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

SPONSOR Moore

DATE TYPED 3/10/05

HB 404/aSPAC

SHORT TITLE Biennial State Budgets

SB

ANALYST Hadwiger

APPROPRIATION

(in $000s)

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

NFI

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to SB211.

SOURCES OF INFORMATION

LFC Files

“Annual and Biennial Budgeting: The Experience of State Governments” (NCSL, October

2004)

Responses Received From

Department of Finance and Administration (DFA)

Department of Transportation (DOT)

Administrative Office of the District Attorneys (AODA)

SUMMARY

Synopsis of SPAC Amendment

The SPAC amendment is effectively a substitute for the original bill, amending the title and

striking the entirety of the remaining text of the original bill. The amendment creates an eight-

year (four biennia) “Biennial Budget Pilot Project,” beginning with the proposed budget consid-

ered by the first session of the forty-eighth legislature.

The pilot project would be administered by the Governor’s office in consultation with a Biennial

Budget Pilot Project Oversight Subcommittee (the Subcommittee) of the Legislative Council

(LCS). The pilot project would include the Department of Finance and Administration (DFA),

Regulation and Licensing Department, Economic Development Department, Department of

Health, and up to 35 executive agencies with budgets under $5 million chosen by the Governor’s

office in coordination with the Subcommittee and Legislative Finance Committee (LFC).

House Bill 404/aSPAC -- Page 2

The Governor’s office would determine baseline data from the last five years for each of the par-

ticipating agencies including:

1.

success in meeting budget performance measures

2.

number of budget analysts employed by the agency, job titles of other agency personnel

who devote time to preparing annual budget proposals and number of hours spent by each

in its preparation

3.

estimated cost of supplies and materials used to prepare annual budget proposals

4.

agency cost for overtime salary or compensatory time for annual budget preparation

5.

estimated savings by each agency in FTEs, overtime/comp time, equipment, supplies and

other costs that will accrue because of biennial budgeting, and

6.

number and types and amounts of budget adjustment requests required by each budget

program.

The DFA and LFC would provide similar baseline data with respect to their operations.

The Governor’s office and Subcommittee would determine evaluation criteria including how

well pilot project agencies met their performance measures and number and amount of supple-

mental and deficiency appropriations requested by pilot project agencies during off-years of each

biennium and reasons for the requests.

The Subcommittee would have six members appointed by the LCS to oversee implementation of

the pilot project and to study constitutional, statutory, organizational and technical issues of bi-

ennial budgeting. The Subcommittee would be staffed by LCS and LFC staff and would seek

advice from the National Conference of State Legislatures and from other states. The Subcom-

mittee would provide interim reports and a final report by the end of the fifty-first legislature,

second session.

Synopsis of Original Bill

House Bill 404, introduced for the Legislative Finance Committee, amends existing budget stat-

utes to establish a biennial budget process for the State of New Mexico beginning on July 1,

2007. The biennial budget would be approved, implemented and modified according to the

schedule below:

ODD-NUMBERED YEARS

BUDGET ACTIVITY

By January 10

Governor submits biennial budget request to legislature.

January-March

Legislature adopts biennial budget

By May 1

Each agency submits operating budget to the Department of

Finance and Administration (DFA) to implement the approved

budget for the ensuing two years.

By June 15

DFA sends supplemental budget forms to be submitted by

state agencies that plan to request a deficiency or supplemen-

tal appropriation.

House Bill 404/aSPAC -- Page 3

June 30

Close of biennium; unexpended general fund appropriations

revert to the general fund.

By September 1

Agencies submit requests for supplemental and deficiency

appropriations.

EVEN-NUMBERED

YEARS

By January 5

Governor submits supplemental and deficiency budget to leg-

islature.

By June 15

DFA sends biennial budget request forms to agencies

By September 1

Agencies submit performance-based biennial budget requests

to DFA and the LFC

Significant Issues

The primary differences between the SPAC amendment and original bill are:

1.

The original bill would adopt biennial budgeting for all agencies; the SPAC amendment

would adopt a biennial budgeting pilot project for up to 39 agencies.

2.

The original bill would integrate the biennial budgeting into existing statutes governing

the state budget process with detailed provisions for implementation of biennial budget-

ing; the SPAC amendment is not integrated into existing statutes governing the state

budget process and does not include provisions for implementation of biennial budgeting.

3.

