The Shoshone municipal water treatment plant complements the Shoshone municipal pipeline project that provides water from the Buffalo Bill Dam to the communities of Cody, Powell, Byron, Lovell, Deaver, and Frannie as well as rural residents in Park and Big Horn counties. Several of the communities and rural residents in this area were facing bad water and water shortages. In addition, there were water treatment needs in Cody. Thus, the Wyoming Water Development Commission (WWDC) encouraged a regional system as the most effective way to meet these needs. In 1987, the Legislature approved water development funding totaling $36,750,000 in grants and loans for the pipeline project, and this loan from the PWMTF for the treatment project.

This loan is administered by the WWDC, under the same project agreement it uses to administer WWDC projects. This requires project sponsors to offer all assets, including existing facilities and water rights, as loan collateral. Further, WWDO project managers must approve each project expenditure.

The Sheridan Area Water Treatment Plant complements the Sheridan Area Water Supply Project that provides water to residents in the city of Sheridan as well as to rural residents in the Big Goose and Little Goose valleys. The area water supply and treatment system was built to address water supply and quality problems in the Sheridan area that included violations of the Safe Drinking Water Act. In addition to this direct legislative loan, the state made loans and grants through the Wyoming Water Development Commission totaling $37,206,000 to finance the system's water development needs.

WWDC administers this loan, under the same project agreement it uses to administer WWDC projects. This agreement requires project sponsors to offer all assets, including existing facilities and water rights, as loan collateral. Further, WWDO project managers must approve all project expenditures.

Green River and Rock Springs, as well as residents in the area between the two municipalities, draw water for municipal and domestic use from the Green River and have shared a water treatment plant. Water treatment improvements were necessary to complete a regional project, financed by WWDC, to improve intake and transmission capabilities. Site contamination at the existing water treatment plant prohibited expansion of that facility, so the joint powers board sponsoring this project sought funding from the Legislature for a new plant. The board was also awarded $18.8 million in Abandoned Mine Land (AML) funding for this project, to be received on a phased basis.

This loan is administered by the WWDC, under the same project agreement it uses to administer WWDC projects. This requires project sponsors to offer all assets, including existing facilities and water rights, as loan collateral. Further, WWDO project managers must approve each project expenditure.

The Natrona County Regional Water Treatment Project is the water treatment aspect of a regional water system, now called the Central Wyoming Regional Water System. Studies conducted by the Wyoming Water Development Commission (WWDC) in the early 1990s indicated that this area could be effectively served through a regional system. As a result, a joint powers board comprised of representatives of some regional municipalities, the county, and water districts, formed and then sought state funding for the system. Current board members are the city of Casper, Midwest\Edgerton, Natrona County, and the Pioneer and Wardwell Water and Sewer Districts. In addition to this loan, the state has funded this system through WWDC grants and loans totaling $21,300,000.

This loan is administered by the WWDC, under the same project agreement it uses to administer WWDC projects. This requires project sponsors to offer all assets, including existing facilities and water rights, as loan collateral. Further, WWDO project managers must approve each project expenditure.

Community colleges were given the power to bond through W.S. 21-18-314 in 1967, and at that time the Treasurer was authorized to invest any permanent state funds in these bonds. The bonds were purchased using Common School Account monies from the Permanent Land Fund. Wyoming statutes do not specify a defined level of authorization for this program. Currently, the Treasurer's Office only has involvement in the program to collect payments on the existing bonds.

Historically, the return has been comparable to other government guaranteed investments. There are numerous protections of the state's investment in place. First, the WSLC repurchases any loans that are in default more than 90 days. Second, there are a number of private guarantees on the loans, and ultimately, all loans carry the guarantee of the federal government as well. The program appears to be sound having experienced no losses. The state pays the WSLC a 1.75 percent servicing fee for the administration of these loans.

In 1987, the Legislature passed enabling legislation authorizing the UW advance payment of tuition program. Inconsistent with the name, this program provides a mechanism by which families can purchase contracts for the costs of tuition, fees, and room and board at the University of Wyoming or any of Wyoming's community colleges. The contracts require advance purchase of 10 to 18 years prior to attendance. The authorization for the State Treasurer to invest permanent funds in the guaranteed portion of nondelinquent loans made to finance these contracts is outlined in W.S. 9-4-701(n) while W.S. 21-16-501 through 21-16-505 provide the authorization for the program.

Time Deposit, Open Account Program

Time deposit, open account (TDOA) refers to a program through which the Treasurer deposits state funds with Wyoming financial institutions for the fiscal year at rates based on the 90-day Treasury bill yield for the previous quarter. W.S. 9-4-801 through 818 authorize TDOAs.

When initiated in 1907, the purpose of the program was to ensure the safekeeping of the state's money, but over time, the purpose of the program has evolved. While statutes are not explicit about the current purpose, TDOAs provide Wyoming banks with a source of stable, reliable, and rationally-priced funding. They can assist banks that lack an asset base sufficient to meet lending needs associated with the impacts of growth. Finally, according to the state banking commissioner, TDOAs enable Wyoming's financial institutions to continue to generate loans to capital intensive sectors of the state's economy. Nevertheless, there are no performance standards for the TDOA program that would indicate whether specific desired outcomes have been achieved.

Hot Springs State Park Loan Program

Due to the difficulties private businesses encounter when attempting to finance improvements on state-leased land, the Legislature authorized the Hot Springs State Park Loan Program in 1967 in W.S. 36-8-318 through W.S. 36-8-320. The program allows the State Loan and Investment Board to issue nonnegotiable debenture bonds not to exceed $2 million in which the Treasurer may invest permanent funds. Bond proceeds are used to make loans to private entities operating in the park. The Office of State Lands and Investments administers the loan program, although the Department of Commerce plans park improvements and approves park leaseholders.

