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F I S C A L I M P A C T R E P O R T

SPONSOR Varela

ORIGINAL DATE

LAST UPDATED

2/10/07

HB 948

SHORT TITLE Public School Insurance Fund Investments

SB

ANALYST Propst

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

NFI

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates SB 754

SOURCES OF INFORMATION

LFC Files

Responses Received From

Public School Insurance Authority

State Investment Council (SIC)

SUMMARY

Synopsis of Bill

House Bill 948 expands the Public Schools Insurance Authority’s investment options with

respect to long-term reserves. The bill would allow the PSIA Board to invest PSIA’s long-term

reserves with either the State Investment Council or with a registered investment adviser.

Currently, long-term reserves must be invested with the State Investment Council.

SIGNIFICANT ISSUES

PSIA reports that long-term reserves are those monies needed to cover outstanding claims. In

PSIA’s Benefits Program, these reserves are commonly referred to as incurred but not reported

(IBNR.) In the Risk Program, these reserves represent the estimate of future settlements of

claims which are in progress, but have not closed, as well as incurred but not reported. PSIA

uses an actuarial firm to determines the required IBNR reserves. PSIA’s Risk Program third

party administrator updates the estimated for claim reserves as they are reported and adjudicated.

House Bill 948 – Page

2

As of December 31, 2006, PSIA has $34.5 million in long-term reserves invested with the State

Investment Council. The investment portfolio has appreciated by 37.8% since the funds were

placed with the State Investment Council in May 2004.

PSIA reports that the fiscal impact is unknown at this point given the lack of comparative

information on how a private investment adviser would perform vs. the State Investment

Council.

The State Investment Council notes that for the fiscal year ending June 30, 2006, NMPSIA’s

fund under the SIC returned 10.1%, outperforming its total fund benchmark by 60 basis points,

or 0.6%; the S&P 500 by 150 basis points (1.5%); and a “simple" 60/40 portfolio (60% S&P500

stocks/40% Lehman Aggregate Bond Portfolio) by 530 basis points (5.3%).

NMPSIA’s return on a two year annualized return was 10.3% and 1% over its benchmark

(9.3%), which reflects the historical asset allocations of the fund.

NMPSIA’s Allocations as of 6/30/06:

Actual

Long Term Target

US Equity 61.4% 62%

Non-US Equity 16.7% 13%

Core Bonds 21.9% 25%

NMPSIA’s above average performance in FY 2006 is influenced significantly by their

investment allocation, which is currently at 78.1% equities, including 16.7% in international

markets and 13.4% in mid-cap stocks, both of which over performed during the year; and 48% in

the Large Cap Index pool, which slightly underperformed the S&P500. NMPSIA also had

21.9% of its investments in fixed income and the SIC Core Bonds Pool, which while exceeding

the negatively performing Lehman Aggregate (-0.8%) by 260 basis points (2.6%), returned a

disappointing 1.8% overall.

ADMINISTRATIVE IMPLICATIONS

The SIC also reports that its management costs are currently less than 18 basis points, or .18%.

Management fees charged by outside, institutional managers are usually two or three times that

amount, depending on the type of investments and size of portfolio. However, it should be noted

that outside active managers could also offer a greater variety of investment asset classes,

including real estate and/or hedge funds, as well as the ability to shift investment allocations

more frequently.

Investment through the State Investment Council involves minimal administrative oversight by

PSIA. Enhanced oversight of a private investor would likely be required by PSIA staff and

Board. If the Board wished to explore the option of an outside private investment firm, staff

would be directed to issue a Request for Proposal, evaluate responses, and implement a contract

for a four year maximum term.

DUPLICATES

SB 754

WEP/mt