For more than 110 years the major purpose of the federal land grant trusts has been to provide economic support for the state`s educational institutions. That remains true today. Unlike many other states, Washington`s land grant trust portfolio has not been diversified, and it remains invested primarily in timber lands. Washington State University`s trust has returned an average of less than two percent per year over the last decade. WSU`s Board of Regents believes that without a gradual conversion of some of the timber assets into other investments, it will only become more difficult to provide adequate funds for education. The failure to diversify will place a greater burden on the taxpayers and the state`s general fund. No prudent investor would invest the largest portion of its assets in timber holdings, and the state should not do so now. WSU urges legislative action to promote the gradual diversification of the trusts` land holdings to both support our educational institutions and to preserve our natural resources.
History of Trust. In 1889 the federal government granted certain lands to the then newly admitted State of Washington. These lands were to be held by the State as trustee for the benefit of specifically designated institutions. The purpose of these trusts was to provide economic support for the designated institution.
Two of these trusts were established for the benefit of Washington State University. One of the grants was of ninety thousand acres "for the use and support of agricultural colleges" (the Agricultural Trust"). Another grant was of one hundred thousand acres "for the establishment and maintenance of a scientific school" (the "Scientific Trust"). The Washington State Legislature assigned the benefits from these two trusts to Washington State University. These two trusts presently contain approximately 150,000 acres of land that is being managed by the Department of Natural Resources. The value of these lands was estimated to be $580,000,000 in 1996.
Trust Responsibility - Making the Trust Productive. In managing the trusts a primary objective is to ensure that the trust property is productive. In this context the assets of the trust must be managed in a way that is reasonably expected to support and enhance the trusts` purpose - to provide economic support to the benefited institutions.
Schedule 1 contains a synopsis of the net revenues obtained from the land assets held by the Agricultural Trust and the Scientific Trust. Over the last nine years those land assets have only produced an average return of 1.96%. Land assets comprise over 70% of the portfolio for the Agricultural Trust and the Scientific Trust, and forest lands comprise over 80% of all land assets held by those trusts. With the listing of the Spotted Owl, the Marbled Murrelet, and now the salmonid species it becomes more and more difficult to make these trust assets productive. As a result of these and other factors the average annual net return on the forest lands has been less than 2% over the last 9 years.
Diversification. A trustee has a general obligation to diversify the trust assets. This is to minimize the risk of large losses, and to ensure that adverse economic trends in one market to not unduly impact the trust. As noted above, with the imposition of many different restrictions on the timber industry, the economic productivity of the trust lands has been severely restricted. Because the trust assets have not been diversified away from land holdings, and in particular forest land holdings, the income produced by the trusts has been severely reduced. In order to make the trusts more productive it is necessary to diversify their holdings away from forest lands.
Schedule 2 contains two graphs that demonstrate the impact of not having diversified the holdings of the Scientific Trust. The graphs compare the actual performance of the trust lands and the performance of a balanced portfolio of stocks and bonds, starting in 1974. Although the principal value of the trust has appreciated significantly, the income generated by the trust has lagged considerably. Schedule 2 indicates that revenues from the trust lands matched expected revenues from a balanced portfolio in only one of twenty years. In all other years the revenues from the trust lands fell millions of dollars below the expected return from a balanced portfolio.
Other States. It is interesting to note what other states have done. 34 of the states received trust lands from the federal government at statehood. Of these, 23 still hold some of the lands, but only 11 still retain 40% or more of those lands. Washington presently holds approximately 2,800,000 acres, or about 47% of the acres originally granted to it.
Unlike most other states Washington has retained the largest part of its land holdings in forest resources. Historically this provided an attractive and dependable revenue source for the trusts. Changing times have altered this. The next largest timber holding states are Idaho, which presently holds approximately 880,000 acres of forest lands; Oregon which holds approximately 754,000 acres of forest lands; and Montana which holds approximately 500,000 acres of forest lands.
It is also interesting to consider the size of the permanent fund accounts held by the large land holding states. In 1990 Washington held approximately $110,000,000 in its permanent fund accounts; however, Arizona held $475,000,000, Montana held $230,000,000, Wyoming held $675,000,000, and New Mexico held approximately $3,000,000,000 in their respective permanent funds. These large permanent funds are the result of many factors, but one key element was the diversification of the trusts` holdings. This was accomplished by the sale of trust assets and resources, and the investment of those proceeds in something other than land. Most of those states had (and still have) major holdings in mineral rights (including oil, gas and coal) and grazing leases. Only Washington, Oregon, Idaho and Montana retained a very significant portion of their overall portfolios in forest lands. As noted above, Washington requires that any proceeds derived from the sale of its trust lands must be reinvested in other trust lands.
Impediments to Diversification in Washington. Recent policy and practice in Washington have restricted the ability of the State to diversify the trusts` land holdings. Several statutory enactments imply that the trust land base should not be diminished. Other statutes specifically restrict or limit the sale of trust lands. These policies and statutory provisions prevent the State from fulfilling its fiduciary obligation to make the trusts productive. As a result the trusts produce very little revenue, and the benefited institutions must look to the legislature for additional funding - funding that could be provided by the trusts if they were invested in a prudent manner.
Solutions. Before the trusts` portfolio of assets can be properly diversified it will be necessary to revise the statements of policy and practice that are contained in Washington`s statutes. A process must also be established for the orderly sale and exchange of a significant portion of the trusts` land holdings. In implementing any diversification strategy it will be important to protect and conserve our ecologically sensitive forest lands. These are part of our State`s natural heritage and should be preserved for future generations.
All of these objectives can be realized. One solution is to have the federal or state governments acquire lands from the trusts for fair market value. The lands could then be properly managed primarily for recreational and environmental purposes. Another solution would be the implementing a program under which commercial enterprises could acquire the lands with a binding commitment to preserve them in return for enhanced commercial rights on unrelated properties.
Summary. The explicit purpose of the federal land grant trusts is to provide economic support for the State`s educational institutions. Without diversification of the trusts` assets it will become increasingly difficult to accomplish this purpose. Even now the income produced by the trusts falls far below an acceptable level of return. With the enactment of Initiatives 601 and 695 the state`s educational institutions cannot rely on support from the state`s general fund. The legislature must allow the trusts to be administered in a fiscally prudent manner and in compliance with the state`s legal obligations as trustee. The trusts must be made productive so that adequate support for our educational institutions can be provided in the years to come.
