Attorney General: The Honorable Christopher B. Burnham, Treasurer, 1996-012 Formal Opinion, Attorney General of Connecticut

Attorney General's Opinion

Attorney General Richard Blumenthal

August 9, 1996

The Honorable Christopher B. Burnham
Treasurer
55 Elm Street
Hartford, CT 06106-1773

Dear Mr. Burnham:

You recently wrote to this office explaining your desire to establish a global combined investment fund to replace nine combined investment funds currently in use. The proposed combined investment fund would include retirement funds as well as seven non-retirement trust funds (hereinafter the "seven funds").Endnote 1 The contemplated seven funds do not currently participate in all of the combined investments established at this time. You seek our advice on several issues that have arisen with respect to the proposed investment strategy.

First, you have asked us to review the documents or statutes establishing the seven funds with regard to any investment restrictions they may have. Second, you seek our assistance in determining the impact of commingling non-retirement and retirement trust funds into one investment vehicle, i.e., a global combined investment fund. Third, you want to know whether there are any potential investments which you could not utilize as a result of the commingling of retirement and non-retirement trust funds.

As to your first question, we believe from a review of the pertinent documents and statutes establishing the subject trusts that there is no investment restriction on the specified funds, other than the Agricultural College Fund which is restricted to investments in federal or state bonds. Of course, all of the funds you intend to combine into a global combined investment fund must be invested in accordance with the requirements set forth in chapter 32 of the general statutes applicable to all trust funds in the custody of the Treasurer. Second, we believe that you may commingle retirement trust funds with non-retirement trust funds so long as you are able to provide accounting procedures from which the interest on each constituent trust fund so combined can be determined and spent in accordance with any requirements in the statute or instrument that govern each fund. Third, we cannot anticipate or speculate as to what types of potential, as yet undetermined investments, out of the universe of possible investments, you can or cannot use when you combine the stated non-retirement trust funds with the retirement trust funds in one combined investment fund. However, should you have in mind a specific type of investment, you may present that investment to us for consideration.

I General Statutory Background

Our analysis commences with the statutory provisions governing the Treasurer's general authority as the trustee or custodian of the state trust funds. Conn. Gen. Stat. 3-13c defines the term "trust funds" for the purposes of Conn. Gen. Stat. 3-13 to 3-13e, inclusive. This provision states:

Trust funds as used in sections 3-13 to 3-13e, inclusive, and 3-31b shall be construed to include Connecticut Municipal Employees' Retirement Fund A, Connecticut Municipal Employees' Retirement Fund B, Soldiers, Sailors and Marines Fund, State's Attorney Retirement Fund, Teachers' Annuity Fund, Teachers' Pension Fund, Teachers' Survivorship and Dependency Fund, School Fund, State Employees Retirement Fund, the Hospital Insurance Fund and all other trust funds administered, held or invested by the treasurer. (emphasis added)

As demonstrated below, the Treasurer is clearly the custodian or trustee of the seven non-retirement trust funds that you desire to include in the proposed global combined trust fund. With respect to the investment vehicles the Treasurer may utilize for state trust funds, there is specific, ample guidance in the statutes. First, Conn. Gen. Stat. 3-13d(a) provides:

... the treasurer shall invest as much of the state's trust funds as are not required for current disbursements in accordance with the provisions of section 45a-203 or the provisions of this part [Part I, chapter 32 of the general statutes]. Notwithstanding the provisions of this section or any other provision in the general statutes or elsewhere to the contrary, the treasurer shall not invest more than fifty percent of the book value of each trust fund in common stock. ... [T]he treasurer may enter into repurchase agreements or lend securities from each such fund...

In addition to the investment options set forth in 3-13d(a), subsection (b) of 3-13d permits investment of the state's trust funds in Connecticut mortgage pass-through certificates.

