Larry J. Horan
The New Mexico Legislature convened at noon on January 17, 2017 for the beginning of the 53rd Legislature, first session. In New Mexico, the legislature convenes at noon on the third Tuesday in January. In odd numbered years, the Legislature meets for sixty days and in even numbered years, they meet for thirty days. What’s the difference and how did we get here?
The structure of the New Mexico Legislature and the rules for a legislative session and the passage of statutes are set forth in Article IV of the NM Constitution. “Every regular session of the legislature shall begin annually at 12:00 on the third Tuesday of January. Every regular session of the legislature convening during an odd-numbered year shall remain in session not to exceed sixty days, and every regular session of the legislature convening during an even-numbered year shall remain in session not to exceed thirty days. No special session of the legislature shall exceed thirty days.” N.M. Cont. Art. IV § 5. In a sixty day session, legislators can introduce legislation on any topic. The volume of legislation during a sixty day session is typically significantly higher during a sixty day session. In a thirty day session, the subject matter of legislation that is considered is limited to the budget, appropriations and revenue bills, legislation introduced pursuant to messages of the Governor and bills that were vetoed in the previous regular session of the legislature.
The New Mexico legislature is considered a “citizen legislature”. The members of the legislature do not receive any compensation or salary other than per diem expenses for their attendance during the legislative session and attendance at interim legislative committee hearings. A common misconception is that New Mexico legislators serve in a paid position and have staff to assist in policy analysis and preparation of legislation. When legislators report to serve in the session, when they meet with constituents, campaign or attend legislative meetings, they must put their other professional lives on hold, for no compensation. Now, imagine asking your employer to allow you to have sixty days off in odd number years and thirty days off in even numbered years to attend the legislative session. Then you would need to agree to attend interim committee meetings during the months the legislature is not in session. Most interim committees meet monthly, for 3-5 days at a time, from May through November. All that work for a salary of $0.00 and per diem compensation at a rate of $164.00/day.
The legislature is composed of two houses, the Senate and House of Representatives. There are a total of 112 members of the New Mexico legislature. There are seventy members in the House of Representatives serving two year terms and forty two members in the Senate serving four year terms. Members of the Senate are elected in presidential election years. Typically, the House and Senate in NM have been held by a Democrat majority. In 2014, for the first time in over sixty years, the Republicans held a majority in the House of Representatives. In the 2016 election, all 112 members of the legislature were up for election. The Republicans were attempting to maintain control in the House with the Democrats trying hard to regain their majority. Ultimately, the House majority was regained by the Democrats with a margin of 38-32 and the Senate majority was retained by the Democrats with a margin of 26-16. With a change in majority in control of the House, all the leadership changed including the Speaker of the House and all the chairmen of the committees. In the Senate, although the Democrats retained the majority, Sen. Michael Sanchez (D, Valencia County), the longtime Senate Majority floor leader was defeated. The defeat of Sen. Sanchez resulted in a change in leadership in the Senate as well.
Following the general election 2016, twelve new members were elected to the House of Representatives and five new members were elected to the Senate. The stage was set for the beginning of the 2017 Session.
The new leadership in the Legislature and the members faced a significant challenge as soon as the gavel fell, signaling the start of the 2017 session. Typically, a sixty day session begins at a relatively slow pace. Committee membership is announced, offices are assigned and bills that have been pre-filed prior to the opening of the session are introduced, referred to committee and printed. The legislature did not have the luxury of settling in this year. At the start of the session, the state was faced with a current year (FY17) budget shortfall of approximately $69 million. Not only were operating expenses short $69 million, but to get to a shortfall of “only” $69 million, the state would be required to exhaust all of the cash reserves, leaving no money in the bank. Typically for bond rating and budget purposes, the state strives to maintain reserves of 5% or more. On January 17th, our reserve was at -1.1%.