Currently, one borrower is in default, and the Office of State Lands and Investments is in the process of foreclosing on the loans, which totaled almost $96,000. There is no loan loss reserve account authorized for this program, but loans must be secured by a mortgage or a lien upon all the property of the project. According to program managers, a 10-percent penalty is also assessed against late payments.

Small Business Assistance Act Loan Program

In 1984, the Legislature authorized through W.S. 9-4-701(e) the State Treasurer to invest in the federally-guaranteed portion of U.S. Small Business Administration (SBA) and Farmer's Home Administration, business and industry loans (FmHA). By statute, the Treasurer may invest up to $35,000,000 in this loan program. The program provides fixed, reduced-interest rates on small business loans for the first five years to aid businesses through their startup phase. As established in statute, for the first five years of the loan the interest rate shall not be less than the yield of the five-year Treasury bond. After that time, the interest rate is adjusted to one and a half percent over the prime rate, net to the state.

To qualify for this loan program, the borrower must assure the creation of additional permanent jobs or preservation of existing permanent jobs. According to the WIDC, 71 jobs were created and 20 jobs were retained as a result of this program in 1996. Individual loan maturity dates vary, but do not run more than 20 years. The term of the loan is set based on the useful life of the asset financed. Proceeds can be used for new construction, construction of an addition or remodeling of an existing structure, purchase of new structures, or equipment. Proceeds may not be used for working capital, refinancing existing debt, or the purchase of an existing business.

Link Deposit Program

The Link Deposit program was established in 1986 under W.S. 9-4-832. It provided reduced rate loans to businesses, which were to use the funds to create or retain jobs in Wyoming.

A 1991 program evaluation by the Legislative Service Office found that borrowers were nearly three times as likely to use the loans to retain jobs as to create new ones. In addition, 72 percent of the dollars were being used to refinance existing debt, not to start new businesses.

Industrial Development Bonds (1991)

Authorized in 1991 through W.S. 9-4-701(h), the Industrial Development Bond Program attempts to promote economic development in Wyoming. This program is the first of two industrial development bond programs the Legislature passed as designated investment programs. Unlike the second program, the amount of funds available here is dependent upon the number of employees retained or new full-time employment positions created.

Industrial Development Bonds (1995)

This Industrial Development Bond Program allows the State Treasurer to invest in bonds issued by municipalities or counties for the purpose of constructing or reconstructing an agricultural products processing facility. As the second of two Industrial Development Bond programs the Legislature has designated, this program appears to be more specific than the earlier program in terms of qualifying projects.

Although the program was specifically proposed for one industry, agricultural processing, it is general enough to permit any entity within the industry that qualifies and provides new full-time employment to participate. This program is similar to the 1991 Industrial Development Bond Program authorized for $25 million, but the two do have substantially different criteria, credit terms, and oversight features. For example, this industrial development bond program does not require approval of the Investment Fund Committee.

Source: LSO analysis of State Treasurer's data.

Second, the realized yields on the PWMTF and the Agency Pool have steadily declined over the analysis period. For example, the realized yield of the PWMTF steadily declined from 7.49 percent in FY 92 to 6.74 percent in FY 96. Over the same time period, the realized yield of the Agency Pool decreased from 7.36 percent to 6.16, despite a small increase in FY 93. This reduction in interest rates tends to further diminish the quantifiable impact on poorly performing LDIs.

Using this method, we estimate that, had allocated funds been invested in PWMTF II, $3.9 million more might have been earned in FY 95, and $2.2 million more in FY 96. These results would be even more dramatic if farm loans were excluded from the analysis.

In addition to other factors, since the funds invested with external investment managers have no liquidity restrictions or other pending obligations, those funds generally produce a higher rate of return than state funds invested in-house. For the past five fiscal years, the realized yield for the external investment managers ranged from 6.35 to 10.71 percent. Therefore, an analysis with this more aggressive comparator results in a larger divergence from the rates of return on LDIs, and thus greater lost earnings.

Comparing the returns of the LDI allocations with the returns of the WRS may not be appropriate retrospectively because it has different investment restrictions. The recent passage of a constitutional amendment and statutory language allow up to 35 percent of the book value of total investments of permanent funds to be invested in specified securities. Therefore, this comparison may be valid for prospective analysis of future forgone earnings.

WRS returns ranged from -2.8 to 25.9 percent over the past five fiscal years. Since WRS returns are volatile, a comparison with the returns of LDIs would not, in every instance, result in forgone earnings. However, on balance, the magnitude of the lost earnings with this comparator is much larger than with the previous comparisons.

Other Funds Maximize Returns

We compared Wyoming's approach with two other states which have significant permanent funds to invest, Montana and Alaska, and found that each has defined policies for participating in targeted investing. In Montana, state law authorizes its investment board to invest a maximum of 25 percent of the Permanent Coal Tax Trust to increase employment and business opportunities. In Alaska, one of the basic principles of the Permanent Fund is that investments should be income-producing at market rates of return.

We reviewed investment policies of the WRS and selected states' pension funds which invest in ETIs. We found they do so when the investment results in at least a market rate of return.

Additionally, unlike the PWMTF, the CSA has an identifiable set of beneficiaries for whom the trust is managed for the maximum and exclusive benefit. As a result, the CSA investments do not generally generate lower returns through the promotion of economic development or other social investments.

