Constitutional Amendment E provides an exception to a general rule in the Utah Constitution prohibiting state and local governments from subscribing to the stock or bonds of a private company. The Amendment authorizes the State to subscribe to stock or bonds of a private company with money from the permanent State School Fund or with money from certain land granted to the state by the federal government.
Background and current provisions of the Utah Constitution
The original 1896 Utah Constitution contained a provision that prohibited state and local governments from subscribing to stock or bonds in aid of any private company. Subscribing to stock or bonds means to buy or to agree to buy stock or bonds of a company that is newly issuing stock or bonds. Buying stock of a private company is buying an ownership interest in the company. Buying the bonds of a private company is essentially lending the company money. The loan is evidenced by bond documents which set forth the interest that the company is obligated to pay on the borrowed amount and the date the company is required to repay the borrowed amount. The purposes of the provision prohibiting government from subscribing to stock or bonds generally include preventing government from using public resources to benefit a single private company and preventing government from risking its resources on a startup company.
The current Utah Constitution continues to prohibit state and local governments generally from subscribing to stock or bonds in aid of any private company. In 2005, however, the Utah Constitution was amended to provide an exception to the general prohibition. The 2005 amendment authorized the state or a public institution of higher education to acquire an ownership interest in a private business in exchange for rights to intellectual property developed by the state or a public institution of higher education.
Effect of Constitutional Amendment E
Constitutional Amendment E makes another exception to the general prohibition against state or local government subscribing to stock or bonds of a private company. The Amendment authorizes the state to subscribe to stock or bonds of a private company if the investment is made with money from either or both of two sources: (1) the State School Fund; and (2) lands granted to the state from the federal government.
The State School Fund is a permanent trust fund established by the Utah Constitution. The State School Fund receives money from the sale of certain school and federal lands, revenues from nonrenewable resources on state lands, revenues from the use of school trust lands, revenues appropriated by the Legislature, and other sources. The Utah Constitution requires the money in the fund to be safely invested and held by the state in perpetuity. Interest and dividends received from investing trust fund money are spent for the support of the public education system. Constitutional Amendment E allows the state to use money held in the State School Fund to subscribe to stock or bonds of private companies.
The other money that Constitutional Amendment E allows the state to use to subscribe to stock or bonds is money derived from certain land that the federal government gave the state in connection with the state achieving statehood. This land includes land to benefit higher education, land for the establishment of reservoirs for irrigation, land for the establishment of a school of mines and other schools, and land for the establishment of other state institutions.
If approved by voters, Constitutional Amendment E takes effect January 1, 2009.
Enactment of this Amendment alone will not likely result in any increase or decrease in revenue or cost to state or local government. However, if the state subscribes to stock or bonds using money held in the State School Fund or money derived from federal land grants, as this Amendment authorizes, the amount of earnings from those monies may be affected. Whether the amount of earnings will increase or decrease and the amount of any increase or decrease will depend on: (1) the amount of money the state invests in subscribing to stock or bonds; and (2) the rate of return derived from subscribing to stock or bonds as compared to the rate of return derived from investments the state would otherwise have made with that money. An increase or decrease of 0.1% in the rate of return on the investment of State School Fund and federal land grants money, currently totaling approximately one billion dollars, would result in about a one million dollar annual increase or decrease in the amount of money available for the support of public and higher education.
Shall the Utah Constitution be amended to authorize the state to invest money in the newly issued stock or bonds of private companies if the money comes from the State School Fund or from land granted to the state by the federal government, as an exception to a general rule prohibiting those investments?