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

SPONSOR Carraro

DATE TYPED 1/28/04

HB

SHORT TITLE Financial Advisor Procurement Code Exemption

SB 61

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: HB 387

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 Bill

Senate Bill 61 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 respond in a timely

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

Senate Bill 61 -- Page 2

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

SB 61 will assist the investing agencies in meeting their performance measures. They anticipate

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

contracting 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

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

timeframe.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Duplicates House Bill 387. Relates to Senate Bill 60, and House Bill 389/Senate Bill 392, all of

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 conducts 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

Senate Bill 61 -- Page 3

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 pension fund, such as PERA, the primary purpose is to select investment man-

agers 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

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

investigations 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

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.

PERA will continue to comply with the procurement code provisions as they relate to procure-

ment of investment-related services. Given the restraints of procuring new investment manager

services and the inability to utilize internet resources, there are no guarantees that PERA will be

as successful in the future with its investment returns as it has been over the past ten-year period.

AMENDMENTS

The SIC has identified a potential conflict between §13-1-98.L and the proposed language in 13-

Senate Bill 61 -- Page 4

1-98.Y. The SIC believes that any ambiguity in this language could be clarified with a simple

addition to the language in §13-1-98.L. The SIC proposes the following amendment to the bill.

1. Recommended change to clarify §13-1-98.L.

a. “L. the issuance, sale and delivery of public securities pursuant to the applicable

authorizing statute, with the exception of bond attorneys and general financial consultants

providing services related to the issuance of public securities;”

GGG/yr