Does the Endowment Fund Investment Board have to apply trust-law fiduciary duties when guaranteeing Idaho school district bonds?
Plain-English summary
The Idaho Endowment Fund Investment Board, called the EFIB, manages the financial assets of the Public School Endowment, the trust fund whose income supports Idaho's public schools. In 1999 the Legislature created a two-step program that uses the State's credit to lower the interest rates Idaho school districts pay on construction bonds. The first step, the Idaho School Bond Guaranty Act, pledges sales tax revenue. The second step, the Credit Enhancement Program at Idaho Code § 57-728, lets the EFIB pledge Public School Endowment assets as a third source of payment if a district defaults; if that ever happens, the EFIB lends the cash to the State Treasurer in exchange for a promissory note bearing statutory interest.
A 2009 statutory revision required the EFIB to draft administrative rules for the Credit Enhancement Program. As the Board worked through those rules, it heard from public-school witnesses that no fees should be charged for the pledge, since defaults were rare and the statutory interest rate would compensate the trust if the program was ever triggered. EFIB staff disagreed: pledging endowment assets narrows the Board's investment options, requires liquid holdings to be ready to make a loan on ten days' notice, and in practice produces a lower long-run return to the trust. The Board ultimately adopted fees designed to offset that projected loss.
AG Wasden's opinion concluded the Board got it right. The EFIB acts as a trustee of the Public School Endowment when administering the Credit Enhancement Program. As a trustee, it owes the Prudent Investor Rule of Idaho Code § 68-502, the duty of loyalty (consider only the trust's interests), and the duty of impartiality between current and future beneficiaries. Both the initial pledge of trust assets to issue a guaranty and the later purchase of a promissory note in the event of a default are "investments" within Idaho Const. art. IX, § 11 as confirmed by Idaho Endowment Fund Investment Board v. Crane (2001). And because the pledge predictably reduced trust returns, charging offset fees was not just permitted, it was required. Investing without the fees would have breached the EFIB's fiduciary duties.
The opinion also concluded the Board cannot consider the benefit to a particular school district, or to school districts generally, when deciding whether to issue a guaranty. The trust's purpose is "support and maintenance" of public schools, which Roach v. Gooding (1905) interpreted as continuing operating expenses, not the construction or equipping of buildings. The Board's only permissible criterion is the investment return to the trust.
Currency note
This opinion was issued in 2010. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.
Common questions
What is the Public School Endowment?
It is the trust fund created by sections 4, 5, and 7 of the Idaho Admission Bill (the federal statute admitting Idaho to the Union in 1890). Land grants and the proceeds from selling that land became the corpus of the trust, with income flowing to Idaho's public schools in perpetuity. The Idaho Constitution at art. IX, §§ 3, 4, 7, and 11 sets the trust's terms and assigns the State Board of Land Commissioners as trustee. The State Board of Land Commissioners delegates day-to-day investment of the financial assets to the EFIB.
What is the Credit Enhancement Program at Idaho Code § 57-728?
It is one of two programs under the 1999 Idaho School Bond Guaranty Act. The Guaranty Program pledges state sales tax revenue as a backup source of payment for school district bonds. The Credit Enhancement Program adds a third backup: the EFIB pledges Public School Endowment assets. With both pledges in place, the bonds receive a higher credit rating and the school district pays a lower interest rate. If a district ever defaults, the EFIB does not pay the bondholders directly; it lends cash from the endowment to the State Treasurer, who issues a promissory note bearing interest set in the statute.
What is the Prudent Investor Rule?
Idaho Code § 68-502, derived from the Restatement (Third) of Trusts § 90, requires a trustee to invest and manage trust assets "as a prudent investor would, by considering the purposes, terms, distribution requirements and other circumstances of the trust." Decisions on individual investments must be evaluated "not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy." Idaho Code § 57-723 specifically applied the Rule to the endowments after Endowment Reform.
Why did the EFIB conclude fees were necessary?
