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

SPONSOR Campos, J.

ORIGINAL DATE

LAST UPDATED

2/02/07

3/15/07 HB 471/aHFl/aSFC

SHORT TITLE Establish Linked Deposit System

SB

ANALYST Schardin

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

($176.4)

($352.8) Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates SB 578

SOURCES OF INFORMATION

LFC Files

Responses Received From

Department of Finance and Administration (DFA)

State Treasurer’s Office (STO)

Economic Development Department (EDD)

Regulation and Licensing Department (RLD)

SUMMARY

Synopsis of SFC Amendment

The Senate Floor Amendment to House Bill 471 changes the definition of a “financially at risk

rural community" to include municipalities with populations up to 3,500. The original bill

required a community’s population to be less than 2,600 to participate. EDD expects this

amendment will allow about 10 to 15 additional communities to participate in the linked deposit

program.

The amendment increases duties of the director of RLD’s financial institutions division by

requiring that director to promulgate rules regarding verification criteria to determine that a

participating institution is meeting the banking service needs of its community.

The amendment also states that a depository institution qualified to participate in the linked

deposit program must be open five days per week, rather than eight hours per day and five days

per week.

House Bill 471/aHFl/aSFC– Page

2

Finally, the amendment makes it clear that the treasurer will be authorized to accept a rate of

return up to 1 percent below the market rate on linked deposits, but is not required to do so.

Synopsis of HFl Amendment

The House Floor Amendment to House Bill 471 makes a technical correction. It amends the

statutory reference for new material found in Section 1 of the bill so that the new section will be

compiled as Section 6-10-24.2 rather than 6-1-24.2.

Synopsis of Original Bill

House Bill 471 creates the linked deposit program, which would allow the State Treasurer to

invest up to 14 percent, not to exceed $49 million, of state deposits in qualified depository

institutions located in financially at risk rural communities. No more than $10 million could be

deposited in any one qualified depository institution. The State Treasurer will be authorized to

accept a rate of return on such deposits that is up to 1 percent below the market rate set by the

state board of finance.

Qualified depository institutions are defined as insured banks, trust institutions or credit unions.

To qualify as a financially at risk rural community a community must have no more than one

insured bank, thrift institution, or credit union; a population less than 2,600; and either a

population that declined between the last two decennial censuses or a median household income

less than 80 percent of the state median.

The bill states that the director of the financial institutions division of RLD will be authorized to

make regulations and orders regarding eligibility criteria for qualified depository institutions and

application procedures for participation in the program.

The effective date of these provisions is July 1, 2007.

FISCAL IMPLICATIONS

EDD and DFA believe it will take about three years for enough financial institutions in New

Mexico to participate in the linked deposit program to exhaust the $49 million cap. It is

estimated that STO will deposit 1/3 of the allowed $49 million in qualified depository

institutions in FY08, 2/3 of the maximum in FY09, and the full $49 million in FY10 and beyond.

The bill states that the treasurer may accept a rate of return that is up to 1 percent below the

market rate (which is set by the State Board of Finance). That Board of Finance interest rate is

the rate earned by the State Treasurer’s CD portfolio. From FY00 to FY06, the rate of return on

the treasurer’s CD portfolio was 8 basis points below the average return on the total portfolio.

Assuming that the rate of return on linked deposit program investments will be 108 basis points

below what would otherwise be earned on the STO portfolio, interest earnings will be $176.4

thousand lower in FY08, $352.8 thousand lower in FY09, and $529.2 thousand lower in FY10

and beyond. This fiscal impact estimate is rough as it depends on participation in the program as

well as the amount by which STO rate of return is lower due to the program.

STO assumes that lost interest earnings will accrue only to the general fund. However, interest

House Bill 471/aHFl/aSFC– Page

3

could be lost to local governments participating in the local government investment pool (LGIP),

the state’s permanent funds, and the state’s self-earning accounts (see Technical Issues).