Chapter 4: Unobligated LDI Funds Also Earn Less-Than-Market Returns

Chapter 3 described how allocated LDI funds reduce investment returns. This chapter goes on to describe how funds authorized for LDIs, but unobligated for those particular purposes, further contribute to lower overall returns. Unobligated LDI funds constitute the difference between the statutorily-authorized level of each LDI and the amount of funds actively at work for the intended purpose.

Our analysis shows that in the past five years, the state earned up to 3.37 percent less on the unobligated portion of LDIs than on state funds invested without legislative obligations, depending on the year and specific comparator. The fact that unobligated LDI funds could potentially be allocated appears to contribute to diminished returns.

We considered the entire authorizations for the Student Loan Stand-By Program, the School District Bond Guarantee Program, and the Local Government Bond Guarantee Program, to be unobligated. Two of these programs, Student Loan Stand-By Program and School District Bond Guarantee Program, have commitments in place for portions of their authorizations. However, no funds are actually outstanding. The State Treasurer is responsible for investing the entire authorization for these programs, which both have some liquidity considerations.

Figure 4 illustrates the level of allocated and unobligated funds for all LDIs over the past five fiscal years. Total unobligated LDI funds increased from $459 million in FY 92 to $726 million in FY 96.

Source: LSO analysis of State Treasurer's data.

Unobligated portions of LDIs produce lower returns than otherwise possible because potential obligations restrict their availability for investment. Even though unobligated funds are not currently being used for the public purposes for which they were intended, the prospect exists that they might be called upon. Therefore, the State Treasurer keeps a portion of the unobligated amounts in the State Agency Pool.

The State Treasurer makes decisions to keep portions of the PWMTF in the State Agency Pool for reasons in addition to dispersals to LDI programs and projects. These include the existence, currently, of a flattened yield curve (i.e., the difference in yields between shorter and longer duration investments is minimal), rising interest rates, and the need to have cash available to invest in equities as directed by the Legislature under the new constitutional authority.

No formal cash flow analysis procedures are in place for LDIs to help the State Treasurer determine how much liquidity is appropriate for these programs and projects. The Treasurer believes that informal but constant monitoring and communication with program officials, and a knowledge of historical trends, provide the information needed to keep an appropriate amount of funds liquid. On the basis of this informal system, the State Treasurer "ladders" investments within the entire State Agency Pool so that maturities meet expected cash needs.

The returns on the State Treasurer's unrestricted investments, or those with no liquidity restrictions or pending obligations, generally outperform the returns on unobligated LDI funds. Figure 5 represents the estimated returns of the unobligated portions of PWMTF LDIs, compared to the returns of all state funds managed by external managers. For the past five years, the difference in these two yields ranges from a low of -0.42 percent to a high of 3.4 percent. Appendix A further outlines our approach and methodology for this analysis.

Source: LSO analysis of State Treasurer's data.

Figure 6 compares the estimated realized yields on unobligated portions of PWMTF LDIs with the estimated realized yields on PWMTF II, for the two years of its existence. The difference in yields for each of these years amounted to roughly one percent. In both illustrations, comparators adhere to similar state investment restrictions, but are not inhibited by obligations such as LDIs.

Source: LSO analysis of State Treasurer's data.

Considerable opportunity costs are associated with maintaining authorized, but unobligated, LDI funds. Had some reductions and eliminations in excess authorization levels been made, the state could have earned up to $2.9 million in additional earnings in FY 95, and $2.4 million in FY 96. These amounts could have been earned if some of the funds authorized for LDIs had been invested in PWMTF II. Specifically, according to our analysis, $267 million in reductions of the unobligated portion of LDIs would have generated these additional earnings.

• Use of the program in FY 96.
• Use trends over the last five fiscal years.
• Potential for growth.
• Presence of factors limiting use or growth, including specific criteria or non-operational status.
• Whether program funds were revolving or one-time use.
• Whether alternatives were available.

In estimating potential increased earnings, we also made the following assumptions:

• The unobligated funds could have been invested in PWMTF II if they were not obligated to LDIs.
• Since PWMTF II is invested for the most beneficial return, and longer term interest rates generally exceed short term interest rates, the PWMTF II will outperform the unobligated LDI funds.
• The State Treasurer could transfer the portion of the amount we recommended cutting that is invested within the Agency Pool to the PWMTF II.

Applying these criteria, we made hypothetical LDI reductions and eliminations totaling nearly $267 million. For the reductions we made, we applied a constant reduction factor of 50 percent of the existing authorizations:

• Small Business Administration Act Loans ($17.5 million).
• Mortgage Loan Program ($30 million).
• Deferred Property Tax Program ($5 million).

For purposes of this analytical exercise, we selected the following programs for possible elimination. Each meets all of our criteria and, in particular, has either never been used, or the use has steadily declined over the last five fiscal years:

• Clean Coal Investments - phased out ($9.3 million remaining).
• Irrigation Loans (as a stand-alone program). Combine with Farm Loans ($60 million).
• Industrial Development Bonds - both ($35 million).
• UW Advance Payment Loan Program ($10 million).
• Local Government Bond Guarantee Program ($100 million).

These reductions and eliminations are not intended as specific recommendations, since under current investment practices, the performance of the unobligated portion of each LDI is indeterminable. Rather, the exercise presents certain reductions and eliminations that would achieve the purpose of reducing unobligated portions of LDIs. We assume the Legislature would have the benefit of more detailed knowledge of each program before it would consider taking such specific actions.

Increased earnings are possible within the category of unobligated LDI funds. Achieving just one percent more per year on $200 million results in an additional $2 million in interest revenue. Several alternatives and methods may achieve the same or similar results. The alternatives have both merits and shortcomings, as summarized below.