Because issuing a guaranty narrowed the trust's investment options. The Board had to keep enough liquid assets ready to fund a promissory note purchase on as little as ten days' notice (see Idaho Code § 33-5305(2)). Holding more liquid investments than the Board would otherwise choose tends to lower the long-run return to the portfolio. Without offsetting fees, the trust would absorb a predictable loss in exchange for a benefit that flowed to school districts, not to the trust beneficiaries.
What did Idaho Endowment Fund Investment Board v. Crane decide?
The Idaho Supreme Court in Crane (2001) held that the Credit Enhancement Program as enacted complied with Article IX, § 11 of the Idaho Constitution. The Court reasoned that the purchase of promissory notes is a permitted "investment," not a transfer of trust funds, and would generate income for the trust through interest. Crane did not analyze whether the initial pledge of assets (as distinct from later note purchases) was itself an investment, which left an open question that this opinion answered: yes, the initial pledge is an investment, subject to the same fiduciary analysis.
Can the EFIB pledge endowment assets to help a particular school district?
No. The opinion concluded the duty of loyalty bars the EFIB from considering the benefit to any specific school district or to school districts in general. The trust's purpose is "support and maintenance" of public schools, which Roach v. Gooding (1905) interpreted as the continuing and regular expenses of running schools, not capital construction. The Board's only permissible question is whether the investment makes financial sense for the trust.
Why does the duty of impartiality matter here?
The EFIB serves both current and future beneficiaries of a perpetual trust. Restatement (Third) of Trusts § 79 and the trust's own perpetual structure require treating those generations even-handedly. Favoring current beneficiaries (today's schools) by accepting a sub-market return on the pledge would shift income away from future beneficiaries, which the AG identified as a separate breach of fiduciary duty.
Background and statutory framework
The Public School Endowment's terms come from the Idaho Admission Bill (26 Stat. L. 215, ch. 656) and the Idaho Constitution at art. IX, §§ 3, 4, 7, 8, and 11. The State Board of Land Commissioners is the constitutional trustee. The Department of Lands manages the land and natural resource assets under Idaho Code § 58-101 and 58-104; the EFIB, established by Idaho Code § 57-718, manages the financial assets.
Endowment Reform in the late 1990s amended Article IX, § 11 to broaden the EFIB's investment authority beyond fixed-income holdings, and the Legislature applied the Prudent Investor Rule to the endowments through Idaho Code § 57-723. The Rule itself sits in Idaho Code § 68-502 and applies to all trustees acting in a fiduciary capacity.
The 1999 Idaho School Bond Guaranty Act and the Credit Enhancement Program at Idaho Code § 57-728 created the two-tier credit support that the opinion analyzes. The 2009 amendments via Senate Bill 1154 separated the two programs and required the EFIB to promulgate administrative rules. The EFIB's resulting rules, published at the August 5, 2009 and October 7, 2009 Idaho Administrative Bulletins, imposed fees both for application review and for the issuance of a guaranty.
The case law backbone of the opinion comes from a line of Idaho Supreme Court decisions: Idaho Endowment Fund Investment Board v. Crane (2001) on what counts as a permitted investment under Article IX, § 11; Idaho Watersheds Project v. State Bd. of Land Com'rs (1999) on the duty of undivided loyalty; Roach v. Gooding (1905) on the meaning of "support and maintenance"; and Engelking v. Investment Bd. (1969) on the constitutional limits of investment authority before Endowment Reform.
Citations
Idaho Constitution: art. IX, §§ 1, 3, 8, 11.
Idaho Code: §§ 33-1102, 33-5303, 33-5305, 57-715, 57-718, 57-723, 57-728, 58-101, 58-104, 68-502.
Idaho cases: Engelking v. Investment Bd., 93 Idaho 217 (1969); Idaho Endowment Fund Investment Board v. Crane, 135 Idaho 667 (2001); Idaho Watersheds Project v. State Bd. of Land Com'rs, 133 Idaho 64 (1999); Pike v. State Bd. of Land Com'rs, 19 Idaho 268 (1911); Roach v. Gooding, 11 Idaho 244 (1905); State v. Fitzpatrick, 5 Idaho 499 (1897); State v. Peterson, 61 Idaho 50 (1939).
