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F I S C A L I M P A C T R E P O R T

SPONSOR Varela

DATE TYPED 3/07/05

HB 387/aHBIC/aHAFC

SHORT TITLE Financial Advisor Procurement Code Exemption

SB

ANALYST Geisler

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

See Narrative Recurring Pension Funds and,

State Permanent

Funds

(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates: SB 61

Relates to: SB 60, SB 392, HB 389

SOURCES OF INFORMATION

LFC Files

State Investment Council (SIC)

Public Employees Retirement Association (PERA)

Educational Retirement Board (ERB)

General Services Department (GSD)

SUMMARY

Synopsis of HAFC Amendment

The House Appropriations and Finance Committee amendment to House Bill 387 deleted HBIC

amendment #1 (additional analysis showed that the HBIC amendment was not necessary).

Synopsis of HBIC Amendment

The House Business and Industry amendment to House Bill 387 amends 13-1-98 (D) to clarify

that general financial consultants referenced are providing services related to the issuance of

public securities.

House Bill 387/aHBIC/aHAFC -- Page 2

Synopsis of Original Bill

House Bill 387 is sponsored by the State Permanent Fund Task Force and exempts from the pro-

curement code contracts for investment advisory services, investment management services and

investment-related services entered into by the Educational Retirement Board (ERB), Public

Employees Retirement Association (PERA) and State Investment Council (SIC).

Significant Issues

According to testimony provided by the investing agencies to both the State Permanent Fund

Task Force and the Legislative Finance Committee, it take a minimum of six (6) to ten (10)

months to award a contract for investment managers or investment related programs under the

current procurement code. This hampers the ability of these agencies to be responding in a timely

manner to changes in market conditions or investment manager performance. By exempting in-

vestment related services from the procurement code, the agencies (with approval of their gov-

erning boards) can streamline the procurement process which will improve their ability to man-

age their investment portfolios.

GSD suggests that the implementation process undertaken by these agencies to streamline the

procurement process should identify how the agencies will insure fairness and the best price for

the taxpayers

PERFORMANCE IMPLICATIONS

HB 387 will assist the investing agencies in meeting their performance measures. They antici-

pate they will be able to issue requests for proposals and subsequent contracts in a more efficient

timeframe. This will improve annualized investment returns while reducing the risk of the port-

folio, which will contribute these agencies exceeding their internal benchmarks for investment

return.

FISCAL IMPLICATIONS

By streamlining the ability to contract for investment-related services, the investing agencies

should be able to enhance returns on its portfolio while reducing overall risk. In addition, the

agencies will have the authority to consider transition costs as an evaluation factor in the RFP

process. In a typical RFP, transition costs for hiring a new investment manager can easily run 10

to 50 basis points (a basis point is 1/100 of a percent).

ADMINISTRATIVE IMPLICATIONS

The investing agencies will develop an internal purchasing policy with guidelines for the con-

tracting for investment-related services and the use of internet-based search resources. If given

the authority to reduce time periods for published notices and amendments, the award of invest-

ment manager contracts and transitioning of portfolio assets may occur in market-sensitive time-

frame.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Duplicates Senate Bill 61. Relates to Senate Bill 60, and House Bill 389/Senate Bill 392, all of

House Bill 387/aHBIC/aHAFC -- Page 3

which propose to improve the investment efficiency of ERB, PERA, and SIC by eliminating the

legal list of investments and making the Prudent Investor Act the governing authority over in-

vestment decision making.

OTHER SUBSTANTIVE ISSUES

The Procurement Process for Investment Agencies

The investing agencies frequently conduct several investment manager searches per year. These

searches are conducted in compliance with the New Mexico Procurement Code, NMSA 1978,

§13-1-1 et seq. For each RFP issued, approximately 50 responses are received, all of which must

be evaluated. On average, each procurement is a minimum 6-month process.

Under the procurement code, multi-term contracts for professional services may not exceed 4

years. The practical implications for investment-related services are significant for the investing

agencies. When contracting with an investment manager, an RFP must be issued for the invest-

ment product(s) under that manager’s control during the last year of the 4-year contract term.

Often, the outcome of the RFP is to award contract to the same investment manager after of a 6-

month procurement process.

In addition, the agencies currently are unable to consider transition costs as an evaluation factor

in the RFP process. In a typical RFP, transition costs for hiring a new investment manager can

easily run 10 to 50 basis points. Further, certain asset classes private equity require long-term

investments for gains to be realized. Specifically, investment in real estate and require a time

horizon to longer than 4-years to realize gain.

In the event of a contracted investment manager’s negative performance, the investment agency

may decide early termination of the contract is appropriate. Unfortunately, procuring for an al-

ternative investment manager that deals in the same investment product is at best a 6-month

process. The procurement code precludes agencies from contracting with the “runner-up” in the

previous RFP for the investment product. The only alternative available to agencies is to transi-

tion a terminated manager’s portfolio to an existing manager under contract who often manages

another product. As a result, an investing agencies overall asset allocation portfolio can be nega-

tively impacted.

Lowest Cost versus Best Value

The procurement code contemplates contracting for services based on the “lowest” bid or cost.

For trustees of a investment funds, the primary purpose is to select investment managers on the

basis of the expected investment return vs. risk, net of cost, rather than the provider with the

lowest operating cost. Since most investment manager contracts are negotiated using perform-

ance fees, factors such as performance and securities exchange commission charges or investiga-

tions are more relevant to manager selection than cost.

Streamlining the Procurement Process

The investing agencies have researched internet-based software applications that allow institu-

tional investors to research, evaluate and select investment products across asset classes and ve-

hicle types. One such software application has a database of approximately 750 investment

managers and 3,500 products. The investing agencies believe that use of a software application

House Bill 387/aHBIC/aHAFC -- Page 4

of this type would provide the administrative convenience of allowing most, if not all, of its re-

sponses to a request for proposals (RFP) to be received on-line for easy search and comparison.

The investing agencies will need to issue a RFP for such an internet-based software application.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

The investing agencies will continue to comply with the procurement code provisions as they

relate to procurement of investment-related services and will miss an opportunity to enhance

management of the funds.

GGG/yr:njw