There are, however, potential drawbacks with this alternative. With any reduction or elimination, the state loses the opportunity to use the program and forgoes the potential benefits that could be provided. Second, even if the Legislature chooses to make such reductions, it might at the same time establish new programs. Such programs would reduce the Treasurer's ability to invest funds in PWMTF II with reasonable security, thus defeating the purpose.

Another, two-tiered "cap" approach, might also be implemented. Using this method, each LDI would be capped at a specified amount above its current allocation level (e.g., $5 million), or at an amount appropriate to anticipated use. Further, the use of the unobligated portions of the LDIs would be capped at a specified amount (e.g., $100 million), and that amount pooled for allocation to whichever LDIs need it to meet demands. The State Loan and Investment Board could make pool allocation decisions among LDIs and report upon them annually to the Legislature.

The advantages to the "cap" approaches would be that they offer flexibility to accommodate LDI growth, yet limit the amount of funds the State Treasurer must manage under the specter of possible allocation to one or more of the LDIs. Reducing or eliminating LDI authorizations would enhance results obtained from all three of these "cap" approaches.

There are at least four caveats to the "cap" approaches. First, the Legislature would need to commit to the established cap(s), as increases would defeat its purpose. Second, although these approaches would keep all programs operational, it might provoke competition for funds between LDIs if the total allocated level approaches the cap. Third, the large water projects which will soon be under construction will use up a significant portion of the currently unobligated funds.

Fourth, the Legislature should carefully consider the amounts committed and uncommitted through the bond and student loan guarantee programs when implementing any cap. The 1997 legislation increased both the Direct Student Loan Program and the Student Loan Stand-By Program by a cumulative $60 million, an increase that is not included in our analysis.

It is important that this effort include LDIs to determine, as precisely as possible, their cash needs so that earnings are maximized. For example, program officials indicated that projections on the use of farm loans (the LDI with the largest amount unobligated) could be made, such that there would be small risk of needing to sell long-term securities at a loss to meet demand. Other LDIs may also lend themselves to more precise projections. With such projections, those involved in LDI administration could budget for anticipated needs on an annual basis.

The incentive for developing a cash management process is the identification of funds available for longer-term investments. With an accurate forecast, an investment officer can take advantage of higher returning investments. Developing such a process forces officials to think through their present investment practices and explore alternatives.

Nevertheless, even with improved cash projections, other factors such as the need to protect against interest rate risk and the need to have funds available for external equity managers, may call for additional liquidity. Furthermore, if program administrators adopt this option, the State Treasurer may still need to accommodate potential new LDIs. As a result, the state might not realize the same $2 million benefit in increased returns under this option.

Some LDI programs and projects have competed with rather than complemented other state programs, including other LDIs, intended to accomplish similar public purposes. Further, in some instances, they actually counter or are countered by those efforts. Such a lack of coordination among alternatives intended for the same public purposes can undermine the effectiveness of the state's use of resources.

In addition, some LDIs appear to be ineffective in helping the state meet intended public purposes because they are targeted to meet specific circumstances and conditions. Over time and as conditions change, these programs have fallen into disuse. Finally, we found the technical aspects of some programs diminish their usefulness.

The Local Government Bond Guarantee and Joint Powers Act Loan programs, and direct legislative loans for water treatment projects, potentially compete with one another as financing alternatives for such projects. If it were operational, the bond guarantee program would enable local governments to issue bonds at optimal interest rates to pay for infrastructure needs, such as water treatment plants. These rates would likely be lower than the rates currently charged by both the Water Development Commission and the State Loan and Investment Board for intergovernmental loans (7.25 percent), and the rate at which the Legislature made its most recent direct loans (8 percent).

However, bonding at any rate would not provide the interest-free years and deferred payments that make direct legislative loans especially attractive to local governments. The opportunity to obtain a legislative loan or federal mineral royalty grant may dissuade local governments from making use of the bond guarantee program.

Local governments may be choosing not to use another LDI, the Joint Powers Act Loan Program, for similar reasons, since it also does not offer the interest and payment deferral option. In addition, this program's loan capacity would not have been adequate to cover the two latest projects financed with direct legislative loans (Natrona County Regional and Green River/Rock Springs Treatment Plants), especially when combined with applications from other local governments. Even if it had, the Joint Powers Act Loan Program provisions such as a one-point origination fee and a maximum 40-year term make these loans less favorable than those received by project sponsors who went directly to the Legislature.

In developing responses to specific needs, the Legislature has created some programs that have limited applicability. For example, the two LDIs authorizing the state to purchase industrial development bonds do not provide a revolving source of financing. Further, the Legislature has set criteria that require developers seeking these bonds to be substantially financed through personal equity and other investors before approaching the state. While these and other criteria protect the state's assets, they may also inhibit the bonds' effectiveness as economic development tools for the state.

The Small Business Assistance Act Loan Program, another LDI targeted at economic development, has technical provisions that apparently inhibit its usefulness for intended beneficiaries. Although the program offers benefits not otherwise available to small businesses, relatively few have used the loans: the state's investment approximates only a quarter of the program's capacity. Economic development officials note that the program's criteria, which prohibit use of loan proceeds for operating capital, may be too restrictive to help small business owners.

Offering capital for operating costs may be more appealing to small business owners than providing capital for business start-up and expansion costs. Other public investors take this approach. For example, Montana's program covers operating capital, inventory, and equipment, but it ties interest rate reductions to job creation. Even though there is little use of the rate reduction feature, Montana has more than $40 million invested in this program. In Wyoming, the state retirement system currently invests in the guaranteed portions of federal Small Business Administration (SBA) loans that do cover operating capital, but only at a market rate. Despite its higher interest rate, the retirement system's investment in SBA guaranteed loans is approximately the same as the state's.

