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

SPONSOR Jennings

ORIGINAL DATE

LAST UPDATED

1/27/07

2/23/07 HB

SHORT TITLE

Local Government Permanent Fund Investments

SB 511/aSPAC

ANALYST Propst

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

NFI

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates HB 1031

SOURCES OF INFORMATION

LFC Files

Responses Received From

State Investment Council (SIC)

Department of Finance and Administration (DFA)

State Treasurer

SUMMARY

Synopsis of SPAC Amendment

Senate Public Affairs Committee amendment gives local governments with their own permanent

funds of greater than $40,000.0 instead of $10,000.0 in the original bill, abilities to invest the

monies in a diversified portfolio. The amendment requires the securities to be rated investment

grade AA or higher instead of the BBB in the original bill.

Synopsis of Original Bill

Senate Bill 511 gives local governments with their own permanent funds of greater than

$10,000.0 additional abilities to invest these monies in a diversified portfolio of public equities,

mutual funds and bonds, as long as managed by advisors/investment professionals of sufficient

credentials currently managing $500,000.0+ of investments.

Senate Bill 511/aSPAC – Page

2

SIGNIFICANT ISSUES

The SIC reports that this legislation does not relate to the Permanent Funds managed by the State

Investment Council, but could apply to some NM clients who use the SIC to manage their local

permanent funds.

The SIC currently manages, in addition to the State Permanent Funds, funds for 16 state agency

clients, including universities, cities, counties, municipalities, and NM political subdivisions.

Currently nine (9) of these clients have assets greater than $10,000.0 and would qualify under

this proposed legislation to place these assets with an outside manager, if they choose to do so.

The SIC allows clients to invest their funds among eight diversified pools of asset classes,

including large cap and mid cap domestic equities, international equities, core and high-yield

bonds. Current SIC costs to manage these funds for state clients are 17 basis points, or

conservatively, one-half to one-third the average industry standard price for managing a

diversified portfolio of institutional assets, even in amounts greater than $10,000.0.

DFA notes that the investment instruments seem reasonable due to the long term preservations

requirements of the permanent fund. Additionally, the opportunity of investment diversification

could provide additional interest income to the municipalities and counties.

However, counties and municipalities should develop policies and procedures that dictate the

type and acceptable investment risks they are willing to place in their respective portfolios

because certain allowable investment instruments such as collateralized mortgage obligation

residuals carry high investment risk elements, particularly principal-only and interest-only strips.

The policy should also require an internal monthly portfolio valuation review and made part of

all monthly reports to the governing body.

However, the State Treasurer reported the types of investments permitted by this legislation may

not be appropriate for public fund investing at a local government level. Investment of public

funds should incorporate safety, liquidity and return, in that order. The investments permitted in

this bill are prone to net asset value fluctuations and the potential loss of principal. Safety of

public funds is a fiduciary responsibility and should mandate investment in the highest quality

securities such as those currently allowed by 6-10-10 and 6-10-01.1 (the State Treasurer’s Local

Government Investment Pool). Additionally inexperienced local government finance officers

may not understand the complexities and risk inherent in investing, especially in the security

types permitted by this legislation and potentially recommended by the investment advisors.

ADMINISTRATIVE IMPLICATIONS

This legislation does not relate to, and would have little if any impact on the SIC or the State’s

Permanent Funds.

DUPLICATION

Duplicates HB 1031.

WEP/mt