Vermont Legislature SmartTranscripts:

[Peter Conlon (Chair)]: January 30. This is follow-up to testimony yesterday about the Higher Education Endowment Trust Fund and getting a little more in-depth as to what it is and how it works. We invited folks from the treasurer's office to kind of walk us through it a bit more. And I think it probably falls under Fred Tuttle's great quote in the movie Man with a Plan. How can I get me some of that government money? It's okay,

[Joshua Dobrovich (Member)]: Beth. It's all all yours.

[David [last name unclear] (Deputy State Treasurer)]: Thank you, mister chair. For the record, David Chair, deputy treasurer. And I know you all heard some testimony yesterday about the basic functioning of the higher ed trust fund, so I don't want to rehash that. But I'll go do a very brief history of it and where we are today and sort of how the income streams work and the investments, and then just open it up for questions. But I'll keep it high level and pretty deep brief. So this was a fund that was established, I believe, the first passed legislature in 1999 and was given an initial $6,000,000 appropriation at that time. They did juice that with a further 1,000,000 a couple years later. And the basic structure of how it works, you heard about yesterday in terms of the disbursements, the distributions has remained the same throughout the history of the fund. It's always been the same three beneficiaries with the same 5% mandatory distribution with the caveat that you don't eat into the principal and the same optional 2% distribution. All that stuff has remained the same throughout the history of the fund. The inputs to the fund, the income to the fund consists of those two initial distributions. And then as I'm sure you've been hearing about and learned about, the other streams of income are the occasional estate tax boost to the fund. And we do have I did have the committee assistant pass around the treasurer's report on the Higher Ed Trust Fund, the most recent one we filed in October '25. And so there are some charts on there that show you the history of the income and you'll see that the significant bumps are, I would describe them as occasional and unpredictable, but they do come in. And as a result, the fund has grown significantly and stands at at this time right around just over $67,000,000. There is a second stream of income that comes from our office. It's, as you can see from chart number one in that annual report, it's if you can you basically can't even see the little pieces coming in, but that comes from a transfer from the unclaimed property fund. The unclaimed property fund lives in our office and as part of the unclaimed property division and the work that they do. That funding stream consists of all of the unclaimed property funds that are more than ten years old and less than $100 And so anything that meets that criteria, so every year another chunk of money meets that criteria as it ages from year nine to year 10, that gets swept into this fund as well. The most recent transfer was just under $150,000 And the years prior to that, it was less than that. That's the most it's ever been, but it's never so it's never been huge by comparison to the other sources of income that that fund sees. And on chart, I believe it's chart number two of this report, you can see how much has been distributed every year, stretching back to the very beginning of the fund. The first year was 2,000. And there's it's mostly gone up, although not every year in terms of that 5% distribution in 2022. There's a big hit as you may recall. There was a bit of a global pandemic just before then and that markets reflected that in that fiscal year. So there was no distribution made because they lost money. The fund had lost money. So you couldn't distribute without touching the principal. So no distribution was made, but that's the exception. Every other year, there's been at least some distribution made with the highest value being in FY '25. And you can see on that history of the 2% discretionary distribution for a number of years is happening every year in the teens. It was not happening. I believe that that was a combination of not wanting to eat into the or not being allowed to eat into the principal and just wanting to protect the body of the fund and not being fiscally responsible. And in last year, they did do a distribution, but it's been more in that 2% distribution has been more infrequent over the last twelve years. So that's a basic overview of the inputs, the income to the fund and the distributions. The fund is managed in our office with a mix of investments to try to grow the fund in order to allow these distributions to be made. It can get very technical very quickly, but it is actually technically not managed as its own fund. It is part of a group of now fairly small funds other than this. This is the biggest piece of that group of funds. It's called the trust investment account. And it's basically instead the statute allows the treasurer's office to group together a set of smaller funds. Shouldn't say smaller because this fund is now fairly large, but other than this fund, a set of fairly small funds and just group them together, do investments for that whole body of funds. They're generally funds that you don't need the cash as frequently as you would for like a short term cash holding, but neither is it the same thing as a pension where you're investing a bit more aggressively to get those higher returns, but obviously accept a little more risk with those sorts of very long term investments. This is kind of a middle of the road, if I'm somewhere between those in terms of the

[Joshua Dobrovich (Member)]: investment strategy.

[Peter Conlon (Chair)]: The trust investment account fund, but kind of a board that oversees the investments. How is it managed?

[David [last name unclear] (Deputy State Treasurer)]: That is managed by our office. The treasurer is the fiduciary for that fund and staff inside our office manage that. And you know, with the treasurer as having the fiduciary responsibilities, manage that responsibly in accordance with the needs of the fund.