Since LDI programs appear designed to finance some public purpose at subsidized rates compared to those available in the private sector, the use of LDI programs could potentially increase with an increase in interest rates. For example, program officials noted that loan volume in the state's Small Business Assistance Act Loan Program increases when interest rates rise. Then, borrowers use the opportunity to obtain lower initial rates and lock in fixed rates for the loan durations.

Similarly, the LDI program that authorizes the Treasurer to purchase pools of home mortgages that net the state ten percent is attractive in times of high market rates. In lower market rate conditions, however, there is little likelihood the state will have an opportunity to purchase such mortgages.

The following discussion of the two largest LDIs illustrates how economic conditions affect the purposes of these investments. Together, the state had more than $255 million allocated to the Farm Loan and TDOA programs in FY 96.

Currently, that purpose is understood to be providing Wyoming banks with a source of stable, reliable, and rationally-priced money. Banks use this added liquidity to make loans and meet customer withdrawal demands, and the state deposits a portion of its operating money in this program rather than putting it in other short-term investments. However, the state must maintain additional liquidity because the TDOA investment is not really available for operating cash, which is the presumed purpose of short-term investments.

The sometimes counter-productive and restrictive natures of certain LDI programs occurred as the Legislature created them on an ad hoc basis to address specific needs. Ideally, they might have been designed as parts of comprehensive state efforts to address broad public policy areas. Because they were designed to meet perceived public needs, the programs all have merit, but they also have costs and other limitations.

These costs are primarily indirect, or those of lost opportunities. LDI programs that counter or undermine one another or other state programs result in the under-use of some, and an increased demand for those with more favorable or current terms. In addition, as previously discussed, several LDI programs have great unused funding capacity, for which increased earnings would be possible if the funds were available for longer-term investment. Finally, committing state funds to programs that are too narrowly conceived or inappropriate for current economic conditions leaves them unavailable for future uses that policymakers may agree are beneficial for the state.

Other states have taken more comprehensive approaches to meet similar public purposes. For example, rather than turning to its Permanent Fund, Alaska has built institutions to finance such public purposes as industrial development, housing, and local government infrastructure. These include an Industrial Development and Export Authority, a Housing Finance Corporation, and a Municipal Bond Bank Authority.

Through its bond bank authority, Alaska sells its "A" rated bonds on the national market and uses the proceeds to purchase the bonds of Alaskan municipalities. In this way, the state provides local governments with funds for capital construction projects at lower interest rates than they could bond on their own. The bond bank uses the principal and interest paid by the municipalities to repay its debt to its bondholders.

By providing an opportunity for local governments to lower the cost of their debt, this approach is similar in concept to Wyoming's Local Government Bond Guarantee Program. Wyoming's program, however, has not been made operational, largely because local governments have not expressed interest in this approach. State and local officials we interviewed noted that bonding entails complexities that make it unattractive to local governments.

The bond bank approach assists governmental entities that may lack the resources or investor familiarity to bond on the national market. Although never used, Wyoming has a bonding authority that is similar to the bond bank concept. This authority, W.S. 9-4-604(b), enables the State Loan and Investment Board to issue up to $60 million in bonds, the proceeds of which can be loaned or granted to local governments. The federal mineral royalties and coal lease bonus payments that the Legislature currently allocates to the local government capital construction fund would, by this statute, be used to repay these bonds.

According to several state officials, however, local governments would object to the state's use of this authority, as they prefer to receive those revenues directly as grants for their capital projects. Financing local government infrastructure in this manner, however, may enable the state to meet more needs than it could through direct grants.

Colorado created an authority to fund municipal water projects similar to those for which local governments in Wyoming have sought direct legislative loans. Similar to the Alaska bond bank, this authority issues bonds for pools of local government infrastructure projects, and also makes direct loans. The authority's bonds receive a AA rating based on the strength of its reserves. Colorado established these reserves using federal capitalization grants accompanying the Clean Water Act, along with the required 20 percent state match. The authority uses reserve earnings to further subsidize the interest rates local governments pay on their debt.

To provide the flexibility to meet economic development needs, public investors in Texas created a private investment company. The Texas Growth Fund manages a pooled fund from state public pensions and endowments that have elected to make investments that foster business expansion. By using the private company, these investors are able to customize financing and keep confidential proprietary information, even though public funds are the source of the investment capital. Because these investments belong to endowments and pensions, they must make a competitive rate of return, as well as encourage economic development. Hence, a critical aspect of this approach is hiring equity specialists with the expertise necessary to ensure that the fund meets these goals.

Montana has designated a portion of its Permanent Coal Tax Trust to finance local government infrastructure. In 1993, the Montana Legislature divided the state's permanent fund into subfunds. The Legislature appropriates the investment earnings from one of these subfunds for local government infrastructure projects. The state established this subfund with a $10 million transfer from the Trust, and augments it with one-half of the coal severance tax earmarked for the Trust.

Wyoming has also created some innovative approaches to funding capital construction. Since 1989, the state has used the authority in W.S. 9-4-605(b) to issue bonds for state capital projects. With this authority, the State Loan and Investment Board has issued revenue bonds backed by the federal mineral royalty distributions earmarked for the School Foundation Program. By this statute, the Board can issue bonds only if the Legislature has made appropriations for the capital construction costs. These appropriations are deposited into the Common School Account and invested so that annual returns equal or exceed the money diverted to cover the debt service. Thus, when the state repays the bonds, the Common School Account retains the original appropriation for future earnings.

