New ND oil trust fund starts with meager earnings
BISMARCK, N.D. (AP) — North Dakota's new state oil tax trust fund will have scanty earnings while an advisory board controlled by state lawmakers decides how the money should be invested.
The board's chairman, state Sen. Randy Christmann, R-Hazen, said he's reluctant to put much of the revenue into the stock market, even though similar funds in other energy-producing states have significant investments in stocks.
"I think stocks would be pretty limited," Christmann said. "Preserving that principal is the priority."
North Dakota voters last year approved a state constitutional amendment to create the new "Legacy Fund," which will get regular deposits equaling 30 percent of North Dakota's oil tax collections.
The first $34.3 million infusion was deposited in the state-owned Bank of North Dakota last week. It will earn less than 1 percent interest there, said Eric Hardmeyer, the bank's president and a member of the advisory board.
The amendment bars the Legislature from spending any of the fund's principal or earnings until July 1, 2017.
Afterward, lawmakers may spend money from the fund only with two-thirds approval of the North Dakota House and Senate, and they are barred from spending more than 15 percent of its principal during any two-year period.
The seven-member advisory board has agreed to keep the Legacy Fund money in the bank until it devises a broad investment policy for the money, which will include how much should be put into stocks, bonds and other types of investments.
Its members are Christmann; Hardmeyer; state Reps. Keith Kempenich, R-Bowman, and Dave Weiler, R-Bismarck; Sen. Jim Dotzenrod, R-Wyndmere; Tax Commissioner Cory Fong; and Pam Sharp, the state budget director.
The panel will also provide advice on investing a $386.4 million rainy-day fund, formally known as the Budget Stabilization Fund. It is now invested mostly in bonds and Bank of North Dakota certificates of deposit.
Similar funds in Alaska, New Mexico and Wyoming have large investments in domestic and foreign stocks, as well as real estate and private equity funds, which typically offer higher potential returns, along with greater risk.
Wyoming's $5.2 billion Permanent Mineral Trust Fund, which is financed by a share of the state's severance taxes on oil, coal and natural gas, did not begin investing in stocks until 1999, after voters approved a constitutional amendment that allowed its investments to move beyond bonds, said Joseph Meyer, the Wyoming state treasurer.
Meyer said Monday it took about eight years to craft an investment plan and build a portfolio. North Dakota's fund, Meyer said, can afford to take a patient approach and ride out market swings.
If the advisory board wants the fund to grow almost risk-free, they should buy 30-year U.S. Treasury securities, "don't look back, forget about it and just go along," he said.
"But if you really believe in America, if you believe we always come back, our world is not going to collapse, if you look at a 100-year pattern of the ups and downs of the stock market ... why wouldn't you invest in equities?" Meyer said.
North Dakota lawmakers were rattled by the stock market's steep decline in 2008 and 2009 and its effect on state pension funds that benefit government workers and public school teachers.
The aftermath provided momentum for proposals in the North Dakota Legislature this year to close the pension funds to new members and enroll new employees in tax-deferred savings plans, although the bills were ultimately rejected.
Once the Legacy Fund's advisory board sets its investment policy, North Dakota's Retirement and Investment Office, which oversees $5.6 billion in pension fund and other investments, will carry it out.
Christmann said he believed it is important for the Legacy Fund to have its own investment policy board, and that its approach be conservative.
"I do think it has to be a very cautious approach that is not going to turn around a real good rate of return," Christmann said.
The pension funds, he said, "can afford to be pretty risky in their investments because they know at the end of the day, the state of North Dakota has to cover the losses," he said. "We can't afford to do that ... If we lose something, there's nobody turning around to cover it."