Public SchoolEndowment Fund Management

Investing a Forever Fund

Children’s Land Alliance Supporting Schools

2008 Annual Conference

2

Assets that endow Public Schoolsin Idaho

As of April 2008 Approximately 2.1 million acres of

land, over 50% of which is forested $770 million in the Public School

Permanent Endowment Fund and Earnings Reserve Fund

3

Public School Endowment Assets By State - FY2005

$2

$37

$50

$158

$173

$187

$301

$317

$433

$469

$569

$732

$908

$1,165

$1,272

$414

0 500 1,000 1,500 2,000 2,500 3,000

Arizona

Mississippi

California

S. Dakota

Washington

Nevada

Nebraska

Alaska

Idaho<<<<

Montana

Utah

Colorado

N. Dakota

Oregon

Wyoming

Oklahoma

New Mexico

Texas

Millions of Dollars

Texas = $21,354 millionNew Mexico = $8,226 million

Source: CLASS

4

Where do public school endowment funds come from? Sale of endowment land

Including extracted minerals Retained income from endowment land Other dedicated sources

For example: unclaimed estates, share of sale of federal land, unclaimed dividends

Voluntary contributions

5

Understand the role of your fund

The role of endowment funds varies by state: Supplement to other state funds Funds for “extra” one-time items outside

the normal budget Dedicated to specific on-going spending

The role influences objectives, asset mix and distributions

6

Mission of Idaho Endowments:Provide a perpetual stream of income by:

Maximizing total return over time at a prudent level of risk

Protecting future generations’ purchasing power

Providing a relatively stable and predictable payout

Source: Idaho Land Board Asset Management Guidelines

7

How the Idaho endowment funds support the Mission Maximize return vs. risk

Diversify the portfolio Protect purchasing power

Retain principal plus inflation (plus more) in the fund

Provide a stable payout Maintain adequate spendable reserves to

continue distributions during downturns

8

MissionEndowment Fund Investment Board

Provide professional investment management

services to our stakeholders consistent with our

constitutional and statutory mandates.

Source: EFIB Strategic Plan

9

Goals: Idaho Endowment Funds

We will provide good investment advice and the tools for implementing that advice

Develop a prudent long-term investment strategy

Select the best portfolio managers and other agents to execute that strategy

Diligently evaluate performance over time Develop an effective spending policy Help the Land Board fulfill their fiduciary

responsibilities and communicate with its stakeholders

Source: EFIB Strategic Plan

10

Who is the Idaho Endowment Fund Investment Board? Nine members, appointed by the

Governor, confirmed by the Senate One Senator, one representative One professional educator Six members of the public familiar with

financial matters Meets at least quarterly Full-time staff of four

Per Idaho Code 57-718

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12

Interdependency of investments, contributions and distributions

DistributionPolicy

• What level of distributions can be supported by expected income?• How much income should be reinvested for future growth?• Any restrictions on spending principal? • How variable is the income? Can a smoothing reserve be built?

Contributions

• Any future contributions expected?

• How variable?• Can the

contribution be distributed or must it be permanently retained?

InvestmentPolicy

• How will the assets supporting future distributions be invested?

• What are the risk/return expectations?

13

Portfolio Diversification:Optimizing Risk/ReturnMost portfolio management today is

based on “mean variance optimization” of various asset classes – a mathematical way of determining the right level of diversification Long-term return expectation (mean) Expected volatility (variance) Correlation with other assets (optimization)

Most avoid “tactical” shifts in allocations

14Source: NEPC

15

Asset Mix – Idaho Endowment Fund

Diversified mix Different

expectations for return and risk

Different correlation with each other (not shown)

Endowment Fund Asset Mix

Target Five-Year Annual% Of Assets Expected Absolute

Invested Return* RiskEquitiesDeveloped markets

U.S. 56% 9.0% 17%Foreign 13% 9.0% 19%

Emerging markets 1% 9.4% 28%Private equity 0% 12.0% 34%High yield debt 0% 7.5% 9%

Total Equities 70% 9.0% 16%

Fixed IncomeTreasuries/Agencies

T-Bills/Cash 0% 3.5% 1%Standard 8% 4.9% 6%Inflation-protected 3% 4.6% 7%

Mortgages (agency) 5% 5.2% 6%Mortgages (non-agency) 10% 5.3% 6%Corporates, other 4% 5.6% 6%Foreign bonds 0% 5.2% 10%

Total Fixed Income 30% 5.2% 4%

Real Estate 0% 7.6% 16%Absolute Return 0% 6.5% 10%

Total 100% 7.9% 10%

Duration/Maturity of Fixed Income (in years) 4.7

* Assumes annual inflation rate of 2.75%

Source: Callan Associates, EFIB staff. Return and risk assumptionsas of March 2008.

