Endowment Overview March 2012

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  • First, a map that show the make-up of Arizona land The proceeds of state trust land sales come to our office to invest in perpetuity K-12 schools are the prime beneficiary and make up about 87% of state trust land.
  • From 1912 to 1998, all of the funds in the Permanent Land Endowment Trust Fund were invested in fixed-income , or bonds. In 1998 the voters approved a Constitutional change that would allow the Fund to invest in equities, or stocks. Up until this time last year we are invested close to 50% stocks and 50% bonds. Last year the Board of Investment updated our investment strategy to implement a 60% stock and 40% bond allocation. Based on the scenarios that were part of the study you can see the positive effect this change will have on the fund.
  • Total market value of the Endowment is at $3.52 billion at end of February. New Record high. Fixed Income is at $1.44 billion (40.9%) Our S&P 500 allocation is at $1.23 billion (35.1%) Our S&P 400 allocation is at $536 million (15.2%) And our S&P 600 is at $306 million (8.6%)
  • This slide shows the growth in the total Market Value of the Endowment since December 2006. Value at the end of February was $3.52 billion, a new record high.
  • Here we show unrealized gains and losses. Gains are also at all-time record at $908 million.
  • K-12 Education is the primary recipient of the endowment. Here you can see the distributions to K-12 since 2000. For this current year, t he preliminary is a $77.8 million distribution for K-12 schools - This is the highest from the endowment in history. Total Endowment Distributions are $83.9 million, when you include the other beneficiaries. Over the last 13 years, the State Land Fund’s distributions have averaged approximately $40 million per year with a high in 2012 near $80 million and a low in 2010 of zero.
  • The 1 st study conducted by the Treasurer’s Office. A projection on future endowment distributions was conducted based on five economic scenarios for the next 20 years.
  • The current formula was put in place in 1998 at the same time the fund was given the opportunity to invest in stocks. It was designed to smooth out distributions given the inherent volatility of the stock market. It also was designed to protect the corpus of the trust from inflation. Using this formula, an estimate is created each year in July using estimated YTD numbers, and then has to be re-done the following October after the final inflation numbers for the 2 nd quarter are published.
  • To provide an example, here’s how it was calculated for the 2012 distribution.
  • After the Board of Investment reviewed the data it is seeking to simplify the formula in the Arizona Constitution. The new formula would create a flat distribution of 2.5% each year based on the previous five years of market value of the Endowment. This will allow a steady increase in distributions while still protecting the fund from the effects of inflation. It will allow school districts to plan accordingly and avoid years with $0 in distributions. Why 2.5%? This is what the average distribution has been since 2004, so the beneficiaries will not be receiving anything less than they have been for the past 9 years.
  • After 9 years in operation, the current formula, in red, has not smoothed out distributions for education. Instead it has been quite inconsistent, which makes the budgeting process extremely difficult. If adopted in 2004 when the current formula was put in place, the new, simplified formula would have resulted $21 million more in funding for K-12 education and would have provided consistent distributions that avoid years where $0 are available.
  • For future distributions, this scenario models a moderate market performance. The current formula is in red and the new, simplified formula is in blue. Here, 6 years could result in $0 funding using the current distribution formula. The new formula being proposed, which will have more consistent funding available every single year.
  • This scenario, models an optimistic market performance. Based on the study, you can see how choppy the projected distributions are using the current formula over the next 20 years. Even in an optimistic scenario there are 3 years that there is $0 projected to fund education, and several other years with very limited money available.
  • You’ve heard the saying, hope for the best plan for the worst… Here is a pessimistic market scenario that would result in 10 of the next 20 years with no funding for education from our $3.4 billion endowment fund. We can’t let that happen. We’ve shared this information with the Legislature and hope that this will be heard in committee next week so that a resolution that would put this formula change on the ballot this coming November.
  • Endowment Overview March 2012

