Summary of VP Taylors Comments on NMHU's FY10 Budget made to the Financial Planning Committee on 9/9/09

1) VP Taylor distributed a handout that summarized the State's current budget situation entitled "New

Mexico Fiscal Outlook" that was presented to a Las Vegas Community Meeting on 9/9/09 by David Abbey, Director LFC. A copy is attached.

2) VP Taylor summarized the State's FY10 and FY11 as follows:

a) Current State revenue estimates predict a $433 million shortfall for the FY10 budget. They do expect FY11 revenues to increase slightly over FY10 projected revenues.

b) The Governor has called a special session for October to address both the projected revenue shortfall and to rebuild the State's depleted reserves. Roughly a 3% cut would be needed to balance the FY10 budget. While the Governor wants to protect K-12 spending from cuts, the legislature may not go along. Because K-12 spending is 45% of the State's budget, if K-12 spending is not cut, all other areas would have to cut by about 5%.

c) The FY09 revenues came in 10% lower than the prior year and the FY10 revenues are expected to come in 8% below FY09. These are the largest year-to-year percentage revenue reductions in decades.

3) VP Taylor then discussed the University's situation and contingency plans. He noted that the University has made not decisions and will not do so until after the special session. Thus, his comments about the any plans the University has are tentative and evolving.

a) So far, the University has taken a 2.5% cut in the 08/09 (FY09) budget and a 2.5% cut in the FY10 budget, for a total reduction of 5%.

b) If the FY10 budget is cut by another 3% it would represent about $977 million. A 5% cut would represent $1.3 - $1.4 million.

c) The Administration's goal is to absorb these cuts without cutting the core operations. Some approaches they are considering are:

i) Cutting back on a few building repair projects

ii) Drawing down the University's reserves

iii) Not filling some open position

iv) Reviewing the tuition budget, which may be a little low

d) Even though we "broke band" in FY09, the State does not have the resources to fund the increase in our budget that would have come from increased enrollments. Since any revenue increases that would have resulted from "breaking band" would not have come until FY11, how much we will get because we "broke band" is still uncertain. The President's Council is discussing a common position. Two alternatives have been mentioned: calculate each institution's revenue based on the formula (which would include the effect of "breaking band") and then reduce all institutions by the same percentage. The other approach would be to ignore the formula and just reduce budgets from their prior year's amounts. The President's Council has postponed any decision on the issue until the FY11 projections have settled down a bit.

e) Informal meetings with state legislators indicate that the legislature will probably not "micro-manage" the State colleges and universities and only cut their budgets. They won't dictate how those cuts should be absorbed.

NEW MEXICO FISCAL OUTLOOK

LAS VEGAS COMMUNITY MEETINGSEPTEMBER 9, 2010

David Abbey, Director LFC

FY09• FY09 recurring revenue fell short by $309 million from the forecast. (Fiscal Year

09 ended on June 30,2009.)• After solvency, reversions and transfers - revenues are still short by $121.5

million in FY09 to cover FY09 appropriations. What does this mean - we have anoverdraft in our checking account!

FY09 Solution• We need to move money from our savings (reserve accounts) into the checking

account for our books to be in balance. Only the Legislature can give DF A (ourbank) this authority - the Legislature will do this during the special session.

• FY09 reserves will be at about 8 percent.

FYIO & FYll• Two weeks ago the state economists are predicted FYIO (fiscal year we are

currently in) to go down by about $433 million.• With this new revenue estimate, reserves fall to negative and the state budget will

not be in balance.

• New Mexico Constitution requires a balanced budget.• Governor Richardson announced a special session in October to work with

legislators to reduce spending and increase revenues in FY 10 so reserves go backup to a positive 5 percent or $250 million or more.

• Economists expect revenues to grow in FY 11 but not by much. This is anotherreason why we need to reduce FYI 0 budgets to a flat level.

FYI0 Solution

• 3 pronged approach:o Appropriation Reductions (spending)o Voiding Capital Outlayo Transferring excess cash balances from special funds to the general fund

FYll Solution

• Avoid layoffs, furloughs and pay cuts

• Prioritize spending - public safety, education, Medicaid• Consider options that raise revenue

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% SHARE OF BUDGET• 43% - Public Education

• 16% - Higher Education• 11% - Medicaid• 14% - Health & Other Human Services

• 7% - Public Safety• 10% - All Other Government

100%

Education

• Povertyo In APS, an average of 55.2 percent of students are eligible for ftee and

reduced lunch. In the poorer schools this number is almost 100 percent.o In Bernalillo the number of children eligible is 95.6 percent and in Los

Lunas, 68 percent.o This means that more than 70 thousand children in the Albuquerque metro

area live in poverty every day.o If you are hungry you can't think or learn.