By using this authorization, the state used two of its financial strengths as capital financing tools. These strengths, the federal mineral revenue resource and the sizable state reserves, enabled the state to issue AA- rated revenue bonds to fund infrastructure while investing its own money for current and future returns. The debt obligation created is clearly limited to the pledged revenue stream, and thus is not a general obligation debt to the state. These two financial strengths similarly leverage the state's capacity to finance government infrastructure through the school district and (potential) local government bond guarantee programs.

Another innovative financing approach taken by the state was the creation of a permanent source of funding for water pollution control needs. Using federal capitalization grants accompanying the Clean Water Act and the required 20 percent state match, the state created a revolving loan fund (SRF). Currently, the SRF has a balance of approximately $12 million available to local governments in reduced-rate loans for projects such as waste water treatment plants, storm water treatment, and non-point source pollution projects. Additional amounts will be available as current borrowers repay their loans.

The state currently has the opportunity to create another SRF with federal capitalization grants authorized as part of the 1996 Amendments to the Safe Drinking Water Act and a 20 percent state match. Federal guidelines allow these funds to be used for loans and loan guarantees, or as a source of reserve and security for leveraged loans. This SRF could be set up as a permanent source of funds to protect and treat drinking water sources.

Through its designation of state fund investments, the Legislature has demonstrated a commitment to using state funds for the benefit of its residents, whether by providing them treated water at a reasonable cost, or by guaranteeing loan programs that help cover college costs. In order to continue making such quality-of-life contributions as well as meet other state needs, however, the Legislature may wish to consider how it can better leverage its resources to do more.

Some efforts have already begun to improve the coordination of state resources. The State Loan and Investment Board has initiated a plan to coordinate the distribution of state funds for local government infrastructure. Local governments will be able to do "one-stop" financing for their infrastructure needs, with state officials providing assistance in developing funding packages using all available state resources, including Abandoned Mine Land grants, federal mineral royalty grants, Joint Powers Act loans, and the existing Clean Water Act SRF.

This is an important step because local government infrastructure needs are predicted to increase as facilities built during the "boom" years all start to deteriorate at the same time. The apparent trend of decreasing federal mineral royalties could add to the strain. The Legislature can support this coordination effort by assuring that any direct loans it makes complement a systematic approach, and perhaps by formalizing the coordination process in statute.

The Legislature can also support infrastructure financing efforts by enhancing the options available. One way would be to review existing authorities and determine if some, such as the bonding options, can be used more effectively and creatively. In the course of our research, however, we repeatedly heard that Wyoming is a "pay-as-you-go" state, which traditionally chooses to avoid debt. Therefore, the Legislature first needs to assess the strength of that position, and whether economic times have changed such that it makes sense to gradually revise that stance.

Further, the Legislature could consider opportunities to make its federal mineral royalty revenue stream and its strong reserves work to greater advantage as tools to finance government infrastructure. It has done this already by creating bonding authority to finance state capital needs and by guaranteeing school district bonds. The potential exists for more impact through the guarantee program for local governments. Another possibility would be to issue revenue bonds rather than direct loans for water treatment plants, or similar projects, and divert federal mineral royalties for the debt service. This approach would keep more of the PWMTF invested for maximum returns.

The state faces other opportunities with infrastructure financing. The new revolving fund potential for water treatment gives the state flexibility to design the program so that it can best meet projected needs. If potential use appears substantial, program designers might consider using federal capitalization funds and state match as leverage to bond, rather than simply as revolving loan funds. Further, as one state official noted, it may be worth considering new ways to use federal mineral royalties for local infrastructure, such as a revolving loan fund, to preserve some of that diminishing and finite state resource for the future.

In other public purpose areas, a recently commissioned study to determine the state's economic development needs may recommend innovative ways for the state to foster business expansion without jeopardizing the permanent fund income. Already, the state has taken an innovative step by creating the Workforce Development Training Fund to put existing revenues to work in aiding economic development. Finally, the State Loan and Investment Board's ongoing efforts to determine an asset allocation strategy may unveil opportunities to better use TDOA short-term investments so that they meet the liquidity needs of both state banks and the state itself.

The Legislature does not have a systematic way to evaluate potential LDIs, or a mechanism to periodically review existing LDIs. As a result, the Legislature is not positioned to compare the merits of one investment proposal against another, and has not been able to build an inclusive perspective about the cumulative impact that LDIs have on the state's revenue picture.

According to the Governmental Accounting Standards Board (GASB), it is important to develop performance information that guides decision making. Information is needed to allocate resources to programs, to evaluate the results and determine if they are making progress in achieving established goals and objectives, and to modify programs to enhance performance.

The Legislature does not have a formal system or process for evaluating proposed LDIs, whether they are projects, such as the Wyoming Territorial Park, or programs, such as the Joint Powers Act Loan program. In addition, once approved, the provisions guiding LDIs are not uniform in requiring performance evaluation and reporting.

The Legislature relies on its fiscal note process to provide evaluation of a potential investment. However, fiscal notes have not been a consistently reliable predictor of opportunity costs for these investments. We examined the original bills for most of the 26 LDIs included in this evaluation, and found that about 25 percent of the proposals pre-dated LSO's practice of preparing fiscal notes. On another 20 percent, it was noted that there had been insufficient time to prepare a fiscal note. Comparing several fiscal notes that the Treasurer's Office completed, we noted that a consistent process for presenting the information was not used. Some appeared to over-state anticipated costs, while others minimized them.

Only a few of the 26 LDIs have provisions that provide a basis for monitoring and reporting on individual investments. For example, three LDIs include requirements to provide legislative reports, and two require periodic evaluation. These controls are a step in the right direction to create comprehensive and consistent monitoring and reporting procedures for all prospective LDIs.

