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

SPONSOR Robinson

ORIGINAL DATE

LAST UPDATED

2/19/07

HB

SHORT TITLE Severance Tax Fund Investments In Art

SB 1142

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

($0.1)

Recurring Severance Tax

Permanent Fund

($0.1)

*See narrative for

more detail

Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Public Education Department (PED)

State Investment Council (SIC)

Cultural Affairs Department (CAD)

SUMMARY

Synopsis of Bill

Senate Bill 1142 allows the State Investment Council to invest up to 3 percent of the Severance

Tax Permanent Fund (STPF) in New Mexico fine art and fine musical instrument private equity

funds. No more than $60 million could be invested in fine art private equity funds and no more

than $40 million could be invested in fine musical instrument private equity funds. These

investments are to be included under “differential rate" investments that are intended to stimulate

the economy of New Mexico as well as provide income to the STPF.

The State Investment Officer shall make investments upon approval of the Private Equity

Investment Advisory Committee in funds that are managed by reputable companies with

sufficient expertise in these assets, and

•

whose representations and warranties have been approved by the SIC;

Senate Bill 1142 – Page

2

•

who have provided audited quarterly statements to SIC;

•

whose bank accounts are in NM banking institutions;

•

who will place the art in the Museum of New Mexico or a traveling in-state exhibit;

•

who will place the musical instruments at University of NM, NM State University, the

NM Symphony or the Santa Fe Opera; and

•

whose fund managers fully insure all acquisitions for use, show or loan against theft and

damage.

NM fine art private equity fund is defined as any limited partnership, limited liability company

or corporation organized and operating in NM whose primary business is acquiring fine art for

sale opportunistically. An eligible fund also only accepts investments from accredited investors

as defined by the Securities and Exchange Commission (SEC).

NM fine musical instrument private equity fund is defined similarly but the allowed investments

are restricted to stringed, unfretted musical instruments from Italy, France, Germany or England

made from 1600 to 1800 and have a value between $100,000 to $8,000,000.

FISCAL IMPLICATIONS

The STPF had a balance of $4.196 billion as of 9/30/06. Three percent of that would be $125

million that would be available to invest in these assets. The fiscal impact on the fund would be

the difference between investing $125 million in other SIC investments and investing in these

assets. An assumption of 4 percent interest for fine art and fine musical instrument return

compared to 8.5 percent SIC historic return means the STPF would forego $5.6 million in

investment return to invest in these assets. Since a portion of the STPF is distributed to the

general fund (as well as numerous other beneficiaries), the general fund impact would be $263

thousand (5 percent of $5.6 million).

SIGNIFICANT ISSUES

SIC makes the point that under the Prudent Investor Act, these asset classes are already available

to them.

SIC:

Niche private equity investments in art and musical instruments have seen notable

popularity in recent years among private individuals as well as some university

endowments, and some institutional investors consider this asset class to be a prudent

investment with an expectation of reasonable returns and risk characteristics when used

in conjunction with other asset classes for portfolio optimization. However, the fine art

and musical instrument markets also lack a significant base of historical performance

data. In 2002, the National Bureau of Economic Research compiled multiple studies on

the art investment field and summarized the following findings:

“Because estimated returns on investment in art depend heavily on the time frame

studied, the method used and the data available, the authors conclude that it is difficult to

come to any broad conclusions about art investment returns. They calculate that

estimates of real returns from investing in art range from 1 to 4.9 percent in the 15

studies reviewed, but they caution that auction prices may reflect an unrepresentative

Senate Bill 1142 – Page

3

slice of the art market, that transactions costs of up to 25 percent are not included in the

estimates and that investing in art involves significant theft and fire risks."

While several changes have taken place in the five years since this study, there is little

evidence that would show a sea change regarding the overall volatility of fine art

investments or their vulnerability to the shifting whims, tastes and trends of the

marketplace

.

Cultural Affairs:

The Museum of New Mexico would not participate in exhibiting or storing the works or

traveling them around the state. Museum policy prohibits this activity. Museums are

established as public trusts and cannot engage in profit making endeavors that involve the

objects in their trust. This would be a violation of the American Association of Museums

“best practices" and could result in the loss of the state museum’s accredited status, and

would be viewed by the profession as an ethical violation.

