Fiscal impact
reports (FIRs) are prepared by the Legislative
Finance Committee (LFC) for standing finance committees of the NM Legislature. The
LFC does not assume responsibility for the accuracy of these reports if they
are used for other purposes.
Current FIRs (in HTML & Adobe PDF formats) are available on the
NM Legislative Website (legis.state.nm.us). Adobe PDF versions include all attachments,
whereas HTML versions may not.
Previously issued FIRs and attachments may
also be obtained from the LFC in
|
SPONSOR |
Maes |
DATE TYPED |
|
HB |
|
||
|
SHORT
TITLE |
Create NM Centers of Excellence Fund |
SB |
33/aSCORC |
||||
|
|
ANALYST |
Garcia |
|||||
APPROPRIATION
|
Appropriation
Contained |
Estimated
Additional Impact |
Recurring or
Non-Rec |
Fund Affected |
||
|
FY04 |
FY05 |
FY04 |
FY05 |
||
|
|
$18,000.0 |
|
|
Recurring |
NM
Technology Cluster Creation Fund |
|
|
|
|
|
|
|
(Parenthesis
( ) Indicate Expenditure Decreases)
REVENUE
|
Estimated Revenue |
Subsequent Years Impact |
Recurring or
Non-Rec |
Fund Affected |
|
|
FY04 |
FY05 |
|||
|
|
($18,000.0) |
|
Recurring |
Severance
Tax Permanent
Fund |
|
|
|
($200.0
estimated) |
Recurring |
General
Fund |
|
|
|
|
|
|
(Parenthesis ( ) Indicate Revenue Decreases)
LFC Files
Responses
Received From
Commission
on Higher Education
State
Investment Council
Economic
Development Department
SUMMARY
Synopsis
of SCORC Amendment
The following
are the Senate Corporations and Transportation Committee amendments to SB 33:
(1) changes the name of the fund to the “New Mexico Technology Cluster Creation
Fund,” (2) increases the pay-out from the severance tax permanent fund to the
NM Technology Cluster Creation Fund from ¼ of 1 percent to ½ of 1 percent (3)
adds the following language: “the manager of the technology cluster creation
fund shall deliver an annual report to the governor and legislative finance
committee and within thirty days of its report, the manager shall return to the
severance tax permanent fund an amount equal to the net excess of the funds
held by the fund…less amounts reasonably reserved for losses,” (4) allows the
Secretary of Economic Development to appoint a manager of the fund who will
make up to 2 percent of the allocation or $380 thousand, and (5) includes
“seed” equity investments.
Fiscal Implications of Amendment
The general
fund receives a 4.7 percent distribution from the severance tax permanent fund
(STPF) per statute. As the original bill is proposed, around $9 million would
be removed from the STPF and would result in a negative impact to the general
fund. An estimate is around $100 thousand negative impact to the general fund,
after taking into account the five-year market value calculation of the STPF.
With the amendments, the payout will double, so around $18 million annually
would be removed from the STPF. In turn, this would then reduce the market
value of the fund and translate into a negative impact to the general fund
roughly estimated at $200 thousand. The proposed amendments will revert the investment gain to the STPF and not the corpus of
the new fund “NM Technology Cluster Creation Fund.” Despite this reversion, the
impact to the general fund will still be negative.
Moving dollars
from the STPF for investment into a new fund may pose an opportunity cost where
the SIC may be able to garner a higher rate of return on similar investments.
The Economic Development Department expects a target return of the new fund at
20 percent. The SIC already has the capacity to invest the money and expects a
high return on its private equity investments (roughly 4 to 6 percent above the
S&P 500 index). Moreover, private equity type investments in “seed” and
early stage businesses are highly volatile. Positive returns are not expected,
if at all, until 4 to 5 years after initial investment in these types of
ventures.
Significant Issues of Amendment
1) Investments in private equity have a high
risk profile. The SIC is able to mitigate some of the risk because private
equity is only 6 percent of the full portfolio. Consequently, as portfolio theory
suggests, private equity, although being risky investments,
add positive portfolio diversification effects for the entire portfolio.
2) The manager
appointed by the Secretary will in effect serve as the general partner of the
fund. As a consequence, the general partner will likely serve as the fiduciary,
which relieves the SIC of its fiduciary duty of the money.
3) The
provision that sets aside “amounts reasonably reserved for losses” is different
from any other market rate investment in the STPF. According to the SIC, no
other market rate investment in the STPF is allowed to keep a “reserve” against
losses.
The bill is introduced
for the Senate’s Economic and Rural Development and Telecommunications Committee
and amends the Severance Tax Bonding Act [Section 7-27-5.15 NMSA 1978] and the
Economic Development Department Act [Chapter 9, Article 15 NMSA 1978] to create
the New Mexico Centers of Excellence Fund and provide for the appointment of a
private equity fund manager.
The proposed legislation
requires that one-fourth of one percent of the market value of the Severance
Tax Permanent be invested in a limited partnership interest in the fund along
with earnings from limited partnership investments from business, financial
institutions, foundations or money appropriated. Money in the fund is
appropriated to and administered by the Economic Development Department for the
purpose of collaborating with the state’s universities to make and manage early
stage equity investments in “new or expanding businesses in New Mexico that
possess technologies with promising prospects for commercialization to
stimulate job growth.”
Significant Issues
1) The
state investment office already has 6 percent of the market value of the SPTF
available for private equity investments. This just removes a portion and gives
it to Economic Development Department for investment with university
collaborations.
2) The
state investment office has made numerous investments in technology based
companies with the expectation that the state will receive a good rate of
return on its investment as well as provide quality job growth. In addition,
some of the companies have affiliations with state institutions of higher
learning and the state’s research laboratories.
FISCAL IMPLICATIONS
The market value of
the Severance Tax Permanent Fund equaled $3.6 billion as of
The state General Fund is a beneficiary of the
Severance Tax Permanent Fund. The General Fund receives 4.7 percent of the five
year average market value of the fund. Removing approximately $9 million in
FY05 and roughly similar amounts in the future will reduce the market value of
the STPF. Consequently, there will be a minimal negative impact to the General
Fund.
Continuing Appropriations
This
bill creates a new fund and provides for continuing appropriations. The LFC objects to including continuing
appropriation language in the statutory provisions for newly created
funds. Earmarking reduces the ability of
the legislature to establish spending priorities.
ADMINISTRATIVE IMPLICATIONS
One quarter of one percent of the Severance Tax
Permanent Fund (STPF) or roughly $9 million is appropriated to the Economic
Development Department (EDD) for investment. The state investment officer,
under this bill is committed to this investment, and therefore cannot be held
responsible as the fiduciary of these funds. The fiduciary should be the
administrator of the fund, which is EDD. However, it is unclear whether EDD has
the proper administrative capacity to serve as the fiduciary of the fund.
POSSIBLE QUESTIONS
Does the proposed
investment from the Economic Development Department (EDD) exceed the expected
return of private equity investments from the State Investment Office?
If EDD does not expect
a return above what the State Investment Office expects or receives from
similar investments, is moving funds from the severance tax permanent fund to a
new fund efficient or effective?
Does EDD have the
capacity to adequately invest these funds and monitor its investment?
DG/lg:yr