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LEGISLATIVE BUDGET BOARD
Austin, Texas
FISCAL NOTE, 88TH LEGISLATIVE REGULAR SESSION
April 16, 2023
TO:
Honorable Bryan Hughes, Chair, Senate Committee on State Affairs
FROM:
Jerry McGinty, Director, Legislative Budget Board
IN RE:
SB1446 by Hughes (relating to the fiduciary responsibility of the governing body of the public retirement systems in this state and the investment managers and proxy advisors acting on behalf of those systems.), Committee Report 1st House, Substituted
Estimated Two-year Net Impact to General Revenue Related Funds for SB1446, Committee Report 1st House, Substituted: a negative impact of ($535,916) through the biennium ending August 31, 2025.
The negative impact of the bill would be to the Pension Review Board for two additional reports that agency would need to produce. The cost to the Teacher Retirement System and the Texas Emergency Services Retirement System cannot be determined. The Employees Retirement System indicated the bill is not expected to have a significant fiscal impact on programs they administer.
The Pension Review Board is required to implement a provision of the bill only if the legislature appropriates money specifically for that purpose. If the legislature does not appropriate money specifically for that purpose, the Pension Review Board may, but is not required to, implement a provision of the bill using other appropriations available for that purpose.
The bill would make no appropriation but could provide the legal basis for an appropriation of funds to implement the provisions of the bill.
General Revenue-Related Funds, Five- Year Impact:
Fiscal Year
Probable Net Positive/(Negative) Impact to General Revenue Related Funds
2024
($307,520)
2025
($228,396)
2026
($228,396)
2027
($228,396)
2028
($228,396)
All Funds, Five-Year Impact:
Fiscal Year
Probable (Cost) from General Revenue Fund 1
Change in Number of State Employees from FY 2023
2024
($307,520)
2.0
2025
($228,396)
2.0
2026
($228,396)
2.0
2027
($228,396)
2.0
2028
($228,396)
2.0
Fiscal Analysis
The bill would amend the Government Code to require the investment managers of Texas public retirement systems to consider only financial factors when performing their duties. The governing body of a public retirement system would not be permitted to grant proxy voting authority to an investment manager unless the manager offers a policy with the sole goal of maximizing financial return, or the governing body has a publicly available policy they require the manager to follow. The governing body of the system would have to post on its website details on how the proxy advisor will cast a proxy vote. The governing body would then be required to tabulate all proxy votes for the preceding fiscal year and submit them annually to the Pension Review Board (PRB). For each vote, the report must include a vote caption, the system's vote, and, as applicable, the recommendation of the proxy advisor. The PRB would be required to post all such reports to its website.
Under the provisions of the bill, the governing bodies of certain public retirement systems would also have to submit an annual report to the PRB that details investment relationships maintained by the system, including information about funds or investment entities the system has invested in during the previous 12 months and the investment manager with which the system has contracted with to provide investment mangement services. The PRB would be required to post this information to its website.
Methodology
The bill would require the PRB to receive and make publicly available two new annual reports from public retirement systems containing detailed investment information and large data files. According to PRB, this would require two new FTEs, an Investment Analyst III and a Program Specialist III.
The Investment Analyst would set up the new reporting requirements, develop guidance and possible rules, provide training, handle requests for assistance from systems, and review the two new annual reports. The Program Specialist would manage the implementation of the new reporting requirement, communicate with systems about reporting deadlines, and assist with data storage and website management to ensure the new reports are accessible on the PRB website. The estimated cost of the two new FTEs, including salary, retirement, social security, health insurance, and agency payroll contribution is $217,520 in fiscal year 2024 and $228,396 in fiscal year 2025 and subsequent years.
The financial impact to the Employees Retirement System, the Teacher Retirement System, and the Texas Emergency Services Retirement System related to returns on investments cannot be determined. The difference in returns between affected investments and those that would potentially replace them cannot be estimated.
Technology
The PRB estimates it will cost $90,000 in fiscal year 2024 to upgrade its data storage systems in order to receive, store, and publish the two new annual reports required by the provisions of the bill. The agency's IT consultant estimates it will take approximately five months at a cost of $18,000 per month to complete the necessary upgrade.
Local Government Impact
According to the PRB, local public retirement systems generally identified the potential for higher administrative costs but indicated uncertainty about precise amounts and types of costs. Types of potential costs identified by local systems include staff to manage data and reporting requirements as well as monitor compliance; legal fees to modify current and new legal contracts with investment managers; and additional investment fees and costs involved with liquidating assets and changing managers if the bill's provisions impact the willingness of investment or asset managers to do business with Texas public retirement systems and potentially shrink the pool of available managers.
According to the Texas County and District Retirement System (TCDRS), the investment contract requirements may discourage investment managers from doing business with TCDRS due to uncertainty about how the new standards will be interpreted, especially regarding liability. The financial impact to TCDRS cannot be determined but could result in significant lost earnings, which would result in increased costs to county and district employers. In addition, TCDRS's operating costs for legal and proxy voting services would increase. According to the Texas Municipal Retirement System (TMRS), the provisions of the bill that include an agreement that investment managers invest according to a new investment standard and which create a new cause of action for breach of that standard may discourage investment mangers from doing business with TMRS. According to TMRS, the fiscal impact of the bill to the system cannot be estimated, but could still negatively impact investment returns.