Other cases: United States v. Fenton, 27 F. Supp. 816 (D. Idaho 1939).
Other authorities: 1976 Op. Idaho Att'y Gen. 1; 1982 Op. Idaho Att'y Gen. 7; Restatement (Third) of Trusts §§ 77, 78, 79, 90 (2007); Idaho Admission Bill, 26 Stat. L. 215, ch. 656; Black's Law Dictionary (6th ed. 1990); EFIB and Land Board minutes from 2009.
Source
- Landing page: https://www.ag.idaho.gov/office-resources/opinions/
- Original PDF: https://ag.idaho.gov/content/uploads/2018/04/Opinion10-1.pdf
Original opinion text
Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.
STATE OF IDAHO
OFFICE OF THE ATTORNEY GENERAL
LAWRENCE G. WASDEN
ATTORNEY GENERAL OPINION NO. 10-1
To: Mr. M. Dean Buffington, Chairman
Endowment Fund Investment Board
816 W. Bannock Street, Suite 301
Boise, ID 83702
Per Request for Attorney General's Opinion
You have requested an Attorney General's Opinion regarding the fiduciary
responsibilities of the Endowment Fund Investment Board ("EFIB") in its roles as trustee
of the financial assets of the Public School Endowment and as the administrator of the
Credit Enhancement Program for School District Bonds established by Idaho Code
Section 57-728 ("Credit Enhancement Program").
EXECUTIVE SUMMARY
The EFIB is the day-to-day trustee of the financial assets of the Public School
Endowment. In all investment decisions entrusted to the EFIB concerning the
endowments' assets, the EFIB is bound by the fiduciary duties established by the Idaho
Admission Bill, the Idaho Constitution, and the statutory and common law of Idaho.
Both the pledging of the financial assets of the Public School Endowment to guarantee a
school bond and the purchase of notes under the Credit Enhancement Program to provide
funds for a school bond debt service payment are investment decisions.
The EFIB's fiduciary duties require it to determine that the investments
represented by the Credit Enhancement Program satisfy the Public School Endowment
terms. To satisfy the terms of the trust, an investment must secure the maximum long-
term return to the Public School Endowment when considered in conjunction with the
trust's investment portfolio and investment strategies. In addition, the current and future
beneficiaries of the Public School Endowment must be treated with impartiality in
investment decisions.
The EFIB thoroughly reviewed the investment aspects of the initial pledge of
endowment assets under the Credit Enhancement Program. The information it reviewed
established that the initial pledge narrowed the future investment options for the Public
School Endowment. The information also identified that this narrowing could produce a
lower return to the trust and that fees could offset this lower return. In light of this
information, the EFIB's fiduciary duties to the Public School Endowment required that it
either establish fees to offset the projected loss of return to the trust or that it decline to
invest under the Credit Enhancement Program. Rather than decline to invest, the EFIB
decided to establish fees to comply with its statutory and fiduciary duties.
QUESTIONS PRESENTED
-
Do the EFIB's fiduciary duties to the Public School Endowment extend to
its decision to pledge the endowment fund to guarantee school bonds issued under the
Credit Enhancement Program? -
If the EFIB's fiduciary duties extend to decisions by the Board to pledge
the endowment fund to guarantee school bonds under the Credit Enhancement Program,
what must the Board do to fulfill its fiduciary duties? -
If the EFIB's fiduciary duties extend to decisions by the Board to pledge
the endowment fund to guarantee school bonds under the Credit Enhancement Program,
may the Board provide a guarantee based upon the benefit to a single Idaho public school
district?
