NOTE: As provided in LFC policy, this report is intended for use by the standing finance committees of the legislature.  The Legislative Finance Committee does not assume responsibility for the accuracy of the information in this report when used in any other situation.

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(Parenthesis ( ) Indicate Expenditure Decreases)

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC files

Attorney General Files

SUMMARY

Synopsis of Bill

The joint resolution proposes to add a new section to Article 4 of the New Mexico Constitution and proposes to limit annual increases in state expenditures in any fiscal year to the percentage no more than the average percentage rate of growth in state personal income for the previous three years. "State personal income" is defined as total annual personal income of the state as determined by the U.S. Department of Commerce.

The spending limitation may be modified in any given fiscal year in two ways. First, the limitation may be suspended if the governor declares a financial emergency to exist in the financing of state government and the legislature concurs by a vote of the total membership of each house. Second, the spending limitation may be changed if approved by a majority of qualified state electors voting in a referendum called for that purpose.

The proceeds from severance tax bonds cannot be used for the state government's operating expenses and can be used only for capital improvements.

The state is prohibited from mandating new programs or increased levels of service under existing programs to political subdivisions unless necessary costs of those mandates are paid for by the state.

Principal and interest on general obligation and severance tax bonds are considered priority state expenditures and the amendment's spending limitations shall not interfere with those payments.

The legislature must limit taxes to amount necessary to fund authorized expenditures and must minimize the accumulation of excess revenue other than to maintain the state's reserve funds.

Significant Issues

The proposed amendment is very restrictive and may make it difficult for the legislature to provide for and adjust to the state's changing spending requirements.

FISCAL/ADMINISTRATIVE IMPLICATIONS

The annual increase in the total general fund budget would be limited to the percentage of no more than the average percentage rate of growth in state personal income for the previous three years. For the previous three fiscal years the annual percentage growth in general fund revenues and appropriations and in New Mexico personal income was:

General Fund

Revenues Appropriations Personal Income

FY96 4.6 2.1 5.1

FY97 10.2 7.2 5.4

FY98 5.7 2.9 4.6

Currently, the annual budget is built on a consensus revenue forecast. Annually, the state would be required to also forecast excess reserves and the legislature will have to determine how to return those excess reserves to the taxpayers.

The Secretary of State has reported it costs $17.0 to place an item on the ballot.

TECHNICAL ISSUES

The Attorney General analysis noted the following technical issues:

1. Subsection F of Section 1 (page 3, line 15) provides that principal and interest payments on certain state obligations are "priority state expenditures as defined in Subsection A of this Section ..." There is no such definition in Subsection A or elsewhere in the joint resolution.

2. Subsection G of Section 1 (page 3, line 23) limits the amount of taxes that may be imposed and contains a proviso which purports to remove certain fees and contributions from the limitation. The last part of the proviso states "but not proceeds of taxes, fees or penalties imposed by the receiving unit which are collected by another unit of government." (Page 4, lines 6-8). This appears to be an exception from the proviso, but, in the context of Subsection G of Section 1 as a whole, its meaning is unclear and does not make sense as presently written.

OTHER SUBSTANTIVE ISSUES

By statute, the proceeds of state severance tax bonds may not be used to fund operating expenses of state government and are used only for capital improvements (Section 7-27-7 NMSA 1978).

Currently, the New Mexico Constitution allows up to $200.0 in aggregate to be borrowed to meet casual deficits or failure in revenue, or for necessary expenses. In addition, not debt, other than that authorized by the constitution may be contracted by or on behalf of the state unless authorized by law for some specified work or object, which law shall provide for an annual tax levy sufficient to pay the interest and to provide a sinking fund to pay the principal of such debt within fifty years from the time of the contracting.

POSSIBLE QUESTIONS

1. Does the sponsor intend that the state return excess reserves, if any, to the taxpayers that are based on forecasts, or does the sponsor intend that the tax decreases take place after the actual revenue number is known?

DKB/njw:gm