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Stock market declines hurt school land trust fund

St. Paul Legal Ledger
October 31, 2008

This year's turbulence in the stock market is putting pressure on investments derived from forest lands held in trust for Minnesota's public schools.

The state Senate Subcommittee on Natural Resources and the Senate E-12 Education Finance Division learned last week that the Permanent School Fund had a return of minus 3.6 percent as of June 30. That's a sharp reversal from 2007's return of plus 13.4 percent.

The school fund, which has $690 million in assets, is divided almost evenly between domestic stocks and domestic bonds. The Permanent School Fund is less than 1 percent of the $59 billion in assets managed by the State Board of Investment (SBI).

State Board of Investment Executive Director Howard Bicker told the joint committee Wednesday he expects that since June 30 the decline has increased from 3.6 percent to the high single digits.

Bicker did not give to the committee exact dollar figures about the decline and what it's costing the state; he also did not respond to repeated requests from Capitol Report for the dollar amounts.

Bicker told the committee the school fund first started investing in stocks in 1997. Stocks provide greater returns than bonds for the fund during bull markets, Bicker said. But they have historically been more volatile, as has been the case this year.

"It's not a free lunch," Bicker said.

State law doesn't allow the school fund's principal to decline. Any capital losses to the school fund must be offset by interest and dividend income.

The Natural Resources and Education Finance panels held their second joint-hearing in three months to look into the management of the school trust lands. At the hearings, senators have pressed state Department of Natural Resources (DNR) officials about how they manage the lands that generate the money that builds up the school fund.

When Minnesota became a state in 1858, the federal government granted Minnesota 8.1 million acres of land to benefit public schools. Today, the state still owns 2.5 million of those acres, which are mostly in northern Minnesota. The rest have been sold off. The trust lands include another 1 million acres of mineral rights.

Timber sales and mineral royalties from mining on trust lands generate money for the Permanent School Fund. Management of trust lands have generated on average about $4.2 million annually for the school fund between 2002 and 2007. But variations have been caused by factors like the demand for commodities. Large wildfires in 2002 and 2007 also put a dent in the financial returns from the trust lands.

In the last two Senate hearings, lawmakers have tried to figure out how well the state is managing the lands. Sen. Tom Bakk, DFL-Cook, asked how the DNR is dealing with trust lands that aren't generating much revenue for the Permanent School Fund. He said the trust might be better served if nonproductive lands are sold.

"I think a closer assessment of how it's being managed for revenue needs [to be done]," Bakk said.

Dave Epperly, DNR's director of forestry, said that timber harvesting isn't the only source of money for the Permanent School Fund. Carbon markets and other emerging environmental investments could generate money for the school fund in the future.

Sen. Dave Hann, R-Eden Prairie, said he wonders if the state has a method to evaluate the performance of trust lands.

"I'm just not clear yet what the costs are compared to some standard [used by other entities]," Hann said.

DNR officials see potential for increased revenue off of trust lands from new mining activities in northeastern Minnesota. Three mineral deposits on trust lands could generate $1.4 billion in royalties at today's metal prices if mined over a 20- to 25-year period, said Marty Vadis, director of the DNR's Division of Lands and Minerals.

Dave Zumeta, executive director of the Minnesota Forest Resources Council, said the state should take a new direction in the way timber is harvested on trust lands. Zumeta urged senators at the joint hearing to harvest woody biomass that can be used for energy along with the timber the forest products industry cuts. Zumeta said harvesting woody biomass "can improve long-term forest health and help restore natural ecosystems."

Zumeta said adding woody biomass to the mix would move the state toward achieving the goal of Gov. Tim Pawlenty's 2007 task force on forest products of increasing Minnesota's timber harvest. Using biomass rather than fossil fuels for energy could help the state reach a goal set by lawmakers in 2007 to use 25 percent renewable energy sources to generate electricity by 2025.

Zumeta said the strategy could reduce the availability of tinder for wildfires. It could also produce more money for the school trust, although Zumeta said he didn't have financial estimates for his proposal.

"There are some win, win, win, win scenarios for multiple interests," Zumeta said.

Sen. Claire Robling, R-Jordan, cautioned that the demand from industry needs to be sufficient to pursue woody biomass harvesting in the management of trust land.

"We have to have the demand for it," Robling said.