Report and Recommendations SUBMITTED

8/22/2019 Report and Recommendations SUBMITTED

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RECOMMENDATIONS ON INVESTMENT OVERSIGHT

OF THE PERMANENT STATE SCHOOL FUND

Commissioned by the Utah State Board of Education on February 8, 2013

Submitted by the School Trust Investment Task Force on July 18, 2013

TASK FORCE MEMBERS:

Rich Cunningham, RIA

David Damschen, CTP

David Hemingway, MBA

Sterling Jenson, CFA

Kent Misener, CFA

Elizabeth Tashjian, PhD

Jennifer Johnson, CFA, Chair



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TABLE OF CONTENTS

TABLE OF CONTENTS ............................................................................................................. 2

TABLE OF FIGURES ................................................................................................................. 4

EXECUTIVE SUMMARY ........................................................................................................... 5

THE CREATION OF THE SCHOOL TRUST INVESTMENT TASK FORCE .......................................... 6

SCHOOL TRUST INVESTMENT TASK FORCE MEMBERS .....................................................................7

TASK FORCE STAFF .........................................................................................................................8

ATTENDEES AND CONTRIBUTORS ...................................................................................................8

TRUST BACKGROUND ............................................................................................................ 9

TRUST ORIGIN ................................................................................................................................9 TRUST LAW ....................................................................................................................................9

TRUST ASSETS: LANDS AND FUND ................................................................................................ 10

CURRENT TRUST LANDS MANAGEMENT: SITLA ............................................................................. 11

CURRENT TRUST FUND MANAGEMENT: STATE TREASURER........................................................... 11

HISTORICAL SUMMARY OF THE INVESTMENT OF THE FUND ................................................. 12

HISTORICAL MISMANAGEMENT ................................................................................................... 12

RECENT CHANGES AND REFORMS................................................................................................. 13

POLITICAL RISKS ........................................................................................................................... 14

GROWTH OF THE PERMANENT STATE SCHOOL FUND ........................................................... 15

FUND GROWTH ............................................................................................................................ 15

DISTRIBUTION POLICY .................................................................................................................. 16

Trust Fund Distribution History .......................................................................................................... 16

Impact of the Trust Fund Distributions .............................................................................................. 17

Leon Jones - Principal of Rose Springs Elementary in Tooele School District: ................................... 18

Dahlia Cordova - Principal of Backman Elementary in Salt Lake City School District: ....................... 18

INFORMATION GATHERING WORK OF THE TASK FORCE ....................................................... 19

STAKEHOLDER INPUT ................................................................................................................... 19

Dr. Martell Menlove, Utah Superintendent of Public Instruction...................................................... 19 Kevin Carter, SITLA Director ............................................................................................................... 19

Kim Christy, SITLA Deputy Director .................................................................................................... 19

Michael Morris, past SITLA Board Chair & past IAC Member ............................................................ 20

IDAHO CASE STUDY ...................................................................................................................... 20

Larry Johnson, CPA/CFA ..................................................................................................................... 20

PRESENTATION OF THE STATE TREASURER’S OFFICE ..................................................................... 21



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GOVERNANCE STRUCTURES OF OTHER STATES ............................................................................. 21

CORRESPONDENCE ON SOLE FIDUCIARY RISKS .............................................................................. 22

QUESTIONS CONSIDERED ............................................................................................................. 23

RECOMMENDATIONS .......................................................................................................... 24

CHARACTERISTICS OF AN IDEAL GOVERNING STRUCTURE ............................................................. 24 BEST GOVERNANCE STRUCTURE RANKINGS .................................................................................. 25

FUND DISTRIBUTION POLICY ........................................................................................................ 27

Characteristics of an Ideal Distribution Policy .................................................................................... 27

Analysis of Current Distribution Policy ............................................................................................... 28

Recommendations Regarding Distribution Policy .............................................................................. 28

REPORTING REQUIREMENTS ........................................................................................................ 29

Why report ......................................................................................................................................... 29

Reporting to whom? .......................................................................................................................... 29

Reporting what ................................................................................................................................... 29

Reporting when .................................................................................................................................. 29 RISK TOLERANCE AND APPROPRIATE ASSETS ................................................................................ 30

AUDITS AND CUSTODY ................................................................................................................. 30

APPENDIX A: State Board Resolution Creating the Task Force .............................................. 31

APPENDIX B: Trust Law ........................................................................................................ 32

APPENDIX C: Detailed Funding Flow Chart ........................................................................... 33

APPENDIX D: Idaho Model ................................................................................................... 34

APPENDIX E: Statute on Delict of Treasurer .......................................................................... 35

APPENDIX F: Correspondence Regarding Sole Fiduciary Risks ............................................... 36

APPENDIX G: Minority Report to Utah State Board of Education School Trust Investment Task

Force ................................................................................................................................... 45

APPENDIX H: Pension Fund Best Practices ............................................................................ 49

APPENDIX I: Analysis of Governing Structures ...................................................................... 51

OPTION 1: SITLA BOARD ............................................................................................................... 51

OPTION 2: POLITICAL BOARD ....................................................................................................... 51

OPTION 3: STATE BOARD OF EDUCATION ..................................................................................... 52

OPTION 4: STATE TREASURER (STATUS QUO) ................................................................................ 52

OPTION 5: STATE TREASURER (WITH REFORMS) ........................................................................... 53

OPTION 6: BOARD OF INVESTMENT PROFESSIONALS WITH STATE TREASURER’S OFFICE ................ 55

OPTION 7: BOARD OF INVESTMENT PROFESSIONALS OVER INDEPENDENT OFFICE ......................... 56



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TABLE OF FIGURES

Figure 1: Trustee and Beneficiaries Diagram ________________________________________ 9 Figure 2: Current Funding Flow Chart _____________________________________________ 10 Figure 3: Current Target Asset Allocation __________________________________________ 14 Figure 4: Growth of the Fund ___________________________________________________ 15 Figure 5: SITLA Contributions and STO Investment Returns ____________________________ 16 Figure 6: School Land Trust Program Annual Distributions, 2002-2013 ___________________ 17 Figure 7: Academic Focus Areas for Plans of School Community Councils _________________ 17

Figure 8: Other States’ Governance Structures for their Trust Lands Funds ________________ 22 Figure 9: Task Force Members’ Rankings of Governance Structures _____________________ 26 Figure 10: Current Distribution Policy (All Interest and Dividends) ______________________ 28



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EXECUTIVE SUMMARY

Utah’s permanent State School Fund (the “Fund”) has grown from approximately $19 million in

1983 to a current market value of approximately $1.6 billion. According to a 2011 study by

Callan & Associates, the Fund will have a market value of approximately $2.8 billion in 2021,with distributions of approximately $66 million per year.

The State Board of Education unanimously passed a resolution to create the School Trust

Investment Task Force on February 8, 2013, to study “the appropriate and prudent investment

oversight, process, and structure” of the Fund and to submit legislative proposals, if necessary.

The School Trust Investment Task Force held a total of 11 meetings, which were each two hours

in length and open to the public. The minutes and audio recordings of the meetings, as well as

other study materials, were all posted online and are available athttp://www.schools.utah.gov/board/School-Trust-Investment-Task-Force.aspx.

The Task Force members were all knowledgeable investment professionals with a diverse set of

skills and backgrounds and were instructed to make their analysis and recommendations for

the best interest of the beneficiary even if this conflicted with current law.

The following are the formal recommendations from the School Trust Investment Task Force.

1. Create an independent board over an independent office as the governancestructure for the permanent State School Fund.

2. Study changing the distribution policy from “interest and dividends” to a

percentage of a rolling average of market value.

3. Enhance the reporting requirements.

4. Preserve the prudent investor rule for the board in statute.

5. Exclude the trust from the “subscription to stock” prohibition.

6. Require an annual audit under the appropriate authority and standards.

7. Take steps to require that assets be held by an independent third party custodian.

Please do not hesitate to contact us if you have any questions.

Jennifer Johnson, CFA

School Trust Investment Task Force Chair

Member, Utah State Board of Education

[email protected]

Timothy Donaldson, JD

Director, School Children’s Trust Section

Utah State Office of Education

[email protected]

http://www.schools.utah.gov/board/School-Trust-Investment-Task-Force.aspx





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THE CREATION OF THE SCHOOL TRUST INVESTMENT TASK FORCE

The permanent State School Fund has grown in size to approximately $1.6 billion. There has

been growing concern from the primary beneficiary representatives (the Utah State Board of

Education and the School Children’s Trust Section of the Utah State Office of Education) that

the current governance structure where an elected fiduciary has sole control over investment

governance, management, and operations poses significant systemic long-term risks. There are

many examples, both historically and recently, from other states where such sole fiduciary

governance structure weaknesses were cited after abuses and mismanagement was brought to

light. There has been a trend in pensions, land trusts, and other long-term investments towards

governing systems where governance, management, and operations are separated.

These concerns were shared with Representative Mel Brown of the Utah Legislature, who

sponsored several bills which created SITLA, created the School LAND Trust Program, put

forward a ballot measure to allow the fund to be invested in stocks, and codified a “prudent

investor rule” for trust investments. Representative Brown suggested that the Utah State

Board of Education, as the primary beneficiary representative under Utah Code, create a task

force to study the appropriate and prudent investment oversight, process, and structure of the

fund and suggest reforms, if needed.

At the February 8, 2013, Utah State Board of Education meeting this matter was discussed. The

Task Force was created by the Utah State Board of Education. Jennifer Johnson, CFA, a member

of the State Board, was appointed Chair, and the Task Force was comprised of members

appointed for their investment experience and expertise. The Governor, the President of the

Senate, the Speaker of the House, and the State Treasurer each made appointments to the Task

Force, and the State Board appointed two additional members. Once selected, those members

were sent an introductory packet with “questions to ponder” (see page 23).