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Asset Mix - Public School Endowment Funds for Various States - FY2005

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

California

Colorado

Mississippi

Montana

Washington

Alaska

Arizona

S. Dakota

Nebraska

N. Dakota

Oklahoma

Utah

Idaho<<<<

Oregon

Texas

New Mexico

% of Total Fund Assets

EquityOtherBonds

Source: CLASS

17

Expected long-term returnIdaho endowment funds

Return MixEquities 9.00% 70%

Bonds 5.25% 30%

Total 7.88% 100%

Returns are before investment management and EFIBoversight fees of approximatley 0.4%

Source: EFIB estimates, Callan Associates

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Idaho Endowment FundPotential range of investment returns

Expected Return Variation

Annual Return Over3 Years 7 Years

Probability Of returns greater than:5% 19.8% 15.5%25% 12.6% 11.0%50% 7.9% 7.9%

Of returns less than:25% 3.4% 4.9%5% -2.8% 0.8%

Returns are before investment management and EFIBoversight fees of approximatley 0.4%

Source: EFIB estimates, Callan Associates

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Public School Endowments - FY 2005 Returns vs. Asset Mix

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.0%

1.5%

3.0%

4.5%

6.0%

7.5%

9.0%

10.5%

12.0%

13.5%

15.0%% in Bonds (left axis)% Return (right axis)

Source: CLASS

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Mix of All Endowment Assets(Assuming Land value of $1.1 billion)

Other Land5%

Equities32%

Fixed Income14%

Timberland49%

Total value of all assets = approximately $2.3 billion

Dept. of Lands

EFIB

21* When the Permanent Fund, adjusted for inflation, exceeds its June 2000 level, only total gain over inflation will be distribut ed to Earnings Reserve.

Dept. of Lands

Endowment Fund Invest-ment Board

Permanent Fund

70% Equities 30% Fixed Income (EFIB)

STRUCTURE OF IDAHO’S ENDOWMENT ASSETS

Distribution to Beneficiaries

Set Annually by

State Land Board

Permanent Assets (Never Spent)

Available Reserve (Stabilization Fund)

Spendable Funds (Appropriation)

Revenues

Intere

st & D

ividends

or Total

Gain

*

Earnings Reserve

Fund

Land Assets

(Dept. of Lands)

Mineral Royalties Land Bank (reinvest land sale

proceeds within five years)

Management Costs (approx. 1% of assets)

Land Sales

Exces

s Res

erves

Idaho’s endowments have significant restrictions on spending the principal or

corpus. Distributions cannot be made from the sale of land or from the principal of the

Permanent Fund.

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Idaho Public School Endowment

Impact of fund structure on expected returns, contributions, distributions and reinvestment

Distributions are expected to be 4% of the fund and to grow 4% above inflation

100% fixed 70% equity Idaho Publicincome 30% fixed School Fund

Gross fund return 5.3% 7.9% 7.9%Less: management exp. -0.2% -0.4% -0.4%

Net fund return 5.1% 7.5% 7.5%Expected inflation -2.8% -2.8% -2.8%

Net real fund return 2.3% 4.7% 4.7%Contributions from land - - 3.2%

Net real funds available 2.3% 4.7% 7.9%

Distributions @ 50% -1.2% -2.4% -4.0%

Real future growth 1.1% 2.3% 3.9%

Source: Callan Associates, EFIB analysis

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Population (000) % Change

Coumpound Annual Growth CPI inflation = 2.5%

2008$ Millions

Coumpound Annual Growth

1970 713 7% 0.7% Public Schools 1,367 6.8%1980 944 32% 2.8% Higher Education 264 4.0%1990 1,007 7% 0.6% Health & Welfare 545 8.7%2000 1,299 29% 2.6% Corrections 201 8.3%2010 1,594 23% 2.1% All Other 443 6.9%'60-'10 1.8% Total 2,821 7.0%

