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

SPONSOR Gonzales

ORIGINAL DATE

LAST UPDATED

01/23/08

02/05/08 HB 218/aHTRC

SHORT TITLE Amend Small Counties Assistance Act

SB

ANALYST Propst

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY08

FY09

NFI

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to SB 171

SOURCES OF INFORMATION

LFC Files

Responses Received From

Department of Finance and Administration (DFA)

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Amendment

On page 1, line 13, after “Counties", strike the remainder of the line, strike all of line 14 and

strike line 15 up to the period.

On page 5 through 9, strike Section 2 in its entirety.

Synopsis of Original Bill

House Bill 218 amends the current Small Counties Assistance Act by revising the definition of

the inflation factor within the calculation that provides the distribution of funds to qualifying

counties. HB 218 includes additional language that will require the first use of the Small

Counties distribution to be utilized to comply with the Audit Act.

House Bill 218/aHTRC – Page

2

FISCAL IMPLICATIONS

The Small Counties Distribution for FY08 in this model includes the corrected "inflation factor"

that is introduced in HB 218. The net increase in the total distribution for FY09 is $217.9

million. Projections for all subsequent fiscal years are calculated with a 10% growth rate per

year. Although a growth rate of 10% is rather high for this distribution, it appears as though the

fund can support the adjustment to the inflation factor.

This model also includes counties that qualified for funding in FY08. Since the formula contains

variables for property valuations, population values and GRT increments; the number of

qualifying counties may or may not change in the future.

Section 7-1-6.5 governs the distribution equal to 10% of the compensating tax to the Small

Counties Assistance Fund. Estimates from the Taxation and Revenue Department were

incorporated into this model to illustrate the capability of the fund and the revenue flow.

FY Compensating Tax Receipts Small Counties Small Counties Estimated

Asst Fund Distribution Reversion

Estimates

2008 $79,982,500 $7,998,250 $4,358,000 $3,640,250

2009 $83,421,748 $8,342,175 $5,273,180 $3,068,995

2010 $87,008,883 $8,700,888 $5,800,498 $2,900,390

2011 $90,750,265 $9,075,026 $6,380,548 $2,694,478

2012 $94,652,526 $9,465,253 $7,018,603 $2,446,650

The overall Small Counties Distribution in this model will increase over time and the reversion

to the General Fund will decrease; this is the only significant impact to the General Fund and

reflects the original design of the amendment that was introduced and passed in the 2004

Legislative Session. HB 218 serves as a correction to that amendment.

SIGNIFICANT ISSUES

According to DFA, the purpose of the Small Counties Assistance Act [Section 4-61-1 through 4-

61-3 NMSA] is to provide a distribution of funds to qualifying counties based upon property

values, census data, inflation factors and additional increments that are based on defined gross

receipts taxes that are imposed at the county level.

Various amendments were incorporated into the statute in the 2003, 2004 and 2005 legislative

sessions. The language adding the adjustment factor was introduced and passed in 2004.

DFA notes the that the language describing calculation of the inflation factor (Subsection D,

Section 4-61-2) does not interact with application of the inflation factor to the distribution

amounts (Subsection D, Section 4-61-3) in the way intended.

The inflation factor is calculated as the ratio of the value of an inflation index (specifically the

GNP implicit price deflator for state and local government purchases of goods and services) for

last calendar year over the index value for the previous year. This ratio is than multiplied against

the distribution amounts in the table to produce the value of the distribution in the current year. It

was anticipated that, as time went by, this year’s ratio would be applied against the distribution

amounts actually distributed the previous year. However, that is not what the language actually

House Bill 218/aHTRC – Page

3

states and the Department of Finance and Administration was instructed only to multiply this

year’s ratio against the (unadjusted) table amount.

Compared with the construction of the “adjustment factor" (Subsection A, Section 4-61-2) which

adjusts the bracket ranges. The calculation is against base property tax values in 2002. This

year’s factor is the ratio of last year’s property tax valuations over 2002’s. Since statewide values

grow every year and 2002’s are fixed, the bracket ranges will always expand.

The inflation factor in contrast is not anchored in a specific year, thus creating a problem in the

overall calculation. The intent was to avoid measurement issues when the federal government

re-calibrates the GNP indices. This happens every ten years and involves changing the base year

and makes changes to what is counted.

The language in HB 218 solves these issues and provides a base year of 2004 for the inflation

factor; this correction was completed with the assistance and participation of the Association of

Counties.

The additional language of HB 218 requires the first use of the distribution by a county to

comply with the Audit Rule is similar to language in SB 171 amending the Small Cities

Distribution.

The Local Government Division (LGD) is currently trying to address this issue of local

governments’ compliance with the Audit Act with the proposed “Budget Certification Rule". A

public hearing is scheduled for February 18, 2008 in Santa Fe to address this new rule. This

proposed rule, developed by the LGD in conjunction with the State Auditor’s Office, stipulates

steps in which the LGD will address local governments’ lack of compliance to the Audit Act.

