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 a vailable 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 be obtained from the LFC in Suite 101 of the State Capitol Building North.

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

SPONSOR SFC

ORIGINAL DATE

LAST UPDATED

2/02/07

3/13/07 HB

SHORT TITLE Establish Linked Deposit System

SB

CS/578/SFC/aSFC/aSFl

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)

Relates to HB 471

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 SFl Amendment

The Senate Floor amendment to the Senate Finance Committee substitute for Senate Bill 578

strikes the entire Senate Finance Committee amendment, which was adopted erroneously and did

not synchronize with the substitute.

The Senate Floor amendment also 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.

Synopsis of SFC Amendment

The Senate Finance Committee amendments to the Senate Finance Committee substitute for

Senate Bill 578 do not synchronize with the committee substitute. LFC cannot provide an

CS/Senate Bill 578/SFCS/aSFC/aSFl – Page

2

analysis of the amendments because of the extensive technical issues.

Synopsis of Original Bill

The Senate Finance Committee substitute for Senate Bill 578 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 committee substitute will require the director of the financial institutions division of RLD to

promulgate rules regarding eligibility criteria for qualified depository institutions, application

procedures for participation in the program, and verification criteria to determine that a

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

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 committee substitute states that the treasurer may accept a rate of return that is not more than

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

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 committee substitute follows a recommendation made by the Rural Bank Task Force in

CS/Senate Bill 578/SFCS/aSFC/aSFl – Page

3

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 committee substitute 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 the local economy’s decline.

DFA asserts that the deposits authorized by this committee substitute will not be high-risk

investments because participating depository institutions will have to follow surety requirements

established in statute and will need 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 committee substitute would add a second economic development

arena to state treasurer investments.

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 required to promulgate rules to

implement the linked deposit program including eligibility criteria, application procedures, and

verification that participating depository institutions are meeting the banking service needs of

their community.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

The Senate Finance Committee substitute for Senate Bill 578 is similar to House Bill 471.

TECHNICAL ISSUES

The Senate Finance Committee amendment to the Senate Finance Committee substitute could

not be analyzed because the amendments do not synchronize with the committee substitute.

CS/Senate Bill 578/SFCS/aSFC/aSFl – Page

4

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

committee substitute 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 committee

substitute will accrue.

SS/mt