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(Parentheses ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

State Investment Council (SIC)

SUMMARY

Synopsis of Bill

Section one of this bill would enact enabling statutory language for the Constitutional changes of Article 8, Section 10 of the New Mexico Constitution. These provisions provide for monthly distributions from the severance tax permanent fund (STPF) to the general fund by the Department of Finance and Administration.

Section two of this bill would amend Section 7-27-5.4 NMSA 1978. This section currently sets investment restrictions (ten percent of book value holdings as a percentage of total portfolio) and guidelines related to STPF investments in: bonds, notes, obligations, commercial paper, as well as obligations securing loans to New Mexico businesses through farm credit entities, banks, savings and loans, and mortgages approved by the U.S. Department of Housing and Urban Affairs. These restrictions relate to investments whose proceeds are to establish or expand business outlets or ventures in New Mexico.

There are two significant amendments to Section 7-27-5.4, New Mexico Business Investments. The current law allows for guaranteeing an investment in bonds of a New Mexico corporation of up to one hundred percent (100%) of the expansion venture or new outlet or $20 million, whichever is less, with and investment-grade bond rating or a letter of credit..

The first amendment proposed would strike language that would permit those guarantees of investments made with a letter of credit. Such investments as it relates to this act, is for the business outlets or ventures to use the proceeds to establish or expand business outlets or ventures in New Mexico.

The reasoning for the statutory change is that the current statute technically allows for the security of those investments to be guaranteed by certain financial institutions, foreign and domestic, with a letter of credit.

As a matter of policy, the State Investment Council will not accept letters of credit from foreign banks because of the risks involved. In the event of a breach of terms of the commercial paper, financed by the STPF and secured by a foreign bank, the venue for dispute resolution may take place in a foreign country and subject to foreign laws. This is an added risk to the already relatively risky nature of commercial paper investments. This amendment would bring clarity and parity to the statute and state investment council policy.

The second amendment proposed would give the state investment council authority to set the rate of interest on the fixed security investments and that the rate be not less that the equivalent yield available on United States treasury issues of a comparable maturity plus one hundred basis points (one percent). Current law sets forth the rate to be the equivalent yield available on United States treasury issues of a comparable maturity plus fifty to one hundred basis points (0.5 percent to one percent).

FISCAL IMPLICATIONS

The State Investment Council reports that they currently do not have any New Mexico investments that would be affected by this proposed change in statute. However, by giving authority to the state investment council to set their own rate, and "raising the bar" on the minimum interest rate as they relate to New Mexico business investments, the investment returns on the New Mexico investments will be positively affected and will reflect the additional risks that may be associated with "singling out" New Mexico venture investments as a portion of the total portfolio.

The change in the law as it relates to letters of credit, would clear up statutory provisions and actual state investment council policy. This clarification would eliminate the possibility of a civil suit being filed by an applicant who had or would have received a letter of credit from a foreign bank as provided in the current law.

ADMINISTRATIVE IMPLICATIONS

None.

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