Representative Mel Brown

Utah House of Representatives

Debra Roberts, Chair

Utah State Board of Education

Dave Crandall, Vice Chair




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SCHOOL TRUST INVESTMENT TASK FORCE MEMBERS

Task Force Chair

Jennifer Johnson, CFA


Governor’s Appointment

Sterling Jenson, CFA

Wells Capital Management

President of the Senate’s Appointment

David Hemingway, MBA

Zions Bancorporation

Speaker of the House of Representatives’

Appointment

Rep. Rich Cunningham, RIA

Utah State House of Representatives

State Treasurer’s Appointment

David Damschen, CTP

Utah State Treasurer’s Office

State Board Appointment

Kent Misener, CFA

Deseret Mutual Benefit Association

State Board Appointment

Elizabeth Tashjian, PhD

University of Utah, Dept. of Finance



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TASK FORCE STAFF

Margaret Bird, Director

School Children’s Trust, USOE

(Margaret Bird retired July 1, 2013)

Tim Donaldson, Director

School Children’s Trust, USOE

[email protected]

ATTENDEES AND CONTRIBUTORS

Bruce Williams, Paula Plant, Karen Rupp, Utah State Office of Education

Karen Peterson, Tracy Miller Utah PTA

Betsy Ross, Allen Rollo, Utah State Treasurer’s Office Jill Flygare, Tenielle Young, Governor’s Office of Management and Budget

Jay Blain, Utah Education Association

Kristina Kindl, Attorney General’s Office



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TRUST BACKGROUND

TRUST ORIGIN

As a part of the process whereby Utah became a state, the United States Congress granted

approximately six million acres of land in trust to support public schools. The state of Utah is

the trustee over both the lands and the income generated off the lands. Under the trust

arrangement, the state has legal title to the lands and funds; however, beneficial title is with

the public school beneficiaries.

TRUST LAW

The trust lands and trust funds must be managed with the single focus of financially

supporting public education (see Figure 1). The trustee has fiduciary duties to administer the

lands and funds in the most prudent and profitable manner possible. Self-dealing is strictly

forbidden, and the trustee has a duty of undivided loyalty. This means that the state may not

use these lands or funds for any other purposes, no matter how meritorious.

Figure 1: Trustee and Beneficiaries Diagram



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The trust is perpetual. This means that policy makers must remember that the interests of

today’s beneficiaries must be balanced against all of the future beneficiaries, forever

onwards, under the principle known as intergenerational equity.

It should be noted that as the Utah State Board of Education, which represents the school

beneficiaries, commissioned this task force all recommendations were to be made solely in the

best interests of the beneficiaries. (For an overview of Trust Law as it applies to this trust, see

APPENDIX B: Trust Law.)

TRUST ASSETS: LANDS AND FUND

The trust is composed of two types of assets, land resources and fund assets.

Originally the entire trust assets were land assets. However, in order to accommodate the

need for the trust requirement of intergenerational equity, the net cash proceeds of the land go

into an endowment-like fund of which only the interest and dividends have gone to the

beneficiaries. Initially, beneficiaries received only interest until equities were added and the

Utah constitution was amended to allow dividends to be included in the distribution policy (See

Figure 2). For more detail see APPENDIX C: Detailed Funding Flow Chart.

Figure 2: Current Funding Flow Chart



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CURRENT TRUST LANDS MANAGEMENT: SITLA

Since 1994, the School and Institutional Trust Lands Administration (“SITLA”) has managed all

Utah trust lands. Previously the state land board managed the lands. SITLA is a quasi-

independent agency of state government, to which has been delegated the task of optimizinglong-term profits from the land.

A seven-person fiduciary board of trustees hires and fires a Director, who also has fiduciary

duties, and carries out the policies of the Board. The board is a governing entity that sets

SITLA’s policies, budget, and appeals processes. Each member of the SITLA board also is bound

by fiduciary duties to ensure that the trust mandate is strictly followed. The Governor has one

direct appointment to the board to serve at the pleasure of the Governor. The other six Board

members serve six-year terms, with one member replaced annually. The Governor makes

appointments to the SITLA Board from a list of at least two qualified names submitted by theSITLA Nominating Committee, which represents beneficiaries and land users. Candidates are

chosen based on integrity and professional expertise in areas relevant to SITLA’s revenue areas.

This governance structure and appointment process was created with the intent to prevent

politicization of the SITLA Board of Trustees and to ensure the highest levels of expertise and

integrity.

CURRENT TRUST FUND MANAGEMENT: STATE TREASURER

Net income earned from the school trust lands is deposited in the permanent State School Fund

(“the Fund”). Currently the State Treasurer manages the Fund.

The State Treasurer is elected every four years in a statewide, partisan, general election. By

Utah Constitution, the only requirements for a candidate to run for the office of State Treasurer

are to be 25 years old, to be a legal resident of the state for 5 years, and to be a registered

voter. In addition to management of the fund, the State Treasurer is the state’s chief financial

officer and is responsible for the management of more than ten billion dollars of state, county,

and city taxes and funds.

The State Treasurer is currently charged with the investment of the fund under the prudent

investor rule. An Investment Advisory Committee (“IAC”), a statutorily created body of

investment professionals, meets quarterly and provides investment advice to the Treasurer.

However, the Treasurer remains the sole fiduciary. Two of the IAC members are appointed by



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the State Superintendent, one by the Utah PTA, one by the Utah Education Association, one by

the SITLA Board of Trustees, and two by the Universities who also have trust lands funds

managed by the State Treasurer. The current members of the IAC are

Jeff Cardon, CFA – Chief Executive Officer, Wasatch Advisors

Sterling K. Jenson, CFA – Regional Managing Director, Wells Capital Management

1

David T. Cowley – Vice President for Business & Finance, Utah State University

Arnie Combe – Vice President of Administrative Services, University of Utah

Kimo Esplin – EVP and Chief Financial Officer, Huntsman Corporation

Steven B. Ostler – Vice Chairman, The Boyer Company

Jeff Roylance – President, Summit Capital Advisors

HISTORICAL SUMMARY OF THE INVESTMENT OF THE FUND

HISTORICAL MISMANAGEMENT

Utah’s school trust funds were not always managed well nor operated in a manner consistent

with basic trust principles. For the first century that Utah was a state, not all land proceeds

always made it into the permanent State School Fund. Even for the funds that did make it into

the permanent school fund in the early years of statehood, loans were often made from the

trust corpus to counties and cities in Utah as well as to individuals for farm loans for less than

market rates.

In 1937 the state legislature actually passed legislation to cancel some debts owed to the

permanent State School Fund. Audit reports in 1916, 1929, 1931, 1944, and 1946 pointed to

definite losses sustained by the Fund and recommended legislation to reimburse the funds and

prevent further losses, under the Constitutional provision that provided for the fund to be

“guaranteed against loss or diversion.” One audit report mentioned records “…so maliciously

mutilated with intent to defraud…” that it was “impossible” to give an accurate accounting.

Beginning with the passage of the Enabling Act in 1894 and for almost 90 years, the permanent

fund was invested by the land office. Many lawsuits were heard by the Utah Supreme Court

regarding those loans, but the authority of the land board to invest the money was never

questioned. In the 1970s the land board’s investment of the fund was questioned, specifically

duration management on fixed income investments. Criticism of the land board’s failure to

1Sterling Jenson was also a member of this Task Force



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benefit from rapidly climbing interest rates on bonds prompted the legislature to reassign the

investment of the permanent school fund to the State Treasurer’s Office in 1981. A statewide

budget shortfall in 1982 led to a substantial raid on the “permanent” State School Fund. Jensen

v. Dinehart, a “friendly” lawsuit between the State Auditor’s Office and the State Lands Division,

was filed. The Auditor’s Office prevailed and the Utah Supreme Court ruled that deposits to thepermanent fund derived from mineral royalty could be liquidated and distributed to the

beneficiaries.

The effect of the ruling was that $42 million in financial assets were liquidated at a loss, and

only $32 million was distributed. After the liquidation, the remaining balance of the permanent

State School Fund was less than $19 million. Education groups subsequently convinced the

legislature to promulgate a constitutional amendment to deposit all future net revenue in the

fund.

RECENT CHANGES AND REFORMS

As recently as 1994 the permanent State School Fund was entirely invested in bonds.

Education groups advocated for, and the legislature subsequently passed, legislation including

the following:

A statutory change for the investment strategy, adopting a 65% equity strategy with

retention of all capital gains in the fund for growth,

The creation of the Investment Advisory Committee,

Inflation protection provisions in the Utah Constitution,

The repeal of the inflation protection provisions in the Utah Constitution, and finally

A “prudent investor rule” in code for the investment of the fund.

In 2007 the State Treasurer invested in real estate partnerships, which was the first, and

remains the only, “alternative” investment made with the permanent State School Fund.

Callan & Associates, the outside consultant to the Treasurer, conducts an asset allocation and spending study for

spending study for the fund every five years. The most recent study by Callan was completed in 2011. As show2011. As show in

Figure 3, the target allocation is currently:

47% domestic equities,

20% international equities,



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23% fixed income, and

10% real estate.

Figure 3: Current Target Asset Allocation

POLITICAL RISKS

Safeguarding the trust from political risk is a paramount concern for the future of the trust.

Most other states have little to nothing left in their land trust funds2. Historical precedent in

Utah also points to the need to safeguard the trust from political risks, as well as trust-violating

proposals seen in recent years, including using school trust dollars to

finance the construction of the Lake Powell Pipeline,

facilitate relocating the prison and developing the current site,

assist with state costs related to the UEP land trust (polygamous) litigation settlements,

build an office building for non-beneficiaries, such as SITLA and the USOE,

fund litigation against the federal government, and

lend funds to the state to offset falling tax revenues.

Other states have had successful candidates for State Treasurer who were not qualified to be a

prudent long-term investor of a multiple billion dollar permanent fund. The incentives for a

2 “Today, twenty-three states continue to manage what is left of their trust land conveyances: Alaska, Arizona,Arkansas, California, Colorado, Hawaii, Idaho, Louisiana, Minnesota, Mississippi, Montana, Nebraska, Nevada, New

Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington, Wisconsin, and Wyoming.

“Several of these states have retained only a tiny fraction of the original grant lands; Nevada, for example, retains

only around 3,000 acres of its original 2.7 million acre grant. By contrast, Alaska, Arizona, Montana, and Wyoming

have each retained between 85 and 90 percent of their original land grants.”

Culp, S. (n.d.) State Trust Lands Today. In State Trust Lands. Retrieved July 18, 2013 from

http://www.statetrustlands.org/about-state-trust-lands/state-trust-lands-today.html

Domestic

Fixed Income,

23%

Real Estate,

10%Broad

Domestic

Equity, 47%

Global (ex-US)

Equity, 20%






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State Treasurer may be short term and political in nature, whereas investment of a permanent

fund must be focused only on the long-term best interests of the beneficiaries.