BACKGROUND
A. Establishment and Management of the Public School Endowment
The original corpus of the Public School Endowment was established by Sections
4, 5 and 7 of the Idaho Admission Bill. The Idaho Constitution sets forth additional terms
of the Public School Endowment trust and specifies that the State Board of Land
Commissioners ("Land Board") is its trustee. See Idaho Constitution art. IX, §§ 3, 4, 7
and 11; see also, Pike v. State Bd. of Land Com'rs, 19 Idaho 268 (1911). The
management of the Public School Endowment is split between two agencies: the land and
natural resource assets of the trust are managed by the Department of Lands and the
financial assets of the trust are managed by the Endowment Fund Investment Board
("EFIB").
B. Investment of the Endowments
The Endowment Reform revision to Idaho Constitution article IX, section 11,
expanded the types of authorized investments in which the endowment funds could be
invested. The primary restriction upon the investment options available to the EFIB
under Endowment Reform is the "Prudent Investor Rule." The Prudent Investor Rule
requires in pertinent part:
(1) A trustee shall invest and manage trust assets as a prudent
investor would, by considering the purposes, terms, distribution
requirements and other circumstances of the trust. In satisfying this
standard, the trustee shall exercise reasonable care, skill and caution.
(2) A trustee's investment and management decisions respecting
individual assets must be evaluated not in isolation but in the context of the
trust portfolio as a whole and as a part of an overall investment strategy
having risk and return objectives reasonably suited to the trust.
Idaho Code § 68-502.
C. Guaranty of School Bonds by the Public School Endowment
In 1999 the Idaho Legislature enacted the Idaho School Bond Guaranty Act
("Guaranty Program") and the Credit Enhancement Program. Idaho Code title 33, ch. 53;
Idaho Code § 57-728. Under the Guaranty Program, the sales tax of the State of Idaho is
pledged to guarantee the debt service payments of bonds issued by Idaho public school
districts under the program.
When the EFIB issues a guaranty under the Credit Enhancement Program, it
pledges the Public School Endowment's assets as a third source of payment should a
school district default on its bonds. In the event of a school district default, the EFIB
does not directly make the school district's bond payment. Instead, the EFIB loans funds
from the Public School Endowment to the State of Idaho in exchange for a promissory
note issued by the Treasurer on behalf of the State of Idaho. The promissory note is held
by the EFIB as an investment for the Public School Endowment until the Treasurer is
able to repay the loan.
ANALYSIS
A. The EFIB is Acting as a Trustee of the Public School Endowment When
Administering the Credit Enhancement Program
The Idaho Constitution grants to the legislature the authority to prescribe the
framework for the management of the land and financial assets of the Public School
Endowment. Idaho Const. art. IX, §§ 3 and 8. The framework established by the
legislature, however, must be consistent with the terms of the Idaho Constitution and the
Idaho Admission Bill.
In Crane, the court recognized that the purchase of a promissory note to be held as
an asset of the Public School Endowment is within the investments permitted by Idaho
Constitution article IX, section 11. Crane, 135 Idaho at 673. Critical to the court's
analysis was the finding that the Credit Enhancement Program involved an "investment."
The Crane court also did not consider whether the initial pledge of trust assets
represented by the issuance of a guaranty is a permitted investment for the Public School
Endowment. As the EFIB recognized in its deliberations concerning the EFIB Rules,
guaranties providing the benefits conferred by the Credit Enhancement Program are
offered by private companies and institutional investors. The issuance of a guaranty is
thus also an investment.
Even though the investment is permitted, the legislature cannot require action by
the EFIB that is contrary to its constitutional duties as trustees. The EFIB is acting as a
trustee to the Public School Endowment when considering the initial investment
represented by the issuance of a guaranty under the Credit Enhancement Program and the
pledge to purchase notes under the terms set forth in statute. The EFIB must satisfy its
fiduciary duties when electing to invest under the Credit Enhancement Program.
B. The EFIB's Duties to the Public School Endowment are to Consider the
Investment Represented by the Issuance of a Guaranty in the Context of the
EFIB's Investment Strategy and Investment Portfolio
The EFIB's duties to the Public School Endowment arise from the terms of the
Idaho Admission Bill, the Idaho Constitution and the common and statutory law
applicable to trustees. A primary investment objective of the trustees of the endowments
is to manage the assets of the trust to secure the maximum long-term return to the
beneficiaries. Idaho Const. art. IX, § 8.
