The Hollings Center was created by Congress in 2003. Over the course of a few fiscal years, Congress appropriated a trust fund of $18.2M. Congress intended for the Center to operate off of the interest of this trust fund (its highest yield was $733,000 during 2010). Congress stipulated in law that the trust must be invested in U.S. Treasury bonds. In 2011, rates for U.S. Treasuries collapsed and the bonds held by the Center began yielding between 0.25 – 1.25%. Because interest was not enough to sustain operations, beginning in FY13, with the approval of the State Department and the Congress, the Center began relying on drawdowns of trust fund principal to support its operations. Consequently the balance in the trust fund as of September 2015 was approximately $16.8M. The board has, in the past, discussed whether they should seek a change a change in the legislation requiring the trust fund to be invested in government securities. Investment professionals have estimated the HC portfolio should earn between 3-4% in CY 2016 as the economy recovers and then 7-8% thereafter (based on historical stock market returns). The board has several questions:
- a) Setting aside the expectation (hope?) that interest rates will soon rise and the fund will begin to yield more interest, how many years could HC live off the principal in the trust before depletion?
- b) How long would it take to make back the depleted principal if the HC were to get the legislative change and invest in a diversified stock portfolio?
- c) What would future HC budgets look like under that scenario?
- d) Would you recommend to the board they pursue lifting of the mandate, or no?