GROWTH OF THE PERMANENT STATE SCHOOL FUND

FUND GROWTH

The permanent State School Fund grew rather significantly during the first decade of its

existence. During the subsequent decades up until 1983 there was very little relative growth.

Since the reforms that have been discussed which began in the early 1980s there has been

significant growth as shown in Figure 4.

Figure 4: Growth of the Fund3

Contributions from the management of the land have been the primary source of the growth of

the permanent State School Fund until most recently. The addition in 1994 of equities as an

authorized asset class has contributed both to the growth and volatility of the Fund. Another

reason for the slower growth of the Fund prior to 1995 was the legal requirement for the

3The Legislature liquidated $43 million from the fund in 1982.

$100,000

$1,000,000

$10,000,000

$100,000,000

$1,000,000,000

$10,000,000,000

1 2 / 3 1 …

1 2 / 3 1 …

1 1 / 3 0 …

1 1 / 3 0 …

1 1 / 3 0 …

1 1 / 3 0 …

1 1 / 3 0 …

6 / 3 0 / 2 6

6 / 3 0 / 3 0

6 / 3 0 / 3 4

6 / 3 0 / 3 8

6 / 3 0 / 4 2

6 / 3 0 / 4 6

6 / 3 0 / 5 0

6 / 3 0 / 5 4

6 / 3 0 / 5 8

6 / 3 0 / 6 2

6 / 3 0 / 6 6

6 / 3 0 / 7 0

6 / 3 0 / 7 4

6 / 3 0 / 7 8

6 / 3 0 / 8 2

6 / 3 0 / 8 6

6 / 3 0 / 9 0

6 / 3 0 / 9 4

6 / 3 0 / 9 8

6 / 3 0 / 0 2

6 / 3 0 / 0 6

6 / 3 0 / 1 0

Permanent State School Fund Growth (log scale)



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distribution of all of the interest income at a time when fixed income was the only authorized

asset class.

Figure 5 below shows the contributions from the operations of SITLA on the land and the

market value adjustments from the State Treasurer’s Office’s management of the permanentState School Fund since 1990.

Figure 5: SITLA Contributions and STO Investment Returns

DISTRIBUTION POLICY

Trust Fund Distribution History

The current distribution policy as defined in the Utah constitution is to distribute all income and

dividends.

The cash distribution as a percentage of fund market value averaged 2.42% the past 13 years

The lowest distribution was 1.56% of market value

The highest distribution was 3.06% of market value

$(100.0)

$(50.0)

$-

$50.0

$100.0

$150.0

$200.0

$250.0

1

9 9 0

1

9 9 1

1

9 9 2

1

9 9 3

1

9 9 4

1

9 9 5

1

9 9 6

1

9 9 7

1

9 9 8

1

9 9 9

2

0 0 0

2

0 0 1

2

0 0 2

2

0 0 3

2

0 0 4

2

0 0 5

2

0 0 6

2

0 0 7

2

0 0 8

2

0 0 9

2

0 1 0

2

0 1 1

2

0 1 2

( i n m i l l i o n s )

Fiscal Year ending in June

Annual Changes to the Permanent School Fund

Contribution from SITLA

Fund Market Value Adjustment



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The market returns, distribution policy, fund asset allocation, and securities selections all

deeply affect the distribution to current and future beneficiaries as shown in Figure 6.

Figure 6: School Land Trust Program Annual Distributions, 2002-2013

Distribution has grown by an average of 16.9% per year the past 12 years.

The biggest annual decline was 10.3%

The biggest annual increase was 44.2%

Impact of the Trust Fund Distributions

The interest and dividends are distributed to schools through the School LAND Trust Program.

All schools hold an election and create a school community council, which must have teachers

elected by teachers, the principal, and a two-person majority of parents. The councils evaluate

test score data and create a plan, using the funds for academic purposes only. Plans are

currently concentrated in the following areas: reading, math, writing, science, arts & music,

social studies, foreign languages, and health as seen in Figure 7.

Figure 7: Academic Focus Areas for Plans of School Community Councils

$0

$5

$10

$15

$20

$25

$30

$35

$40

F Y 2 0 0 1

F Y 2 0 0 2

F Y 2 0 0 3

F Y 2 0 0 4

F Y 2 0 0 5

F Y 2 0 0 6

F Y 2 0 0 7

F Y 2 0 0 8

F Y 2 0 0 9

F Y 2 0 1 0

F Y 2 0 1 1

F Y 2 0 1 2

F Y 2 0 1 3

F Y 2 0 1 4

M i l l i o n s

School LAND Trust Program Annual Distributions (FY01-FY13)



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The following are two of many testimonials regarding the immediate and important use of the

trust benefits for today’s beneficiaries:

Leon Jones - Principal of Rose Springs Elementary in Tooele School District:

Utah School Trust Land moneys are making an amazing difference for elementary

students in Tooele School District. Most schools have elected to hire curriculum

specialists in areas such as reading, math, art, music, computers, and Professional

Learning Community (PLC) interventions. We are excited and appreciative as we begin to

envision and provide adequate instructional support for all students.

Dahlia Cordova - Principal of Backman Elementary in Salt Lake City School District:

School Land Trust moneys have been vital for students at Backman Elementary. These

funds have been used to support technology and to fund a staff position in the computer

lab. We have also used the funds to purchase software and other publications for our

students - such as Weekly Reader for grades K-3 and National Geographic for students 4-

6.

0

100

200

300

400

500

600

700

800

900

R e a d i n g

M a t h

W r i t i n g

T e c h n o l o g y

S c i e n c e

A r t & M u s i c

S o c i a l S t u d i e s

F o r e i g n L a n g u a g e

H e a l t h

Academic Focus Areas



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INFORMATION GATHERING WORK OF THE TASK FORCE

STAKEHOLDER INPUT

The School Trust Investment Task Force began most meetings by hearing from the mostimportant and knowledgeable stakeholders in trust management.

Dr. Martell Menlove, Utah Superintendent of Public Instruction

At the first School Trust Investment Task Force meeting, State Superintendent

of Public Instruction Martell Menlove, Ph.D, spoke to the members of the Task

Force. Dr. Menlove thanked the investment professionals for giving their time

and service to help the State Board find what is best for Utah’s public

schoolchildren, today and in the decades to come. The trust, Dr. Menlove

said, is doing great things in schools throughout the state, and is tremendously

important to all stakeholders in Utah’s public education system.

Kevin Carter, SITLA Director

Kevin Carter, Director of the School and Institutional Trust Lands

Administration, spoke to the Task Force. Mr. Carter has been involved with

the trust lands since 1981, and has been SITLA Director since 2003. He said

that there was a long history of the land trust management, before SITLA,being governed under various boards, which included unqualified political

appointees. Mr. Carter said that a professional board of qualified members

has allowed for a consistent single-minded focus on what is in the best long-

term interests of the beneficiaries.

Kim Christy, SITLA Deputy Director

Kim Christy, Deputy Director of the School and Institutional Trust Lands

Administration, spoke to the Task Force. He shared his experiences working

with the task force that created SITLA in the early 1990s.

Mr. Christy emphasized to the Task Force that, through SITLA’s 20-year

history, it has been important that a volunteer board of professionals have

governing authority and bring a single-minded focus on the mission of the



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trust. This focus has allowed the agency to function like a business, and the results have been

far in excess of expectations. At the same time, the agency has to be transparent and

accountable to the beneficiaries and Utah Legislature, and seek collaborative “win-wins” with

other stakeholders as often as possible.

Michael Morris, past SITLA Board Chair & past IAC Member

Michael Morris spoke to the Task Force. Mr. Morris was a member of the

SITLA Board of Trustees and served on the Investment Advisory

Committee. He is currently a senior Vice President at Zions Bank. Mr.

Morris said that he found the board structure at SITLA one that allowed

him, and other board members, to make significant contributions, but he

did not have the same experience on the Investment Advisory

Committee. He stated that an independent board over an independent

office would be a better structure and allow for better returns and better

risk management.

IDAHO CASE STUDY

Idaho has a land grant trust fund that is nearly identical in size to the Utah permanent State

School Fund, but a much different governance structure. Idaho’s land grant trust funds are

invested by the “Endowment Fund Investment Board.” That board consists of investmentprofessionals who meet quarterly and have authority to hire and fire the Chief Investment

Officer.

Larry Johnson, CPA/CFA

Larry Johnson is the Chief Investment Officer for that office. Mr. Johnson

came to a Task Force meeting and discussed Idaho’s model, operations,

and practice. Mr. Johnson is one of four employees of that office, which is

self-funded from their trust fund, and costs approximately $700,000 a

year. Idaho’s returns have been impressive (see APPENDIX D: Idaho

Model).



21

PRESENTATION OF THE STATE TREASURER’S OFFICE

The State Treasurer’s Office (“STO”) presented a comprehensive background of the current

governance structure and procedures. The STO receives expert advisement from the

Investment Advisory Committee (“IAC”) that is composed of investment professionals whomeet with the STO at quarterly meetings. Investment policies are developed in consultation

with the Investment Advisory Committee and the outside consultant, which is currently Callan

& Associates. Information on the Fund is included in the Comprehensive Annual Financial

Report (CAFR) and audited annually. The STO annually delivers the State School Fund Report

to the Education interim committee.

The State Treasurer’s Office pointed to Utah Code 67-4-11 (see APPENDIX E: Statute on Delict of

Treasurer) which has a process for an Auditor and Governor to suspend a State Treasurer for

“derelict” actions with respect to the office.

4

There was discussion regarding the possibility of adding requirements for candidates to be a State Treasurer. A past study of other states did

not indicate any evidence of a good method of doing that, nor would doing that adequately

ensure the intended protections for the trust fund.

The Treasurer’s Office has a preference for passive management strategies, with the selective

use of active strategies within targeted asset classes such real estate. At present, equity

investments utilize enhanced index funds. The time horizon on the fund is measured in

centuries. Current practices and policies regarding rebalancing were explained with the

acknowledgement that active management would require additional staff for due diligence andoversight.

GOVERNANCE STRUCTURES OF OTHER STATES

Recent years have seen many western states pass major reforms in the structure of their trust

fund investments, distributions, and other policies. Below in Figure 8 is a simplified depiction of

how other western states are structuring the investment of their permanent school trust funds.