Budget and Solvency
How did New Mexico get to be in such a dire budget situation? There are many ideas about different components of our budget woes, but everyone will agree that our continued dependence on oil and natural gas revenues are the greatest factor of the state budget difficulties. Oil and natural gas revenues account for approximately 1/3 of the state’s budget. New Mexico was slow to recover from the economic downturn that occurred in 2008-2009. But the recovery had begun until the price of oil took a dramatic drop. For every dollar the price of oil decreases, the General Fund (main operating fund) for the state of New Mexico is reduced by about $15 million. Oil prices have been decreasing for the past several years. According to the December 2016 Consensus Revenue Estimate, the following reflects the price of oil:
In 2016 during the legislative session, the price of oil dropped as low as $26.54/barrel. December 2016 Consensus Revenue Estimate. As oil prices drop, production in New Mexico is reduced. In December 2015, there were 102 operating oil rigs in New Mexico. That number dropped to 31 active rigs in October 2016. Id. When rigs are not operating in New Mexico, the state loses out in severance tax revenue, gross receipts tax revenue and corporate/personal income tax revenue. The snowball effect puts our state in a dire economic situation.
The legislature and Governor have been dealing with the budget crisis for the past year. During a special session of the legislature in October 2016, state agencies and higher education institutions had their budgets cut an average of 5.5% These cuts came on the heels of previous budget “cuts” and “sanding” during the 2016 legislative session. Additionally, the legislature had previously “swept” unspent money from funds across state government and picked up as much unspent money as possible. All the change had been cashed in and all the money that was found in the cushions of the couch has already been spent to fix budget woes. The one time fixes and tricks had been played. Now the legislature in 2017 had to find more cuts in the budget or had to find ways to generate additional revenue to fund state government.
The legislature tackled solvency for 2017 as soon as the session began before they started the process of crafting a budget for FY18. They passed a solvency package very early in the session which reduced fund balances throughout state government, further reduced general fund spending and appropriations and swept cash balances of school districts. The total package of cuts and fund sweeps covered the $69 million shortfall and put $95.2 million into the state’s general fund reserve, resulting in a cash reserve of 1.6% for FY17.
The 2018 budget that was passed by the legislature has total appropriations from the state general fund of $6.093 billion, an increase of $22.6 million over the FY17 budget. This reflected an increase of approximately 0.4% in spending. Fiscal Impact Report, HB 2 & 3/HAFC/aSFC. Most state agencies will see a reduction in funding in the FY18 budget. However, included in the budget is increased spending for public schools, the Attorney General’s office, Corrections, the Public Defender Department, Veteran’s Services, funding for jury, witness and interpreter costs and the Department of Public Safety. Id. The budget passed by the legislature was based upon the passage of HB202, a revenue bill that will increase revenue to the state by approximately $325 million. The budget has not been acted on by the Governor at this time.
With the passage of the FY17 solvency package, the legislature began to focus on the 2018 budget and numerous policy issues that covered a broad spectrum of topics. Although the 2017 session was a sixty day session, open to all topics and types of legislation, there was a significant reduction in the amount of legislation introduced this year in comparison to previous sixty day sessions.
The reduction of legislation is tied to the lack of new revenue. With no funding available, the legislature did not introduce or consider bills that would create any new program or cost the state any general fund revenue. The following are areas where there was a significant amount of legislation and discussion during the session.
Reform of the gross receipts tax system is a hot topic in New Mexico. Only New Mexico and Hawaii have a gross receipts tax system in place, rather than a sales tax. The two primary differences between a gross receipts tax and a sales tax are 1) a gross receipts tax imposes a tax on services provided as well as sale of goods and 2) the burden of the tax on a gross receipts tax is on the seller of goods or services, unlike a sales tax where the purchaser is responsible for payment of the tax. Tax reform is in the forefront of discussions regarding economic development and the state’s budget situation.
Rep. Jason Harper (R, Rio Rancho) has been working for the past several years on an omnibus gross receipts tax reform bill. Rep. Harper was the Chairman of the House Taxation and Revenue Committee in 2014-15 (during his tenure, the committee was named the House Ways and Means Committee). During the interim period between the 2016 and 2017 session, Rep. Harper held meetings of the Interim Revenue Stabilization and Tax Policy Committee to discuss tax reform. In concept, his tax reform bill would eliminate most of the gross receipts tax credits, deductions and exemptions (“tax expenditures”). Once the tax expenditures are eliminated, the idea is that the overall gross receipts tax rate would be reduced because the tax base will be broadened. Sound tax policy calls for a broad based tax with a lower overall rate. Rep. Harper and the proponents of the bill argue that broadening of the base will lower the overall tax rate and will make New Mexico more attractive to business.
