align investment from these funds with the investment practices of state retirement systems, which are also focused on long-term gains.

As the fiscal note accompanying this amendment points out, investment in stocks is accompanied by higher risks than fixed income investments like bonds, but it should also result in greater yields over the long-term. Since these are permanent funds, we would ideally want them to grow over time. This amendment would not require 65% of the funds to be invested in stocks, but would provide the portfolio managers additional flexibility to respond to market conditions whatever they might be.

The Treasurer’s office has said its investment strategy is to expose its portfolio to less risk than the overall stock market, recognizing yields might be lower than some aggressive investors achieve, but so would the losses. CABL believes greater flexibility in investing these valuable assets which belong to the citizens of Louisiana better serves their interests and makes sense for the future of our state.

CABL Recommendation: SUPPORT

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