4 The Task Force Chair queried the State Auditor, Governor’s Office, and Treasurer’s Office, and it appears that this

code provision has never been utilized and would likely be challenged in the courts if ever implemented.



22

Figure 8: Other States’ Governance Structures for their Trust Lands Funds

Texas North Dakota Arizona New Mexico

Oklahoma Utah Idaho

California Colorado South Dakota

Nevada Nebraska

Alaska Minnesota

WashingtonMontana

Oregon

Wyoming

The task force also considered the structures and policies employed by state pension investors,

university endowments, and private foundations.

CORRESPONDENCE ON SOLE FIDUCIARY RISKS

At the May 20, 2013, meeting of the Investment Advisory Committee to which the Task Force

members were invited, Jeff Cardon, Chair, asked if the beneficiaries could provide examples of

significant losses that occurred in other states due to the sole fiduciary structure. Tim

Donaldson, School Children’s Trust Director at the Utah State Office of Education, drafted a

memo with recent examples from New York, Connecticut, and Ohio. Richard Ellis, State

InvestmentCouncil or

Board

A board of trustees overseesthe investment of

the fund

Treasurer

One of the manyduties and

powers of anelected StateTreasurer or

Commissioner of Revenue is to

invest the trustfunds.

Land Board

The officecharged to make

money on theland is alsoassigned to

invest thatmoney

Unique

The State Boardof Educationoversees the

investment of thefund



23

Treasurer, wrote a response, stating his view that transparency and accountability are adequate

avenues to protect against such risks. Tim Donaldson wrote a response sharing his view that a

system that implemented strong checks and balances would be the best policy for the long-

term interests of the trust beneficiaries. The Task Force was copied on all of this

correspondence. (See APPENDIX F: Correspondence Regarding Sole Fiduciary Risks).

QUESTIONS CONSIDERED

Before the first meeting the Task Force was presented with the following seventeen questions

to consider.

1. Are there preventable weaknesses that have been inadvertently designed into this

system?

2. Is it prudent for the investment manager of the fund to be an elected official (partisan

or otherwise)? Pros and cons?

3. What are the pros and cons of the investment manager being hired/ fired by the Utah

State Board of Education?

4. What are the pros and cons of the investment manager being hired/ fired by another

board?

5. What other oversight structures should be considered?

6. What structure for investment oversight is most likely to protect the fund from sub-par

returns? From concentrated risks? From conflicts of interest? From political pressures to

invest locally? From political pressures to do anything not in the best interests of the

beneficiaries? From political pressures to make investments based on political

correctness?

7. What legal counsel can the investment manager use? Only the Attorney General?

8. What requirements and annual disclosures from the SEC/FINRA for fund managers make

sense for the fund?

9. How would you write the Investment Policy Statement (such as risk and return

objectives, benchmark, reporting frequency and audience, rebalancing policies,

prohibitions, legal constraints, etc.) for the fund?

10. Are alternative investments appropriate for the fund? (Should the consideration of

alternative investments be made with or without a consideration of the risk and return

characteristics of the trust lands?)

11. What is the appropriate distribution rate/formula?

12. How should cash and cash flows be treated?



24

13. How should the investment manager and his or her staff be properly compensated/

incentivized? Should constraints be used? If so, how and by whom?

14. Should consultants be used? If so, how much and how frequently? By whom?

15. Should the other trusts be managed by the same investment team?

16. Should the asset allocation and strategy followed by the investment manager take intoaccount the land assets held in the fund, i.e., energy, minerals, and real estate?

17. Amongst all these considerations, which items should be part of statute?

RECOMMENDATIONS

The Task Force made the following formal recommendations.

1. Create an independent board over an independent office as the governance

structure for the permanent State School Fund.

2. Study changing the distribution policy from “interest and dividends” to a

percentage of a rolling average of market value.

3. Enhance the reporting requirements.

4. Preserve the prudent investor rule for the board in statute.

5. Exclude the trust from the “subscription to stock” prohibition.

6. Require an annual audit under the appropriate authority and standards.

7. Take steps to require that assets be held by an independent third party custodian.

Greater detail about each of these recommendations follows in this section and in APPENDIX I:

Analysis of Governing Structures.

CHARACTERISTICS OF AN IDEAL GOVERNING STRUCTURE

The Task Force created a list of the characteristics of an ideal governing structure for the

permanent State School Fund. The list of those fifteen characteristics is below.

1. Independent of politics

2. Independent of lobbying

3. Independent of all state budget pressures

4. Responsive to current beneficiary input while balancing current and future beneficiary

needs

5. Transparent and accountable



25

6. Aiming to provide consistent and stable distributions with periodic study of inter-

generational balance on the land and fund components of the trust

7. Managed under an investment policy statement (IPS) which allows a broad array of

investments, both active and passive, with appropriate risk parameters in place, and in

view of a long time horizon

8. Clear on short and long term goals and objectives in the governing documents9. Coordination between land managers, fund managers, and beneficiary representative

on efficient fund transfers to seek optimal risk adjusted returns

10. Trust fund managers invest in consideration of risk exposures from land assets

11. Investment managers are prudent regarding costs as they hire and monitor managers,

produce investment reports net of fees, and perform other functions

12. Using consultants regularly to review asset allocation, spending, best practices, and

other reviews

13. Annual external audit by qualified firm in addition to State Auditor reviews

14. Using an external custodian of funds

15. Consistency of philosophy and process over time

BEST GOVERNANCE STRUCTURE RANKINGS

The Task Force created a basic description of seven different possible governing models, and

created a pros and cons list for each one. (See APPENDIX I: Analysis of Governing Structures).

Kent Misener created a single page memo detailing the pension fund best practice of

separating authority over funds into three levels: governance, managing, and operating. (See

APPENDIX H: Pension Fund Best Practices).

The seven options considered were for the investment management of the fund:

1. SITLA Board: Many states still have their permanent funds managed by the same land

board which manages the lands. Utah did this until 1981.

2. State School Board: This model is based on Texas, where the State Board of Education

has governing authority over another board, which invests the land grant trust fund.

3. Political Board: The Governor, Treasurer, Attorney General, and other elected and

appointed figures in some states comprise a board responsible for the investment of the

fund. Some states do this.4. State Treasurer (Status Quo): Under this model, no changes would be recommended.

5. State Treasurer (with Reforms): This model would leave sole fiduciary authority with

the elected State Treasurer, while enhancing statutory reporting requirements to the

IAC, the legislature, and the Utah State Board of Education, as well as requiring formal

IAC votes on recommendations made to the Treasurer.



26

6. Investment Board with State Treasurer: This model would place certain fiduciary duties

of governance authority with a board of investment professionals, while maintaining the

other fiduciary duties of management and operations responsibility with the State

Treasurer’s Office.

7.

Independent Board over Independent Office: This model would place governanceauthority with a board of investment professionals, and place management

responsibility with a chief investment officer (CIO) hired and fired by the board. The CIO

would oversee a small office with operations responsibility.

Each Task Force member ranked his or her top three preferred governance structures as shown

in Figure 9.

Figure 9: Task Force Members’ Rankings of Governance Structures

Task Force Member 1st Place Vote 2nd Place Vote 3rd Place Vote

Sterling Jenson 7 6 5

Kent Misener 6 7 5

David Damschen* 5 4 6

Rich Cunningham 7 6 5

Elizabeth Tashjian 7 6 5

Jennifer Johnson 7 1 3

David Hemingway* 6 1 5

* Members included in Minority Report

Six of the seven task force members recommended creating a board of investment

professionals with governance authority as their first choice (options 6 and 7) with four favoring

a fully independent board as their first choice and two favoring a board with governance

authority, but leaving management with the State Treasurer’s Office.

As mentioned in the note in APPENDIX I: Analysis of Governing Structures, OPTION 6: BOARD

OF INVESTMENT PROFESSIONALS WITH STATE TREASURER’S OFFICE, there was a legal question

raised about option 6 that went unanswered. Some task force members believed this might

have affected the ranking. The possibility was discussed in the last meeting of the task force. In



27

that last meeting an attendee asked the question about whether anyone would change his or

her ranking. Not one member changed. Though task force member David Hemingway was

absent, he had already ranked option 6 as his first choice.

Task force member David Damschen presented a “minority report” voicing concerns about theaffect of the legal question upon the validity of the ranking process and invited task force

members to add their names to the report if they concurred. Task force member David

Hemingway added his name. This “minority report” in contained in APPENDIX G: Minority

Report.

Aggregating the votes,5 the Task Force’s combined ranking of most preferable alternatives is

1. Independent Board over independent office (14 points and four of the seven Task

Force members ranking this as his or her first choice)

2. Investment Board with the State Treasurer (13 points with two of the seven Task Force

members ranking this as his first choice)

3. State Treasurer (with reforms) (8 points and only one Task Force member ranking this

as his first choice)

FUND DISTRIBUTION POLICY

Characteristics of an Ideal Distribution Policy

The Task Force created this list describing characteristics of an ideal distribution policy.

1. Reasonable predictability in distributions

2. Intergenerational Equity

3. The policy does not provide incentives to bias portfolio structure to anything other than

total return net of costs within appropriate risk parameters

4. Protection of purchasing power

5. Independent of political pressures

6. Independent of budget pressures7. Informed by demographics, economic conditions, market factors, projected SITLA

contributions

8. Appropriate for and responsive to differing economic and market conditions

5A first place voted counted as 3 points, a second place vote as 2 points, and a third place vote as 1 point.



28

Analysis of Current Distribution Policy

The Task Force provided some analysis of the current distribution policy as shown in Figure 10.

Figure 10: Current Distribution Policy (All Interest and Dividends)

PROS CONS

Independent of budget pressures and political

swings

Inadequately addresses intergenerational

equity

Doesn’t force the sale of assets in a negative

environment

Spending policy could dictate portfolio

allocation6

Dividends and interest are incremental cash

returns

Growth in income streams does not

necessarily match growth in principal valuesSteady growth in income is preferred by

beneficiaries

Macroeconomic changes create uncertain

cash flow streams for beneficiaries

No discretion to address current investment

environment as it affects the distribution

Recommendations Regarding Distribution Policy

The Task Force unanimously recommends that the distribution policy be studied further,

towards a possible change to an adjustable percentage of a multi-year rolling market value

average, similar to the common endowment practice.