Additionally, as the Museum of New Mexico is a state owned museum, it is unethical for

the governing body of the museums (State of New Mexico) to be involved in activities

that are in direct conflict with the museums’ stated mission. In essence, the state would

be in competition with its museums.

Furthermore, the high valued works that are proposed for these investments would

require a level of care (conservation), storage, and handling that the State of New Mexico

is not equipped to provide outside of the state museum system as administered by the

Department of Cultural Affairs

.

PED:

This legislation will provide future opportunities for applied learning, apprenticeships

and work training for those students to carry forward in arts education fields.

Visual and Performing Arts investments across the state can help promote student interest

in learning. The arts can enhance communication in many ways including the following:

verbal and nonverbal; literal or symbolic; invoke response; create dialogue; inform;

evolve; persuade; require interaction; and be formal or informal.

Reading, writing, invention, computation, valuing one’s own and other’s cultures and

problem solving can be enhanced through major fine arts and fine musical instruments

investments. In addition, the housing of these fine arts and fine musical instruments will

promote community, museum and public school learning through field trips, workshops,

traveling exhibits and other such displays. These methods will enhance student learning

tied to New Mexico Standards and Benchmarks and selected measurable Performance

Standards and can capture students’ beliefs and imaginations and greatly enhance their

learning.

Student learning through a program with curriculum based upon learning through

community, arts and culture via museum and other cultural institutions builds life-long

learning.

Senate Bill 1142 – Page

4

The New Mexico Content Standards for the Arts makes a foundation for this learning and

the world of work along with other Content Standards through:

• Demonstration of an understanding of the dynamics of the creative process.

• Observation, discussion, analysis and making critical judgments about artistic

works.

• Increased awareness of diverse peoples through film, visual and performing arts.

• Knowledge about how invention and technology have historically influenced

artists and offered them new possibilities for expression.

• Connections and parallels among the arts disciplines as well as all other content

areas, Science, Math, Language Arts, Social Studies, Modern, Classical and Native

Languages, Physical Education and Health and Career Technology.

• Contributions to local and international communities by sharing learning

experiences in dance, music, theater/drama and visual arts and by participating in cultural

activities in their community and cultural stories developed and recorded through their

films.

As the world moves from a logical, linear Information Age into an economy and society

built on the inventive, big picture capabilities of a Conceptual Age, creative design,

story, symphony, empathy, play and meaning* will emerge to be as valued as logical

thinking and linear skills are now.

*concepts from Daniel Pink’s A WHOLE NEW MIND. Riverhead Books, NY. March,

2005.

ADMINISTRATIVE IMPLICATIONS

SIC:

Enacting this legislation would most likely require the SIC to hire an additional advisor to

choose and perform due diligence on any prospective funds in these categories, which

could increase administrative costs and may require additional personnel to run the

program.

Cultural Affairs:

Museum registrars, collections managers and conservators would need to be involved in

the care, storage and handling of the proposed artworks. The state museums could not

ethically provide any staff toward this effort.

TECHNICAL ISSUES

As other legislation affecting SIC investments in private equity has demonstrated, tribal entities

are excluded from the allowed investors in these types of funds.

SIC:

SB 1142 defines in Section 7-27-5 that it is intended to be a differential rate investment.

As a differential rate investment, it is assumed that in addition to returns the investment

will produce undefined and underlying benefits to the state’s economy. While

differential investments can achieve market rate returns, and are still governed under the

Uniform Prudent Investment Act, there is typically a higher rate of risk involved.

Senate Bill 1142 – Page

5

As the funds must be located and managed within New Mexico, this would provide

employment opportunities in art appraisal while also showcasing the rich art heritage of

the state. However, this particular restriction may also lead to sub-optimal investment

returns if, in the opinion of the SIC and its advisor, better funds with higher expected

returns exist outside New Mexico. As specialized a field as this is, that is a definite

possibility.

ALTERNATIVES

It is unclear why instruments of this particular provenance are the only ones allowed. There is a

large secondary market in instruments owned by all rock and roll stars and several of those

investments have paid off well. According to Juliens Auctions, one of Beatle George Harrison’s

guitar is being auctioned for $200,000.

http://www.juliensauctions.com/auctions/entertainment_legends/george-harrison-guitar.html

NF/nt