In SWFs We Trust

Ashby Monk

I’ve spent the better part of three years trying to understand the origins, motivations and operations of foreign SWFs. I’ve been to Africa, Asia, Europe and the Middle East for research trips. I even went to my native Canada (twice). But I can’t say I did any field work in the United States (not counting Washington, DC). I’m starting to think that was a big oversight on my part. Why? Because American states are sponsoring sovereign fund institutions in droves. In fact, my most recent count of US funds has just increased to 10!

I know I’ve mentioned all this before, so bear with me. I just continue to be surprised by my failure to notice all of these funds. Think of it this way: For the past year, I’ve been living and working in a country that has more sovereign fund-like vehicles than the United Arab Emirates, and I haven’t visited any of them. I’ve met some at conferences. But still, that’s pretty weak.

But, to give me some credit, I’m actually not alone in this oversight. In fact, I recently received comments on an academic paper I’m developing from a well-known SWF luminary; this individual said, “I am not sure that Louisiana, Oklahoma and Texas have SWFs.” Oh, but they do, wise SWF person, they do! Louisiana has $4.5 billion invested in a series of “Trust funds”. Oklahoma has $5 billion invested in “non-pension state funds”. And, of course, Texas has tens of billions in the Permanent Schools Fund and the Permanent University Fund (which I believe are the first SWFs ever created, seriously). In my view, if we’re going to count Alaska’s Permanent Fund as a SWF, then we probably have to count these as well.

In fact, we probably also have to count the Alabama Trust Fund, the Montana Permanent Coal Tax Trust Fund, the New Mexico State Investment Council (which manages a variety of permanent funds for the state), and the Permanent Wyoming Mineral Trust Fund.

Moreover, we should probably start counting the new funds that states are just now setting up (perhaps on the advice of Ben Bernanke). Indeed, I just came across an article that highlights two new funds under development in West Virginia and North Dakota. Here’s a blurb from the recent Platts article:

“With new fields constantly emerging from a rash of US unconventional drilling in full flower, at least one state is mulling entry into a growing lineup of producing peers that have set aside a permanent or “rainy-day” fund fueled by petroleum revenues. West Virginia is the latest to study the potential for creation of a permanent fund from state oil, natural gas and coal revenues. In recent years the Appalachian Mountain state has reaped natural gas wealth from the Marcellus Shale and renewed drilling of older fields using new extraction technologies. Like Alaska, Texas and most recently North Dakota, which all have permanent funds, West Virginia wants to “turn nonrenewable resources into a sustainable source of income for the state,” Jill Kriesky, an economist with the nonprofit, nonpartisan West Virginia Center on Budget and Policy, said.

“While relatively few US states now have permanent funds, rising oil and gas revenues from an activity boom created by high oil prices and prolific development of unconventional plays has prompted some jurisdictions to take a look at the funding possibilities. For example, North Dakota voters last year gave a green light to creation of a Legacy Fund, into which the state July 1 began depositing 30% of its oil and gas tax revenues. The fund cannot be touched until 2017. After that, up to 100% of its interest can be tapped each year, along with up to 15% of the principal, Pam Sharp, director of the North Dakota Office of Management and Budget, said. The state in recent years has seen a huge revenue boon from the Bakken Shale, one of the largest US oil deposits industry has exploited in years. Sharp was uncertain how much the nascent fund amassed in its first week of life. “We estimate roughly each month maybe $23-$30 million will go into it,” she said. “Over the course of the next biennium [which ends June 30, 2013] we estimate we’ll have over $600 million in the fund.”

Ten! That’s the number of heritage, stabilization, rainy day, saving, permanent, non-pension, trust funds (i.e., sovereign funds) that I count in the United States today. In all cases, these funds are helping state governments manage their resource revenues to meet short and long-term governmental obligations. (Your question: But, Ashby, these aren’t national funds. So they don’t really count do they? My retort: Neither is ADIA. Does it count? How about Alberta’s Heritage Fund?)

Anyway, I’d love to spend a year looking into the origins and operations of these funds. So if somebody has some extra research funding laying around, I’d be happy to do a project on this; make your checks payable to Stanford University. ;)

4 Responses to “In SWFs We Trust”

  1. 1 Paul Rose July 15, 2011 at 1:01 pm

    Nice post. I think the list of US SWFs may be even bigger than 10, depending on how we count. Texas created its funds in the 1850′s, but the practice of granting public lands to support schools started in 1803 with Ohio. However, these grants were not restricted–in other words, the trusts were not permanent trusts–so states often squandered their trust lands. In 1835 Michigan created a permanent school fund, with restrictions on the sale of the lands, coincident with its entry into the union in 1837. All Western US states have some kind of permanent land trust for the benefit of schools, typically established by US congressional acts coupled with state constitutional amendments.

    The Lincoln Land Institute has produced a nice history of state land trusts:

    We can make the list even bigger if we count state funds set up to invest funds from the master tobacco settlement.

    What is interesting about all this to me is that despite the age of some of these funds, US states often seem to lag in their asset management techniques. As in life, it seems there is a negative correlation between age and agility. Older trusts often seem to be rigid in their management. I don’t think we should blame the investment managers for this, however, since much of the rigidity is due to statutory or even constitutional restrictions. Some rigidity is just institutional–the board may need to be convinced, as you described here:

  2. 2 GH July 16, 2011 at 12:19 am

    Ashby, if you start to include all state funds as sovereign, then you need to include all of the Australian supers as well and any other local government investment units around the world – the county council funds in the UK, the stat boards in Singapore, the authority funds (housing, hospital etc) in Hong Kong. You can argue for this, but you need to draw the line somewhere.

    • 3 Ashby Monk July 18, 2011 at 7:13 am

      Thanks, GH. I take your point. At the same time, however, I think that if a fund meets the definition of a sovereign fund…we should call it a sovereign fund. (Even if that means there are 200+ funds in the world). For example, if a fund doesn’t have explicit liabilities and is used to manage governmental wealth, I’d be inclined to include it in the group. In this regard, don’t the OzSupers have liabilities? Which would prevent their inclusion?

  1. 1 The Daily Brief « Oxford SWF Project Trackback on August 1, 2011 at 8:30 am

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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