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99004 |
Prepared by the North Dakota Legislative Council
staff for the Budget Committee on Government Finance |
STATE INVESTMENT PROCESS - BACKGROUND MEMORANDUM
House Concurrent Resolution No. 3002 (attached as an appendix) directs the Legislative Council to study the state's investment process as it relates to the state bonding fund and the fire and tornado fund and to monitor the performance of all investments of the State Investment Board and the Board of University and School Lands. The resolution was recommended by the 1995-96 interim Budget Committee on Government Finance. The committee recommended the study because of the potential to generate larger returns on the state bonding fund and the state fire and tornado fund and to continue monitoring investment processes of the State Investment Board and the Board of University and School Lands.
PREVIOUS STUDIES
1995-96 InterimThe 1995-96 interim Budget Committee on Government Finance, pursuant to Senate Concurrent Resolution No. 4008, studied the state's investment process and the investment of state funds. The committee reviewed the various funds administered by the State Investment Board, Job Service North Dakota, State Treasurer's office, and the Board of University and School Lands, including a review of fund balances, the performance of investments, objectives of each fund, and the money managers used by the various state agencies responsible for investing state funds. The committee recommended House Concurrent Resolution No. 3002 providing for this study.
1993-94 Interim
The 1993-94 interim Employee Benefits Programs Committee, as a result of reviewing a committee bill which would have increased the primary insurance benefits under the Old-Age and Survivor Insurance System, studied whether investment returns could be enhanced while still maintaining appropriate safety and liquidity requirements in the Old-Age and Survivor Insurance System fund. As a result of this study, the committee recommended Senate Concurrent Resolution No. 4008 directing the Legislative Council to study the state's investment process in the investment of state funds and House Bill No. 1125 to expand the investment options available to the Old-Age and Survivor Insurance System. House Bill No. 1125, as approved by the Legislative Assembly, requires the State Treasurer to invest any portion of the old-age survivor trust funds not needed for current payment of benefits and costs of administration of the fund in bonds, treasury bills, notes, or other securities that are direct obligations of the treasury of the United States; bonds, debentures, or notes issued by a federal farm credit bank, the federal National Mortgage Association, or the federal Home Loan Mortgage Corporation; deposits of the Bank of North Dakota; or deposits of any federally insured bank, federal savings bank, or savings and loan association in an amount not to exceed the maximum insurance available for each deposit and to sell and dispose of the investment when funds are needed for payment of benefits or administration of the fund.
1991-92 Interim
The 1991-92 interim Employee Benefits Programs Committee, pursuant to Senate Concurrent Resolution No. 4005, studied the consolidation of the Retirement and Investment Office, Public Employees Retirement System, and Teachers' Fund for Retirement. The study was a result of the passage of Senate Bill No. 2030 by the 1989 Legislative Assembly and the passage of Senate Bill No. 2078 by the 1991 Legislative Assembly. The committee recommended House Bill No. 1035, which was approved by the 1993 Legislative Assembly which repealed the sunset provision contained in 1989 Senate Bill No. 2030 and 1991 Senate Bill No. 2078.
1989-90 Interim
The 1989-90 interim Retirement Committee, pursuant to Section 14 of Senate Bill No. 2030, studied the feasibility and desirability of the various options relating to the consolidation of various organizational and investment functions of the Public Employees Retirement System, the Teachers' Fund for Retirement, and the State Investment Board. Senate Bill No. 2030 established the State Retirement and Investment Office to coordinate the activities of the State Investment Board and Teachers' Fund for Retirement. The bill also transferred the responsibility for investment of moneys of the Public Employees Retirement System from funding agents under contract with the Public Employees Retirement System to the State Investment Board. The bill was originally effective through June 30, 1991 (the effective date was later extended to June 30, 1993, and then later, the effective date was repealed).
The committee recommended Senate Bill No. 2078 and Senate Concurrent Resolution No. 4005, both of which were adopted by the 1991 Legislative Assembly. Senate Bill No. 2078, as approved by the Legislative Assembly, extended the sunset provision to June 30, 1993, of 1989 Senate Bill No. 2030, eliminated the Retirement and Investment Office Board, and transferred the administrative responsibilities of that board to the State Investment Board. The bill also provided that if asset allocations for each fund were not approved by the governing body of that fund and the State Investment Board by January 1 of each year, the previous asset allocations would remain in effect.
