Brief Analysis of Proposed Constitutional Amendment 5
2014
Summary of Proposed Constitutional Amendment 5
Constitutional Amendment 5 would: - allow more than 15 percent of the Land Grant Permanent Fund to be invested in international securities;
- change the investment standard for the fund from the Prudent Man standard to that in the Uniform Prudent Investor Act (UPIA), which is the standard used by the State Investment Council for managing other funds; an
- raise the reserve required to be maintained in the fund from $5.8 billion to $10 billion to continue the yearly distributions of 5.5 percent through fiscal year 2016.
Background and Information Regarding the Land Grant Permanent Fund and Investment of the Fund
Over the past 25 years, the annual return on investment of the Land Grant Permanent Fund has been 8.65 percent, which is below the median return of 8.84 percent for public plans of $1 billion or greater. The Constitution of New Mexico requires that five percent of the fund be distributed each year to New Mexico's state colleges and other beneficiaries. The actual amount distributed changes each year based on the average value of the fund over the previous five years. Pursuant to an amendment adopted in 2003, the present distribution from the fund is 5.5 percent, with the extra one-half percent distribution for educational reforms; however, this increased distribution is set to expire at the end of fiscal year 2016.
What the Land Grant Permanent Fund Is
Prior to statehood, Congress reserved lands in New Mexico for the support of common schools, for state higher educational institutions and for other public infrastructure purposes. Specifically, the statehood Enabling Act of 1910 and the subsequent constitution and statutes of New Mexico establish that: - these lands are held in trust for the benefit of education and other public purposes and are managed by the commissioner of public lands through the State Land Office;
- the proceeds from the sale of these lands or from oil and mineral production agreements, or other land use licenses and fees, are placed in various trust funds; and
- these various trust funds are collectively designated as the Land Grant Permanent Fund and are managed by the state investment officer at the direction of the State Investment Council.
Investments and Distributions from the Land Grant Permanent Fund
The Constitution of New Mexico restricts certain investments from the Land Grant Permanent Fund; limits the distribution of money from the Land Grant Permanent Fund; and establishes the standard of care required of the State Investment Council with regard to investing the Land Grant Permanent Fund.
Standard of Care for Investments
The current language of Subsection C of Section 7 of Article 12 of the Constitution of New Mexico mirrors a standard developed from court decisions dating from a 1830 Massachusetts case, Harvard College v. Amory, regarding the standard of care that an investment firm owes to its clients, often referred to as the Prudent Man standard.
Constitutional Amendment 5 would replace the Prudent Man standard with the requirements established by the UPIA. The UPIA was developed by the National Conference of Commissioners on Uniform State Laws to standardize and update trust investment guidelines to reflect changes in investment practices since the late 1960s. The UPIA was incorporated into New Mexico statute in 1995 and has been enacted by 40 other states. Aside from the Land Grant Permanent Fund, all other funds managed by New Mexico, such as the public employees retirement funds and the Water Trust Fund, are required by statute to use the UPIA standard.
Both the Prudent Man and UPIA standards are attempts to recognize industry best practices in striving for the sometimes conflicting goals of getting a high return on an investment and protecting the invested funds from loss. A major difference between the two standards is that, under the Prudent Man standard, each investment is analyzed separately. Conversely, the UPIA analyzes investments as components of a portfolio.
Investment Restrictions
Article 12, Section 7 of the Constitution of New Mexico requires that:- no more than 65 percent of the Land Grant Permanent Fund be invested in corporate stocks;
- no more than 10 percent of the voting stock of a corporation be held;
- all stocks be listed on a national stock exchange; and
- no more than 15 percent of the Land Grant Permanent Fund be invested in international securities.
Constitutional Amendment 5 would remove the limitation on international investments. The 15 percent limitation has been interpreted to be a limitation on investment in stocks and bonds; however, whether it applies to investment companies with multifaceted corporate structures, such as limited holding companies, is an open question.
Distribution Limitation Based on the Value of the Fund
The Constitution of New Mexico allows for an increased (5.5 percent) distribution from the Land Grant Permanent Fund through fiscal year 2016; however, if the five-year average value of the Land Grant Permanent Fund falls below $5.8 billion, distributions are limited to five percent of the five-year average. Constitutional Amendment 5 would increase the value requirement, and the increased distributions would be prohibited if the five-year average value of the Land Grant Permanent Fund falls below $10 billion. The Land Grant Permanent Fund's balance at the end of April 2014 was approximately $13.7 billion.
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