“Obviously, people can invest privately much better and more efficiently than Montana government. Therefore, we should keep money in the taxpayer’s hands whenever possible.”
Last week we published Kendall’s op-ed addressing the debate over state budget growth, concluding that the Biennial Comparison is a flawed measure for budget growth that masks the true growth of government by excluding inter-fund transfers from the general fund to investment trust accounts obligated for future spending.
Kendall wrote: “we should represent the growth of state government fairly and let taxpayers decide whether that growth was a good investment.”
Since then, we’ve had some followers ask whether we think trusts are ever a good investment for the state. Good question.
How should supporters of limited government approach the prospect of the state government saving and investing for the long-term?
Here’s our take:
1. Should the state be utilizing savings and investment trusts at all?
We are certainly not opposed to the state planning long-term by responsibly saving and investing. This can be a prudent way to operate government, if done appropriately.
2. How much should the state set aside in savings and investment trusts?
After fully funding a limited government, the state should set aside in investments/savings only the minimum of what it needs to ensure long-term fiscal stability, and no more. Any additional surplus beyond that should be returned to taxpayers.
Why? Because tradeoffs matter. The government’s savings is taxpayer dis-saving. As Milton Friedman points out, people investing their own money will almost certainly generate greater return and value for themselves than the government ever will. There are significant opportunity costs for the government to be holding your money instead of you.
This isn’t just a theoretical statement. Montana’s investment funds (except retirement related funds) are limited by our state constitution and state law to only invest in fixed-income securities such as U.S. treasuries. Compare this to individuals, who can invest in corporate stocks, bonds.. basically anything according to their own risk tolerance. Someone who set up a stock app on their phone and invested in a standard SP 500 index fund 5 years ago would see upwards of 90%+ return today. Meanwhile the Montana Board of Investments benchmark 5 year return for fixed income assets is around 10% (2% annualized). That doesn’t even beat inflation!
Obviously, people can invest privately much better and more efficiently than Montana government. Therefore, we should keep money in the taxpayer’s hands whenever possible.
3. When should the state put taxpayer money into savings and investment trusts?
Proponents of the state’s new GO Trust, created by HB 924, have argued that the bulk of this year’s surplus was essentially a one-time-only (OTO) windfall of tax revenue, and that it would be irresponsible to return this windfall to taxpayers in the form of OTO income tax rebates. Instead, they argued that this windfall would be better allocated in an investment trust towards future anticipated spending such as infrastructure, childcare, housing etc.
It’s not completely off-base to argue that a windfall of unexpected tax revenue should be saved for a rainy day. But, there are some aspects of this premise that deserve to be debated:
A. Is the method used for determining whether surplus tax revenue is OTO accurate?
The volatility measure matters. If a surplus actually represents a trend of increasing revenues beyond what the state needs, assuming all existing long-term savings vehicles are fully funded, then the state should be considering permanent tax cuts instead. The GO Trust’s measure of volatility has met some legitimate criticism.
B. How much does the state actually need?
Montana already has a rainy day fund, a fire fund, and a capital development fund. Assuming these savings vehicles are fully funded (they are at record highs in 2025), then why should the state be saving even more instead of returning the money to taxpayers?
The debatable proposition here is: how much should the government be planning on spending in the future? Reasonable conservatives may disagree on this, so it’s a debate worth having.
Be wary of government investments today being used as an excuse for growing government spending tomorrow. Future spending needs can’t be assumed to be infinite, that’s for sure.
C. Are there better alternatives?
Placing money, even OTO money, in investment trusts comes with tradeoffs. For one, the money is no longer readily accessible to the state, it is obligated only for specific future spending (infrastructure, childcare etc.), unless extraordinary actions are taken.
Lawmakers can and should debate whether there are other immediate OTO needs (infrastructure, pensions etc.) that OTO revenue could be allocated for now instead of being allocated in the future via the Trust. Or, don’t spend it and leave an ending fund balance to be used for building next Biennium’s budget.
The tradeoffs of trusts vs rebates are also a fair debate. Despite popular rhetoric, tax rebates aren’t categorically irresponsible and leaving more money in taxpayer’s hands leads to more efficient resource allocation in the market, leading to greater economic growth that will boost the state’s tax revenues long-term.
4. What should investment trusts be used for?
If we grant the premise that surplus revenue would be appropriately placed in an investment trust account, the next debatable proposition is whether the trust is allocating distributions to the right things.
For instance, the GO Trust allocates resources towards backstopping pension funds, providing low-interest loans for low-income housing, property tax rebates, childcare and infrastructure.
Are these priorities correct? What percentage of the trust should go towards each one? Perhaps the entire trust should be dedicated for property tax relief? These are legitimate and constructive political debates to be had.
Conclusion
At the end of the day, controlling additional taxpayer money in new investment accounts obligated for future spending is growing government. Any growth of government should be heavily debated and done reluctantly, with the utmost restraint, and as the very last resort.