• Homelessness

o The APS superintendent reported last week that almost 5,000 studentsenrolled in APS for the last school year are homeless.

o This is more than a thousand new homeless students in just one year.o This means they are living in a shelter, on a friend's couch, in the family

car, in a park or maybe a ditch somewhere.• APS has made arrangements with the YMCA in Albuquerque for

up to 2,500 students to shower every morning before school. Howthe other 2,500 get by is not clear.

• How do we change the way we do business to help these kids?o Since 2003 we have increased funding to schools by $743 million dollars.

Of this amount, 634 million has gone to teachers, principals, educationalassistants and other employees for pay increases, insurance and retirement

o Another $109 million has gone into programs like Fine Arts, P.E. andredesigning high schools.

o Even with this big amount of money going to education, everybody wantsmore.

o Schools need to look at how they are working for kids, especially the poorand homeless and make hard decisions about how to help these kids along.

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LFC Staff:

• 1 Director (David Abbey)

• 2 Deputy Directorso Cathy Fernandez (Deputy for Budget Analysts)o Manu Patel (Deputy for Performance Evaluators)

• 15 Budget Analysts - develop budget recommendations, analyze issues, brieflegislators - budget experts

• 10 Performance Evaluators - evaluate effectiveness of programs - Investments inEarly Childhood, Effectiveness of GSD Procurement, etc.

• 3 Economists (Tom, Becky & Dan) - forecast revenues, tax policy, debt analysis,resident revenue experts - they each have a crystal ball.

• 3 Capital Outlay Analysts (Linda, Jeannae & Kyle)• 6 Support staff - help set up meetings, record LFC minutes, make sure members

get per-diem, ensure clean LFC audits, answer phones etc.40 Total Staff

Pressures on Le2islators• Courts/Judges & District Attorneys• Educators & Public Schools - NM Constitution requires "free public education"• Corrections - very little room to cut• Medicaid - can't cut or else we lose federal funds - we get about $4 in federal

funds to every $1 in state funds spent for the poor and needy - keep in mind thisis an entitlement program!

• Aging Networks- Senior Services in communities• Disabled Services• Health Care for the Uninsured & Children

• Long-term Health Services for the Elderly• Temporary Assistance for Needy Families• Mental Health Services

• Higher Education

Non-Profit Information

• In FY09 state agency contracts with nonprofit organizations totaled over $600million for services such as:

o civil legal serviceso domestic violence services

o home visiting serviceso rest area maintenance

o attorney feeso adult drug courto youth rnentoringo (see attached)

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Table 2

GENERAL FUND FINANCIAL SUMMARY - August 2009 Consensus Forecast(Dollars in Millions)Actual

EstimatedEstimatedEstimated

FY200S

FY2009FY2010FY2011

APPROPRIATION ACCOUNTREVENUE

Recurring RevenueFebruary 2009 Revenue Estimate (I)

$6,015.5 $5,727.0 $5,485.1 $5,756.1

August 2009 Consensus Revisions

(309.1)(4331)(358.3)

Total Recurring Revenue

$6,015.5 $5,417.9 $5,052.0 $5,397.8

FY2011Nonrecurring Revenue

New Money

August 200S tax rebate

$47.2$(55.7)$ $$(89.9)

2009 Solvency package

$349.3 Replace

DOH/HSD ARRA funds

$133.9 Fed. Funds:

$

(152.0)

TotalTotal Non-Recurring Revenue

$47.2$427.5 $ $Needed for Flat

Budgets:TOTAL REVENUE

$6,062.6 $5,S45.4 $ 5,052.0$5,397.8 $(241.9)

APPROPRIA TIONS

Recurring AppropriationsRecurring Appropriations - General

$5,675.0 $ 6,035.1$5,487.6 $5,397.8

Recurring Appropriations - 20 I 0 Session Feed Bill

6.0

Total Recurring Appropriations

$5,675.0 $6,035.1 $5,493.6 $5,397.8

Nonrecurring Appropriations

$295.1$(75.8)$ $

2009 Fund Transfers100.0

Total Nonrecurring Appropriations

$295.1$(75.8)$100.0 $

TOTAL APPROPRIATIONS

$5,970.1 $ 5,959.3$ 5,593.6$5,397.8

Transfer to/from Reserves

$92.6$(113.9) $(541.7) $

Annual deficit in appropriation account

$(113.9) $(541. 7) $

Cumulative deficit in appropriation account

$(113.9) $(655.6) $(655.6)

