HOUSE BILL REPORT
This analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent.
As Passed House - Amended:
March 2, 2012
Brief Description: Amending the Constitution to provide clear authority to state research universities to invest funds as authorized by law, including investment in stocks or bonds issued by any company.
Sponsors: Senators Kilmer, Schoesler, Tom, Murray, Harper, Conway, Shin and McAuliffe.
Higher Education: 2/16/12, 2/20/12 [DPA];
Ways & Means: 2/24/12, 2/25/12 [DPA(WAYS w/o HE)].
Passed House - Amended: 3/2/12, 93-4.
HOUSE COMMITTEE ON HIGHER EDUCATION
Majority Report: Do pass as amended. Signed by 13 members: Representatives Seaquist, Chair; Carlyle, Vice Chair; Haler, Ranking Minority Member; Asay, Buys, Fagan, Pollet, Reykdal, Sells, Springer, Warnick, Wylie and Zeiger.
Minority Report: Do not pass. Signed by 3 members: Representatives Parker, Assistant Ranking Minority Member; Crouse and Hasegawa.
Staff: Jill Reinmuth (786-7134).
HOUSE COMMITTEE ON WAYS & MEANS
Majority Report: Do pass as amended by Committee on Ways & Means and without amendment by Committee on Higher Education. Signed by 25 members: Representatives Hunter, Chair; Darneille, Vice Chair; Alexander, Ranking Minority Member; Bailey, Assistant Ranking Minority Member; Dammeier, Assistant Ranking Minority Member; Orcutt, Assistant Ranking Minority Member; Carlyle, Chandler, Cody, Haigh, Haler, Hinkle, Hudgins, Hunt, Kagi, Kenney, Ormsby, Parker, Pettigrew, Ross, Schmick, Seaquist, Springer, Sullivan and Wilcox.
Minority Report: Do not pass. Signed by 2 members: Representatives Hasegawa, Vice Chair; Dickerson.
Staff: David Pringle (786-7310).
The state Constitution generally limits the investment of state funds. Article VIII, section 5, prohibits the state's credit from being given or loaned to an individual, association, company, or corporation. Article XII, section 9, prohibits the state from loaning its credit or from subscribing to or being interested in the stock of a company, association, or corporation. Unless exempt from these provisions, permissible investments are limited to government securities.
The state Constitution has been amended to allow certain funds to be invested "notwithstanding" these constitutional limits and "as authorized by law." These funds include:
public pension or retirement funds;
the industrial insurance trust fund;
funds held in trust for the benefit of persons with developmental disabilities; and
permanent funds established for institutions of higher education.
Permissible investments are more diverse, and include a mixture of corporate bonds and stocks.
The State Investment Board manages and invests public pension and retirement funds, industrial insurance funds, permanent funds, and other trust funds, including the Developmental Disabilities Endowment Trust.
Governing boards of institutions of higher education have full control of the institutions' property, and manage and invest their operating funds. Institutions also accept endowments and other private gifts and grants for their use or benefit, and manage and invest their endowment funds.
Summary of Amended Bill:
At the next general election, the Secretary of State must submit to voters a proposed amendment to the state Constitution.
The amendment allows the public moneys of the University of Washington and Washington State University in investment funds specified by the Legislature to be invested as authorized by law. The investments are not limited by constitutional provisions prohibiting giving or loaning the state's credit to an individual, association, company, or corporation. The investments also are not limited by the constitutional provision prohibiting the state from subscribing to or being interested in the stock of a company, association, or corporation.
Fiscal Note: Available.
Staff Summary of Public Testimony (Higher Education):
(In support) This bill tries to ensure that the University of Washington (UW) and Washington State University (WSU) are able to earn better returns on investments of local funds. Right now, investments are limited to government securities, which generally have a low return. This bill would allow these universities to invest in higher-return securities.
This proposal would leverage university assets to the benefit of students. Investments of operating funds are currently restricted to government-backed securities. This restriction limits the universities' ability to diversify investments and reduce risk, and has negatively affected returns.
This proposal would allow the UW to better manage risk and generate greater return. It would strengthen investment portfolios and generate between $11 million to $20 million per year. This revenue would directly support the university's academic mission and help build financial stability over the long term.
There is precedent for this change. The Legislature and the people have changed this provision five times. Consequently, pension funds, the Labor and Industries trust, and the Developmental Disability Endowment Trust may be invested in more diverse and higher-return portfolios, and not just in government securities.
There is also precedent for successful management of these investments. This ability is reflected in the UW's Triple A bond rating, which is the highest in the state.
This is a responsibility that the universities do not take lightly. Only now is WSU beginning to add a conservative mix of equities to the permanent fund investment portfolio. With investments of operating funds, such as unrestricted donations and certain tuition and bond proceeds, WSU would be even more conservative.
The aerospace industry is growing and dynamic. The global market is huge, and competition will be intense. The industry will need tens of thousands of engineers. To meet that demand, the industry must have a robust supply of high quality graduates exiting the higher education system.
The budget crisis is putting a tremendous strain on the system's ability to produce graduates, particularly in technical fields. It is urgent that the state find innovative ways to get new revenue to the schools. This bill provides additional resources without more tax revenue. If approved, it will provide new dollars to carry out these schools' missions. It is imperative that these schools be empowered to operate with optimal efficiency and effectiveness.
Students are underserved in the number of slots available to pursue degrees in science, technology, engineering, and mathematics (STEM) fields. Only one in four students is able to pursue a degree in computer science. The other three cannot because there are not enough slots, and not because they are unqualified. More resources are needed to make more slots in STEM fields available, mitigate tuition increases, and expand financial aid.
Staff Summary of Public Testimony (Ways & Means):
(In support) The University of Washington (UW) would like the opportunity to diversify our operating investments, earn better returns, prudently manage risk, and potentially generate $10-$20 million per year in additional revenue. This revenue would support our academic mission and build financial stability over the long term. We urge that you support the amendments proposed. The Washington State University (WSU) very strongly urges your support for these measures. The state Constitution has been amended four times in recent years, including allowing the universities to diversify their investments from the trust lands – an authority that has been exercised very cautiously by WSU. We would similarly approach the use of this authority cautiously. The funds that are contemplated here are not state appropriated funds, but funds like unrestricted donations, earmarked but unspent bond proceeds, and enterprise funds. We invest those funds now, but only in government-backed securities. The WSU supports the amendments that would have the State Investment Board (SIB) manage these funds.
(In support with amendment) The State Treasurer supports the proposed amended version of Substitute Senate Bill 6468 and this constitutional amendment. This version ensures that only operational reserves are invested in equities and that risk be prudently managed.
(Information only) The proposed striking amendment and corresponding changes to the proposed constitutional amendment would allow the UW to identify amounts appropriate for investment in equities and corporate credit. Those amounts would be put into the appropriate account and invested by the SIB. The SIB would work with the schools to appropriately invest those funds.
Persons Testifying (Higher Education): Senator Kilmer, prime sponsor; Margaret Shepherd, University of Washington; Chris Mulick, Washington State University; Bill McSherry, Boeing; and Andrew Lewis, Associated Students of the University of Washington.
Persons Testifying (Ways & Means): (In support) Margaret Shepherd, University of Washington; and Chris Mulick, Washington State University.
(In support with amendment) Nona Snell, Office of the State Treasurer.
(Information only) Victor Moore, Washington State Investment Board.
Persons Signed In To Testify But Not Testifying (Higher Education): None.
Persons Signed In To Testify But Not Testifying (Ways & Means): None.