The Task Force unanimously recommends that the study carefully balance what portions of

the distribution policy should be in the Utah Constitution, statute, and/or policy, to mitigate

the risks of the fund being depleted under challenging conditions, while allowing flexibility

through time.

6 Could incentivize investments in income securities to raise distributions (biases for value stocks and lower rated

fixed income securities or in the extreme, value-trap stocks and junk bonds or low liquidity alternative

investments)



29

REPORTING REQUIREMENTS

The Task Force considered recommendations for reporting requirements. These

recommendations were organized in the following categories: Why, To Whom, What, and

When.

Why report

Oversight and performance evaluation

Transparency

Policy making

Planning purposes

Reporting to whom?

Investment Board

Beneficiaries (State Board, School Children’s Trust, school community councils)

Legislature (Committees)

Governor’s Office

General public

Reporting what

Different audience would get different reports

Efficient Information targeted to appropriate audiences

GIPS Standards

Policy compliance Performance reports relative to appropriate benchmarks

Risk reports (draw down, retracement, etc.)

Absolute return measurements relative to appropriate peers

Transactions and cash flow history (contributions, commitments, and distributions)

Estimated distributions

Separated by trust

Asset valuation methodologies

Reporting when Quarterly to board

Annually to Governor’s Office, Legislative Committee(s), school community councils

Monthly electronic statements

Ad hoc upon request

Event-driven requirements at certain thresholds



30

RISK TOLERANCE AND APPROPRIATE ASSETS

The Task Force shared the following ideas about the appropriate asset classes and risk

tolerance for the Fund

Status quo allows prudent investments except for potential legal issues with

“subscription to stock” (private equity)

Current holdings include equities, bonds, cash, real estate

Rapid innovation in financial market products and strategies makes forbidding

categories by statute challenging and could unintentionally prohibit appropriate, return-

enhancing, risk-mitigating investments

A thorough risk tolerance assessment should be developed and included in the

investment policy statement, taking into consideration

o Intergenerational equityo Current predictable distributions

o Long term nature of the fund

The Task Force recommends unanimously to preserve the prudent investor rule for the board

in statute, and taking steps to exclude the trust from the “subscription to stock”

constitutional prohibition.

AUDITS AND CUSTODY

The Task Force recommends unanimously that an annual audit should be conducted by the

appropriate authority, and should be conducted under generally accepted accounting

standards.

The Task Force recommends unanimously that steps should be taken to require assets to be

held by an independent third party custodian.



31

APPENDIX A: State Board Resolution Creating the Task Force



32

APPENDIX B: Trust Law

The beneficiaries are entitled to the benefit of the trust arrangement. Because beneficiaries

depend upon the trustee to act in their interest, certain protections are in place in the law with

the intent to ensure that the benefit of a trust is, in fact, flowing to the beneficiaries. A trust

beneficiary has both legal rights against the trustee and equitable rights in the property itself.

Beneficiary rights include:

1. Right to inspect records, documents, and securities and the right to receive accountings

2. Right to skill and prudence in trustee administration of the land and funds

3. Right to receive undivided loyalty in the execution of the trust

4. Right to have the trustees defend the trust against attack

5. Right to not have the various trusts commingled

There are numerous other trustee duties, such as the duty of the trustee to make the property

productive, to review investments, to not commingle investments of the trust with other

entities, to make payments to the beneficiary, to allocate income, and to retain trust

documents.

The beneficiary has the right to hold the trustee accountable for any wrongful acts or omissions

that affect the beneficiaries’ interests. In the case of the school trust lands, however, the

beneficiary’s ability to recover against SITLA, the State Treasurer, or the State of Utah,

ultimately, is severely limited. Statutes of limitation, governmental immunity, and fundingshortages all might act to constrain such remedies. It is therefore of great importance for

beneficiary representatives to proactively seek to prevent injury to the trust.

If the trustee is preparing to commit a breach of trust, the beneficiary need not sit idly by and

wait until damage has been done. He or she may sue in a court of equity for an injunction

against the wrongful act. Beneficiaries can seek such a remedy to prevent a trustee from acting

in violation of their duties, such as preventing the trustee from selling trust property for an

improper purpose, under improper conditions, or for an unreasonably low price. With the

School Children’s Trust, beneficiary representation and involvement has been responsible forbringing the neglected trust to light, discovering cases of breach, and creating a system with a

higher degree of proper oversight. The Utah Attorney General’s Office championed the trust in

recent decades, but has needed the cooperation and information provided by the School

Children’s Trust to defend it legally.

Tim Donaldson

Director of The School Children’s Trust Section, Utah State Office of Education



33

APPENDIX C: Detailed Funding Flow Chart

Courtesy of the Utah State Treasurer’s Office



34

APPENDIX D: Idaho Model

Source: Institutional Investor Magazine



35

APPENDIX E: Statute on Delict of Treasurer

67-4-11. Delict of treasurer – Duties of an auditor and governor – Suspension

(1) The state auditor shall notify the governor if the state auditor examines the books of

the state treasurer, and finds that:a. The books do not correspond with the amount of funds on hand;

b. The books do not show the actual condition of the funds;

c. Money belonging to the state has been embezzled, diverted, or in any manner

taken from the treasury without authority of law; or

d. The state treasurer has been guilty of negligence in keeping the books or in

taking care of the public money.

(2) Upon receipt of the notice, the governor shall:

a. Take possession of all books, money, papers, and other property belonging to

the state in the possession of the state treasurer; andb. Temporarily suspend the state treasurer from office.

(3) a. The state auditor shall:

i. Examine the books, papers, and all matters connected with the office of

the suspended state treasurer; and

ii. Notify the governor of the findings

b. If, based upon the examination, the auditor concludes that the state treasurer

has embezzled or converted to personal use the public money, the governor

shall appoint another person to replace the suspended state treasurer.c. The new state treasurer shall execute an official bond, and enter upon the

office of state treasurer, as provided by law.

d. The governor shall report all of the acts done under this section to the

Legislature.

(4) The new state treasurer shall hold office until the suspended state treasurer is

restored or until successor is elected and qualified.

Amended by Chapter 342, 2011 General Session

Source: Utah Legislative Code



36

APPENDIX F: Correspondence Regarding Sole Fiduciary Risks

The following is a string of email correspondence. The first message is from Tim Donaldson to

Jeff Cardon regarding statements made at an Investment Advisory Committee meeting in which

Jeff Cardon had asked a question about examples where sole fiduciary risks were an issuecausing harm. Members of the Investment Advisory Committee were copied as they had been

invitees to that meeting.

The second is a response from Utah Treasurer Richard Ellis questioning the examples provided.

The third is a response from Tim Donaldson seeking to clarify areas of difference and

commonalities between the State Treasurer’s Office and The School Children’s Trust Section at

The Utah State Office of Education.

1- From Tim Donaldson to Jeff Cardon, CFA, chair of the Investment Advisory Committee,

May 21, 2013 (Emphasis of highlights retained from the original)

Hi Jeff,

The question was asked at yesterday’s Investment Advisory Committee meeting- could we

could provide some examples of situations where a sole fiduciary in the public realm, over

significant sums of money, had led to serious problems. I have listed 6 examples below.

Let me add- I know this has been phrased as merely a “rogue treasurer” idea, and that is a

significant concern, but I think that is overly reductionist. There are dangers in potentially

having an unqualified Treasurer (an Arizona treasurer once told Margaret and Paula that

she knew only “how to get elected” and “nothing about investing.”) There is danger in

having a “politically sophisticated scheming treasurer” who was making investments that

helped out local governments or local companies. Reporting that to the Governor and

Legislature might not be a real fix if the Governor and Legislature like those investments.

The intent of the Task Force is to look at ways to find the ideal structure that best protects

against all of those risks, while making sure that we continue to have the fund managed asprudently and possibly as possible.

1. Alan Hevesi was the New York State Comptroller, which is the state’s chief fiscal

officer (Treasurer equivalent). He was the sole fiduciary over $125 billion. He

steered $250 million to a California private capital fund, in exchange for over $1

million in campaign donations and illegal gifts made by investment company



37

relatives and friends. He also sought to have California’s CALPERS invest with the

same company.

http://www.nypost.com/p/news/local/jailbird_hevesi_is_free_634YQ0TuxXYmr6

jv2zETbK

2.

Paul J. Silvester was the Connecticut State Treasurer. He was the sole fiduciaryover the $20 billion pension fund. He had an investment advisory committee but

simply ignored their recommendations. He pled guilty to corruption charges. He

admitted that he elicited kickbacks for himself and his friends in exchange for

steering state investment money. At least 5 companies were involved, in

addition to lobbyists, fundraisers, and staffers for the Governor. Jobs were

arranged for Treasurer’s office staf f if he lost an election, which he did.

http://www.nytimes.com/2003/06/21/nyregion/ex-treasurer-says-scheme-

aided-campaign.html

3. Hank Morris was an outside consultant within the office of the New York State

Comptroller. He received $19 million in “pay to play” kickbacks from investment

companies to invest the state pension. He claimed in his defense that he was not

a public employee and that he checked with the US Attorney first and was told

when he was ok. He also defends the performance of the companies he

brokered deals with. He was sentenced to 4 years in prison and was the biggest

conviction resulting from Andrew Cuomo’s probe that resulted in numerous

arrests and settlements. http://www.nydailynews.com/new-york/pension-fund-

scammer-hank-morris-denied-parole-article-1.1024027

4. The Ohio Workers Comp Fund did their own custody arrangements. They

invested $50 million in rare coins. Only $12-13 million of the coins could be

accounted for. Tom Noe was convicted of false accounting and theft, and the

scandal became known as Coingate.

http://en.wikipedia.org/wiki/Coingate_scandal

5. The Florida Board of Administration had approximately $150 billion under

management. A political appointee at a salary of $100,000 a year was in charge.

The person put the local government investment pool in the highest yielding

AAA bonds available, which seemed reasonable. The problem is, they were the

riskiest AAA bonds, and closest to the AA borderline, which is why they paid the

most. Innocent error led to huge losses and a freeze in money available to local

governments when a flight to safety happened in the market. Florida

subsequently fired that employee, tripled the salary for the position, and hired a

qualified manager.

