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 Sharer

ORIGINAL DATE

LAST UPDATED

02/06/08

HB

SHORT TITLE Limit State Expenditure Increases

SJR 15

ANALYST Schardin

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY08

FY09

(See Narrative)

Recurring

General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Companion to SB513

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY08

FY09

FY10

See Narrative

Nonrecurring Severance Tax

Permanent Fund

See Narrative

Nonrecurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Department of Finance and Administration (DFA)

Attorney General’s Office (AGO)

Public Education Department (PED)

SUMMARY

Synopsis of Bill

Senate Joint Resolution 15 asks voters to amend the New Mexico Constitution to limit state

expenditure growth. During the 2009 regular legislative session, the proposal would require the

legislature to limit expenditures for the FY10 budget to the FY08 budget plus growth of 3.6

percent plus the state population growth rate for the most recent calendar year for which an

estimate is available from UNM’s bureau of business and economic research. During the 2010

Senate Joint Resolution 15 – Page

2

regular legislative session (FY11 budget) and every year thereafter, the expenditure limit would

be the previous fiscal year’s budget plus growth of 3.6 percent plus the New Mexico population

growth rate.

The resolution also provides that in the event revenue collected in a fiscal year exceeds the

expenditure limit, 60 percent of the unexpended or unencumbered balance will be deposited in

the Severance Tax Permanent Fund (STPF) and 40 percent will be rebated by TRD on an equal

per capita basis to all persons filing a New Mexico personal income tax return in the calendar

year in which the excess is determined.

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 SB 513/SJR 15

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

$5.5

$6.0

$6.5

FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07* FY08* FY09**

Actual Recurring General Fund Expenditures

Result of SB 513 Expenditure Limit

* Preliminary; ** LFC Recommendation

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 6.2 percent between FY96 and FY09, it fluctuated from 0.6 percent

in FY03 to 11.0 percent in FY08. Fluctuations in expenditure growth rates are attributable

Senate Joint Resolution 15 – Page

3

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

have been lower than average expenditure growth in every year.

Actual General Fund Expenditure Growth vs. SB513/SJR 15 Limit

0%

2%

4%

6%

8%

10%

12%

FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07* FY08* FY09**

Actual Spending Growth Rate (%)

Proposed limit

Average Growth = 6.2%

Average Growth Rate: 6.2%

* Preliminary; ** LFC Recommendation

Proposed Limit

The earliest time the bill could have a fiscal impact would be in the FY11 budget, which is

enacted in spring of 2010. DFA estimates that if provisions in the bill had been in place in the

past decades, the average annual rebate check would be about $35 per person and that the STPF

corpus would have grown by an additional $66 million.

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 would 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 1.3 percent per year in the near future. If these projections are

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

4.9 percent per year (1.3 percent plus 3.6 percent).

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 proposal 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 proposal would allow state expenditures

to recover from temporary revenue shortfalls.

Senate Joint Resolution 15 – Page

4

Expenditure limits such as the one proposed 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 to serve

individuals who cannot afford purchasing private insurance or whose expensive health care

needs lead private health insurers to deny them coverage. The presence of such market failures

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

The act requires rebates of excess revenue to personal income tax filers to be sent in the calendar

year in which the excess is determined. If excess revenue is determined to exist at the end of

FY11, the calendar year of determination will be CY11. Since personal income tax returns for

CY11 will not be filed until spring of CY12, the bill would delay payment of FY11 rebates until

spring of CY12 or spring of CY13.

In the event that a small amount of excess revenue exists at the end of a fiscal year, the proposal

would still require TRD to send very small rebate checks to all personal income tax filers. If the

amount of excess revenue is small enough, the costs of issuing rebate checks could outweigh the

benefits of the rebates. Consider amending the resolution so that unless excess revenue exceeds a

certain percent of personal income tax liabilities the entire amount of excess revenue is

distributed to the severance tax permanent fund. Suggested language may be found in Section 6-

4-5 NMSA 1978, which states that refunds to taxpayers from the taxpayers dividend fund only

occur if the balance of the fund exceeds one percent of the tax liabilities reported to TRD during

the fiscal year (currently about $10 million).

PERFORMANCE IMPLICATIONS

Proponents of the resolution believe that it will force government programs to control cost

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

leave critical government programs without adequate funding.

ADMINISTRATIVE IMPLICATIONS

Administrative costs to TRD for the rebates would be high. Before rebates of excess revenue

could be sent, TRD would have to know the total number of eligible filers. This would not be

known by the time personal income tax refunds are currently sent, so the rebate would either

have to be sent separately or along with the following tax year’s refunds,

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

by the resolution.

Senate Joint Resolution 15 – Page

5

COMPANIONSHIP

Senate Joint Resolution 15 is a companion to Senate Bill 513. The provisions of Senate Bill 513

will become effective on January 1 following adoption by the state’s voters of the constitutional

amendment proposed in Senate Joint Resolution 15. However, the language in Senate Joint

Resolution 15 does not tie completely to language in Senate Bill 513.

TECHNICAL ISSUES

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

in a fiscal year that has already begun.

On page 2, lines 24-25 and page 3, lines 4-5, the reference to “unexpended or unencumbered

balance" in the general fund is not in sync with the state’s recent adoption of modified accrual

accounting. The terms “unexpended" and “unencumbered" applied previously when the state

operated on a cash accounting basis.

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.

If the intent of the resolution is to grow the FY10 budget over the FY09 base rather than the

FY08 base, the resolution should be amended to replace the number “2008" with “2009" on page

2, lines 10, 14 and 18.

DFA notes that if a rebate check mailed by TRD were returned, a taxpayer would need to pursue

their rebate amount through unclaimed property rules.

SS/jp