Idaho loses millions in market Officials expect endowment fund to rebound following tough year

Betsy Z. Russell - Staff writer

BOISE _ Since voters decided that Idaho's permanent endowment fund for education should be invested in the stock market, the fund has lost millions of dollars and seen nearly 10 percent of its value disappear.

"We probably could not have picked a worse time to get into the equity market," endowment investment director Charlie Saums told the endowment board last week.

The fund has lost $76 million since the start of the fiscal year in July. The biggest chunk of the losses has come since December, when the state finished six months of phasing into its new investment plan -- 70 percent stocks and 30 percent fixed-rate investments such as bonds.

Before Idaho voters changed the state constitution in 1998, Idaho's $800 million endowment couldn't be invested in anything but the safest, fixed-rate investments. The change came in the hope of higher returns to benefit Idaho schoolchildren, universities and more.

So far, the dismal earnings haven't affected payouts to public schools and other endowment beneficiaries. But if they don't turn around, payments in future years could be affected. And if the endowment fund isn't back in the black within four years, the state will have to make up any losses with taxpayer money.

Saums said he doesn't think that's likely.

"This has just been a bad year," he said. "I think anybody that's got any money in a retirement plan or 401(k) realizes what a bad year it's been."

Even the state's $7 billion public employee retirement fund, which has seen stellar investment earnings in recent years, is down this year. That fund was down 7.6 percent as of mid-March, with a $552.6 million investment loss since July.

"In the long run, it'll work out," said Nick Hallett, chairman of the Endowment Fund Investment Board. "For the endowment board, it's a very long-term plan -- it has to be."

Idaho's constitution requires the endowment fund to remain "inviolate," which means only its earnings, not the principal, can be spent. That's because the fund is supposed to be a permanent source of funding for education and certain other high-priority needs.

Idaho had a law on the books for years allowing a four-year window for the endowment fund to make up any investment losses. But when the endowment reforms were enacted, the four-year rule was left out.

This year, with little discussion, lawmakers passed a bill to bring back the four-year rule. "This is probably the most open-ended appropriation bill to ever come through the House of Representatives," Rep. Bill Deal, R-Nampa, who serves on the endowment board, said, chuckling.

The new law still requires the state general fund to make up any loss shown in the endowment fund at the end of each four-year period. The current four-year period will be up June 30, 2004. Without the bill, losses would have had to be made up each year.

"If we hadn't passed that, we'd be in a quandary -- here we have a $95million loss," Deal said.

That's strictly the amount lost in stock investments, which was partially offset by a profit on fixed-income investments. Overall since the start of the fiscal year July 1, the endowment investments lost 9.4percent, or $75.9 million.

Additional money was pumped into the fund during the year from state timber sales and other revenues, and the fund this year has paid out $53 million to beneficiaries and spent $11 million on expenses.

All those factors add up to a fund that's 5 percent smaller today than it was at the start of the fiscal year. At that point, Idaho's endowment funds had a market value of $803.7 million. At the end of March, the value had fallen to $760million.

"The safety valve we have in the whole thing is the timber," state Controller J.D. Williams said. "We can make the payments to the schools with the timber money."

Idaho's endowment was set up at statehood. It started with 3.5 million acres of land that were specifically earmarked in the Admissions Act to permanently benefit public schools, the University of Idaho, teacher education, a mental hospital, state prison and "charitable institutions" such as a veterans home, a school for the deaf and blind, and juvenile corrections programs.

Over time, some of the land was sold and the proceeds were invested through the endowment fund. Idaho now has about 2.5million acres of land, including valuable timber land that generates $50 million to $60 million a year in revenue, and a large investment fund.

Most of the endowment -- revenues from 85 percent of the land and 68 percent of the cash -- is for public schools. The University of Idaho is the second-biggest beneficiary, with the others receiving small percentages.

When the endowment reforms were enacted, they set up an "earnings reserve fund" as a cushion against downturns in the market. Timber proceeds, investment earnings and other revenues are placed in that fund, to cover payouts to beneficiaries.

"Then lo and behold, the first year we start this the market's in the tank and there is no earnings reserve cushion built up," Saums said.

Asked if lawmakers might be dipping into taxpayers' pockets to make up losses four years from now, Saums said, "I would say it's rather unlikely. The markets are going to snap around. They'll do better."

Under the old investment system, the endowment fund earned about 6 percent on its investments, Saums said. Long-term, under the new scheme, "We're shooting for 10."

The Public Employees Retirement System of Idaho fund, with a similar investment mix, has seen annual investment returns hit a high of 19.6 percent in recent years, a mark it hit in 1997.

Williams remains convinced that the endowment will see similar gains over time.

"In the long run, without a shadow of a doubt, the schoolchildren of Idaho will be big winners," he said.

Annual payouts to schools and other beneficiaries are determined through a formula that takes into account inflation and population growth along with investment earnings. Saums said next year's payments already have been set, but the following year's payout could be lower because of the market's downturn.

Gov. Dirk Kempthorne called a special meeting of the Land Board in December to look at how the stock market decline was affecting the fund.

"The governor has been reassured ... that no redistribution of the funds needs to take place," said Kempthorne's communications director, H.D. Palmer. "It's a diversified portfolio, and the long-term projection for the endowment fund, based on the information we've received from the investment experts, is good. Short term, it's certainly been a bumpy patch."

Williams said. "This has been a difficult time to get in, but it's still the right decision. Just hang out, because it'll work."

Said Hallett: "In the long run, we're all very confident that this will deliver a great deal more money to benefit the beneficiaries in the state of Idaho. Short term is different -- this isn't a short-term plan."

•Betsy Z. Russell can be reached at (208) 336-2854 or by e-mail at bzrussell@rmci.net.

-- Anonymous, April 15, 2001

Answers

Kip,

WOW!

I've lost my fair share, but nothing like that!

I'm just sorry that I can't take my money out, but it is a reqirement where I work. :(

I've lost about 10K in the past 6 months. Peanuts next to the money listed above, but not peanuts to me. :(

-- Anonymous, April 15, 2001

Sheeple, Washington State lost big also. They just haven't told us how much. I wonder what the loss total is for all fifty states?

Kip

-- Anonymous, April 15, 2001

Kip,

Can you say a really BIG number? I knew you could. One of my largest losses has been with TIAA-CREF, a teachers retirement. I know most states kick into that one.

Heck, it's all paper don'tcha know. :(

I almost hated to open my statements this quarter.

-- Anonymous, April 15, 2001