6. “The pay to play scandal forced the New Mexico State Investment Council to

undertake a dramatic overhaul of its investment and governance

http://www.nypost.com/p/news/local/jailbird_hevesi_is_free_634YQ0TuxXYmr6jv2zETbK



http://www.nytimes.com/2003/06/21/nyregion/ex-treasurer-says-scheme-aided-campaign.html



http://www.nydailynews.com/new-york/pension-fund-scammer-hank-morris-denied-parole-article-1.1024027















38

policies…several individuals had been enriched by politically motivated

investments…allegedly in collusion with state investment officer Gary Bland and

certain other ‘politically-connected individuals’…“The main problem that the old

SIC had was a concentration of power, where you had one individual or two

individuals – one of those being the Governor, who appointed the stateinvestment officer – who had the ability to call the shots and had the ability to

push through investments if they wanted to,” NMSIC spokesperson Charles

Wollman told Private Equity International . “…believes received investments in

exchange for political favors, including payments to Marc Correra and other

politically connected individuals,” according to the state’s motion to approve the

settlement. “This is a significant recovery of money for the taxpayers of New

Mexico, and it demonstrates how diligently this Council has worked over the

past two years to bring a measure of accountability following a deeply

disappointing chapter in New Mexico history,” Governor Susana Martinez said in

a statement.

http://www.privateequityinternational.com/Article.aspx?article=71792

Thank you,

Tim Donaldson

School Children’s Trust Specialist

(801) 538-7709

2. From Richard Ellis, May 24, 2013

From: Richard Ellis, Utah State Treasurer

To: Members, Investment Advisory Committee

Jeff Cardon

Dave Cowley

Arnie Combe

Kimo Esplin

Jeff Roylance

Sterling Jenson

Steve Ostler

Cc: Members, State Board of Education School Trust Investment Task Force






39

Jennifer A. Johnson

David Hemingway

Elizabeth Tashjian

Rich Cunningham

David DamschenKent Misener

Cc: Staff, School Trust Investment Task Force

Timothy Donaldson

Eric Hutchings

Re: Response to Tim Donaldson email dated May 21 entitled “Risks of a Sole

Fiduciary”

Date: May 24, 2013

The question has arisen, in the setting of a task force created by the State School Board

(Task Force), whether there is a better investment structure for the state’s school and

institutional trust land funds than that of the Office of the State Treasurer in conjunction

with advice from the Investment Advisory Committee (IAC). It has been suggested that

the Treasurer, as a sole fiduciary, has the opportunity for unchecked misconduct, and

that the IAC, because it is advisory only with no fiduciary responsibility, may not take its

role as seriously as it would if it were a “true” board.

Staff for the Task Force, Tim Donaldson, has provided you an email (the “May 21 email”)

reflecting his position that a sole fiduciary has a causal relationship to illegal and

inappropriate behavior. The Treasurer’s Office response follows.

The May 21 email presents six examples purporting to support the argument against a

sole fiduciary/advisory committee structure. Two of the examples, numbers 1 and 3,

are actually the same example from New York State, number 1 referencing the state

comptroller, and number 3 the outside consultant involved with that comptroller.

Of the remaining four, Connecticut, rather than supporting the argument against a sole

fiduciary/investment advisory committee, is an argument for the success of such a

structure. It was Connecticut’s Investment Advisory Council (Council) that played an

important role in uncovering the misconduct of Silvester, the governor-appointed

treasurer, as referred to here in an excerpt from current treasurer Denise Nappier



40

before a legislative committee in January 2000: “In many respects, they *the Council+

are the heroes of the Paul Silvester scandal. Through their diligence and courage,

Silvester was unmasked and brought to justice. And, notwithstanding the extraordinary

pressures associated with the scandal, they, the Investment Advisory Council, never lost

sight of their fundamental goal and purpose. That is, to protect and grow theConnecticut Retirement Plans and Trust Funds. They are to be commended.”

The other three examples are not examples of pure sole fiduciaries. Ohio involved a

Board of Directors (Ohio Workers Compensation Fund), Florida a Board of

Administration and New Mexico a State Investment Council.

There are limitless examples exposing misconduct by trustees in the care of funds under

their control that do not involve sole fiduciaries.

1. Legislative bodies, or any group of individuals with the power and inclination, can

work in unison toward their individual benefit at the expense of the greater good. The

City Council of Bell, California had the highest salaries in the nation, due to the passage

of a bill to eliminate salary caps. Before being discovered and ousted, the officials,

including the police chief, head DA, and mayor, siphoned about $6.7 million of public

funds.

2. One can always target a single member, or multiple members, of a legislature or a

board, with the result of misconduct. In Detroit, a former mayor and an ex-city

treasurer accepted gifts in an influence-peddling scheme involving pension funds. As an

SEC official said, “You’ve got a *pension+ board that was making a decision of $100-

million-plus, while at least two of the members were potentially influenced by things

like Vegas trips, a Prince concert and massages.”

These examples, those from the May 21 email and the additional ones above, reflect a

legitimate concern with the opportunity for misconduct in the management of public

dollars. Where we disagree with the May 21 email is that we believe misconduct can

occur regardless of the governing structure, not because of it.

No structure contains the magic bullet protecting against misconduct.7

7 Also referenced in Tuesday’s IAC meeting was the fact that there have been raids in Utah of school and

institutional trust funds in the past. This activity occurred prior to the State Treasurer’s management of those

funds, and were unrelated to investment. At the time of the misconduct, the funds were being managed by the

Division of State Lands and Forestry, and the incidents in question involved selling trust lands at below market



41

The issue is not structure, it is the controls in place to protect against abuse. And the

best control against misconduct is transparency . Connecticut learned that lesson from

its “Corrupticut” scandal noted in paragraph 2 of the May 21 email. Connecticut’s

response has been the creation of “Open Connecticut,” a published collection of datafrom state agencies regarding state tax revenue, borrowing, financial projections and

spending.

That is why the Utah Treasurer’s Office is proposing amendments to the IAC statute that

would require more reporting from the Treasurer to the IAC, and from the IAC to the

governor, the legislature, the beneficiaries, and the general public.

We agree with the State Board of Education that improvements can and should be

made to bolster the current structure. Rather than promoting a disruptive and

expensive change in structure, however, the effect of which is unknown against a

history in Utah of a successful and impeccably honest treasurer’s office, we should be

talking about improving transparency so that any hypothetical “rogue treasurer,”

“unqualified treasurer,” or “politically sophisticated scheming treasurer” would be

exposed.

It is through greater government transparency and accountability, the bedrocks of

democracy, that misconduct will be thwarted.

3. From Tim Donaldson to Utah State Treasurer Richard Ellis, May 24, 2013

Richard, May

24, 2013

Thank you for your perspective and feedback to me, the IAC, and the Task Force. In my

six years of working with you and the IAC I have learned a lot and I appreciate your

work. The Task Force, Investment Advisory Committee, and interested legislators should

know the points whereon we agree and disagree, so as to focus the discussion goingforward.

values or use of the fund by the governor or legislature to plug budget holes. Since taking back his rightful role as

investor of the funds, the State Treasurer has protected the fund assets on more than one occasion from pressure

to make investments that were a violation of his fiduciary duty.



42

I agree with the State Treasurer’s Office more than you seem to realize. We agree that:

1. There is “legitimate concern with the opportunity for misconduct in the

management of public dollars.”

2. “Misconduct can occur regardless of the governing structure…”

3.

“No structure contains the magic bullet protecting against misconduct.”4. “The State Treasurer has protected the fund assets on more than one

occasion from pressure to make investments that were a violation of his

fiduciary duty.”

5. “Improvements can and should be made…”

This is all true. As I have said and will continue to say, you and your predecessor Mr.

Alter have been excellent public servants of high integrity and should be honored and

commended for that. For 32 years, the school trust fund has been in good hands.

I respectfully disagree on the following points.

1. The example from Connecticut highlights, for me, the safety function of an

Investment Advisory Committee. But, should a similar problem arise in Utah

in 2017 or 2047, rather than hope for IAC members to be involved enough to

uncover misconduct, and over a lengthy time period exhibit diligence and

courage to unmask the extent of the abuses, withstand extraordinary

pressure to stop, and never lose sight of their goal, hoping that huge sums of

schoolchildren’s money is not forever lost in the meantime…I would prefer

that the person making the investments have to answer their board’s

questions satisfactorily and be immediately fired if they couldn’t. I would

think the advisory council members in Connecticut wished they had firing

authority as that unfolded.

2. Those who tried to clean up and mitigate the damage done in New Mexico

indicated repeatedly that the crux of the problem was too much power

concentrated in the hands of one or two people, and that subsequent

reforms were made specifically to reduce the risks of concentrated power.

3. Your footnote states “Since taking back his rightful role as investor of the

funds…” The Treasurer’s Office was assigned the responsibility to invest the

land trust funds, by statute, in 1981. You can on ly “take back” something

which you originally had. The Treasurer’s Office did not invest these funds

before 1981. The courts have said the Constitutional purview of your office is

what it was at statehood, and your argument seems to be that “it should

have included this at statehood.” It didn’t, and the courts will likely focus on

that fact.



43

4. You apparently disagree with the idea that “the IAC, because it is advisory

only with no fiduciary responsibility, may not take its role as seriously as it

would if it were a “true” board.” The IAC members do take their

responsibility seriously- limited as it is. But several members of the Task

Force and several members of the Investment Advisory Committee (currentand past), have provided the perspective that they find that where

council/committee/board members lack significant responsibility or

opportunity to contribute, their value-add is limited and they don’t worry too

much about it. It is worth noting that a lack of a quorum present to conduct

business has been a growing problem in recent years for the IAC. We are very

thankful for the service of those who have sat or do sit on the IAC- it would

be my hope that any reforms which are made would strengthen those who

sit on a committee/council/board to be able to make even more of a

contribution.

5. You state that Option #6 (a board of investment professionals) would be “a

disruptive and expensive change in structure.” I do not believe changes need

to be disruptive nor expensive. Idaho has a professional board, governing a

staff of 4, and that office costs approximately $700,000 a year, which is self-

funded through the investments by legislative appropriation. I believe their

total costs are about 37 basis points where ours are 24 basis points- and

Idaho seems to be consistently, over time, performing 1-2% per year better

than we are in Utah. I would welcome correction of these facts if my

understanding is incorrect. In terms of disruption, for my two cents worth- I

wouldn’t want to see any sudden nor dramatic shifts in asset allocation or

anything like that- and I would support a structure which made the State

Treasurer a board member by statute (just like URS).