There is widespread agreement among legislators and the Governor’s Office regarding the need for gross receipts tax reform. For the first time, Rep. Harper introduced his tax reform bill, HB412. The legislation included all the provisions discussed in the interim, repealing many of the tax expenditures and included re-imposition of the gross receipts tax on food and removed the gross receipts tax exemption on the receipts and sales of not-for-profit entities. The bill was referred to only one committee in the House, the Taxation and Revenue Committee. They held multiple hearings on the bill and it was passed out of the Tax Committee on a “without recommendation” motion. The next step for the bill was the floor of the House of Representatives. The bill was amended in the House prior to passage. The amendment removed any mention or re-imposition of the tax on food. By agreeing to remove the tax on food from the bill, the House created a situation where the tax base would remain narrower and the revenue that would have been collected from the tax on food would have to be covered by a higher tax rate in all other areas. Had the bill not been amended, it would have failed to pass because the House Democrats would not vote to re-impose the food tax. The bill passed the House unanimously.
Once the bill was received in the Senate, it was referred to the Senate Corporations Committee and the Senate Finance Committee. As committee staff and staff for the majority and minority in the Senate began to analyze the bill, it became clear that there were significant issues with how the tax rate will be set and implementation of the tax. A joint meeting of the Senate Corporations Committee and the Senate Finance Committee was held to discuss the bill. Many groups came forward and testified with concerns about the implementation of the GRT tax “reset” including the Association of Counties, the NM Municipal League, the NM Hospital Association, not for profits and representatives of all aspects of the agricultural community. Several Senators expressed concerns with the lack of certainty regarding the actual tax rate and concern over the uncertainty the bill, if enacted would create for the state and local governments. No action was taken on the bill in the Senate and it was still in the Senate Corporations Committee upon adjournment of the legislature.
Following the hearing on HB412, the Senate Finance Committee incorporated some of the proposed repeals of certain tax expenditures contained in Rep. Harper’s bill into another piece of legislation. They amended HB191, a tax bill sponsored by Rep. Larrañaga by inserting language requiring the Interim Revenue Stabilization Committee study the repeal of approximately forty “tax loopholes”. The repeal of the tax credits, deductions and expenditures are scheduled to take place in two stages, first in 2019 with a second round of repeals in 2021. The bill was sent to a conference committee to reconcile the differences in the bill between when the House and Senate passed the bill. In the conference committee, language was added to the bill to require the legislature to act in lowering the GRT rate if the elimination of the tax expenditures results in the ability to lower the tax rate while maintaining current revenues.
Rep. Carl Trujillo, acting Chairman of the House Taxation and Revenue Committee introduced the House Taxation and Revenue Committee Substitute for HB202. The bill passed the House and was amended in Senate Finance. The legislation became the vehicle for the legislature to generate new revenue by “closing certain tax loopholes” and increasing the gas tax and motor vehicle excise tax. As passed by the legislature, the bill would generate approximately $325 million in revenue for the state. The legislation imposes a tax on hospitals (both for profit and not-for profit) at a rate that is 40% of the current GRT rate. It also imposes an increase in the gas tax of $0.10, increases the weight distance fee for interstate trucking to $50.00, increases the motor vehicle excise tax from 3% to 4%, imposes a sales tax on internet sales, delays the cuts to the corporate income tax rate and freezes the funding of the legislative retirement. HB202 provides the necessary funding for the state’s FY18 budget and funding of the state’s reserves at a level of 3%. The Governor has not acted on this bill but has sent signals that she considers the bill a tax increase and will not support many of the pieces of the bill. Because HB202 is an appropriations bill where the Governor may exercise her line item veto authority in the bill, meaning the Governor can sign the bill while vetoing sections that she objects to if she chooses that option.
Local Election Act:
HB174 was a combination of two major election reform bills that were proposed this session. The bill combines all the non-partisan elections into one election, run by the County Clerks and overseen by the NM Secretary of State, to be held on the first Tuesday following the first Monday of November in odd number years. Currently, these elections are held at various times throughout the year. These elections include school board elections, community college board elections, water and sanitation districts, flood control districts and others. The bill originally included all the municipalities as well as other non-partisan elections. The NM Municipal League, the City of Las Cruces, the City of Albuquerque and the City of Rio Rancho opposed the inclusions of municipalities in the legislation because it is an infringement on local authority. The pressure and opposition of the cities resulted in a compromise proposed by the sponsors of the bill. The bill was amended in the Senate Rules Committee to allow municipalities the option of “opting out” of the local election act, meaning if the Governing Body of a municipality adopts an ordinance opting out of the act, the municipality can hold their elections separately from other non-partisan elections. The amendment also allows a city to opt in to the local election act at any time. The bill is awaiting action by the Governor.
