Could Minnesota’s Permanent School Fund Be Drained?

It’s one of the most important questions voters can ask about Minnesota’s Permanent School Fund:

If we distribute more money to schools today, could we eventually drain the fund for future generations?

The proposed amendment is designed to avoid that outcome.

It would change how annual distributions are calculated, but it would also place a different long-term protection into the Minnesota Constitution: the fund would have to remain a perpetual financial resource, with management designed to preserve its purchasing power over time while balancing the needs of current and future beneficiaries.

So how is that supposed to work?

First, 4.5% doesn't mean spending 4.5% of today's balance every year

If the amendment is approved, state law would establish an annual distribution equal to 4.5% of the Permanent School Fund's average net asset value over the preceding three fiscal years.

That three-year average matters.

Instead of calculating each year's distribution solely from the fund's value at one moment in time, the formula looks backward across three fiscal years. That helps smooth changes in the fund's value as financial markets rise and fall.

And the fund doesn't simply sit there while distributions come out.

It remains invested, and proceeds from Minnesota's school trust lands continue to be credited to the Permanent School Fund.

In other words:

Investment returns + school trust land revenue − annual distributions = the fund's changing value over time.

A 4.5% distribution therefore does not automatically mean the fund shrinks by 4.5% every year.

Why 4.5%?

The number wasn't selected without financial analysis.

The nine-member Permanent School Fund Task Force examined distribution rates between 3% and 5% using historical returns, asset allocations, land revenues and forward-looking assumptions.

The analysis included scenarios with returns below capital-market expectations, multiple years of negative investment returns and fund declines exceeding 20%.

According to the Task Force report, even a 5% distribution generally supported consistent distributions and modest fund growth in scenarios with returns significantly below expectations. The fund declined when distributions exceeded the combination of modeled investment returns and land-management revenues.

Ultimately, the Task Force unanimously recommended 4.5% of the three-year average.

But couldn't markets crash?

Yes. No investment fund is immune from market losses.

That's one reason the proposal uses a rolling three-year average rather than simply taking 4.5% of the fund's current value.

The Task Force specifically modeled volatile conditions, including multiple negative-return years and declines greater than 20%. It also considered adding a special mechanism that could reduce distributions during extreme downturns.

The Task Force ultimately concluded that an additional mechanism would add complexity and unpredictability and that the rolling-average approach provided an appropriate adjustment mechanism.

That doesn't mean the fund can never decline. It means market downturns were part of the analysis behind the recommended distribution model.

What protects future students?

This is also where the constitutional amendment itself matters.

The existing Constitution says that the fund's principal must be “perpetual and inviolate forever” and generally limits distributions to net interest and dividends.

The proposed amendment would replace that framework with a total-fund approach.

The new constitutional language would require the Permanent School Fund to be:

• a perpetual financial resource;
• managed to preserve its purchasing power over time; and
• managed to balance the needs of current and future beneficiaries.

That's an important distinction. The proposal does change how the fund is protected; it does not simply eliminate long-term protection.

Students today—and students tomorrow

There is a genuine trade-off in any permanent endowment.

Distributing less can allow more money to remain invested and compound. Distributing more can provide greater benefit to current beneficiaries.

The Permanent School Fund Task Force explicitly recognized that trade-off. Its recommendation was intended to find a distribution rate that provides greater support to today's schools while maintaining the Permanent School Fund as a lasting resource for future generations.

That's ultimately the question Minnesota voters are being asked to consider: how should a permanent education trust balance the needs of students sitting in Minnesota classrooms today with those who will attend our schools decades from now?

Students First. Improve the Trust.

Learn more about Minnesota's Permanent School Fund amendment at mnpsfamendment.org.