6. Finally, you conclude by saying “we should be talking about improving

transparency so that any hypothetical “rogue treasurer,” “unqualified

treasurer,” or “politically sophisticated scheming treasurer” would be

exposed…It is through greater government transparency and accountability,

the bedrocks of democracy, that misconduct will be thwarted.” I agree that

improved transparency and accountability are good things. However, I do not

think that requiring reports and notice to certain entities so that one might

be “exposed” is enough. If we expose, six months into his or her term, that a

new Treasurer is unqualified- what is the solution? I would want something

more than to hope that three and a half years later a different one is elected.

I think as a matter of trust law the beneficiaries are entitled to more than

that, and as a matter of policy in a state that has such challenges in funding



44

education we all should demand that this system which flows over with

enormous potential- be structured better than that. If we expose that a

treasurer is buying bonds in a Utah municipality at favorable rates, or making

investments in Utah companies in Senator So and So’s district to create jobs,

what is the solution? These are just a few “known unknowns.” I am remindedof the wisdom of the Founding Fathers in designing a system that did not

leave too much power isolated in any one person or even one branch of

government. They did not and could not have foreseen what perils would

come over the centuries, but they knew history, they knew where others had

gone wrong. They realized with soberness that they weren’t “hypotheticals”-

I would add that most states have no land trust funds left, so these aren’t far-

fetched worries. The Founding Fathers sought to build a system that

provided checks and balances by dispersing powers broadly. As one Task

Force member said in one Task Force meeting, “It is good to have a king if

you could always have righteous kings…” I do not want to bet the future of

the schoolchildren’s trust on that.

Ultimately, the question is not whether any structure eliminates all risks; it is whether

there is a better structure which can reduce the risks and consistently provide for the

most prudent and profitable investment of billions of dollars. I don’t believe that

investment management for these trusts properly involves political questions. As such,

it probably should not be left in the political arena as a matter to be decided through

political campaigns. In short, it doesn’t make sense to me to elect a single fiduciary over

billions of school dollars and rely on the political system for the incentives, retention,

compensation, removal, and so on.

Hopefully this helps. Respectfully and gratefully,

Tim Donaldson



45

APPENDIX G: Minority Report to Utah State Board of Education School

Trust Investment Task Force

The parties whose signatures are appended below wish to present this minority report inresponse to the report provided by the Chair to the State Board of Education School Trust

Investment Task Force. The reason for this minority report is as follows8:

Confusion as to Legal Issues has Inappropriately Influenced the Recommendations

At the beginning of the Task Force proceedings, the chair, Jennifer Johnson, directed that the

work of the Task Force would not be inhibited by legal considerations, but would focus on the

ideal structure for the investment of the school land trust funds. Discussions proceeded in that

fashion until the presentation of Option 6, the option for which there would be a sharing of

investment authority between an independent board and the state treasurer. At that time, at

the introduction of staff member Tim Donaldson, and with the assent of the chair, the legal

viability of Option 6 was questioned.

Mr. Donaldson suggested that it was appropriate to consider the legal merits of Option 6 and

not Option 7, because any legal problems with Option 7 could be corrected either statutorily or

constitutionally; the legal problem with Option 6, according to Mr. Donaldson, was

“insurmountable.”9

Thus, there was never a discussion of the legal impediments to

implementation of Option 7, per Ms. Johnson’s directions, while there was discussion of the

legal impediments to the implementation of Option 6, to such an extent that the “pros andcons” to Option 6 were not drafted until the last meeting of the Task Force (wherein a finalizing

review of the report was conducted), and after the vote on the preferred models had already

been taken.

8For the purposes of this minority report, reference is made exclusively to Options 6 and 7, the two top options in

terms of points scores (13 points to 14 points). Option 6 contemplates an independent board structure working in

conjunction with the State Treasurer’s Office. Option 7 contemplates an independent board overseeing an

independent office.9 The chair requested a legal opinion from the Attorney General’s Office, which opinion was not available prior to

the final vote. In a draft report, staff indicated that additional attorneys had the same concerns as Mr. Donaldson

as to the insurmountability of legal impediments to Option 6, and named those concerned as Betsy Ross of the

Treasurer’s Office, and Kristina Kindl of the Attorney General’s Office. Both Ms. Ross and Ms. Kindl asked to have

their names removed as supporting Mr. Donaldson’s position. Attached to this minority report is the email

correspondence between Ms. Ross and Ms. Kindl to address any concerns that there was inappropriate

communication.



46

In fact, there has been presented to the Task Force no legal opinion, nor is there informal

agreement, that Option 7 is any different in terms of legal issues than Option 6. Each would

potentially pose an incursion into the constitutional duties of the state treasurer, resulting in

the possible necessity either for a court decision or constitutional amendment. Given that there

are legal impediments to each Option, the fact that Option 6 was singled out as the one optionwith legal problems may have affected the vote of some Task Force members. As a result, the

recommendations are flawed.

Recommendation

We recommend that both Option 6 and Option 7 be considered the top options of the Task

Force, and that, due to inaccurate legal representations that potentially affected the vote of

Task Force members, any differentiation in terms of preference between the two options benullified. We suggest that the report be amended to present as the recommendation of the

Task Force these top two choices, with an explanation that no preference for one over the

other can be inferred due to the issues presented above. Emphasis should be placed on the fact

that there was agreement on the preference for a structure that included, in some fashion, an

independent board.

Respectfully submitted this 19th day of July, 2013 by:

David Damschen

David Hemingway



47

Attachment to

Minority Report toUtah State Board of Education School Trust Investment Task Force

Email Communications, Ms. Ross and Ms. Kindl

Below in their entirety are the email communications between Ms. Ross and Ms. Kindl as

referenced within the Minority Report:

Kristina Kindl <[email protected]> Jul 17 (2 days ago)

to Betsy [Ross], Brian [Farr], Thom [Burr], me, RICHARD [Ellis], Allen, Jenny [Johnson], David

Jennifer:

Betsy Ross and I just had a conversation about the investment task force, and its report.

Initially, let me clarify that I have not received a copy of the report. However, Betsy indicatedthat somewhere in the report it states: "Kristina [Kindle] [sic] and Tim [Donaldson] voiced

concerns that there may be insurmountable legal hurdles regarding a structure that tried to

merge responsibility with both an elected official and a board." That is not an accurate

reflection of my concern; I believe that in relation to this issue the legal hurdles are significant

insofar as obtaining a constitutional amendment would be a significant legal hurdle. However,

"significant" is not synonymous with "insurmountable." Accordingly, I am requesting that my

name stricken from that statement; this is especially important because I understand that

statement, and my opinion, was relied upon in voting for or against certain options.

Also please clarify for any individuals that I am not legal counsel for the task force; rather David

Jones is the designated AAG to the task force.

Sincerely,

Kristina L. Kindl

Assistant Attorney General Education DivisionHeber Wells Building160 East 300 South, 5th

Floor P.O. Box 140853

Salt Lake City, Utah 84114-0853 tel: (801) 366-0279fax: (801) 366-0242

Confidentiality Notice: This email may contain attorney work product, attorney client privileged

communications, and/or confidential information which may be protected under the

Individuals with Disabilities Education Act, the Family Education Rights and Privacy Act, and/orthe Goverment Records Access Management Act. The contents of the email are intended only

for the sole use of the intended recipient. If you are not the intended recipient of this email, or

the employee or agent responsible for delivering this to the intended recipient, you are hereby

notified that any unauthorized review, use, distribution, disclosure, dissemination or copying of

this email is strictly prohibited. If you have received this email in error, please notify me at (801)



48

366-0279 or by reply email, and then please delete and destroy all copies of this message.

Please contact me if you have any questions. Thank you.

On Wed, Jul 17, 2013 at 9:29 AM, Betsy Ross <[email protected]> wrote: Kristina,

I left you a phone message, but thought I should give you a preview of what I wanted to discuss.

The quote from the final report will read something like: "Analysis including the pros and cons

of this option was going to be done by the Task Force following the receipt of legal advice from

the Attorney General's office, the official legal counsel to the Task Force. The reason for this

caution as recorded in the minutes from that meeting was that "Kristina [Kindle] [sic] and Tim

[Donaldson] voiced concerns that there may be insurmountable legal hurdles regarding a

structure that tried to merge responsibility with both an elected official and a board." This legal

advice is not available at the time of the writing of this report."

I do not agree that the issues are "insurmountable," and wonder if you really do, as reflected in

the report. Here are my thoughts:

1. If the constitution is interpreted to exclude the custody of these funds from the Treasurer's

constitutional duties (as Tim argues), there would be no issue with the legislature adding the

investment responsibility to the Treasurer with the oversight of a board; or

2. If the constitution is interpreted to include the custody of these funds within the Treasurer's

constitutional duties, the constitution could be amended to make the office of the Treasurer

appointed, not elected, to address Tim's concern with the Hansen v. Utah State Retirement Bd.

case.

I am not suggesting either of these solutions necessarily. I present them only to show that

presentation of the legal issues surrounding the option of shared investment responsibility with

the Treasurer and an independent board as "insurmountable," is misleading.

Looking forward to chatting with you.

Betsy



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APPENDIX H: Pension Fund Best Practices

Dear Task Force Members,

While I do not know how helpful the best practices in Pension fund governance structure are to

a political trust environment, there are some similarities and I share these concepts in case they

may prove useful. These concepts are probably articulated best by Keith Ambachtsheer. His

group looked at performance data, and are not just theorizing, and although the data is a bit

noisy, it does validate some issues and the conclusions seem to make intuitive sense. Below is a

brief synopsis of some of the more pertinent issues they isolated.

Within best practices of pension governance there are general speaking three sectors of

governance responsibilities. They are:

1. Governing fiduciary: This is a group of individuals whose responsibilities are viewed

from the macro level of the plan. They are primarily responsible for the broad policy

issues. Included in these would be issues like goals of the plan; capital markets beliefs;

spending and contribution issues and policies; liquidity guidelines; and asset allocation

policy.

