The State Investment Council Needs a Closer Look

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The pending loss of New Mexico’s $19 million investment in Eclipse Aviation raises important questions about how wisely the State Investment Council (SIC) is handling our money. This is not the first private equity investment by the SIC to go sour. New Mexico lost a $7 million investment in TCI Medical, a start-up nuclear medicine company that was supposed to create 100 jobs in Carlsbad but employed just seven people. The SIC also lent about $2 million to Millenium Transit, a bus manufacturing company in Roswell. That company is now in bankruptcy.

The SIC does not seem to know exactly what is being done with New Mexico’s money. It claims to have bought equity positions in 52 New Mexico companies, but it cannot say, despite repeated requests by the Rio Grande Foundation, how much money it has in each of these companies or what percentage of each company’s stock is owned by New Mexico taxpayers.

The Legislature, at Governor Richardson’s urging, has authorized the SIC to invest up to 9% of the Severance Tax Permanent Fund in acquiring stock in private New Mexico companies. This is a substantial amount of money. At the end of 2007, the SIC had over $141 million invested in private New Mexico companies.

So far, the SIC’s New Mexico private equity program hasn’t produced hard returns for New Mexico taxpayers. For years, the SIC claimed its New Mexico private equity program was in the black. But favorable (and inflated) valuations for Eclipse, the largest holding in the portfolio, accounted for those paper gains. With Eclipse in the tank, the false bloom is off the rose.

Even some of the SIC’s smallest acquisitions look questionable. Take for instance, its investment in Small Smiles. The SIC’s 2007 annual report showed an investment of an unstated sum in this New Mexico company. By directly contacting the venture capital firm that handled this investment, the Rio Grande Foundation learned that about $500,000 New Mexico taxpayer dollars have been invested in Small Smiles. The SIC itself had not been able to answer this question.

Contrary to the SIC’s annual report, Small Smiles, is not a New Mexico company. It is a national chain of low income dental clinics owned by a bank in Bahrain. Furthermore, at the time half a million taxpayers dollars were going to help Arab investors, Small Smiles was being blasted in an Emmy Award winning investigative television series called “Drilling for Dollars.” Small Smiles clinics in the Washington, D.C. area were exposed for abusing children by strapping them to “papoose boards.” Small Smiles had engaged in unethical billing practices. Parents came forward with complaints of unnecessary dental work being performed on their children without their consent.

The same complaints about Small Smiles arose in New York, Colorado and Kansas. New York Senator Charles Schumer has called for criminal prosecution and disqualification of Small Smiles from the Medicaid program. New York, in fact, did revoke Small Smiles’ Medicaid credentials.

The ABC news program “20/20” has conducted its own investigation of Small Smiles. and has an expose’ ready for national broadcast.

A review of SIC meeting minutes shows not one mention of Small Smiles’ difficulties. In fact, Small Smiles wasn’t discussed once though a half million dollars were invested in this troubled company.

The Eclipse bankruptcy proves that politicians and their appointees make very poor judges of the next big breakthrough in aviation or other technologies. The fact that even in its smallest investment the SIC seems less than completely informed should make taxpayers concerned about whether their money is being prudently managed.

There is scant oversight of the SIC’s investment practices and decisions. Only when a big investment like Eclipse craters does the public learn of losses. It’s time the Legislature revisit the discretion it has given the SIC, and provide for greater transparency and more informed decision making. It should also ensure inescapable accountability for those who make the wrong calls in handling the public’s money.

Paul J. Gessing is President of the Rio Grande Foundation. The Rio Grande Foundation is an independent, non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.