SIGNIFICANT ISSUES

This bill follows a recommendation made by the Rural Bank Task Force in summer 2006 after

Wells Fargo announced it was closing the only banks located in Roy, Vaughn and Wagon

Mound. Later, First National Bank announced it would open branches in Roy and Wagon

Mound, while Everyone’s Federal Credit Union opened a branch in Vaughn.

Proponents of the bill believe allowing state deposits in qualified financial institutions will

prevent closure of banks from leaving New Mexico’s small communities without any banking

services. EDD states that closure of a small community’s only bank can dramatically hasten a

local economy’s decline.

DFA asserts that the deposits authorized by this bill will not be high-risk investments because

participating depository institutions will have to follow surety requirements established in statute

and will be required by statute to meet collateral requirements established by the State Board of

Finance. However, LFC believes that since some rural banks may be required to provide only 50

percent collateral, investment in them does increase STO portfolio risk somewhat.

The State Treasurer is charged to invest state balances in a manner that preserves investment

principal, provides adequate liquidity for state expenditure needs, and provides the maximum

return possible while ensuring safety and liquidity.

STO is currently authorized to deposit up to $350 million in general fund balances in certificates

of deposit (CDs) at New Mexico financial institutions at a rate of return set by the State Board of

Finance. This CD program is currently the only economic development oriented investment

currently made by STO. The bill would add a second economic development arena to state

treasurer investments.

STO reports that any financial institutions participating in this new program will need to comply

with the state board of finance collateral policy.

PERFORMANCE IMPLICATIONS

STO recently adopted a general fund performance benchmark that is a weighted average of 15

percent zero to one year treasuries, 70 percent one to five year federal agency securities, and 15

percent one to five year federal agency securities (option only). If the treasurer chooses to

deposit up to $49 million in financial institutions that qualify for the linked deposit at a rate of

return 1 percent below the market rate set by the state board of finance, overall returns will be

lower and it will be more difficult to meet or exceed this benchmark.

ADMINISTRATIVE IMPLICATIONS

The director of the financial institutions division of RLD will be authorized to make regulations

to implement the linked deposit program including eligibility criteria and application procedures.

House Bill 471/aHFl/aSFC– Page

4

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

House Bill 471 as amended duplicates the Senate Finance Committee substitute for Senate Bill

578 as amended.

TECHNICAL ISSUES

RLD believes the statutory reference to Section 6-10-15 NMSA 1978 on page 2, line 13 of the

bill should be amended to reference Section 6-10-10 NMSA 1978. While Section 6-10-15

NMSA 1978 pertains to collateral requirements for a bank or savings and loan associations to

qualify to hold deposits of the state treasurer, Section 6-10-10(A) NMSA 1978 reads,

“A. Upon the certification or designation of a bank, savings and loan association or

credit union whose deposits are insured by an agency of the United States to receive

public money on deposit, the state treasurer and county or municipal treasurers who have

on hand any public money by virtue of their offices shall make deposit of that money in

banks and savings and loan associations, and may make deposit of that money in credit

unions whose deposits are insured by an agency of the United States, designated by the

authority authorized by law to so designate to receive the deposits of all money thereafter

received or collected by the treasurers."

Because trust institutions are prohibited from accepting deposits unless they are departments of

insured banks (Section 58-1-76 NMSA 1978), RLD recommends amending page 2, lines 11

though 13 to read, “‘qualified depository institution’ means an insured bank, trust department of

an insured bank or credit union qualified pursuant to Section 6-10-10(A) NMSA 1978."

The definition of “state deposits" as any public funds under control of the state treasurer or the

state treasurer’s designee is vague and should be clarified. The state treasurer accepts deposits

from the general fund, the state’s self-earning accounts, local governments, and the state’s

permanent funds. This definition will determine which types of deposits can be invested in rural

banks, and subsequently, will determine the funds to which the fiscal impact of the bill will

accrue.

SS/nt