source: Idaho Blue Book, Idaho Economic Forecast 7/07 source: Idaho Fiscal Facts

1998 4,000 % Change CAGR 1998 11,260 % Change CAGR

2008 7,902 98% 7.0% 2008 21,194 88% 6.5%

source: Idaho Fiscal Facts source: Idaho Fiscal Facts

1997 37,274 % Change CAGR 1997 245,252 % Change CAGR

2007 43,705 17% 1.6% 2007 257,990 5% 0.5%

source: State Board of Education website source: Dept. of Education Statistical Reports

Potential Drivers Of Corpus Growth In Excess Of Inflation

Higher EducationFull Time Equivalents

and Supervised Inmates

Population Growth By Decade General Fund Expenditures - '98-'08

Incarcerated Inmates Total Incarcerated Inmates

School Children

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Land Grant Endowment BeneficiariesFiscal Year 2008 Distribution Summary

FY 2008Approv. Dist. % Of

Endowment Beneficiary ($000) TotalPublic Schools $ 26,995 69.9% All University Beneficiaries* 7,852 20.3% State Hospital South 1,149 3.0% Penitentiary 728 1.9% State Juvenile Corrections 689 1.8% State Hospital North 689 1.8% Veterans Home 430 1.1% School for the Deaf and Blind 86 0.2% Total - Land Board $ 38,617 100.0%

Capitol Commission $ 467 Grand Total - All Endowments** $ 39,084

Measuring investment performance

26

Monthly investment report posted on the EFIB website

Overall return vs. benchmark

Asset mix

27

Returns by asset class

Returns for each outside manager, both absolute and relative to their benchmark

28

Idaho Endowment Fund Investment Performance(For cumulative periods ended December, 2007)

11.4%10.7%

13.7%

6.6%

8.7%

11.9%

0%

4%

8%

12%

16%

1 Year 3 Years 5 Years

An

nu

al R

etu

rn

EFIBBenchmark

Before fees.

29

Idaho Endowment Fund Investment Performance (By calendar year)

11.4% 12.0%

8.7%

12.7%

24.1%

6.6%

13.7%

6.1%

10.8%

23.3%

0%

4%

8%

12%

16%

20%

24%

28%

2007 2006 2005 2004 2003

An

nu

al R

etu

rn

EFIBBenchmark

Before fees.

30Peer comparison: Idaho Endowment vs. Public Pension FundsSource: Callan Associates

31Peer comparison: Idaho Endowment vs. Other Endowment FundsSource: Callan Associates

32Peer comparison: Risk and return vs. Public Pension PlansSource: Callan Associates

33

The important role CLASS plays

Those who govern endowment trusts have a fiduciary duty to the beneficiaries of the fund

However, many endowment stakeholders do not understand, or choose to ignore, this fiduciary duty, and attempt to pressure the governing authority to give improper consideration to non-trust issues

Governing authorities appreciate CLASS support when they must stand up to stakeholders whose interests are not aligned with the public schools

Support of prudent and effective management of public school endowments may also benefit other land grant endowments

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Questions to askInvestment PolicyWhat is your investment policy? Governance of the investments (who

decides what, delegation) Goals and objectives (performance

measures) Restrictions on investing (constitutional,

statutory, self-imposed) Asset mix (diversification)

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Questions to askSpending/Distribution PolicyWhat is the Distribution Policy? Governance (who decides how much) % of assets, % growth Based on total return or cash return Level of expenses

Paid by the fund or from general tax revenues

Interaction with other fund sources

36

Questions to askThe three most important ones1) How can I track your investment

performance?

2) What outdated constraints impede your ability to earn the best long-term return?

Suboptimal governance Outdated investment restrictions Budget constraints (staff, consultants, investment

managers) Bureaucratic roadblocks (e.g. purchasing procedures)

3) How can I help eliminate these constraints?