Conn. Gen. Stat. 45a-203(a), cited in Conn. Gen. Stat. 3-13d(a), sets forth additional various types of investments available to the Treasurer. Specifically these are:

a) Investments permitted. Trust funds, received or held by trustees, unless otherwise provided in the instrument creating the trust, and funds received or held by guardians or conservators, (1) may be invested in such real estate mortgages as the savings banks in this state may be authorized by law to invest in, or (2) may be deposited in savings banks incorporated by this state or in time or savings deposits in state banks and trust companies and national banking associations located in this state, or (3) may be paid into accounts of savings and loan associations located in this state insured by the Federal Savings and Loan Insurance Corporation, its successors or assigns, or (4) may be invested or reinvested in any bonds, stocks, specifically including but not by way of limitation, shares of any open-end or closed-end management-type investment company or investment trust registered under the Federal Investment Company Act of 1940, as amended, or other securities, selected by the trustee, guardian or conservator with the care of a prudent investor. Any bonds purchased by a trustee, guardian or conservator under authority of this section may, in the discretion of such fiduciary, be in coupon form.Endnote 2

The Treasurer has been granted the authority to establish combined investment funds under Conn. Gen. Stat. 3-31b(a). This statute provides:

Notwithstanding any contrary provision of law, the state treasurer may establish one or more combined investment funds for the purpose of investing funds for which the treasurer is custodian or trustee, provided the treasurer shall adopt appropriate accounting procedures from which the exact interest of such funds so combined for investment can be determined. ... (emphasis added).

Lastly, we note that any type of investment recommended by the Treasurer must be reviewed by the Investment Advisory Council and approved by that body as "consistent with the law pertaining to the kind or nature of the investment, including limitations, conditions or restrictions upon the methods, practices or procedures for investment." Conn. Gen. Stat. 3-13b(c).

We now review each of the seven funds you contemplate including in the proposed global combined investment fund in order to determine whether such inclusion is allowed and, if so, whether there are restrictions on the particular fund.

II Agricultural College Fund

The Agricultural College Fund dates back to 1862 when it was received as proceeds from the sale of federal land or land scrip granted to the States from the federal government.Endnote 3 This fund has remained from its inception to the present "in the custody of the state treasurer." Conn. Gen. Stat. 10a-115. See also Conn. Gen. Stat. 3-40, delegating to the Treasurer the Fund's "care and management" and the right to "loan and invest the principal" of the Fund.

The Agricultural College Fund is, therefore, a trust fund administered and held by the Treasurer. Thus, it must be invested under the investment criteria and guidelines set forth in part I of chapter 32 of the general statutes. See Conn. Gen. Stat. 3- 13c.

This fund, however, does come with certain conditions for its investment. Congress has laid the following ground rules for investing the Agricultural College Fund:

All moneys derived from the sale of lands aforesaid by the States to which lands are apportioned and from the sales of land scrip hereinbefore provided for shall be invested in bonds of the United States or of the States or some other safe bonds; or the same may be invested by the States having no State bonds in any other manner after the legislatures of such States shall have assented thereto and engaged that such funds shall yield a fair and reasonable rate of return, to be fixed by the State legislatures, and that the principal thereof shall forever remain unimpaired: Provided, That the moneys so invested or loaned shall constitute a perpetual fund, the capital of which shall remain forever undiminished (except so far as may be provided in section 5 of this Act [7 U.S.C. 305]), and the interest of which shall inviolably appropriated, by each State which may take and claim the benefit of this Act [7 U.S.C. 301 et seq.], to the endowment, support, and maintenance of at least one college where the leading object shall be, without excluding other scientific and classical studies and including military tactics, to teach such branches of learning as are related to agriculture and the mechanic arts, in such manner as the legislatures of the States may respectively prescribe, in order to promote the liberal and practical education of the industrial classes in the several pursuits and professions in life.

7 U.S.C. 304 (emphasis added).Endnote 4

Hence, the Agricultural College Fund may be included in a global combined investment fund created by the Treasurer pursuant to Conn. Gen. Stat. 3-31b(a), only if it is possible to segregate that portion of the combined investment fund attributed to the Agricultural College Fund and invest it solely in federal, state or other safe bonds. We do not determine here whether it is possible to do so as part of the global investment fund you would like to create. Also, any income attributable to the Agricultural College Fund would have to be appropriated in accordance with 7 U.S.C. 304.

III Andrew C. Clark FundThe Andrew C. Clark Fund was created under the Will of Andrew C. Clark of New Milford, Connecticut, who died in 1916. Under the residuary clause of his Will,Endnote 5 Mr. Clark left one-half of the remainder of his estate to the State of Connecticut while the other half was directed to a religious society. In 1917 Special Act No. 261, An Act Concerning the Interest of the State in the Estate of Andrew C. Clark, was enacted authorizing the Treasurer to receive one-half of the corpus of the testamentary trust created by Mr. Clark's Will. On September 13, 1945, the sum of $31, 607.62 was paid over to and accepted by the then Treasurer, William T. Carroll.Endnote 6

It is evident from the language of Mr. Clark's Will that the State was authorized "to hold and invest" the corpus of the trust created under Clause Fifth of the Will. We conclude therefore that the Andrew C. Clark Trust Fund is a trust fund within the meaning of Conn. Gen. Stat. 3-13c. There are no restrictions in the Will regarding the manner of investment of said funds. We therefore also conclude that this fund may be incorporated into a combined investment fund within the limitations set forth in Conn. Gen. Stat. 3-13d(a), 3-31b(a) and 45a-203(a).

