Could Idaho's Endowment Fund Investment Board legally invest permanent endowment funds in money market mutual funds, and what was the State Treasurer's role in questioning those investments?
Opinion 85-4: Money market mutual fund investments and Idaho's endowment funds
Plain-English summary
The Endowment Fund Investment Board's Investment Manager asked the Attorney General whether Idaho Code § 57-722(3)(b), which authorizes investment in money market mutual funds whose assets are limited to U.S. or U.S. agency obligations, was constitutional. He also asked about the State Treasurer's authority as custodian of the public school fund to question or refuse the Board's investment instructions.
The AG concluded the statute was constitutional in operation, but only if two conditions were met. First, the money market mutual fund had to unconditionally guarantee full repayment of principal and interest, satisfying the Idaho Supreme Court's reading of "loaned" in Article IX, § 11 (Engelking v. Investment Board). Second, the investment could not result in the state directly or indirectly becoming a stockholder in any association or corporation, as required by Article VIII, § 2. Compliance had to be assessed case by case based on each fund's investment agreement and prospectus.
On the State Treasurer's authority, the AG concluded she has a custodial responsibility to safeguard fund assets and may refuse to open accounts for clearly illegal investments. For investments she only suspects might be illegal, the AG recommended completing the transaction and limiting any legal challenge to judicial review.
Currency note
This opinion was issued in 1985. 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.
Background and statutory framework
Article IX, § 11 of the Idaho Constitution sets the primary limit on permanent endowment fund investments:
The permanent endowment funds other than funds arising from the disposition of university lands belonging to the state, shall be loaned on United States, state, county, city, village, or school district bonds or state warrants or on such other investments as may be permitted by law under such regulations as the legislature may provide.
Article VIII, § 2 forbids the state from directly or indirectly becoming a stockholder in any association or corporation. Idaho Code § 57-722(3)(b) lets the Board invest in money market mutual funds with assets limited to U.S. or U.S. agency obligations.
Engelking v. Investment Board (1969) had struck down statutory language permitting purchase of stock and conversion of convertible bonds, holding both that "loan" must mean an unconditional promise to repay principal and interest, and that the state could not directly or indirectly become a stockholder.
What the AG concluded at the time
Engelking sets two requirements for any endowment investment
First, the investment must be a "loan" in the Engelking sense, with an unconditional guarantee of full repayment of principal and interest. Mere appreciation potential is fine if it is paired with that unconditional guarantee. Second, the investment cannot result in the state becoming a stockholder, directly or indirectly, in any association or corporation.
Money market mutual funds can fit those requirements
A money market mutual fund typically purchases short-term high-quality money market instruments such as U.S. Treasury obligations and commercial paper. Whether a particular fund satisfies the Engelking requirements depends on the fund's investment agreement and prospectus. If the fund's structure unconditionally guarantees principal and interest and avoids stockholding (for example, by holding only U.S. obligations and structuring beneficial ownership in a permissible form), it can be a permissible investment under § 57-722(3)(b).
Case-by-case review
The AG declined to issue a categorical green light. Each fund must be reviewed against its investment agreement and prospectus before the Board commits to invest. The Engelking requirements operate on the substance, not the label.
State Treasurer's custodial role
The State Treasurer, as custodian of the public school fund, has a duty to safeguard fund assets. That duty supports refusing to open accounts or transfer funds for clearly illegal investments. For closer cases, the AG recommended completing the transaction and limiting any legal resistance to judicial review of the question. The Treasurer is not a substitute for the Board's investment judgment.
Common questions
Could the Board invest in a money market fund holding corporate commercial paper?
Probably not. Article VIII, § 2 forbids stockholding, but more importantly, commercial paper is not a U.S. or U.S. agency obligation. Section 57-722(3)(b) limits eligible money market funds to those whose assets are U.S. or U.S. agency obligations.
What if a money market fund's net asset value drops below $1.00?
That would suggest the fund did not in fact unconditionally guarantee full repayment of principal. Engelking treats unconditional repayment as constitutionally essential.
Can the State Treasurer veto investments she disagrees with on policy grounds?
No. Her authority is custodial. Investment policy belongs to the Endowment Fund Investment Board.
Citations
- Idaho Constitution art. IX, § 11 — endowment fund investment limit; "loaned" requirement.
- Idaho Constitution art. VIII, § 2 — bar on state stockholding.
- Idaho Code § 57-722(3)(b) — money market mutual fund authority.
- Engelking v. Investment Board, 93 Idaho 217, 458 P.2d 213 (1969) — leading case interpreting "loan" and the stockholding prohibition.
Source
- Landing page: https://www.ag.idaho.gov/office-resources/opinions/
- Original PDF: https://ag.idaho.gov/content/uploads/2018/01/OP85-04.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
JIM JONES
ATTORNEY GENERAL
BOISE 83720
TELEPHONE (208) 334-2400
ATTORNEY GENERAL OPINION NO. 85-4
TO: Mr. William G. Hepp
Investment Manager
Endowment Fund Investment Board
STATEHOUSE MAIL
PER REQUEST FOR ATTORNEY GENERAL'S OPINION
Regarding: Idaho Code § 57-722(3)(b)
QUESTIONS PRESENTED:
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Whether Idaho Code § 57-722(3)(b) is constitutional?
