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

SPONSOR HGUAC

ORIGINAL DATE

LAST UPDATED

1/30/06

2/10/06 HB 326/HGUACS/aHAFC/aHFl#1

SHORT TITLE State Board of Finance & Treasurer Duties

SB

ANALYST Schardin

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

195.3

Recurring

General Fund

159.8

Recurring

Self-Earning

Accounts

264.0

Recurring LGIP Participants

(Parenthesis ( ) Indicate Expenditure Decreases)

ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)

FY06

FY07

FY08 3 Year

Total Cost

Recurring

or Non-Rec

Fund

Affected

Total

28.5

28.5

57.0 Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates SB722.

Relates to SB84 and HB596.

SOURCES OF INFORMATION

LFC Files

Responses Received From

State Treasurer’s Office (STO)

Department of Finance and Administration (DFA)

Attorney General (AGO)

SUMMARY

Synopsis of House Floor Amendment #1

The House Floor Amendment to the House Government and Urban Affairs Committee substitute

for House Bill 326 strengthens BOF oversight over the STO by changing the word “may” to

“shall” on page 3, line 14. As amended, the BOF will now be required, rather than allowed, to

House Bill 326/HGUACS/aHAFC/aHFL#1– Page

2

adopt rules and regulations concerning procedures for investing and handling the treasurer’s

portfolio, relationships with the treasurer’s investment advisors and broker/dealers, public disclo-

sure of investments, and treasurer’s internal reporting. The BOF will also be required, rather than

allowed, to recommend statutory changes regarding public fund investment to the legislature,

establish a STO whistleblower program, hire an independent auditor to perform a fiduciary audit

of the STO, and instruct the BOF director to employ experts, auditors, accountants and attorneys

as required.

Synopsis of HAFC Amendment

The House Appropriations and Finance Committee amendment to the House Government and

Urban Affairs Committee substitute for House Bill 326 fixes technical errors contained in current

statute, and amends the list of entities from which the state treasurer and STO employees are

prohibited from soliciting, receiving or accepting campaign contributions or any other thing of

value.

Synopsis of Original Bill

The House Government and Urban Affairs Substitute for House Bill 326 attempts to address

concerns that the State Board of Finance (BOF) does not have adequate oversight authority over

the State Treasurer’s Office (STO).

Section 1 amends the powers and duties of the BOF. It would

•

require that one of the governor’s four appointed BOF members have at least three years

of experience managing fixed-income or equity investments;

•

require BOF to adopt rules and regulations concerning procedures for investing and han-

dling the treasurer’s portfolio, relationships with the treasurer's investment advisors and

broker/dealers, public disclosure of investments, and treasurer's internal reporting;

•

require BOF to recommend statutory changes regarding public fund investment to the

legislature, establish a STO whistleblower program, hire an independent auditor to per-

form a fiduciary audit of the STO, and instruct the BOF director to employ experts, audi-

tors, accountants and attorneys as required;

•

give BOF general supervision over the “investing” of public funds. Currently, BOF only

has general supervision over the “safekeeping” and “depositing” of public funds.

Section 2 establishes in statute the State Treasurer’s Investment Committee (STIC), which is cur-

rently created in the STO investment policy. STIC will have five members: the treasurer, two

members from the BOF, and one public member chosen by the treasurer and one chosen by the

BOF. The public members must have at least 3 years of investment experience. Duties of the

STIC will be to review investment policies and recommend modifications, advise the treasurer,

identify potential violations, and periodically report to the BOF. STIC will also be able to ap-

point an advisory committee including representatives from state agencies and local entities that

have funds deposited at the STO. STIC will be subject to the Open Meetings Act. STIC members

will be reimbursed for attending meetings.

Section 3 amends Section 6-10-10 NMSA 1978 to

•

allow the STO to accept U.S. agency obligations as collateral on repurchase agreements;

•

allow the STO to enter tri-party repurchase agreements;

•

restrict STO investments in mutual funds to shares of an open-ended diversified invest-

House Bill 326/HGUACS/aHAFC/aHFL#1– Page

3

ment company that is registered with the SEC, complies with diversification, quality and

maturity rules applicable to money market mutual funds, and assesses no fees pursuant to

rule 12b-1 of the securities and exchange commission, no sales load on the purchase of

shares, and no contingent deferred sales charge.

Section 4 will require that the short-term investment fund (normally referred to as the local gov-

ernment investment pool or LGIP) obtain and maintain a credit rating of “AA” or higher from a

nationally recognized statistical rating organization. If the LGIP receives a rating lower than

“AA,” the treasurer will be required to immediately submit a plan to the state board of finance to

bring the rating back to “AA” or higher.

Section 5 amends the duties of the state treasurer to require the treasurer to comply with all di-

rectives, requirements and policies made by the BOF pursuant to the BOF’s authority granted by

law.

Section 6 creates a new section dealing with campaign contributions, conflicts of interest and

financial disclosure involving the state treasurer. The section would:

•

require the treasurer or a candidate for treasurer to file a report with the BOF within 30

days of receiving campaign contributions of more than $250 from the same contributor.