IV Soldiers, Sailors and Marines FundThe scope of the Treasurer's authority to invest the Soldiers, Sailors and Marines Fund is set forth in Conn. Gen. Stat. 27-138 and provides in relevant part as follows:

The Soldiers, Sailors and Marines' Fund shall remain as established and shall be in the custody of the treasurer as trustee of said fund. The Treasurer shall administer said fund as required by the provisions of this chapter, and shall reinvest as much of said fund as is not required for current disbursement in accordance with the provisions of part I of chapter 32. ...

The Soldiers, Sailors and Marines Fund is expressly defined as a "trust fund" for the purposes of Conn. Gen. Stat. 3-31b(a). See Conn. Gen. Stat. 3-13c. From the foregoing we conclude that the Treasurer may include the Soldiers, Sailors and Marines Fund in a global combined investment fund established under part I of chapter 32 , Conn. Gen. Stat. 3-31b(a), subject to the investment restrictions and conditions set forth in Conn. Gen. Stat. 3-13d(a), 3-31b(a), and 45a-203(a).

V School FundThe Treasurer's authority to invest the School Fund is set forth in Conn. Gen. Stat. 3-40. It provides:

The treasurer shall have the care and management of the School Fund and the Agricultural College Fund, loan and invest the principal thereof and have the care of the income from the same; but no loans from the School Fund shall be made outside of the state. He shall give a bond in the sum of one hundred thousand dollars, with surety to the state, conditioned for the faithful performance of his duties in the care and management of said funds, and shall report annually to the governor, as provided by section 4-60, with such suggestions as he deems important. (emphasis added).

The School Fund is expressly included in the definition of "trust fund" set forth in Conn. Gen. Stat. 3-13c. Sections 3-40 and 3-13c of the general statutes, therefore, make it clear that the Treasurer has the authority to invest the corpus of the School Fund in accordance with the provisions of part I of chapter 32 of the general statutes. As such, the Treasurer may include the School Fund in a global combined investment fund established pursuant to Conn. Gen. Stat. 3-31b(a), subject to the investment restrictions and conditions set forth in Conn. Gen. Stat. 3-13d(a), 3-31b(a) and 45a-203(a).

VI The Ida Eaton Cotton FundIda Eaton Cotton died on April 27, 1946, in Milford, Connecticut, leaving no heirs at law or next of kin.Endnote 7 She died testate, however, and pursuant to clause Second of her Will dated June 22, 1939,Endnote 8 Mrs. Cotton left one-half of her estate to the State of Connecticut in trust, designated "The Ida Eaton Cotton Fund".Endnote 9 On February 18, 1948, then State Treasurer Joseph A. Adorno accepted the aforesaid trust.Endnote 10

Mrs. Cotton's Will clearly designates the trust funds to be held by the State Treasurer. Therefore this trust qualifies as a "trust fund" within the meaning of Conn. Gen. Stat. 3-13c. The Will contains no prohibitions or restrictions on the type or manner of investment of the fund. We conclude, then, that the "The Ida Eaton Cotton Fund" may be a component of the global combined investment fund as you propose with the attendant statutory restrictions set forth in Conn. Gen. Stat. 3-13d(a), 3-31b(a) and 45a-203(a). As mentioned previously, the income from this fund must be identified and spent in accordance with restrictions in the will.

VII Hopemead State Park Trust FundThe Hopemead State Park Trust Fund was created pursuant to the August 14, 1964, Last Will and Testament of Charlotte Fuller Eastman of Norwich, Connecticut, who died in 1965. This testamentary trust, denominated the "Hopemead Fund" and provided under clause III c of said Will, as follows:

c) The savings account in my name in the Savings Bank of New London, designated as the "Hopemead Fund" I bequeath to the said trustee, in trust, separately and my said trustee is to pay the interest paid by said bank on said account to my said sister, H. Louise Fuller, together with such portion of the principal of said account as she may request and upon her death the balance of said fund shall be paid to the Connecticut State Park and Forest Commission with the provision that said monies shall be used by said Commission solely for the development of the property previously conveyed to the State of Connecticut, by H. Louise Fuller and myself. (Emphasis added.)