This rule is intended to address the issue of past due audits by working with local governments to

be current with their annual audits.

TRD added the following analysis:

The Tax Administration Act requires that ten percent (10%) of net receipts from the

compensating tax be distributed to the Small Counties Assistance Fund. Qualifying counties are

provided with distributions based upon their population and total assessed value for property tax

purposes. The base distribution amount for each qualifying county is determined in accordance

with the table below; provided that the amounts in the first two columns of the table shall be

adjusted annually by the adjustment factor; and the amount in the last column shall be adjusted

annually by the inflation factor. If the county’s total valuation for the preceding property tax year

is:

at least:

but less than: and population is:

Then the distribution

amount is:

$0

$100,000,000 under 1,000

$450,000

$0

$100,000,000 at least 1,000 but under

4,000

$325,000

$0

$100,000,000 at least 4,000

$250,000

$100,000,000 $230,000,000 under 12,000

$175,000

$100,000,000 $230,000,000 at least 12,000

$125,000

$230,000,000 $1,400,000,000 under 48,000

$75,000

House Bill 218/aHTRC – Page

4

Under current law, the term “inflation factor" is defined as a fraction where the numerator is the

annual implicit price deflator index for state and local government purchases of goods and

services for the calendar year one year prior to the year in which the distribution is to be made;

and the denominator is the same index for the year two years prior to the year in which the

distribution is to be made, i.e., (Index Last Year)/(Index Two Years Ago). Given the manner in

which both the numerator and denominator roll forward from year to year, the formula fails to

adequately capture the effects of inflation and adjust the base distributions accordingly. This bill

would amend the definition of “inflation factor" to anchor the inflation factor to a base year

(2004). The inflation factor would become (Index for Last Year)/ (Index for 2004). The base

distributions would grow by the annual rate of inflation, as measured by the annual implicit price

deflator index for state and local government purchases of goods and services for the year prior

to distribution. The bill would also require that the first use of the distribution would be to timely

comply with all requirements of the Audit Act.

Effective Date: July 1, 2008.

Estimated Revenue Impact*

FY2008 FY2009 FY2010 FY2011 FY2012 FY 08-12

R or

NR**

Fund(s) Affected

$0

($459) ($482) ($506) ($531) ($1,976) R General Fund

$0

$459 $482 $506 $531 $1,976 R Small Counties Assistance Fund

* In thousands of dollars. Parentheses ( ) indicate a revenue loss. ** Recurring (R) or Non-

Recurring (NR).

DFA’s actual distributions in FY08 for FY07 served as the basis for the estimated revenue

impact. A comparison was made of the base distribution under the current law with the base

distribution under the proposed amendment. In FY08, the net impact to the General Fund would

have been $436 thousand under the terms of the proposed amendment. The bill would increase

this amount annually with inflation. According to the index, the annual rate of inflation in 2005,

2006 and 2007, was 6.4%, 5.43%, and 5.45%, respectively. An annual inflation rate of five

percent is assumed in the estimated revenue impacts from FY09-12.

The impact that individual counties would have experienced in fiscal year 2008 had the proposed

changes been in effect are reflected in the following table. These figures served as the basis for

the estimated revenue impact. In future years, they would grow with inflation, as measured by

the annual implicit price deflator index for state and local government purchases of goods and

services for the year prior to distribution.

House Bill 218/aHTRC – Page

5

COUNTY 2008

2009

2010

2011

2012

Catron

$41,745 $43,832

$46,024 $48,325 $50,741

Cibola

$16,056 $16,858

$17,701 $18,586 $19,516

Colfax

$0

$0

$0

$0

$0

Curry

$9,633

$10,115

$10,621 $11,152 $11,709

De Baca

$41,745 $43,832

$46,024 $48,325 $50,741

Grant

$9,633

$10,115

$10,621 $11,152 $11,709

Guadalupe $32,111 $33,717

$35,403 $37,173 $39,031

Harding

$57,800 $60,690

$63,725 $66,911 $70,257

Hidalgo

$32,111 $33,717

$35,403 $37,173 $39,031

Lincoln

$0

$0

$0

$0

$0

Los Alamos $0

$0

$0

$0

$0

Luna

$16,056 $16,858

$17,701 $18,586 $19,516

Mora

$32,111 $33,717

$35,403 $37,173 $39,031

Quay

$32,111 $33,717

$35,403 $37,173 $39,031

Rio Arriba $0

$0

$0

$0

$0

Roosevelt $16,056 $16,858

$17,701 $18,586 $19,516

San Miguel $9,633

$10,115

$10,621 $11,152 $11,709

Sierra

$16,056 $16,858

$17,701 $18,586 $19,516

Socorro

$16,056 $16,858

$17,701 $18,586 $19,516

Taos

$9,633

$10,115

$10,621 $11,152 $11,709

Torrance $16,056 $16,858

$17,701 $18,586 $19,516

Union

$32,111 $33,717

$35,403 $37,173 $39,031

TOTAL $436,714 $458,549

$481,477 $505,551 $530,828

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