The original bill would permanently implement biennial budgeting pending amendment

by subsequent legislatures; the SPAC amendment would implement an eight-year pilot

project.

4.

The original bill contains no provisions for evaluation of improved performance and cost

savings from implementation of biennial budgeting; the SPAC amendment sets up a pro-

cedure and data elements for evaluating improved performance and cost savings in the

budget process from implementation of biennial budgeting.

Possible advantages of the SPAC amendment:

1.

The proposal is structured as an experiment that could provide useful information to

evaluate the benefits of biennial budgeting. It sets up a rigorous process to identify sav-

ings and performance improvements and for a terminal evaluation of the biennial budget

process after eight years, the results of which would be used to decide whether to con-

tinue, expand or terminate biennial budgeting.

2.

The SPAC amendment provides for a transition to implement biennial budgeting by af-

fecting only a portion of state agencies.

3.

The SPAC amendment is closer to the proposal preferred by Governor Richardson than

the original bill. Governor Richardson recommended that biennial budgeting be imple-

mented only for the 72 agencies with budgets under $5 million.

House Bill 404/aSPAC -- Page 4

Possible disadvantages of the SPAC amendment:

1.

The SPAC amendment would not measure the primary source of cost savings from bien-

nial budgeting. The amendment focuses on costs of administering the budget process.

The major financial benefit of biennial budgeting derives from improved oversight of to-

tal agency operations to produce improved outcomes at lower costs. The most significant

savings of the pilot project could be generated in agencies that would not be part of the

pilot project but would be benefited by the additional time for oversight.

2.

There are significant drafting problems in the SPAC amendment. It does not specify that

participating agencies would be required to prepare biennial budgets. It does not set forth

procedures for how biennial budgets would be prepared or implemented. It requires

oversight of the pilot project by agencies (governor and LCS) that lack staff and expertise

for this purpose. It sets out baseline data on six criteria, but evaluates the pilot program

based on only one of those criteria and one additional criterion for which no baseline

would be gathered. Participating agencies are likely to have much of the workload to

track cost and staff savings, but these agencies (smaller than $5 million) are most likely

to lack staff to perform this tracking and are least likely to experience significant savings

in budget preparation. Incorrect statutory names are used in the amendment. The final

report deadline does not provide sufficient time for legislative extension of biennial

budgeting if the legislature decides to do so.

3.

The bill conflicts with existing statutes governing the budget process, which could create

ambiguity in implementation. For example, existing statute prohibits an agency from

spending more than one-half of its annual appropriation in the first half of a fiscal year.

This is done, among other reasons, to protect a newly elected official from entering office

with more than one-half of their annual budget spent by their predecessor. The SPAC

amendment does not clarify how this provision would be applied. There are many other

statutory provisions that require annual budgets that are modified in the original bill but

not addressed in the SPAC amendment.

4.

The SPAC amendment would require two separate budget processes in even-numbered

years. Participating agencies would be allowed to submit supplemental and deficiency

requests which would be reviewed in the context of their biennial budget; non-

participating agencies would follow the annual budget guidelines.

General Comments on Biennial Budgeting

Proponents indicate that biennial budgeting would improve the New Mexico budget process by

reducing time devoted to crunching the numbers for annual budgets and increasing the time

available for consideration for policy and performance aspects of budgets and for agency over-

sight by the legislature and Department of Finance and Administration (DFA). Biennial budget-

ing may also reduce government spending, by reducing the need to process volumes of paper for

annual budget requests, possibly reducing the need for overtime, per diem, supplies and other

costs related to annual budget preparation. Proponents of biennial budgeting also indicate that

this reform will increase predictability for state agencies, providing long-term commitments to

programs and policies.

According to DFA, the current annual budgeting process has been seen as time-consuming for

state agencies; biennial budgeting would 'free up' time for those involved in the process to man-

age for outcomes because agencies would only have to build a budget every two years and sup-

plement the appropriated budget with requests for a deficiency and/or supplemental during the

House Bill 404/aSPAC -- Page 5

interim year.

Prior to 1940, 44 states used biennial budgets. According to a study by the National Conference

of State Legislatures (NCSL), the number of states with biennial budgets declined through the

1970s, primarily because legislatures shifted from biennial sessions to annual sessions and ad-

justed their budget cycles accordingly. In the last decade, this trend has reversed somewhat.

