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

SPONSOR Cravens

ORIGINAL DATE

LAST UPDATED

2/20/07

HB

SHORT TITLE Limit Legislative Expenditure Increases, CA

SB SJR 17

ANALYST Schardin

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

(See Narrative)

Recurring

General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates HJR 9

SOURCES OF INFORMATION

LFC Files

Responses Received From

Higher Education Department (HED)

Attorney General’s Office (AGO)

State Investment Council (SIC)

Public Education Department (PED)

Department of Health (DOH)

SUMMARY

Synopsis of Bill

Senate Joint Resolution 17 would ask voters to amend the New Mexico Constitution to limit

state expenditure growth. The resolution would limit FY10 expenditure growth over actual FY08

expenditures to 3.6 percent plus the growth rate of population in the most recent calendar year

for which data is available. For FY11 and beyond, the resolution would limit expenditure growth

over the prior fiscal year expenditure limit to 3.6 percent plus the growth rate of population in the

most recent calendar year for which data is available.

The resolution provides that in FY10 and beyond, money in the general fund in excess of the

expenditure limit on June 30 will be distributed as follows: 60 percent will be transferred to the

severance tax permanent fund (STPF) and 40 percent will be returned on an equal per capita

basis to everyone who filed a personal income tax return in the prior calendar year.

Senate Joint Resolution 17 – Page

2

Finally, the resolution provides that the amendment proposed in this resolution will be submitted

to voters at the November 2008 general election or any special election prior to November 2008

called for that purpose.

FISCAL IMPLICATIONS

If adopted, this constitutional amendment would decrease the average rate of appropriation

growth and decrease reserve fund balances by mandating that revenues in excess of the

expenditure limit be transferred to the STPF and refunded to taxpayers. It is difficult to estimate

how much the constitutional amendment would reduce expenditures, but the chart below

illustrates how general fund expenditures would have been different if an identical expenditure

limit had been in place since FY96.

General Fund Expenditures: Actual vs. Limit Proposed by HJR 9

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

$5.5

FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06* FY07**

Actual Recurring General Fund Expenditures

Result of HJR 9 Expenditure Limit

* Preliminary; ** Operating budget

The chart below compares actual general fund expenditure growth with the limit that would have

applied if the provisions of the proposed constitutional amendment had been in place. While

expenditure growth averaged 5.8 percent between FY96 and FY07, it fluctuated from 0.6 percent

in FY03 to 9.3 percent in FY02. Fluctuations in expenditure growth rates are attributable

primarily to volatility in energy-related revenues. The limit proposed in the resolution would

have been lower than average expenditure growth in every year.

Senate Joint Resolution 17 – Page

3

Actual General Fund Expenditure Growth vs. HJR 9 Limit

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06* FY07**

Actual Spending Growth Rate (%)

Proposed limit

Average Growth = 5.8%

Average Growth Rate

* Preliminary; ** Operating budget

Proposed Limit

The general fund receives a constitutional distribution equal to 4.7 percent of the five-year

average market value of the STPF. By mandating that 60 percent of revenue that exceeds the

expenditure limit is distributed to the STPF, the bill may indirectly increase general fund

revenue.

SIGNIFICANT ISSUES

UNM’s Bureau of Business and Economic Research (BBER) projects that New Mexico’s

population will grow by about 1.2 percent per year in the next few decades. If these projections

are correct, the proposed constitutional amendment would limit state expenditure growth to

about 4.8 percent per year.

By basing each year’s expenditure limit on the prior year’s expenditure limit rather than on the

prior fiscal year’s actual expenditures, the resolution avoids one of the most troubling aspects of

similar amendments that have been approved in other states. Many other states’ limits base the

limit on actual prior year expenditures so that a sharp revenue and expenditure decline in one

year reduces expenditure limits in all future years. This resolution would allow state expenditures

to recover from temporary revenue shortfalls.

Expenditure limits such as the one proposed in this resolution may be unreasonable for

government programs. Many government programs exist due to the failure of private markets to

provide services deemed necessary by society. For example, government health programs are

designed primarily to serve individuals who cannot afford purchasing private insurance or whose

poor health makes them too expensive for private companies to insure. The presence of such

market failures suggests the costs of many government services should be expected to grow

Senate Joint Resolution 17 – Page

4

faster than many private sector costs. In addition, many state programs are federally mandated,

taking expenditure choice away from state policymakers.

The resolution limits expenditure growth in FY11 and beyond using the prior fiscal year as a

base. However in FY10, the base is two years prior (FY08). By basing the FY10 expenditure

limit on FY08 instead of FY09, the resolution eliminates one year of natural expenditure growth.

PERFORMANCE IMPLICATIONS

Proponents of the resolution believe that it will force government program control cost increases

to become more efficient. Opponents of the resolution fear that the expenditure limit will leave

critical government programs without adequate funding.

ADMINISTRATIVE IMPLICATIONS

It is unclear which department will be responsible for calculating the expenditure limit required

by the resolution.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Senate Joint Resolution 17 duplicates House Joint Resolution 9.

TECHNICAL ISSUES

It is unclear whether a revision to state population growth could require expenditure reductions

in a fiscal year that has already begun.

The resolution does not clearly define the base on which the expenditure limit is calculated. The

intent may be for “state expenditures" to mean only those contained in the general appropriation

act (GAA). However, limiting GAA appropriations could have the unintended consequence of

increasing special, supplemental and deficiency appropriations as well as capital outlay

expenditures. Additionally, the GAA contains federal funds and other non-state sources.

The resolution does not state whether revenues deposited in reserve funds will count toward the

expenditure limit. If so, building reserves will be in competition with all other state spending.

The resolution states that each year’s growth limit is to be based on population growth in the

most recent prior calendar year for which data is available. Population estimates are released by

the Census each July 1 rather than January 1, so calendar year population growth rates are not

available. The resolution should be amended so that the limit is based population growth in the

most recent fiscal year for which data is available.

SS/csd