Education Trust Fund

Dec. 8, 2014

Transcript:

Ted Simons: Arizona's permanent land endowment trust fund recently hit the $5 billion mark for the first time. That milestone is of note because money earned from the fund goes to state education. Patty Humbert is the chief investment officer for the estate treasurer's office and joins us now. Good to have you here.

Patty Humbert: Thanks, Ted.

Ted Simons: Ok. Permanent land endowment trust fund. What are we talking about?

Patty Humbert When Arizona became a state, the Congress granted to our school districts for the benefit of our school districts, in an act of Congress, over 10 million acres, those acres are held aside, and any sales releases on those acres must benefit the beneficiaries, and the beneficiaries are our school districts.

Ted Simons: So the land is out there, and it gets sold when -- how do you decide, how does the state decide? We have covered this before but I think it's confusing to people, how does the state decide when it's time to sell.

Patty Humbert That's not handled out of the treasurer's office, that's hand out of the land department, and I don't know what determinations they used to make those.

Ted Simons: Ok. But once they make those sales, it's up to you to make sure the sales prosper?

Patty Humbert: That's correct.

Ted Simons: And prosper they have. 93% of the funds, the earnings go to K-12 education.

Patty Humbert: That's Correct.

Ted Simons: And the $5 billion mark, talk to us about why do you think that that happened?

Patty Humbert: Well, the fund is in perpetuity. So, the only thing that comes out of the funds is a percentage of our earnings. The land sales go into them this year so far, this fiscal year we've had about $68 million in land sales that come into the fund, last year, we had about $100 million, the year prior, over $200 million, those help the trust fund add up quickly. Then on top of that we have our earnings for this fiscal year so far, we have earned about 6.6% for the first half of the year. And when you look at a percentage on 5 billion, if we had earned 5%, we would still earn 125 million for the fund.

Ted Simons: We are talking real money?

Patty Humbert: You're talking Real money.

Ted Simons: Do you know -- as far as the money being distributed now to K-12 education, can you tell us how that money is distributed or where that goes or --

Patty Humbert: Once the school districts get the money, we don't know how they distribute it and use it. But we have a formula that is in our constitution that says how much we must distribute to the school district.

Ted Simons: And it sounds like for this fiscal year, $76 million, and that looks like a 12% increase, again, as far as asset allocation and equities and bonds and all those things, how do you work that out? What's the formula and what do you do?

Patty Humbert: Right now, we invest in 40% bonds. We index -- we have -- I'm sorry, we benchmark and we look at the city big index, that's just a big bond fund.

Ted Simons: Ok.

Patty Humbert: And we look at that bond fund, and we try to make similar bond investments in our bond fund. Say interest bearing, investments that will come back to the fund. The other 60% of what we invest is in the stock market. We index, so we're passive. We invest exactly like the S&P 500, 400, and 600. The 400 is the mid caps and the 600 is the small caps, and we added the small caps under treasurer Ducey, and they have been profitable since we added the small caps in, and we extended the mid caps not very many years ago, as well, so equities have done very well for us.

Ted Simons: And is it by statute that you must index? Is there any rule that says that you cannot go and take a leap on some faith over here and try something daring?

Patty Humbert: It is not by statute. I don't think it's in the statute that we have to index. I believe that we have more latitude than indexing in statute. One rule that we have for the endowment that's in the constitution is the prudent investor rule. So, we have to make prudent investments as an institutional investor would make with their own money.

Ted Simons: It's hard to argue against indexing when you really are trying to make sure that things go forward.

Patty Humbert: Right. Right. We are very conservative. We tend to invest very conservatively. We don't want to take a loss in the core of these funds.

Ted Simons: And you said 60% bonds, 40% stock market? Is that what you said?

Patty Humbert: It's the other way around.

Ted Simons: Ok. Is it the other -- whatever it is, is that by statute?

Patty Humbert: That is by constitution.

Ted Simons: By constitution. All right.

Patty Humbert: That's book value, so we can't hold book value or the corpus of more than 60% in stocks. As far as the book value, right now, we're at 52%. Now, because we invested in those, the market value is higher. We're at 62% by market value.

Ted Simons: Ok. All right. And I have got 14% yields since 2011, you had said 6.6 is calendar year and three-year returns, 1245,five- returns, that's pretty good.

Patty Humbert: It's been good. It's been good. The last -- our last trailing year, we had almost 10%.

Ted Simons: And again, do you -- the stock market has been going gang busters here. In the past few years. Is it a -- are the goalposts moving a bit as far as the investments or are you just keeping them in those indices and watch them?

Patty Humbert: We have discussions quite often about going into different investments. Now that we have a new treasurer coming in January, we'll sit down again and talk about what we can do with it. In 2012, we hired a consulting firm to give us an allocation study, and they went over with us, based on the constitution, and our state statutes, what we could invest in to widen our horizons a bit. We chose to stay invested, the way that we are investing, and just expand a bit into the small cap stock area. And it did very well for us, but we'll probably look into another asset allocation study and see if we can do something better for the taxpayer.

Ted Simons: Indeed, and as far as doing something better than, perhaps, other states, do you get a chance to compare those things? What do you see?

Patty Humbert: We don't compare very much, there is not a benchmark, a lot of people don't look at these. The land trusts were done for five or six larger states. We compare ourselves to University foundations. There was a group who did a study in 2013 for large University foundations, and they are allocated in much wider allocations than we are. And in a comparison basis, we did quite well. Compared to the Universities.

Ted Simons: And I know that you've been to the treasurer's office for quite a while, when everything went south there, you know, six, seven years ago, was there -- was there the feeling that we had to break out of a box a little bit or was that the time to hunker down and be more conservative? What was the thought process that happened?

Patty Humbert: Well, we did a lot of talking. We sat down and we talked quite a bit about what was happening in the market and where we wanted to be, and again, like I said, we tend to always defer to being conservative. So we went into a conservative mode at that point. Analyzing everything that was happening in the market and trying to pick our spots where we were going to be best served. We have the ability to index, like I said, so we left those indexed, and we followed the stock market back up with that. In our bond portfolios we just went to a bit more conservative approach.

Ted Simons: I'll bet, and certainly it seems to have worked out very well. 76 million this year, and any ideas what you could see the next fiscal year or thoughts?

Patty Humbert: I anticipate the fund to continue to grow, and we pay 2.5% on the five-year average balance for the last five years. If the fund continues to grow, we'll continue to grow those disbursements.

Ted Simons: I am sure that the K-12 schools will be happy to hear that. Thank you very much for joining us. We appreciate it.

Patty Humbert: You are welcome.