Senate Concurrent Resolution No. 4005 directed the Legislative Council to study the feasibility and desirability of consolidating the Retirement and Investment Office, Public Employees Retirement System, and Teachers' Fund for Retirement.
1997 LEGISLATION
House Bill No. 1117, approved by the 1997 Legislative Assembly, eliminates the Veterans Home improvement fund and provides that Veterans Home membership contributions be deposited into the Veterans Home operating fund rather than the Veterans Home improvement fund.
House Bill No. 1346, approved by the 1997 Legislative Assembly, provides that the State Investment Board is also responsible for the investment of the Veterans Cemetery trust fund.
State Bonding Fund
The state bonding fund was created in 1915 and is maintained for bond coverage of public employees. The state bonding fund is managed by the Insurance Commissioner, and the amount of coverage provided to each state agency, department, industry, and institution is determined by the commissioner based on the amount of money and property handled and the opportunity for default. North Dakota Century Code Section 26.1-21-09 provides that premiums for bond coverage are to be determined by the Insurance Commissioner but may be waived if the state bonding fund balance is in excess of $2.5 million. No premiums have been charged possibly since 1953 because the bonding fund's balance has exceeded $2.5 million. The schedule below presents estimated balances, revenues, and expenses of the state bonding fund for the 1997-99 biennium.
| ANALYSIS OF THE STATE BONDING FUND FOR THE 1997-99 BIENNIUM | ||
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Estimated balance - July 1, 1997 |
$4,166,106 | |
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Add estimated revenues: |
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Investment income |
$378,690 | |
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State bonding fund claims collections |
50,000 | |
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Other income |
5,000 | |
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Total estimated revenues |
433,690 | |
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Total available |
$4,599,796 | |
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Less estimated expenditures: |
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Insurance Department - Administration (1997 HB 1010) |
$81,743 | |
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State bonding fund losses |
450,000 | |
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Total estimated expenditures |
531,743 | |
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Estimated balance - June 30, 1999 |
$4,068,053 | |
The State Investment Board administers the investments of the state bonding fund. As of March 31, 1997, the market value of the fund's investments totaled $3,793,000. The average return for the period July 1, 1996, through March 31, 1997, was 5.18 percent. The average return for fiscal year 1996 was 6.98 percent.
State Fire and Tornado Fund
The state fire and tornado fund originated in 1919. The fund is maintained to insure the various political subdivisions and state industries against loss to public buildings and permanent fixtures. North Dakota Century Code Section 26.1-22-14 requires that if the fire and tornado fund balance is less than $12 million, the Insurance Commissioner must increase assessments on policies. The schedule below presents estimated balances, revenues, and expenses of the fire and tornado fund for the 1997-99 biennium.
| ANALYSIS OF THE STATE FIRE AND TORNADO FUND FOR THE 1997-99 BIENNIUM | |||
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Estimated balance - July 1, 1997 |
$14,149,979 | ||
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Add estimated revenues: |
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Premium collections |
$5,260,000 | ||
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Investment income |
1,200,000 | ||
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Boiler inspection fees |
200,000 | ||
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Reinsurance recovery |
1,000,000 |
1 |
|
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Loss claims recovery |
15,000 | ||
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Total estimated revenues |
7,675,000 | ||
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Total available |
$21,824,979 | ||
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Less estimated expenditures: |
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Loss claims payments |
6,000,000 | ||
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1997 Red River Valley flood loss claims payments |
6,000,000 |
2 |
|
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Insurance Department |
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| Fire and tornado fund administration and boiler inspection program (1997 HB 1010) | 646,787 | ||
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Anhydrous ammonia storage facility inspections (1997 HB 1010) |
150,205 | ||
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State Fire Marshal program (1997 HB 1003) |
834,973 | ||
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Firemen's Association grants (1997 HB 1015) |
63,000 | ||
| Agriculture Department - Anhydrous ammonia storage facility regulation (1997 HB 1009) | 20,444 | ||
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Total estimated expenditures |
13,715,409 | ||
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Estimated balance - June 30, 1999 |
$8,109,570 | ||
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1 The loss payment relating to the North
Dakota Winter Show building claim is estimated to be $2 million. The fire and
tornado fund has reinsurance that pays for loss claims that exceed
$1 million. |
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The State Investment Board administers the investments of the state fire and tornado fund. As of March 31, 1997, the market value of the fund's investments totaled $15,865,000. The average return for the period July 1, 1996, through March 31, 1997, was 5.14 percent. The average return for fiscal year was 6.45 percent.
