Two words hold the key to how North Dakota should handle its Legacy Fund.
The words are, "Legacy Fund."
The Legacy Fund, in other words, is just that: a Legacy Fund-a fund for the Legacy of North Dakota, meaning the state's long-term good.
It is not a rainy day fund. It is not a pot of money that was set aside to fill shortfalls in the North Dakota budget.
Instead, it's an endowment. And as any college or university administrator can tell you, a healthy endowment is a hugely meaningful indicator of institutional strength.
It's what sets Harvard and other Ivy League schools apart. At the level of a nation-state, it's what makes Norway-with its $825 billion sovereign wealth fund-one of the most envied and respected countries in the world.
But growing an endowment into that kind of financial strength depends entirely on the fund managers exercising self-restraint.
In other words, those managers-in North Dakota, the state's lawmakers-should make a conscious decision NOT to use Legacy Fund dollars to fill big, short-term budget gaps.
That certainly includes the fund's principal, but it also should include the earnings to a large extent. For if North Dakota starts spending down the Legacy Fund's principal, then of course the state won't have a Legacy Fund for long.
More immediately, if North Dakota starts using the fund's earnings to fill in for huge General Fund shortfalls, then the fund's growth will be stunted, especially in times when investment returns are good.
That's especially true because once the Legislature makes a habit of spending those earnings, that habit will be hard to break. Far better to make a habit of refusing to spend the money, thus fully recognizing the enormity of the asset that a thriving Legacy Fund could be for the state.
So, does this mean that every penny of the fund's earnings is sacrosanct?
No. Colleges spend portions of their endowment earnings all the time. But the key word there is "portions." Typically, a college spends part of its endowment earnings each year-in many cases, an amount equivalent to about 4 percent or 5 percent of the endowment's total value.
Then, if the endowment earns an 8 percent or 9 percent return, the dollars that remain (also amounting to about 4 percent or 5 percent of the fund's value) get reinvested in the fund's principal.
In this way, the college benefits, and the endowment continues to grow. That's a higher education win-win.
In North Dakota, the bipartisan Legacy Fund Initiative came up with a similar formula for North Dakota's own "endowment fund." Under the initiative's preferred formula, the Legislature would spend 25 percent of the fund's annual earnings from 2017 to 2039 and reinvest the remaining 75 percent back into the fund's principal.
The initiative also suggested that lawmakers direct the spending into special projects, such as planning a "world class" pre-K-to-college education system. That's good advice, too, especially as a way to keep lawmakers from using the earnings as a mere rainy day fund.
North Dakota made a great choice in creating the fund, as virtually every North Dakotan knows. But now, another choice looms, this one about protecting and shepherding the fund.
Lawmakers should choose well.
-- Tom Dennis for the Herald