    1. 1. ENDOWMENTPERFORMANCE As of February 29, 2012 OFFICE OF THE ARIZONA STATE TREASURER
    2. 2. ENDOWMENT TRUST LANDS Bureau of Land Management (17%) US Forest Service (15%) Tribal Reservations (28%) Privately-owned land (17%) State trust land (13%) ARIZONA STATE TREASURER DOUG DUCEY
    3. 3. ENDOWMENT ASSET ALLOCATIONIn 2011 the fund was updated from 50/50 to a 60/40 stocks to bond allocation: 20-year Projected Returns Previous Allocation Current Allocation Gain95th percentile (highest value) 9.1 9.9 $2.38 B75th percentile 7.0 7.5 $1.17 B50th percentile 5.5 5.8 ($240 M)25th percentile 4.1 4.2 $130 M  Expected Return increased to 6.4% from 6%  Standard Deviation increased to 11% from 9.6% ARIZONA STATE TREASURER DOUG DUCEY
    4. 4. ENDOWMENT ASSET ALLOCATION 8.6% $3.52 Billion Fixed Income $1,549.4 million $542.2 million 15.2% $1,600.04M $502.79M 40.9% S&P 500 35.1% S&P 400 $1,122.1 million $1,052.42M S&P 600 As of 2/29/2012 ARIZONA STATE TREASURER DOUG DUCEY
    5. 5. ENDOWMENT MARKET VALUE $3.52 Billion N D D TRE A R UPW ARIZONA STATE TREASURER DOUG DUCEY
    6. 6. ENDOWMENT UNREALIZED GAINS $908 million ARIZONA STATE TREASURER DOUG DUCEY
    7. 7. ENDOWMENTDISTRIBUTION OFFICE OF THE ARIZONA STATE TREASURER
    8. 8. K-12 DISTRIBUTIONS New Record Distribution for FY 2012: $77,832,917 ARIZONA STATE TREASURER DOUG DUCEY
    9. 9. ASSETALLOCATION STUDY OFFICE OF THE ARIZONA STATE TREASURER
    10. 10. REVIEW PROCESS  Highlights the risk and return tradeoffs of different investment policy options  Evaluates various approaches based on the practices of similar funds  Allows the Board of Investment to make more informed decisions ARIZONA STATE TREASURER DOUG DUCEY
    11. 11. CURRENT DISTRIBUTION FORMULAFY 2008 AVG. TOTAL RETURN FY 2008 AVG. TOTAL INFLATION + +FY 2009 AVG. TOTAL RETURN FY 2009 AVG. TOTAL INFLATION + +FY 2010 AVG. TOTAL RETURN FY 2010 AVG. TOTAL INFLATION + +FY 2011 AVG. TOTAL RETURN 20% FY 2011 AVG. TOTAL INFLATION 20% + +FY 2012 AVG. TOTAL RETURN FY 2012 AVG. TOTAL INFLATION FY 2008 MARKET VALUE + FY 2009 MARKET VALUE + FY 2010 MARKET VALUE + FY 2011 MARKET VALUE + 20% FY 2012 MARKET VALUE ANNUAL DISTRIBUTION ARIZONA STATE TREASURER DOUG DUCEY
    12. 12. WHAT’S THE FORMULA FORECAST FOR 2012?HOW THE FORMULA WORKS ARIZONA STATE TREASURER DOUG DUCEY 12
    13. 13. WHAT’S THE FORMULA FORECAST FOR 2012?HOW THE FORMULA WORKS ARIZONA STATE TREASURER DOUG DUCEY 13
    14. 14. WHAT’S THE FORMULA FORECAST FOR 2012?HOW THE FORMULA WORKS ARIZONA STATE TREASURER DOUG DUCEY 14
    15. 15. SMOOTHER, CONSISTENT DISTRIBUTIONS X 2.5% Takes 2.5% of the average monthly market value from each of the previous five years ARIZONA STATE TREASURER DOUG DUCEY
    16. 16. K-12 DISTRIBUTIONS ARIZONA STATE TREASURER DOUG DUCEY
    17. 17. MODERATE MARKET SCENARIO Years with $0 Distribution Using Current Formula ARIZONA STATE TREASURER DOUG DUCEY
    18. 18. OPTIMISTIC MARKET SCENARIO Years with $0 Distribution Using Current Formula ARIZONA STATE TREASURER DOUG DUCEY
    19. 19. PESSIMISTIC MARKET SCENARIO Years with $0 Distribution Using Current Formula ARIZONA STATE TREASURER DOUG DUCEY
    20. 20. QUESTIONS? OFFICE OF THE ARIZONA STATE TREASURER

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