The Legislature has not designated a central administrative entity to monitor and provide feedback for all LDIs. Absent a mechanism to provide comprehensive information about these investments, the Legislature does not have a means of systematically evaluating their performance, once approved.

The Treasurer's Office, the State Land and Farm Loan Office, and the Wyoming Water Development Office are the main agencies with administrative responsibilities for LDIs. In addition, there are intermediaries and other entities involved with the administration of individual investments.

Because the Treasurer's Office is responsible for making the actual investment, it is either directly or indirectly involved in all of the LDIs. The Treasurer's Office serves as the lead state-level entity for many of the investments, absent any other state-level delegation of authority. For example, the Wyoming Industrial Development Corporation services Small Business Assistance Act loans, but the Treasurer's Office was responsible for selecting this provider as the servicing agent.

In addition, the Treasurer serves on the State Loan and Investment Board, which oversees seven of the LDIs administered through the Office of State Lands and Investments. The Treasurer is also responsible for distributing the funds to the Wyoming Water Development Office for the four LDI water projects administered there.

Although the Legislature has not required a specific agency or office to report on the performance of the 26 LDIs, the Treasurer's Office has been reporting on a partial list of these investments. The Treasurer's Annual Report provides selective information on LDIs. While this information is helpful, it still presents an incomplete picture of LDI performance.

We found that year-to-year variations in the content and style of the annual reports make this information difficult to aggregate and analyze. In 1992 through 1996 reports, different LDIs were included in the estimate of total opportunity cost at various times. This leaves the reader to question which investments may have been excluded and for what reasons. It also hinders analysis and comparisons. Furthermore, different measurements were used to describe the performance of LDIs during the five-year period reviewed, making it difficult to establish trends.

According to professional literature we reviewed, the usefulness of information depends on what kind of comparisons can be made over time. Trend comparisons will be meaningless if information is not consistent over the years.

Without accepted criteria and comprehensive performance information, the Legislature cannot objectively evaluate proposals for new investments or review current LDIs. One of the primary justifications for creating a performance accountability system is to provide timely information to assist policymakers in making crucial resource allocation decisions, understanding outcomes, modifying policies and programs, and improving performance. A structured process can help policymakers allocate resources among competing priorities and understand the opportunity costs that may result from this type of investing.

Absent specific goals and objectives, it is difficult for executive branch agencies to monitor and report on the effectiveness of LDIs. Because a central entity has not been designated to provide comprehensive information about LDIs, the Legislature does not receive an accurate picture of the cumulative impact of these investments on the state's revenues. Finally, without ongoing feedback about the performance of existing investments, the Legislature has been effectively precluded from making other decisions about alternative uses for the authorized funds.

In 1993, the Center for Policy Alternatives conducted a study of economically targeted investing (ETI) in state pension systems. The study found that successful ETI programs develop policies and procedures that allow for objective analysis of a proposed investment. The report also noted that these policies include regular evaluations of investments. We contacted several states mentioned in the report to determine what procedures have been developed for targeted investment programs.

We did not find many states that can be compared to Wyoming in this arena. Although Montana and Alaska have permanent funds and have developed policies and procedures for targeted investing, most other states do not have sizable reserves available for long-term investing.

Pension funds are the only other comparators we found that have undertaken this type of investing. We reviewed information from seven state pension funds that engage in targeted investing. It is important to note that pension fund trustees have a specific responsibility to manage the fund for the exclusive benefit of their employees, so they may not represent an ideal comparator. Nevertheless, a number of practices in both Montana and Alaska, as well as the seven pension funds, may provide direction in Wyoming. Some of the "best practices" we found include:

The 26 LDIs we reviewed have been approved on an ad hoc basis over the course of 90 years. It appears the Legislature has not viewed LDIs as an investment strategy, but rather as a means to individual ends by providing a source of money for specific public policy purposes.

In the past, proposals for LDIs were sent to the legislative committee which had subject matter jurisdiction. No specialized committee existed with expertise to make informed decisions about the investment of state funds, or to provide perspective on the cumulative effect of investment choices.

The Legislature has recently embarked on a more proactive method to oversee the state's investment program. The Legislature has taken a step toward planning for, monitoring, and reporting on the state's investments by designating the State Loan and Investment Board to take an active role in the investment of state funds. In addition, the Management Council recently appointed a Select Committee on Capital Financing and Investments. The purpose of this committee is to provide a forum for legislators to develop a core of knowledge and expertise regarding state investment policy. Policies and procedures to evaluate LDIs may be another step in the evolution of the state's investment sophistication.

The Legislature could take several actions to establish some basic parameters for LDIs. It could designate a specific committee to develop expertise and perspective about LDIs and to develop procedures for analyzing investment proposals and scrutinizing current holdings. The newly-created Select Committee on Capital Financing and Investments may be a natural fit for such a task. Management Council indicated that if this committee appears useful, it could be institutionalized as a statutory committee, similar to the Select Water Committee.

The structure of the Select Water Committee may be a model the Legislature could duplicate. That committee uses a meticulous process to approve water projects by requiring multiple levels of technical review and analysis, clear reporting, and ongoing legislative involvement. Under such an arrangement, standing committees would still have purview over many of the public policy decisions underlying these investments. The task of this specialized committee would not be to assume standing committee jurisdiction, but to deepen the legislative understanding of the cumulative effect of these investments.

As part of the legislative process to analyze investment proposals, the Legislature may wish to require that a standard methodology be used to calculate the fiscal impact of these investments. This requirement would assist the Legislature in balancing the promise of social, economic, and political benefits with a realistic consideration of the fiscal impacts to the state. The designated committee could also establish procedures to guide the selection and monitoring of these investments, and could assist in the establishment of goals and performance measures, including the identification of benchmarks.