Connecticut returned to biennial budgeting in 1991; Arizona enacted a biennial budget in 1999,

now limited to smaller state agencies. In all, today 21 states adopt budgets biennially. Both

President Bill Clinton and President George W. Bush recommended biennial budgeting at the

federal level in their FY2001 and FY2002 budget submissions to Congress.

In Moving New Mexico Forward: Further Along, which was released in August 2004, Governor

Bill Richardson’s administration recommended adoption of a biennial budget model similar to

that used in Arizona and Kansas, whereby biennial budgets would be adopted for smaller

agencies and annual budgets would be prepared for large agencies. In Governor Richardson’s

proposal, biennial budgeting would be used for 72 agencies with budgets under $5 million.

The primary concern raised by biennial budgeting is the need to address rapid changes in agency

budgets driven by changes in federal funding, state revenues, client populations, federal regula-

tions, etc. DFA indicated concern that biennial budgeting might create difficulties in those agen-

cies that have volatile revenue sources (i.e. Medicaid) and are driven by unforeseen circum-

stances (i.e. the Department of Corrections' inmate population growth). State agencies that typi-

cally have little growth from year-to-year and that have steady sources of revenue would be more

apt to succeed in the biennial budgeting process due to their ability to forecast their future ex-

penditure and FTE needs. For example, the Administrative Office of District Attorneys noted

that, while a biennial budget process would reduce the work associated with preparing, submit-

ting and justifying an annual budget request, it would also make the district attorneys less able to

respond to emerging crime trends and changes in federal grant status which can have significant

fiscal implications. The provision for supplemental and deficiency appropriations in the middle

of the biennium would help to address this concern.

PERFORMANCE IMPLICATIONS

DFA noted that the biennial budget process would assist the smaller agencies by only requiring

the time consuming budget development process on alternate years. The agency would have

more time to manage, implement and measure their performance goals. The two budget agencies

(State Budget Division of DFA and Legislative Finance Committee - LFC) would not need to

review every state agency's budget annually, but would have to review the budget for the sup-

plemental and deficiency requests which could be significant for some agencies. Review of all

agencies would be required and assistance throughout both years, however, those agencies that

maintain level operating budgets would require less time for review compared to the amount of

time that the annual budget process requires now. The process would allow for more time for the

management and oversight of budgets.

FISCAL IMPLICATIONS

There would be savings from reduced paperwork and staff time devoted to preparation, review,

and implementation of annual budgets. To the extent that DFA and LFC staff devote greater

time to performance and policy activities, these savings may be partially offset.

House Bill 404/aSPAC -- Page 6

DFA commented that expenditures will decrease in budget preparation time and resources for

state agencies as well as the State Budget Division, and Legislative Finance Committee every

other year. Decreases may be seen in overtime, comp time, office supplies, and per diem rates in

years without a budget request. However, funds could be then reallocated for training, site visits

and other activities related to management and oversight.

ADMINISTRATIVE IMPLICATIONS

DFA noted that the administration of HB404 will occur at the agency level, State Budget Divi-

sion and the Legislature. Currently, both the State Budget Division and the Legislative Finance

Committee have responsibilities during the request, appropriation and operating aspects of the

budget process. These aspects include the statutory deadlines for the budget submissions and

performance measures development and release of budget recommendations, and the hearings

that the Legislative Finance Committee schedules with each agency. DFA indicated that each

agency involved in the budgeting process has sufficient staff and resources to carry out the legis-

lation.

The resources and staff would have to reallocate the work hours and associated costs for the

tasks associated with each year of the biennial budget.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

This bill relates to Senate Bill 211.

OTHER SUBSTANTIVE ISSUES

The Department of Transportation identified several ideas which should be considered in evalu-

ating HB404, including:

•

Agencies would continue to require budget adjustment authority and may require greater

flexibility to implement a biennial budget.

•

The DFA and LFC may need to develop a process, in addition to supplemental and defi-

ciency appropriations, to evaluate policy initiatives that the legislature or executive may

wish to undertake in the middle of a biennium.

•

The bill does not address capital outlay budgeting.

DFA noted that consideration should be given to agencies headed by elected officials to assure

that newly elected officers don’t take over an agency with one year left on a depleted budget.

ALTERNATIVES

DFA favored the approach included in Moving New Mexico Forward: Further Along. Accord-

ing to DFA, by implementing the process statewide, several of the larger agencies will experi-

ence difficulty with biennial budgeting due to the size and volatility of the associated revenues

and expenditures.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

The state would continue to adopt annual budgets.

DH/lg:sb:rs