The report would show the name, address, occupation and employer of the contributor,

the date and value of the contribution, and whether or not the contributor or a member of

the contributor's family/household performs or seeks to perform business with the STO;

•

allow the BOF to prohibit the state treasurer from personally participating in a decision

affecting a campaign contributor. If the treasurer is prohibited from participation, the

treasurer will appoint one or more STO staff members who have no relationship with the

contributor as a proxy to aid in making the decision;

•

prohibit the treasurer or any STO employee from soliciting, receiving or accepting con-

tributions or any other thing of value from a person who is a current contractor with the

STO or a STO employee;

•

require the treasurer and each STO employee designated to do so by the BOF to file an

annual report with the BOF disclosing all personal, financial or business relationships

with banks, financial institutions, financial advisers or persons who perform or seek to

perform business with the STO.

The bill carries an emergency clause, so its provisions will become effective upon the governor’s

signature.

FISCAL IMPLICATIONS

Amending statute to allow U.S. agency securities as repo collateral will increase return on term

repos by 10 to 20 basis points and increase return on overnight repos by 2 to 4 basis points. This

amendment will increase earnings by about $547.5 thousand in FY07 (see table below).

Amending statute to allow tri-party repos will increase return on overnight repos by about 2.2

basis points. This amendment will increase revenue by about $71.5 thousand in FY07.

These additional earnings will be distributed to the state general fund ($195.3 thousand), self

earning accounts ($159.8 thousand), and LGIP participants ($264.0 thousand).

A rating organization such as Standard and Poor’s will charge the State Treasurer’s Office an

House Bill 326/HGUACS/aHAFC/aHFL#1– Page

4

advisor fee of about $16 thousand per year to monitor the fund, plus a fee of 1/8 of one basis

point (0.00125 percent) of the portfolio balance. Assuming an LGIP balance of $1 billion, these

fees will be about $28.5 thousand per year. The bill contains no appropriation for this fee.

FY07

Allow federal agency obligations as repo collateral

10 to 20 basis point increase on Term Repos (assume 15 bp)

450.0

$

2 to 4 basis point increase on Overnight Repos (assume 3 bp)

97.5

$

Allow tri-party repos

2.2 basis point increase on Overnight Repos

71.5

$

TOTAL REVENUE

619.0

$

DISTRIBUTION OF REVENUE

State General Fund

195.3

$

Self-Earning Accounts

159.8

$

LGIP

264.0

$

Assumptions: (based on Dec. 2005 consensus estimate)

55% of STO general fund goes to state general fund and 45% goes to self-earning accounts

Expected STO General Fund Overnight Repo Balance

250,000

$

Expected STO General Fund Term Repo Balance

150,000

$

Expected LGIP Overnight Repo Balance

75,000

$

Expected LGIP Term Repo Balance

150,000

$

Fiscal Impact of Amending Repurchase Agreement Restrictions

(Dollars in Thousands)

SIGNIFICANT ISSUES

While the provisions in this bill will dramatically reduce opportunities for a corrupt treasurer to

exploit his or her official office, the bill does not address opportunities for corruption in other

areas of state government. The state’s other elected officials, public investing agencies, cabinet

departments, and the public regulation commission should arguably face the same checks and

balances as the state treasurer’s office. While these agencies are not all involved in the invest-

ment of public funds, they do have the power to influence financial outcomes in the state.

In the short period of this legislative session, it may be impossible to propose thoughtful reforms

that encompass other branches of state government. Perhaps anticorruption measures for other

areas of state government should be considered by the State Permanent Fund Task Force during

the 2006 interim.

ADMINISTRATIVE IMPLICATIONS

DFA reports that increased oversight of the STO will require additional resources for the BOF.

The provisions of the bill could require one additional FTE and occasional appropriations for the

special audits and investigations provided in the bill.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

The House Government and Urban Affairs Committee Substitute for House Bill 326 duplicates

Senate Bill 722. The bill also relates to Senate Bill 84 and House Bill 526. These bills contain

many of the same amendments found in Sections 3 and 4 of this bill.

House Bill 326/HGUACS/aHAFC/aHFL#1– Page

5

TECHNICAL ISSUES

DFA notes that on page 6, line 12, the bill refers to the “chair” of the board of finance. This ref-

erence should be amended to read “president,” since the BOF does not have a chair, but the gov-

ernor is the board president.

On page 3, lines 22 and 23, the bill states that the BOF may establish standards for the compen-

sation and regulation of investment advisors and broker dealers. It will be difficult for BOF to

establish standards for compensation since broker dealer compensation is often built into the

price paid for an investment. It may also be difficult for BOF to set standards for regulation since

regulation of broker dealers and investment agents is the responsibility of the regulation and li-

censing department.

OTHER SUBSTANTIVE ISSUES

Because the bill affects the duties of a constitutional office, STO recommends that it be referred

to the House Judiciary Committee.

SS/mt:yr:nt