How best to manage Wyoming’s funds, so that they provide income for many, many years through the ups and downs of ordinary tax revenues, is the focus of intense thought these days by the State Treasurer’s Office and the Legislature. It should be something every citizen considers. But oh, it’s important but dry, and complicated.
Jason Shogren, a leading economics professor at the University of Wyoming who is active in local affairs — he’s served on the board for Albany county schools and the Wyoming Environmental Quality Council, and he plays a mean guitar with local bands, has offered to help us out. Shogren is the Stroock professor of natural resource conservation and management, in the Department of Economics & Finance at UW. He’s also served as a financial advisor to the king of Sweden, among other engagements.
This column is the first of an occasionally appearing series Shogren will be writing for WyoFile to help us understand management of state funds and why they’re important — and, of course, his view of the best way forward.
This first column focuses on the general problem of how it can be a good idea to invest funds rather than put them in the kind of savings account (or mattress) people might be tempted to consider “safe.” His explanation of the issues involved applies to personal finances as well as state funds. It also applies specifically to a matter coming before voters on the Nov. 8 ballot: “Amendment A” that would change the Wyoming Constitution — Ed.
“Safe” ain’t safe for Wyo investments
With this first column, I’m going to start with this:
Why the Rule of 72 matters — for you, but really more for the future of your kids, your grandkids, and their grandkids who will be in Wyoming for the far distant future.
Recall, this is how the rule works with compound interest: Wealth (roughly) doubles every [72/x%] years, where x is your rate of return.
If your rate of return is 7.2 percent, your wealth doubles in 10 years. If your rate of return is 0.72 percent, your wealth doubles in 100 years.
Based on this rule, “safe” investing (e.g., cash under your mattress) will minimize risk, but it will also minimize return. If your own personal appetite for risk is low, then by all means play it safe. That might be how you want to treat your own retirement money, if you don’t want to see it grow much.
But Wyoming is not going anywhere—a state never retires.
You and I will come and go, but Wyoming never ends. For the State of Wyoming, “safe” investing is really not “safe” — we will have left behind so much money on the table that in the future we will always be behind in growing Wyoming’s wealth. We will always be set back on our heels.
As quoted in Sam Western’s recent Casper Star-Tribune article on investment of Wyoming’s Permanent Mineral Trust Fund and other state funds:
Patrick Fleming, chief investment officer for the treasurer’s office, quoted a National Association of College and University study that showed institutions with assets over $1 billion averaged a 7.7 percent return over the last 10 years. The state of Wyoming’s return, including investments in the permanent fund, averaged 5.93 percent return during the same period. If the state had not been hampered by certain investment restrictions, Fleming said, “this would have resulted in an increase of $2.1 billion over the last 10 years.”
That is $2.1 billion left on the table because Wyoming has followed a safety-first conservative investment strategy. Think about what we could have done with an extra $2,100,000,000.00 over the last 10 years. Invested in K-12, invested in infrastructure, invested in new carbon technology research centers, invested in higher education, invested in tourism, invested in the generation of more and better ideas on how to diversify and grow the Wyoming economy today and into the future (read that as jobs for Wyoming).
Today we have tools to hedge risk to manage the volatility in the stock market. So it is far safer to invest in the stock market, under the care of good managers, than to leave our money strictly in cash or bonds.
What can you do about it as a Wyoming citizen? Vote “yay” for Amendment A this November. Amendment A takes the handcuffs off two of our investment funds, allowing them to be invested in equities—in stocks—not just “safe” bonds and cash. These funds include the Wildlife Trust, Wyoming Public TV, Wyoming Children’s Trust Fund, the Military Assistance Trust Fund, State Hospital Emergency Medical Services Trust Fund, and the Cultural Trust Fund.
Fortunately, Wyoming already has most of its funds free to be invested in stocks. The State currently has roughly $19 billion in trust funds in total. Wyoming already invests $13 billion of that $19 billion in equities (stocks and index funds) up to a 45-55 percent cap. The cap is set by the House and Senate, and the investments are overseen by the five highest elected State officials on the investment board. The state’s prized Permanent Mineral Trust Fund is one of the key funds that can already be invested in equities.
So Amendment A is nothing really so new. All it does is give the other $6 billion of state funds — the funds I listed above — the same option for better investment. And, just as with the bulk of state funds, the share of those funds actually invested in stocks still have to be approved by the House and Senate, and overseen by the five highest elected State officials on the investment board.
To get an idea of what this means, if we had passed Amendment A ten years ago, Wyoming would have earned an extra $500 million for the corpus of these funds, if we had followed the same balanced risk strategy used for the other funds.
But isn’t this all just too risky?
No, the real risk is letting the State and our children’s children get left behind. Vote yay for Amendment A.