[Unidentified Committee Member]: So the the three entities split the 5%, and then they get a possible 2% bump as well. Two of the entities get the 2%. Okay. Right. And the fund started at $6,000,000 now it's over 60?

[David [last name unclear] (Deputy State Treasurer)]: That's right. Yeah. It started at at the very beginning, it was 6, went up to 7 two years later, and now it's over 60. It's amazing.

[Unidentified Committee Member]: And so I think I just read maybe last year you made over 11%. So that's great.

[David [last name unclear] (Deputy State Treasurer)]: Yeah, I mean the stock market in general has been doing very well, and that 11% does reflects that.

[Unidentified Committee Member]: So so the bigger the fund, the bigger the 5% is?

[David [last name unclear] (Deputy State Treasurer)]: Yes. It's a fair statement unless the market crashes, in which case you might have

[Peter Conlon (Chair)]: Yeah. Nothing. Nothing. Yeah. And and as you said, annual contributions are erratic.

[David [last name unclear] (Deputy State Treasurer)]: Yeah. Certainly, the estate tax is erratic. The unclaimed property

[Peter Conlon (Chair)]: That's such a small number.

[David [last name unclear] (Deputy State Treasurer)]: Tiny. That is much more stable, but it's also tiny. So it doesn't make a huge difference. The real contributions are estate tax and they're erratic.

[Peter Conlon (Chair)]: And is is that largely because, frankly, people with great wealth have the ability to shield themselves from the estate tax? It just seems uncommon to have had a, you know, kind of a a chunk come in as came into 2025.

[David [last name unclear] (Deputy State Treasurer)]: It certainly is uncommon. I would defer to tax experts to maybe make suppositions about why that that is so erratic, both in term and I'm sure that it has to do both with what you're saying around folks managing their money, also just the size of the state and and the likelihood of having very large estates like that. But I think generally what you're saying is probably a fair supposition.

[Peter Conlon (Chair)]: I guess, in the sense of like, oh, is this a trend? But I assume there's never been a trend here. There's never been a We should not start thinking that this is a trend.

[David [last name unclear] (Deputy State Treasurer)]: There's no reason to believe based on what we know in the last twenty six years that this would be a trend.

[Unidentified Committee Member]: But there could be a trend. And I mean, could be reflective of current wealth.

[Peter Conlon (Chair)]: And demographics. That was thank you for saying that. You jumped in.

[David [last name unclear] (Deputy State Treasurer)]: Yeah. It it could be. I the the the data that we have

[Peter Conlon (Chair)]: I see.

[David [last name unclear] (Deputy State Treasurer)]: Is hard to, yeah, hard to derive at. It's it's possible. Yeah.

[Unidentified Committee Member]: Wait. Fingal, there's a shift in the. Right.

[David [last name unclear] (Deputy State Treasurer)]: And this is an exceptionally large estate tax distribution, so it's unusual.

[Unidentified Committee Member]: I get it. It's very obvious. Yeah.

[Unidentified Committee Member]: So it gets to the 4% benefit, right? When you give up seven, like in a good year, right? So if the fund grows just because

[David [last name unclear] (Deputy State Treasurer)]: Yeah, I mean, possible that if the fund is growing at 5% every year and you're doing a 5% distribution every year, it'll just stay the same other than estate tax and unclaimed property income. As long as the investments are growing at a greater than 5%, really greater than 7% rate, assuming you do that other 2%, then the investments will help grow the fund. But it also could stay flat if those aren't if those returns aren't greater than that percentage.

[Unidentified Committee Member]: Right. That was my big question from yesterday. Just saying it's trustfully.

[Peter Conlon (Chair)]: It's good.

[David [last name unclear] (Deputy State Treasurer)]: Yeah, there's Yeah. Significant.

[Peter Conlon (Chair)]: When the news of this came out, I think that those of us in the allocating resources business started drooling. But I think it's very good to understand that is Where the money goes is very clear, and how it's to be used is very clear in statute. And that really, if we wanted to monkey around with it, it's gonna require a change in statute very clearly.

[Unidentified Committee Member]: It was. That's correct.

[Peter Conlon (Chair)]: Crushing many dreams, but that's okay. Yes. Is this fund

[Bridget (Guest, likely from a budget committee)]: the recipient of 100% of the estate tax

[David [last name unclear] (Deputy State Treasurer)]: No, it's that gets a little bit complicated. My understanding is if there's a projection about the anticipated estate tax returns that's made in the summer And if it's above 125% of that projection, everything above 125% of that percent of that projection comes into this fund.