State Investment Board
In addition to administering investments of the state bonding fund and fire and tornado fund, the State Investment Board administers the following statutory and contracted funds:
| As of March 31, 1997 | |||
| Fund Name | Market Value | Year-to-Date Return | Fiscal 1996 Annual Return |
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Teachers' Fund for Retirement |
$897,479,000 | 7.91% | 15.63% |
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Public employees' retirement fund |
$810,572,000 | 8.20% | 16.09% |
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Job Service North Dakota pension fund |
$23,199,000 | 10.36% | 24.70% |
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City of Bismarck employees' pension fund |
$14,898,000 | 7.52% | 14.50% |
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City of Bismarck police pension fund |
$7,198,000 | 7.58% | 14.45% |
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Workers' compensation fund |
$500,361,000 | 6.48% | 9.50% |
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Insurance regulatory trust fund |
$2,069,000 | 6.22% | 9.05% |
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Petroleum tank release compensation fund |
$5,570,000 | 5.87% | 8.18% |
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State risk management fund* |
$3,218,000 | N/A | N/A |
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National Guard tuition waiver fund |
$213,000 | 4.66% | 5.60% |
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Veterans Home improvement fund |
$459,000 | 4.63% | 5.65% |
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Public Employees Retirement System retiree health insurance fund |
$14,608,000 | 8.07% | 16.45% |
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* Began October 1, 1996 |
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LAND DEPARTMENT
The Land Department administers the following permanent educational trust funds:
Common schools
North Dakota State University
School for the Blind
School for the Deaf
State Hospital
Ellendale*
Valley City State University
Mayville State University
Youth Correctional Center
State College of Science
School of Mines**
Veterans Home
University of North Dakota
*Income earned on the Ellendale trust fund is
allocated equally to the School for the Blind, Dickinson State University,
Minot State University, Minot State University - Bottineau, Veterans Home,
State Hospital, and State College of Science.
** Income earned by the School of Mines trust fund is distributed to the
University of North Dakota.
The Land Department combines the assets of the educational trust funds for investment purposes. The schedule below presents the investments of the educational trust funds as of March 31, 1997.
| Type of Investment | March 31, 1997, Allocation | Percentage of Assets | Fiscal Year-to-Date Yield or Total Return |
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Fixed income |
$249,514,769 | 61.2% | 7.55% |
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Cash equivalents |
10,383,779 | 2.5% | 5.38% |
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Convertible securities |
32,624,084 | 8.0% | 7.34% |
|
U.S. equities |
82,384,746 | 20.2% | 12.85% |
|
International equities |
32,490,741 | 8.0% | 0.32% |
|
Total/Average |
$407,398,118 | 100.0% | 7.97% |
The Land Department also administers investments of the Capitol building fund, coal development trust fund, and the lands and minerals trust fund. The March 31, 1997, fund balance and the fiscal year-to-date return on the investments is listed in the following schedule
| March 31, 1997, Balance | Fiscal Year-to-Date Return | |
| Capitol building fund | $1,067,567 | 5.07% |
| Coal development trust fund | $50,672,244 | 4.55% |
| Lands and minerals trust fund | $5,487,158 | 5.91% |
PROPOSED STUDY OUTLINE
The committee may wish to proceed with this study as follows:
- Receive testimony from representatives of the Insurance Department and State Investment Board regarding the objectives and purposes of the state bonding fund and fire and tornado fund, the types of investments currently being utilized, current returns on investments of these funds, and investments available but not being utilized.
- Receive testimony from representatives of the State Investment Board and the Board of University and School Lands regarding the objectives and purpose of funds administered by these agencies, the types of investments currently being utilized, and current returns on investments being held by the various funds.
- Review possibilities of increasing investment income of the state bonding fund and fire and tornado fund.
- Receive testimony from interested persons, including investment professionals, regarding possible investment options.
- Consider changes to improve the investment process.
- Develop recommendations and prepare legislation necessary to implement the recommendations.
- Prepare the committee's final report for submission to the Legislative Council.
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