Missourians will vote next month on a proposal to set aside and invest state money that could remain untouched for more than a century, with the eventual goal of generating enough earnings to eliminate state taxes.
Amendment 7 will ask voters if they would like to enshrine in the state’s constitution a “permanent public endowment fund to support state government” with the ultimate goal of eliminating all state taxes. The idea, called a sovereign wealth fund, allows a state to invest public money and allow the returns to compound over generations.
It is like a “financial time capsule,” Republican state Sen. Adam Schnelting, who championed the proposal in the legislature, told The Independent. “We invest into the fund once, and we let it ride. Then future Missourians, they will be the beneficiaries of our foresight.”
By his legislative staff’s predictions, an initial investment of $250 million would grow enough in 125 years to cover the state’s expenses.
The proposal is not tied to Amendment 5, the measure overwhelmingly rejected by voters in August that would have given lawmakers greater authority to move Missouri away from an income tax. Amendment 7 measure has a much different timeline, benefiting future generations of Missourians instead of those at the ballot box.
Schnelting said the idea came from his personal investment strategy — setting aside money for his kids and future grandchildren.
“When we do these calculations on the power of compounding, it is enormous,” he said. “So I just thought one day, why don’t we use the power of compound interest to ensure that we provide for future generations as far as our tax revenue is concerned?”
Sovereign wealth funds are not novel, but Missouri’s proposed model would be unusual.
For example, Texas’s Permanent School Fund was created alongside the state’s founding and invests revenues from land sales and oil royalties to support public education. The 50-year-old Alaska Permanent Fund uses oil and mineral revenues to fund government services and distributes some of its earnings to residents with annual dividends.
Amendment 7 would rely on money appropriated from Missouri’s general revenue fund, along with any private donations.
Nathan Mauck, a professor at the University of Missouri-Kansas City’s Henry W. Bloch School of Management with expertise in sovereign wealth funds, told The Independent that Amendment 7’s funding source is “a little bit different than what you would normally see.”
“Normally the source of those funds comes from some type of surplus, so maybe it is oil or some other natural resource, rather than a tax appropriation,” he said.
While other states have created their sovereign wealth funds in times of prosperity, Amendment 7 comes at a time when lawmakers are looking for ways to cut spending.
In June, State Auditor Scott Fitzpatrick wrote in a report that the state’s spending is exceeding its revenue.
“The state is on track to completely run out of money in the (general revenue fund) and be forced to implement emergency budget reductions,” he wrote.
Setting aside hundreds of millions of dollars for a fund that could not be tapped for generations would leave that money unavailable for current state services.
Schnelting believes there is enough “waste that can be cut” to allow a strong initial investment. But even if the money is not available, the fund can sit empty for future legislatures to pour into, he said.
“If things are just too tight over the next few years… the fund structure is still there, and we could revisit it in a better time if that was required of us,” he said.
The proposal got support from all but eight Republicans in the state legislature while Democrats voted it down. During debate of the bill, lawmakers on both sides of the aisle seemed open to the idea of a sovereign wealth fund but were skeptical of the bill’s timing amid financial pressures.
“We do not have a lot of general revenue that is going to be left on the bottom line this year — and even less next year,” state Sen. Maggie Nurrenbern, a Democrat from Kansas City, said during the Senate’s debate in March.
State Rep. Kemp Stricker, a Lee’s Summit Democrat, zeroed in on a provision that prevents the state from dipping into the fund before it is large enough to eliminate all state-imposed taxes.
“If (revenues) come in too light, we have locked up money that is sitting in a fund that may never be touched for hundreds of years, potentially,” he said in May.
The prohibition on premature spending is part of a few measures intended to protect the fund from political pressure, Schnelting said.
“You have got to invest money and leave it,” Mauck said. “If they are pulling from this fund, it is going to extend the amount of time needed and even the likelihood that that goal is ever reached.”
While voters should consider the source of the funding and the proposal’s ultimate goal, Amendment 7’s framework is also important, Mauck said.
His research has shown that good governance and independence from political influence is essential to a sovereign wealth fund’s prosperity.
“We have elections all the time,” he said. “So if you have a long-term strategy but that strategy pivots because of evolving politics or who wins a given election, it can reduce confidence that the goals of the fund are going to be pursued.”
The amendment would assign responsibility of the fund’s management to the state treasurer, which is an elected position in Missouri.
Giving the power to the treasurer “does not get the type of independence that normally I would recommend,” Mauck said. “However, by limiting the types of investments that the fund can make, it does reduce let’s say some of the some of the concerns.”
Investments would be limited to “exchange-traded funds tracking the stock performance of the Standard and Poor’s 500, or a comparable successor index to be determined by law.”
This measure “reduces possible political influence, but it certainly doesn’t eliminate it,” Mauck said.
Schnelting chose the S and P 500 to “just invest into the American market,” he said. “It won’t give a future treasurer too much leniency and too much power.”
Missouri has already seen political disputes over how public money should be invested.
In 2023, Treasurer Vivek Malek pushed the Missouri State Employees Retirement Fund’s board to divest from Chinese-owned companies. Malek said his rationale wasn’t political in nature but was focused on the “level of risk that is contrary to the interests of our time.”
Schnelting said the choice to have the state treasurer oversee the fund was simple, since it is the office’s role “to oversee the very various funds that we have.”
He pointed to another provision requiring the state auditor to conduct an audit of the fund at least once every three years as a layer of protection.
For Mauck, Amendment 7 presents a test not only of voters’ patience, but of their confidence that Missouri officials decades from now will manage the fund as its creators intend.
“It could be hugely beneficial if executed well and things go according to plan,” he said. “So it is an interesting trade off that folks have to make as they’re thinking about the wisdom of this strategy.”
This story first appeared in the Missouri Independent. Read the original here.