Archive for the 'Ballot Issues & Initiatives' Category

Well, it seemed time to start looking at the issues that will be on our November ballots, and I thought I should start at the beginning. A ballot issue is a bill from the legislature, that has been referred to the people of Montana to vote on in an election.

Just as a brush up on the formatting of bills, issues and initiatives, when something is underlined it is the new proposed language and when something is struck through, it is the language that is being eliminated from the laws.

Here we go with the language for C-44, which comes from Senate Bill No. 489, and is sponsored by Sen. Vicki Cocchiarella:

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AN ACT SUBMITTING TO THE QUALIFIED ELECTORS OF MONTANA AN AMENDMENT TO ARTICLE VIII, SECTION 13, OF THE MONTANA CONSTITUTION TO ALLOW UP TO 25 PERCENT OF CERTAIN PUBLIC FUNDS TO BE INVESTED IN PRIVATE CORPORATE CAPITAL STOCK; AND PROVIDING AN IMMEDIATE EFFECTIVE DATE.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MONTANA:

Section 1. Article VIII, section 13, of The Constitution of the State of Montana is amended to read:
“Section 13. Investment of public funds and public retirement system and state compensation insurance fund assets. (1) The legislature shall provide for a unified investment program for public funds and public retirement system and state compensation insurance fund assets and provide rules therefor, including supervision of investment of surplus funds of all counties, cities, towns, and other local governmental entities. Each fund forming a part of the unified investment program shall be separately identified. Except as provided in subsections (3) and (4), no public up to 25 percent of public funds shall may be invested in private corporate capital stock in the same manner that a prudent expert acting in a fiduciary capacity and familiar with the circumstances would use. The investment program shall be audited at least annually and a report thereof submitted to the governor and legislature.
(2) The public school fund and the permanent funds of the Montana university system and all other state institutions of learning shall be safely and conservatively invested in:
(a) Public securities of the state, its subdivisions, local government units, and districts within the state, or
(b) Bonds of the United States or other securities fully guaranteed as to principal and interest by the United States, or
(c) Such other safe investments bearing a fixed rate of interest as may be provided by law. that a prudent expert acting in a fiduciary capacity and familiar with the circumstances would use in investing a fund guaranteed against loss or diversion.
(3) Investment of public retirement system assets shall be managed in a fiduciary capacity in the same manner that a prudent expert acting in a fiduciary capacity and familiar with the circumstances would use in the conduct of an enterprise of a similar character with similar aims. Public retirement system assets may be invested in private corporate capital stock, and the restrictions in subsection (1) on the percentage that may be invested in private capital stock do not apply.
(4) Investment of state compensation insurance fund assets shall be managed in a fiduciary capacity in the same manner that a prudent expert acting in a fiduciary capacity and familiar with the circumstances would use in the conduct of a private insurance organization. State compensation insurance fund assets may be invested in private corporate capital stock. However, the stock investments shall not exceed 25 percent of the book value of the state compensation insurance fund’s total invested assets.”

Section 2. Effective date. This amendment is effective upon approval by the electorate.

Section 3. Submission to electorate. This amendment shall be submitted to the qualified electors of Montana at the general election to be held in November 2008 by printing on the ballot the full title of this act and the following:
[] FOR allowing up to 25% of all public funds presently restricted to fixed income investments to be invested in private corporate capital stock.
[] AGAINST allowing up to 25% of all public funds presently restricted to fixed income investments to be invested in private corporate capital stock.
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I looked up the fiscal notes, and there are some pretty important points made.

The DNRC points out that Article X, Section 3 of the Montana Constitution says:
“Public school fund inviolate. The public school fund shall forever remain inviolate, guaranteed by the state against loss or diversion.” Putting money into the stock market could hardly be considered an experience that is immune to loss, if it was, everyone would invest without fear. Instead, any losses to the fund would have to be reimbursed to the fund by the state. So C-44 would come into conflict with the Montana Constitution.

The DNRC also points out that Section 17-6-201(2)(b) of the Montana Code Annotated (MCA) says: “other public funds may not be invested in private capital stock. “Private corporate capital stock” means only the common stock of a corporation.” So as the law stands today, only retirement funds are allowed to invest in capital stock, not any other public funds. C-44 would come into conflict with this part of the MCA.

I also delved a little deeper into the legislative history of C-44. This bill was introduced by Senator Vicki Cocchiarella, it was SB 489, and can be found under bill draft number LC1758. Perhaps the most interesting thing I have found yet regarding C-44, are the audio minutes from the February 21, 2007 hearing from Business, Labor and Economic Affairs.

Anything from Carroll Soth, Chief CEO, Board of Investments is fascinating. He starts at about 60 minutes into the recording, and the committee is discussing 3 different bills, all having to do with investments, and therefore the Board of Investments. (If you are curious, they were SB 467 (passed), SB 468 (died in committee) and SB 489 (onto November ballot for voters)).

At 1:38, Senator Balyeat asks Carroll South about investing the trust funds in equities rather than the current fixed income bonds, and refers to an exhibit passed out at the meeting; showing 80% invested in fixed income (bonds) and 20% in equities, showing that had the funds been invested such as Sen. Cocchiarella was suggesting, that there would be substantially more income to the funds. Sen. Balyeat rattles off quite a few different stock investment strategies, then talks about returns and risks. “Isn’t it the cardinal rule of investing that if you want to maximize the return to risk ratio, that you want to diversify as much as possible?” Carroll South replies at about 1:43 “these charts are probably right, . . . but they are only right if you don’t spend any of the capital gains, because in the equity world, that is where you make your money, you don’t make your money on dividends, you make your money on capital gains. And the idea is to sell those stocks, put the capital gains to work, and continue to build the fund. And you can’t do that if the legislature is going to spend all of the income.”

Terrill Moore, from First Interstate Bank and Chairman of the Board of Investments was asked his opinion regarding the bill, and while he hadn’t had a chance to read it, he said it was certainly doable, but he was concerned what would happen when the market turned down, and how those losses would affect the funds as a whole, and how those losses would be reconciled.

Then at 1:48 Senator Brown asked Senator Cocchiarella about the fact that there had been no proponents who got up and spoke in favor of her bills, and he wanted to know what her motivation was for proposing them. She spoke about oversight of the Board of Investments, and that they were not immune from scrutiny. Senator Cocchiarella also talked about the fact that she was going away, and that the other Senators were not (term limits), and she wanted to be sure that these issues were discussed before she left. She said that the rule of investing is diversity the best you can, and that presently public funds don’t have any diversity.
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Well, I guess here is where I stand right now. I don’t think diversifying our public funds into corporation stocks is a good idea at all. The stock market hasn’t been doing so hot lately, and even my money market account lost money last month after the account fees were subtracted. The idea that the legislature regularly pulls about 100 million a year out of the public fund profits, compared pulling about 100 million a year out of an equity, that the rate of return simply wouldn’t be worth the switch from bonds to equities when you think about risk and costs. Not to mention the fact that the passing this ballot issue would come into conflict with two other established laws. On the surface it seems simple, but when investing our public funds, I frankly think acting more conservatively is the right way to go.