GENERAL FUND RESERVES Beginning Balances

$650.8$735.0 $485.7 $(6.5) FY2010

Transfers in ITom Appropriations Account

92.6(113.9)(541. 7)

Revenue and Reversions

48.341.0119.058.9

Appropriations, expenditures and transfers out(56.7)(176.4)(69.5)(39.3)

Ending Balances

$735.0$485.7 $(6.5)$13.1$

Reserves as a Percent of Current Year Recurring Appropriations

13.0%8.0%-0.1%0.2%

(I) includes increased Fire Protection Fund reversion $1.6 million in FY09 and $3.3 million FYIO. Also includes $21.2 million in FYIOand $31 million in FYI] from TRD Fair Share collections and $0.6 million of other revenue enhancements from 2009 session.

_______ Ge_n_eralFunciRecurring Revenue!$7,000 Ii I

$6,000

$5,000

$4,000

$3,000

$2,000

$1,000

% Change Annual(Right Axis)

_....---120%18%

15%

13%

10%

8%

5%

3%

0%

- -3%

-5%

-8%

-10%

$- -13%a.<:>;:£:!,.,'g.on""r-ooa.<:>0~•...•;gon""r-oo***00 a. a.~a.0..a.~<::> <::>~<:><:><:>a.<:>

>- >->->->->- >->->- >->->->->- >->->-<::>

'""'""'""'""'""'""""""""ILIL'""""""'""""""""tz..tz..>->->-

• Aug 09 ForecastILw.IL

• Recent declines have lowered the state's long-tenn revenue growth rate to 5.6%,roughly equal to the growth rate of personal income.

• After two negative years, growth is expected to turn positive in FYI1.

Energy_lilted Revenues as a Share of Total Recurring General Fund Revenue

25%

Augusl2009 Forecast

FY9B FY99 FYOO FY01 FYIJ2 FYD3 FY04 FY05 FY06 FY07 FY08 FYW FY10 FY11 fY12 FY13 FY14

"1'felint1a'Y Data

• Energy-related revenues will fall to 13% of the General Fund in FYIO, their lowestlevel in 8 years.

2

Economic Environment:

• Mixed economic data in recent weeks indicate the economy is near the bottom of thedownturn and that recovery is imminent. The speed of the recovery - and whethergrowth will be sustained or on-again off-again - remains difficult to predict .

• Financial markets have continued to rally since their recent lows in the spring of 2009;but the majority of financial indices are still well below their level of a year ago. TheS&P 500 Index for example has rallied more than 45 percent since its March low, but isstill trading at nearly 22 percent lower than it was a year ago.

NM vs. us Labor Market Trends

-New Mexico__ U.S.

• Declining employment occurred later in New Mexico, but has since caught up with thenational trend (source: Federal Reserve Bank of Philadelphia).

% Change Output va. Employment Trends

~l----~-~'--4.0 - .---- ..... -------..-

2.0 +---

0.0 -

-2.0

-4.0

-6.0

-8.0

,f~,/'Y ~~;?,/~ ~~,,'" ,,'!> ~~ ,f':- ~r51''},f~ ~r51'~~,,(j~ ~"cs'Y~,,<:!?(l~Calendar Year Quarter

• Although output growth may resume as soon as this quarter, employment growth is notexpected before late next spring (source: Global Insight).

3

Year-to-date CIT Collections

$450,000,000 -- - m_

:::::~i1--- - --.. _n

$250,000,000 . nn_

$200,000,000--- --.. -­

$150,000,000

$100,000,000

$50,000,000

$0

._--_ ..~.. -.---.-.--- ..--+- FY 2008 _ FY 2009

• Gross receipts tax distributions began the fiscal year well above year ago levels, but havedecelerated sharply in recent months as illustrated in the following figure.

Monthly General Fund GRT Distributions

20.0%

15.0%0 ~ 10.0%! 5.0%j f

0.0%

6

-5.0%i -10.0%n.-15.0%

1------ --_._---- -a.T-_-

5