Purpose

Explain how the Minnesota State Board of Investment (SBOI) would operate, bill for its expenses, and report to the Governor and Legislature. The bill changes who pays SBOI costs, how performance is measured, when and how reports are made, and how SBOI can manage funds (including use of private investment managers). It also adds governance and transparency requirements, and sets rules for property escheat (unclaimed property).

Main Provisions

• SBOI as trustee and policies

  • The SBOI continues to act as the trustee for funds it invests, with a recognized standard of care for assets involved (and pension assets follow separate pension law).
  • The SBOI must formulate policies and procedures to carry out its duties and must inform fund beneficiaries and the public about proposed actions.
  • Policies and procedures of the SBOI are not subject to the Administrative Procedure Act.
  • The SBOI may hire an executive director, investment advisors/consultants, and may establish advisory committees to help carry out duties.
  • The SBOI must establish a policy to prevent conflicts of interest for its employees’ personal investments.
  • The SBOI may prohibit state funds from underwriting or directly purchasing municipal securities from issuers or their agents.
  • The SBOI may sell escheated property (property that has escheated to the state) at the state auditor’s direction, but sales must be to the highest bidder under terms set by the SBOI.
  • The SBOI is to establish formulas to measure management performance and return on investment; public pension funds will use the SBOI’s formulas.

• Investment management and reporting

  • The SBOI may hire private external investment managers to invest, manage, or provide services for assets it oversees, with annual funds appropriated to pay these costs.
  • By January 15 each year, the SBOI must report to the Governor and Legislature on costs and investments, including management fees paid to each investment manager and their performance.
  • The SBOI may contract with the Mn State Colleges and Universities System to provide investment review and selection services, and must arrange for payment for those services.

• Budgeting and reporting requirements

  • The SBOI may receive and spend legislative appropriations for administration.
  • The SBOI must maintain records, prepare budgets, and submit budgets to the Department of Management and Budget (and the SBOI must be able to provide annual and biennial budgets to the SBOI and Governor/Legislature).
  • The SBOI must prepare and file a report summarizing its activities each year with the Legislative Reference Library and post an annual report and executive summary on its website.

• Other duties

  • The SBOI can require access to financial documents from state agencies as needed for its investment activities.
  • The SBOI may modify how it bills or apportions expenses in a manner consistent with its duties and applicable law.
  • The SBOI can accept legislative appropriations and undertake other activities necessary to implement its duties.

Financial and Budgetary Changes

• Apportionment of expenses (new framework)

  • Annual SBOI expenses (including advisor/consultant/external firm costs) must be paid from the assets of all funds it manages, into an SBOI operating account in the special revenue fund.
  • The executive director first allocates expenses to the fund(s) they are solely for or allocate among funds based on weighted average assets under management (AUM) if multiple funds are involved.
  • Remaining expenses (after the general fund allocation) are allocated among funds proportionally based on weighted average AUM.
  • Expenses are paid from investment earnings of each fund, with receipts credited to the SBOI operating account.
  • The annual estimated expenses for retirement funds must be deposited into the SBOI operating account, with a reconciliation at least annually. Any surplus or deficit is allocated to the respective funds.
  • The SBOI must present the accrued actual expenses after reconciliation; any year-end surplus may be kept in the operating account and credited against next year’s estimated expenses for each retirement fund; the executive director must refund any surplus portion to the retirement funds.

• Direct appropriation option

  • On a biennial basis, the SBOI can request a direct appropriation to cover the portion of SBOI expenses needed to provide investment services to the state general fund. This appropriation would go to the SBOI operating account.

• Administration and reporting

  • The SBOI operating account is funded by appropriations and investment earnings, with quarterly billing and interagency payment procedures for retirement funds and other funds.
  • The SBOI must provide annual and quarterly reporting, including costs, fees, and performance.

Significant Changes to Existing Law

• Expense billing and cost allocation

  • Replaces or updates how SBOI expenses are allocated among the General Fund, the state retirement funds (MSRS, PERS, TRA), and other funds, with clear formulas based on assets under management and direct charges to funds.

• Private investment managers

  • Formalizes use of private external investment managers and requires reporting on their costs and performance.

• Transparency and reporting

  • Adds stronger reporting requirements to the Governor, Legislature, and the SBOI website, including annual reports, executive summaries, and detailed management fees.

• Administrative Procedure Act exemption

  • Explicitly states SBOI policies are not subject to the Administrative Procedure Act.

• Governance and operations

  • Expands ability to establish advisory committees, adopt an investment policy statement, and contract for investment review services.

• Prohibitions and property handling

  • Prohibits underwriting or direct purchases of municipal securities by state funds and sets procedures for selling escheated property.

• Formula-driven performance

  • Requires SBOI to establish performance and return-on-investment formulas for use by public pension funds.

Terminology and Concepts to Highlight

• State Board of Investment (SBOI)
• Funds and assets under management (AUM)
• Private external investment managers / private investment firms
• Investment earnings
• Escheated property
• Weighted average assets under management
• Investment policy statement
• Advisory committees
• Administrative Procedure Act (exemption)
• General Fund, Minnesota State Retirement System (MSRS), Public Employees Retirement Association (PERA), Teachers Retirement Association (TRA)
• Operating account (State Board of Investment operating account)
• Special revenue fund
• Interdepartmental payments and budgeting process (Department of Management and Budget)
• Annual and biennial budgets and reporting

Relevant Terms - State Board of Investment - 11A.04 and 11A.07 (Minnesota Statutes) - standard of care - trustees - fiduciary duties - escheated property - investment advisors/consultants - external investment manager - weighted average assets under management - investment earnings - operating account - appropriations - reporting to governor and legislature - retirement funds (MSRS, PERS, TRA) - general fund - advisory committees - investment policy statement - administrative procedure act exemption - custody of securities - competitive bidding - annual report - quarterly report