2. Managing fiduciary: This is an individual or team that takes the guidelines and policies

from the governing fiduciaries, and develops and executes a plan of implementation for

the fund. These would relate to issues like tactical asset allocation process if allowed;credit tilts and other biases that may be built into individual asset classes; and manager

selection. Also a reporting structure is developed to assess whether the goals of the

plan are being met, and policies are within compliance. They also develop a process and

reports to assure the operating fiduciaries are performing as expected.

3. Operating fiduciary: These groups are the ones that actually buy the assets. They are

typically the individual managers hired by the managing fiduciaries. These are typically

external managers, however there are times when operating fiduciaries are also part of

the managing fiduciary group. (Internal asset management)

This proved to be the best governance structure for pension plans, however there was a key

element that is critical to the success of the plan. While the reporting nature of the different

levels can appear to be something similar to a policing structure, this should not be the primary

purpose. The best functioning governance structures were those with a strong trust and team



50

work orientation between the various fiduciaries. To function otherwise leads to damaging

influences on behavior and a significant reduction in results.

While there are a lot more details to the summary listed above, and these studies were

specifically directed towards pension governance, there may be enough similarities to be of some use in our discussions.

It is a pleasure to serve with you all.

Thanks,

Kent



51

APPENDIX I: Analysis of Governing Structures

OPTION 1: SITLA BOARD

PROS CONS

Coordination with all trust assets Different expertise required for board

members managing land than for those

managing investments

Blurred mandate of diverse operations

without synergies

Lack of staff expertise/ different skills needed

for investment

Potential conflicts of interest

Lacks a separation of powers

States similar to this model: North Dakota, Oklahoma, California

OPTION 2: POLITICAL BOARD

PROS CONS

Increased awareness from key policy makers Controlled by politics

Short term motivations and incentives

Lack of expertise

Blurred fiduciary mandate

States similar to this model: Idaho (technically, their Investment Board is under their Land

Board, which itself consists of statewide elected officials)



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OPTION 3: STATE BOARD OF EDUCATION

PROS CONS

Knowledge of needs Lack of investment and trust knowledge

Commitment to students Short term motivations and incentives could

undermine intergenerational equity

Lack of independent trustee- separation of

powers is lost

Board members are elected on political

considerations

Frequent turnover- lack of consistency of process and policy

States similar to this model: Texas

OPTION 4: STATE TREASURER (STATUS QUO)

PROS CONS

POLITICAL Election every 4 years can provide

accountability

Political risk: who gets elected in a process

largely ignored by most voters?

Hire and fire authority is with voters and

Senate impeachment process

Treasurer is sole fiduciary; may lack financial

acumen and expertise

Risk of political pressure on Treasurer

regarding investment choices

ROLE OF INVESTMENT ADVISORY COMMITTEE

Investment Advisory Committee- well-

qualified members who can raise concerns if

needed

IAC ultimately is advisory only and lacks

enforcement capacity

Institutional memory within current State

Treasurer’s Office and IAC

Structure does not allow shared responsibility

for IAC members



53

SUSPENSION/FIRING MECHANISM

There is a process for Auditor and Governor to

suspend Treasurer

High hurdle for suspension process

(“negligence” & political necessity) which

doesn’t account for some violations of

prudent investor standard and does notnecessarily provide expert management of the

funds during the suspension period

GOVERNMENT COST FOCUS

Reduced costs Treasurer compensation limitations- might

prevent attracting and retaining adequate

talent

Budget constraints of government might

inhibit best practices

OTHER

Independence- Clear separation of powers

between Treasurer’s Office and SITLA,

beneficiaries, Legislature, other government

entities

Stability of investment process and philosophy

through time could be compromised

States similar to this model: Arizona, Colorado, Nevada, Alaska

OPTION 5: STATE TREASURER (WITH REFORMS)

Explanation of Possible Reforms: Enhance the Investment Advisory Committee to receive

reports from the State Treasurer and to provide reports to other entities. Ultimate investment

authority remains with the elected State Treasurer.

1) Require audited reports from Treasurer to IAC on actions related to:

a) Investment policy statement,

b) The selection of investments in new mandates,

c) Re-balancing transactions in excess of pre-defined limits,

d) Deviations from target asset allocations which exceed the State Treasurer’s pre-defined

limits,e) Custody reports.

2) Require the IAC input to be reported to the State Board, beneficiaries, and executive branch

officials regarding trust investments, including guidelines on specific actions that should be

reported to the legislature and other parties (ad hoc as they occur) if/as they are.



54

3) Require Investment Advisory Committee to vote on significant actions and record the

recommendations.

PROS CONS

POLITICAL

Election every 4 years can provide

accountability

Political Risk: who gets elected in a process

largely ignored by most voters?

Hire and fire authority is with voters and

Senate impeachment process

Treasurer is sole fiduciary; may lack financial

acumen and expertise

Risk of political pressure on Treasurer

regarding investment choices

ROLE OF INVESTMENT ADVISORY COMMITTEE

Investment Advisory Committee- well-

qualified members who can raise concerns if

needed

IAC ultimately is advisory only and lacks

enforcement capacity and decision-making

authority. The governing fiduciary is the same

as the managing fiduciary (e.g.- the IPS

currently is voted upon by the IAC, but

ultimately is set by the same entity that does

the investing)

Institutional memory within current State

Treasurer’s Office and IAC

Structure does not allow shared governance

responsibility for IAC members

Enhanced Treasurer reporting requirements to

IAC

IAC Input required to be reported to

Legislature and Beneficiaries

IAC advice votes are recorded

SUSPENSION/FIRING MECHANISM

There is a process for Auditor and Governor to

suspend Treasurer

High hurdle for suspension process

(“negligence” & political necessity) whichdoesn’t account for some violations of

prudent investor standard and does not

necessarily provide expert management of the

funds during the suspension period, Utah

Code for suspension has legal uncertainties



55

GOVERNMENT COST FOCUS

Reduced costs- synergies and resource

efficiencies in place, Office is data magnet,

Treasurer on URS Board

Treasurer compensation limitations- might

prevent attracting and retaining adequate

talent

Budget constraints of government mightinhibit best practices

OTHER


between Treasurer’s Office and SITLA,

beneficiaries, and other government entities

Managing the trust funds is one of many

duties for the Treasurer’s Office; divided focus

Stability of investment process and philosophy

through time could be compromised

States similar to this model: Arizona, Colorado, Nevada, Alaska

OPTION 6: BOARD OF INVESTMENT PROFESSIONALS WITH STATE TREASURER’S

OFFICE

Explanation of Possible Reforms: Enhance the Investment Advisory Committee to become a

formal governing fiduciary board. The board receives reports from the State Treasurer and is to

provide reports to other entities. Ultimate investment authority is shared with the elected State

Treasurer.

1) Independent Board has governing fiduciary responsibilities such as:

a. Investment Policy Statement

b. Asset allocation ranges

c. Eligible asset classes

d. Risk management framework

e. Spending policy

f. Liquidity policy

g. Reporting requirements to ensure goals are being met

h. Budget/staff levels

2) State Treasurer’s office retains the managing fiduciary responsibilities such as:

a. Manager selection

b. Tactical asset management within policy ranges

c. Rebalancing of asset allocation

d. Risk management

e. Liquidity management



56

PROS CONS

Separates governing fiduciary from managing

fiduciary

Lack of explicit mechanism for enforcement-

possible turf battles

Likely less expensive to beneficiaries than an

independent office

Possible compensation limitations

Creates fiduciary responsibilities for an

independent board

Governing fiduciary lacks the ability to remove

Treasurer

Helps with consistency of investment

philosophy through election cycles

Accountability to an audience (the Board) that

has expertise and some power to effect

change

Analysis including the pros and cons of this option was performed in a less detailed manner by

the Task Force at its last meeting. The Task Force had been awaiting receipt of legal advice fromthe Attorney General’s Office, the official legal counsel to the Task Force. The reason for this

caution as recorded in the minutes from an earlier meeting was that: “Tim [Donaldson] voiced

concerns that there may be insurmountable legal hurdles regarding a structure that tried to

merge responsibility with both an elected official and a board.” Formal legal advice was not

available at the time of the writing of this report.

OPTION 7: BOARD OF INVESTMENT PROFESSIONALS OVER INDEPENDENT OFFICE

Explanation of Possible Reforms:

1. A board, comprised of qualified investment professionals, would be established to oversee

a small office of “at will” employees, charged with investment of the Fund. Board members

would be unpaid but receive per diem allowances.

2. A careful selection and removal process for board members would be created by statute,

with

Board members appointed by the Governor from a qualified list submitted by

beneficiary groups

Senate confirmation required

The State Treasurer is automatically a member of the Board

3. Board members would receive training in their legal responsibilities

4. Board members would be protected from personal liability through governmental immunity

and a limited scope of responsibility (see #5)

5. Board has a specified, narrow area of power atop the structure, including responsibility to



57

hire and fire the Director/CIO

establish and periodically update the investment policy statement: including asset

allocation, liquidity, return objectives, risk tolerance, contributions

establish a prudent focus on costs vs. benefits

set distribution policy

establish and periodically review compensation for the Director/CIO set governance policies

review audits and consultant reports

set budget for the office, which is appropriated from the funds

6. A Director/CIO oversees staff and participates in board meetings

7. Transparency, accountability, and reporting are required

At least quarterly board meeting

Annual reporting to State Board and Legislature

Public report required online

8. There is a clear division of responsibilities between the board and the staff

Staff hires/manages/monitors/fires outside managers

Processes prohibit board members from micromanaging

PROS CONS

Board of experienced professionals withoversight authority Increased costs to beneficiaries

Diffusion of political influence Consistency of philosophy and practice over

time could be compromised through frequent

hiring/firing of the Director/CIO

Ability to hire professional Chief Investment

Officer (CIO)

Potential disruptions of transition

Multiple fiduciaries

CIO and Staff exclusively devoted to investing

these funds

Ability to Fire CIO for underperformance,

misconduct, etc.

Allows for performance incentives


between Investment Board and SITLA,

beneficiaries, and other government entities



Director/CIO Required to report to Board

Board required to report to Legislature and

beneficiaries

Governing fiduciary is separate from the

managing fiduciary

States similar to this model: New Mexico, Idaho, South Dakota, Nebraska, Minnesota,

Washington, Montana, Oregon, Wyoming.

Documents

Report and Recommendations SUBMITTED