HF3900

Purpose

Explain a proposed constitutional change and related state statutes that would reshape how Minnesota’s permanent school fund is managed, measured, and distributed to school districts, with the goal of preserving fund value over time while providing annual support to schools.

What the bill would change (Overview)

• Proposes a constitutional amendment to Article XI, Section 8 to redefine and manage the permanent school fund and related lands and funds.
• Requires changes to how investment earnings are calculated and how those earnings are distributed to school districts.
• Adds statutory changes that specify the method for calculating distributable earnings and how those earnings are allocated and reported.
• Requires voter approval at the 2026 state general election.

Constitutional amendment details

• What makes up the permanent school fund:
  • Proceeds from lands granted by the United States for schools within townships.
  • Proceeds from swamp lands granted to the state.
  • All cash and investments credited to the permanent school fund and to the swamp land fund.
  • All cash and investments credited to the internal improvement land fund and the lands within it.
• Restrictions and protections:
  • Lands may only be sold through public sale and under law.
  • All funds from sales or pre-sale income go to the permanent school fund.
  • The fund’s principal must be perpetual and inviolate; losses not offset by gains are repaid to the fund from future interest and dividends.
• Investment and distributions:
  • Net interest and dividends from the fund are to be distributed to serve as a perpetual financial resource to support Minnesota school districts.
  • Management aims to provide annual distributions while preserving purchasing power for current and future beneficiaries.
  • The distribution policy will be set by law.
  • Distributions must be allocated to school districts according to a lawful method.
• Governance:
  • A Board of Investment (comprising the governor, state auditor, secretary of state, and attorney general) will administer and direct investments of all state funds.
  • The board is prohibited from using state funds to underwrite or directly purchase municipal securities from issuers or their agents.

Statutory changes (11A.16) and related provisions

• Subdivision 5 (Calculation of income distributable earnings):
  • Each fiscal year-end, the state calculates investment income earned by distributable earnings from the permanent school fund.
  • The base for distributable earnings includes: interest on debt securities, dividends on equity securities, and interest earned on certified monthly earnings before transfer to the Department of Education.
  • Gains and losses from selling securities are handled as follows:
  • Affects 4.5% of the fund’s average net asset value (NAV) over the prior three fiscal years.
  • If there is a net gain in a year, that gain is paid out in equal installments over the next ten years to offset future net losses.
  • Any unused portion of a gain installment is added back to the fund’s principal.
  • If there is a net loss in a year, that loss is first offset against gains allocated to that year; if gains aren’t enough, the shortfall is covered by interest and dividend income in equal installments over the next ten years.
  • After the fiscal year ends, the director must report total distributable earnings to the Legislative Permanent School Fund Commission and the commissioner of the Department of Education.
• Subdivision 6 (Disposition of income distributable earnings):
  • The income distributable earnings calculated under subdivision 5 must be credited to the permanent school fund and transferred to the school endowment fund as needed for payments authorized under section 127A.32.
• Section numbering indicates changes to existing law, with the intended effect of tying distributable earnings to a more controlled, endowment-based approach.

Significant changes to existing law

• Moves toward a formal constitutional framework for the permanent school fund’s composition, investment, and distributions, including added protections for principal.
• Establishes a defined, rule-based system for calculating distributable earnings and handling gains and losses over a ten-year horizon.
• Creates a clear link between distributable earnings and transfers to a school endowment fund to support specific education payments (127A.32).
• Strengthens governance by specifying a Board of Investment and its responsibilities, with explicit restrictions on certain uses of state funds (e.g., underwriting municipal securities).
• Requires voter approval in 2026, making these changes contingent on a statewide referendum.

Process and timeline

• The proposed constitutional amendment must be submitted to Minnesota voters at the 2026 state general election, with the ballot question phrased for a Yes/No vote.

Potential impacts and considerations

• Potential for more stable, long-term funding for Minnesota schools through a disciplined, endowment-like approach.
• Emphasis on preserving fund purchasing power may influence short-term distributions depending on market performance and gains/losses handling.
• The approach creates detailed mechanisms for offsets of losses and for transferring earnings to a school endowment fund, which could affect how and when districts receive funds.
• Governance changes could affect how state investments are managed and restricted, including limits on certain municipal security activities.

Relevant Terms permanent school fund; swamp land fund; internal improvement land fund; lands; public sale; principal; perpetuity; inviolate; net interest and dividends; distributable earnings; investment income; debt securities; equity securities; interest; dividends; average net asset value (NAV); gains; losses; equal installments; ten fiscal years; school endowment fund; 127A.30; 127A.32; Legislative Permanent School Fund Commission; Board of Investment; governor; state auditor; secretary of state; attorney general; Department of Education; 11A.16; 11A.12; 2026 general election; Yes/No vote.