In addition, the Legislature could designate a specific agency or entity to be responsible for monitoring LDIs and submitting comprehensive performance information. Reliable data, regularly submitted, would assist the Legislature in periodically reviewing LDIs, but additional staff with special expertise will likely be necessary to carry out these duties. As a start, the Legislature may wish to review the 26 LDIs analyzed in this report, and determine if modifications are appropriate at this time.

Chapter 3: The committee could consider defining the terms and conditions under which it will accept less-than-market returns on its investments.

Chapter 4: The committee could consider alternatives for managing unobligated portions of LDIs to realize increased returns. This may include certain reductions in or elimination of some of the existing LDIs, a cap on the total allocation levels for LDIs, or a combination of approaches. The committee could also recommend that the State Treasurer develop a formal cash management system to better project needs for unobligated funds.

Chapter 5: The committee could also review alternative financing approaches, and develop those which are appropriate to state needs, to enable the state to better leverage its resources.

By our estimates, the Legislature already devotes more than $1 billion of its investable funds to LDIs, and has the capacity to do even more LDI investing in the future. Before committing more funds, legislators now have an opportunity to assess what has been created. The information in this report puts almost a century of ad hoc decision making in context, and provides a platform for legislative consideration of past and current practices.

At this juncture, reviewing LDI performance is particularly important because few of the programs have sunset dates and most do not come before the Legislature for reauthorization or budget approval. Thus, few legislators are likely to have a working knowledge of all 26 programs and projects, or an appreciation for the policy and investment potential they represent.

If properly planned and managed, economically targeted investing can be a valid part of an investment program. However, it is important that the Legislature have a full and complete understanding of the purposes of making such investments. It also needs a clear picture of associated opportunity costs.

Before adopting more LDIs, we suggest the Legislature assess its approach to economically targeted investing by considering such questions as the following:

• Are LDIs doing what legislators today intend them to do?
• Should anything that appears to benefit the state be approved as an LDI?
• Is the process for approving LDIs logical and defensible?
• Do the benefits of LDIs outweigh their costs?
• Is any level of investment performance acceptable?
• What procedures might help legislators weigh LDI costs against other pressing needs for state resources?

The collective potential of LDIs and their impact as a group of investments is a significant factor in the financing of Wyoming state government. An understanding that LDIs are a major part of the state's investment portfolio, requiring an investment philosophy and ongoing management, needs to emerge.

Our primary source of financial information was the Treasurer's Annual Reports for FY 92 through FY 96. We also used records from the Office of State Lands and Investments as well as other related supporting documents. In addition to the assumptions listed and footnotes provided within the report, a further explanation of the methodology used may prove helpful. Due to a number of data constraints ranging from uncalculated returns to unreported interest earnings and account balances for specific LDIs, our analysis uses the best available information.

Our analysis uses the following definition of realized yield: a percentage of return or income in interest that an investment actually generates each year. For example, if the state purchases a farm loan with an 8 percent interest rate but the borrower does not make any payments during the fiscal year, the realized yield would be 0 percent, regardless of the stated rate of return on the loan.

For a number of the LDIs, we used the stated yield at the time of the investment, if the payments were current. For others, we divided the total interest generated during the fiscal year by the average monthly outstanding balance. For a limited number of the programs, if an average monthly balance was not available, the yield was estimated using the fiscal year beginning and ending balances. Unless the balance varied dramatically during the fiscal year, this should provide a close approximation of the actual return.

The realized yields for the comparators, such as the PWMTF II, are also estimates since the Treasurer's Office calculates the yield using the fiscal year end balance rather than a more precise method. Finally, the allocated balances at fiscal year end were used for a comparison of potential earnings. Since this assumes the balance was outstanding the entire year, which is not always the case, this only provides an approximation of the actual difference in earnings. We acknowledge that a number of comparator yields such as current yield, yield to maturity, or total return would have improved the analysis; however, adequate information is not available to accurately determine these measures. We further recognize that our analysis is based on fiscal year end dates, or a snapshot in time. While this methodology has limitations, the general conclusions drawn take this fact into consideration.

Since the accounting and investing of state funds is not compatible with tracking each dollar, its fund of origin, and its investment vehicle, we estimated the yield for the funds authorized, but not allocated, for LDIs. Since nearly the entire impact from unobligated LDI funds is limited to those originating from the PWMTF, our analysis targets just this portion of LDIs. To determine the realized yield on the unobligated funds within the PWMTF, a weighted process using the unobligated funds in the PWMTF not invested elsewhere is weighted with the PWMTF invested within the Agency Pool. The appropriate yields are then applied to each weight. This method only results in a "best approximation" since the rate of the PWMTF includes the performance of LDIs themselves. Therefore, this method tends to slightly underestimate the rate actually earned.

As described in the report, all authorizations for the Student Loan Stand-By Program, School District Bond Guarantee Program, and Local Government Bond Guarantee Program are considered unobligated for the purposes of Chapter 4. Additionally, the commitment fees received from the Student Loan Stand-By Program are used exclusively in the analysis in Chapter 3.

(Note: Responses from the State Treasurer and Office of State Lands and Investments are available with the report, which is on file at the Legislative Service Office.)

Reports completed since 1995 are available free on the Internet at http://legisweb.state.wy.us. Due to technical limitations, the format of reports on the web site have been altered somewhat to be compatible with the Wyoming Legislative Service Office's web site. The agency responses, certain graphics, attachments, and appendices to these reports are unavailable on an on-line basis. Complete printed copies of program evaluation reports are available for purchase from the Wyoming Legislative Service Office, 213 State Capitol, Cheyenne, Wyoming, 82002, (307)777-7881.