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What authority does the State Treasurer have as custodian of the public school fund to: (a) question the investments made by the Board through its Investment Manager who has been granted discretionary authority regarding investments; and (b) to refuse to open accounts as instructed by the Investment Manager for securities which clearly qualify for investment pursuant to Idaho Code § 57-722, specifically subsections (3)(b) and (8)?
CONCLUSIONS:
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Idaho Code § 57-722(3)(b) authorizes investment in money market mutual funds whose assets are limited to obligations of the United States or any agency or instrumentality thereof. Such investments are constitutionally permitted, provided that the money market mutual fund meets two requirements. First, it must unconditionally guarantee full repayment of principal and interest as required by Idaho Const. art. IX, § 11. Second, the state must not directly or indirectly become a stockholder in any association or corporation. These determinations must be made on a case-by-case basis following review of the particular investment agreement and prospectus.
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Responsibility for choice of legally permissible investments is vested in the board. The state treasurer has a custodial responsibility to safeguard fund assets entrusted to her care. Her responsibility is broad enough, at a minimum, to refuse to open accounts or transfer funds for clearly illegal investments. As to investments which the treasurer believes are possibly illegal, we recommend that the transaction be completed and that legal resistance, if any, to a board request for investment be limited to judicial review of the question.
[Question 1 analysis]
The question presented is whether Idaho Code § 57-722(3)(b) violates the Idaho Constitution. Idaho Code § 57-722(3)(b) provides:
The board or its investment manager(s) may, and they are hereby authorized to, invest the permanent endowment funds of the state of Idaho in the following manner and in the following investments or securities and none other:
(b) Money market mutual funds whose assets are limited to obligations of the United States or any agency or instrumentality thereof.
Idaho Constitution art. IX, § 11, sets forth the primary constitutional limitation upon permissible investments of the permanent endowment funds. That section provides:
The permanent endowment funds other than funds arising from the disposition of university lands belonging to the state, shall be loaned on United States, state, county, city, village, or school district bonds or state warrants or on such other investments as may be permitted by law under such regulations as the legislature may provide. (Emphasis added)
The leading case construing this section's limitations upon investments is Engelking v. Investment Board, 93 Idaho 217, 458 P.2d 213 (1969). In that case, the Idaho Supreme Court held that §§ 9(6) and 9(8) of S.B. 1277 (S.L., 1969), which permitted purchase of stock and conversion of convertible bonds, violated Idaho Const. art. VIII, § 2, and art. IX, § 11.
In construing Idaho Const. art. IX, § 11, the court found that the legislature was limited to authorizing loans of endowment funds in view of the operative verb "shall be loaned" which is used in that section. In defining loan, the court held:
In this situation we believe the important word "loan" must not be loosely construed to include all types of "investment." Instead, the word "loan," as used in Idaho Const., art. IX, § 11 and as extended in scope by the 1968 amendment, must carry the meaning that there must be a guarantee of full repayment of principal as well as interest. There must be an unconditional promise to repay the principal sum originally lent. (emphasis added)
93 Idaho at 223.
The court in Engelking also held that the statute authorizing purchases of stock and conversion of convertible bonds violated the express provision of art. VIII, § 2, that the state shall not "directly or indirectly become a stockholder in any association or corporation."
Thus, the court has established two requirements which must be met by any investment of the Idaho Endowment Fund Investment Board. First, the investment must be a "loan," that is, there must be an unconditional guarantee of full repayment of principal as well as interest. Second, the board must not directly or indirectly become a stockholder in any association or corporation.
In Engelking, supra, the court permitted investment in convertible bonds provided that they were not converted into common stock by the board. Thus, the fact that a security includes a potential for appreciation measured by the increase in value of equity interests is not fatal, provided that the security also unconditionally guarantees the full repayment of principal and interest.
In view of the numerous and varying provisions included in financial instruments offered to investors, it is necessary to determine compliance with Idaho's constitutional limitations upon endowment investments on a case-by-case basis. This necessarily requires a review of the particular security being considered as defined by the terms of the security agreement and prospectus.
Applying the Engelking decision to money market mutual fund investments, the AG examined the typical structure of such funds (Dictionary of Banking and Finance, John Wiley & Sons, 1982), considered how a fund's investment agreement and prospectus must demonstrate unconditional guarantees of principal and interest, and considered how stockholding-type interests must be avoided. The AG concluded that money market mutual funds limited to U.S. or U.S. agency obligations can satisfy both Engelking requirements, but only on a case-by-case showing.
[Question 2 analysis]
The State Treasurer's custodial role permits her to refuse to open accounts or transfer funds for clearly illegal investments. For investments where legality is in doubt, the AG recommended that the Treasurer complete the transaction and limit any legal resistance to judicial review.
DATED this 20th day of June, 1985.
ATTORNEY GENERAL
State of Idaho