Capital Outlay funding or Severance Tax Bond funding is what is commonly known as “pork” projects. This is the method by which legislators and the executive fund capital improvement projects. With the decrease in revenues, there has been a significant decrease in money available to fund capital improvement projects. Capital outlay projects are a great way for local governments to fund improvements in their communities and the projects provide opportunities for New Mexico businesses to work on the construction of these projects. There was limited funding, approximately $61.9 million available this year to fund capital outlay projects. As a comparison, in 2016 there was approximately $185 million available to legislators and the Governor for capital projects. Prior to the downturn of the economy in 2008-2009, there were years where the available capital outlay funding exceeded $1 billion. Although local government entities still requested funding for Capital Outlay projects, it became apparent early on in the session that there would not be any funding available to individual legislators for capital needs. The legislature passed SB462 for capital outlay funding. They used approximately $23 million of the funding to shore up the state’s reserves, and the remainder of the dollars were spent on state wide capital outlay projects. No local capital outlay projects were funded.
Worker’s Compensation/Employment Law
Two pieces of legislation were introduced relating to worker’s comp and employment law. Sen. Jacob Candelaria (D, Albuquerque) introduced both bills.
As often occurs in a sixty day session, there were numerous bills introduced relating to health care. There were two common themes underlying the proposed legislation this session. First, the budget and a number of bills were introduced that related to the State’s Medicaid program. Currently, 905,000 New Mexicans are covered under the Medicaid program. Governor Martinez opted to expand Medicaid coverage under the Affordable Care Act. Under Medicaid expansion, the federal government originally provided 100% funding for the expansion population. The funding will be rolled back incrementally until the federal government pays for 90% coverage of the expansion population while the state is required to cover the remaining 10%. In FY 18, state funding for Medicaid is approximately $940 million. With the Federal match in place, the Medicaid program consists of $5.7 billion in New Mexico. The exponential growth in Medicaid coverage has created a strain on the state’s general fund budget.
The second significant issue around health care is the uncertainty created by the Trump administration. During the presidential campaign, President Trump promised to abolish and replace Obama Care. This promise was echoed by the Republicans in control of Congress. This has created a high level of uncertainly in the health care arena. Several pieces of legislation were introduced with the intention of placing many of the requirements of the Affordable Care Act into state law to guard against a federal repeal of Obama Care. Most of the legislation failed to pass, but expect to see more health care legislation in future sessions.
How the Republican led Congress and President Trump intend to fund the Medicaid program in the future is still undetermined. There have been discussions related to Medicaid shifting from the current funding structure to a block grant program. If this occurs, states will receive a set dollar amount for Medicaid funding and they will determine how the money will be spent on Medicaid coverage. With nearly 1 in 2 New Mexicans obtaining health care under the Medicaid program, there is a significant anxiety in waiting to see how the state will fund the program going forward.
When the gavel finally fell signaling the end of the 2017 session, 277 bills had passed and were sent to the Governor for signature or veto. A balanced budget was passed along with HB202 which, if enacted, will increase state revenues by $325 million. Every legislative session is unique and develops a life and personality unlike any other session. Because of the change in leadership and the ongoing fiscal crisis we are facing in New Mexico, the intensity and tension felt in the halls of the roundhouse made the 2017 session unlike any session before. Governor Martinez has until April 7th to act on legislation passed during the session. The Constitution gives the governor twenty days following the end of the session to act on legislation. She can sign or veto bills until that time. If the Governor fails to act on a piece of legislation during those twenty days, the bill is deemed to be pocket vetoed.
Governor Martinez has publicly stated that she will not sign any tax increases and has threatened to veto the 2018 budget. If the Governor vetoes the budget, she will call the legislature back for a special session. So although the sixty day session is over, the legislative action for 2017 may have just begun.