[Peter Conlon (Chair)]: It's based on the e boards. Oh, okay. Okay. Interesting. Does everybody feel like they got a full understanding of it now? Yep. So just for the committee's sake, the governor sort of alluded to a potential use of money to fund project at UVM. It wasn't very clear to me whether it was specifically about this fund. Many people have thought that it is. But I just think it's important to remember what's in statute about what's the mission of these dollars. I think it's great. It's a great resource for these places. Any questions? Bridget, you're welcome to ask questions while you're here as well. Do you have any?

[Bridget (Guest, likely from a budget committee)]: I just wanna say there has been language already drafted about the specific use that's come through our committee.

[Peter Conlon (Chair)]: It has, okay. Could you tell us what it says, if you know?

[Bridget (Guest, likely from a budget committee)]: The governor is proposing in the budget to take $15,000,000 out of the fund and put it towards sports complex UBM. And also proposing a change to the way it was funded. So to stop basically putting in amounts above 125%. So it would change the revenue stream and it would change that. It would not withstand basically this year is what their proposal was to just take $15,000,000 out of it for this year. But also to basically stop the main fund stream of it in the future.

[Joshua Dobrovich (Member)]: Interesting. Josh? Do you invest in accounts that the money sits in to earn its interest? We're talking about 5% is right here is what we made come to down average, 5% to 7%.

[David [last name unclear] (Deputy State Treasurer)]: I'd have to check the let me there is a chart here that has some of the returns. Think that's generally true. Yes, that is generally the case.

[Joshua Dobrovich (Member)]: Is there any mechanism for moving it into other accounts as the markets move? So for a long time, you would put money in medical technology, those were the funds that were doing well. And so, a lot of these IRAs and mutual funds would put their money there. But now, we're looking at microprocessors and stuff like that. Everything changes every three, four, or five years. Is there a mechanism to allow or anyone to move that money around to try and every few years chase a 12% or 13% return on investment? Because that's a grip of money to be able to do that with and actually provide double the return, we're probably not as much work as one might think.

[David [last name unclear] (Deputy State Treasurer)]: Yeah, I mean, and two things. One, let me amend my prior answer to be a little bit more precise. Over the trailing ten years, there has been a 5.6% annualized return. Those returns have been higher in more recent years. To your question about the mix of investments, it's always a question of how much risk you're willing to accept. In recent years, the equities have had very high returns that may we have to expect that that won't always be the case. And so you have to invest in a way that will protect the body of the fund while still having reasonable returns. And this the goal of the trust investment account generally is to have a sort of middle of the road viewpoint. Not super conservative as you would need for short term cash holdings, not as aggressive as he would for very long term investments. And so sort of middle of the road mix. In terms of the precise, the current mix that they've decided on and chart number four does have that laid out for you. I would want to have one of the folks in our office who's really expert on that come in and talk to you a bit more about that to get into the weeds of it more intelligently than I can. But generally speaking, that's the goal. There's always you could always invest more aggressively, but you're accepting more risk and they're trying to balance that.

[Joshua Dobrovich (Member)]: You may not need to come in, because I may be the only one interested in this. But I'm interested in it, so if you can have them send us- We're happy to. Josh

[Peter Conlon (Chair)]: has a crypto. I

[Joshua Dobrovich (Member)]: have no crypto. To me, the way you're saying you're investing into someone who's in their late 30s getting a four zero one ks or an IRA versus someone in their early 20s or in their 50s. That's a fair way to look at it. I wanted the return on investment, but I'm not willing to be too risky, but I don't want to be too lazy either.

[David [last name unclear] (Deputy State Treasurer)]: Yeah, so that analogy is reasonable in terms of a retirement type investment. Like how close are you to needing that money? So that's the general concept. In terms of getting into the weeds of those decisions. I'm happy to connect you with somebody in our office who really does that one time. Thank you.

[Peter Conlon (Chair)]: So again, for the the committee's deliberation and certainly in ways of means, The governor has sort of opened the door to not withstanding the use of this money. I guess I would say if we're thinking about notwithstanding that, I often think about beefing up contributions to the eight zero two opportunities, tuition free or freedom immunity. But, it's just all for a second, not for you to institute and listen too much debate. Any other questions? Otherwise, thank you for taking the time to help us out with that. Really appreciate it. So you put before last year?

[David [last name unclear] (Deputy State Treasurer)]: Right. Yeah.

[Peter Conlon (Chair)]: So committee, we will pick it up again Tuesday,