The interest on notes purchased by the Public School Endowment under the Credit
Enhancement Program is set forth in statute. At the time of the issuance of a guaranty,
the EFIB must consider whether these terms represent an investment that, within the
current and projected structure of the Public School Endowment portfolio as a whole, is
reasonably projected to produce the maximum long-term return to the trust.
The fiduciary considerations related to the issuance of the guaranty are the same as
the considerations for the purchase of the notes issued by the Treasurer in the event of a
school district default. Adjustments to the strategy and portfolio to account for the
guaranty may produce a lower return to the Public School Endowment. As the EFIB
recognized in its discussions, the lower return can be offset if school districts pay fees
designed to provide the present value of the lower return for deposit in the trust.
The offset represented by the fee is critical to the EFIB's exercise of its fiduciary
duties. The pledge under the Credit Enhancement Program does not satisfy any
investment purpose for the portfolio of the Public School Endowment. Instead, the EFIB
has determined that the pledge likely produces a loss to the trust if the lower return is not
offset by fees. Investment through the pledge without the fees is thus a breach of the
EFIB's fiduciary duties to the trust.
C. The EFIB may not Consider the Benefit to an Individual School or to School
Districts Generally When Administering the Credit Enhancement Program
The trustees of the Public School Endowment must act in furtherance of the
purposes of the trust and in compliance with the trust's terms. The Idaho Admission Bill
and the Idaho Constitution provide that the purpose of the trust is the perpetual support
and maintenance of public schools. Idaho Admission Bill §§ 4 and 5; Idaho Const. art.
IX, § 3.
In Roach v. Gooding, 11 Idaho 244 (1905), the Idaho Supreme Court considered a
state statute allowing for the issuance of bonds for the construction of university facilities
secured by the revenues from the University Endowment. The court adopted the analysis
of other states that had considered the issue and concluded that the language in the Idaho
Admission Bill and the Idaho Constitution concerning the support and maintenance of the
public schools means the continuing and regular expenses of the school and not the
erection and equipment of school buildings. Because the erection and furnishing of school
buildings is not a purpose of the trust, the EFIB may consider only the investment aspects
of the issuance of a guaranty under the Credit Enhancement Program and not the other
public benefits arising from the guaranty.
The investment aspects of the guarantee are not limited to the impact on the
current portfolio held by the Public School Endowment. The trustees owe a duty of
impartiality when dealing with the current and the future beneficiaries of the trust.
Restatement (Third) of Trusts § 79 (2007). The duty of impartiality requires that the
trustees invest and administer the trust so that the trust estate will produce income that is
reasonably appropriate for the diverse present and future interests of its beneficiaries.
CONCLUSION
The EFIB acts as a trustee when determining whether to invest the Public School
Endowment under the Credit Enhancement Program. As a trustee, the EFIB must
comply with the Prudent Investor Rule and the duties of loyalty and impartiality in the
administration of the Credit Enhancement Program. These fiduciary duties require that
the EFIB determine that the investments represented by the Credit Enhancement Program
will secure the maximum long-term return to the endowment when considered in
conjunction with the trust's investment portfolio and investment strategies. The EFIB is
also prohibited from selecting an investment that improperly favors either current or
future beneficiaries.
Investment through the Credit Enhancement Program without fees is an
investment that does not comply with the duties of loyalty, impartiality or the Prudent
Investor Rule. As a condition of its investment through the Credit Enhancement
Program, the EFIB decided to impose fees to offset the projected loss of return to the
trust caused by the narrowing of investment opportunities. Had EFIB decided otherwise,
it would have breached its fiduciary obligations. The EFIB chose instead to impose
offset fees, fulfilling its duties of loyalty and impartiality as well as the requirements of
the Prudent Investor Rule.
DATED this 8th day of January, 2010.
LAWRENCE G. WASDEN
Attorney General
Analysis by:
JULIE K. WEAVER
Deputy Attorney General