Mrs. Eastman's sister, H. Louise Fuller, died on May 20, 1973.Endnote 11 According to the February 3, 1975, final administration account of Mrs. Eastman's estate filed by the trustee, Second New Haven Bank, in the Probate Court for the District of Norwich, the sum of $143,288.18, representing the then present value of stocks, bonds and the balance in a savings account in the Savings Bank of New London, all comprising the Hopemead Fund, was paid to the state Department of Environmental Protection ("DEP"), the successor to the Connecticut State Park and Forest Commission, to be used solely for the development of the Hopemead State Park.Endnote 12 On or about March 22, 1976, the funds bequeathed in trust to the State under Mrs. Eastman's Will were transferred to the Treasurer from the DEP for investment by agreement of the two agencies.

Because the Treasurer is now holding the Hopemead State Park Trust Fund, it is clear that such fund qualifies as a "trust fund" within the meaning of Conn. Gen. Stat. 3-13c. See supra, section I. The provision of Mrs. Eastman's Will which creates the Hopemead Fund does not dictate any restrictions on how it is to be invested. Therefore, we conclude that you may invest said fund within the strictures of Conn. Gen. Stat. 3-13d(a), 3-31b(a) and 45a-203(a). This trust fund may properly be included in the global combined investment fund you contemplate with the income identified and spent in accordance with the governing instruments.

VIII Connecticut Arts Endowment FundThe Connecticut Arts Endowment Fund is created by statute, Conn. Gen. Stat. 10-373o. It provides:

There is created a "Connecticut Arts Endowment Fund". The proceeds of any bonds issued for the purposes of sections 10-373n to 10-373q, inclusive, shall be deposited in said fund. The state treasurer shall invest the proceeds of the fund and the investment earnings shall be credited to and become part of the fund. Annually, on or before September first, the treasurer shall notify the commission of the total amount of investment earnings of the fund for the prior fiscal year and such amount shall be available to the commission for payments pursuant to sections 10-373p and 10-373q. Any balance remaining in the fund at the end of each fiscal year shall be carried forward in the fund for the succeeding fiscal year. (emphasis added)

The Treasurer is clearly the custodian of the Connecticut Arts Endowment Fund. He is charged with administering, holding and investing such fund. Thus, this Fund is a "trust fund" within the meaning of Conn. Gen. Stat. 3-13c. Therefore, it may be incorporated into the global combined investment fund you contemplate within the limitations set forth in Conn. Gen. Stat. 3-13d(a), 3-31b(a) and 45a-203(a).

IX Commingling Non-retirement and Retirement Trust FundsAs we discussed above in section I, you may commingle non-retirement and retirement trust funds in a combined investment fund. However, if you do so, you must adopt appropriate accounting procedures which enable you to determine the exact interest of each fund so combined. Conn. Gen. Stat. 3-31b(a).

X Potential Prohibited InvestmentsAs we discussed above in section I, you have a broad range of permissible investment options for a combined investment fund. See Conn. Gen. Stat. 3-13d, 36b-3(13) and 45a-203(a). You have asked whether there are any potential investments which you may not utilize when you establish the proposed global combined investment fund. Because this question essentially asks us to speculate and to consider hypothetical, unidentified investments, we cannot provide you with an answer to this question. See, e.g., 85 Op. of Atty. Gen. 284, 290 (#85-77) (Nov. 21, 1985 opinion to Eliot J. Dober). However, if you have a particular type of investment in mind which you are uncertain is proper under the statutory provisions we discussed in section I above, you may direct a specific inquiry in that regard to this office.Endnote 13

XI Conclusion

We trust the foregoing addresses your concerns related to the establishment of a global combined investment fund for state retirement funds and the seven specified non-retirement funds. Only the Agricultural College Fund has investment restrictions but each of the seven trust funds is eligible for investment in such combined fund and the type of investments you select must meet the terms of Conn. Gen. Stat. 3-13d(a), 3-31b(a) and 45a-203(a).

Very truly yours,

RICHARD BLUMENTHAL
ATTORNEY GENERAL

William J. Prensky
Assistant Attorney General
RB/WJP/rj


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