Presentation to the

Association of Commerce and Industry

January 10, 2017

David Abbey, Director

N.M. Legislative Finance Committee

General Fund

Fiscal Outlook

Overview

2

Significant reductions in expectations for employment, wage and salary, and state economic growth

December revenue estimates for FY17 and FY18 are each down about $130 million from adjusted August forecast and are each down $866 million from December 2015 forecast

FY17 revenues projected to fall below appropriations by $237.9 million

Historically low reserves

Solvency again should be first order of business for the 2017 legislative session

Recurring spending reductions raise constitutional issues and service delivery is threatened

New Mexico employment growth forecasts revised

downward from August to December

3

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

New Mexico Employment Growth (Year-over-Year Percent Change)

Source: Workforce Solutions Department, BBER, Moody's

August Forecast

Estimate: 1.3%

December Forecast

Estimate: 0.4%

Current employment levels are lower than 2005;

wage & salary growth declined since 2014

4

2005: 871,248

2008: 902,411

866,203

-4%

-2%

0%

2%

4%

6%

8%

700

750

800

850

900

950

thousands

New Mexico Total Labor Force and Wage & Salary Growth

Employment Wage & Salary Growth Source: US Bureau of Labor Statistics

The last 10 years were a “lost decade” for New Mexico for

employment and wage and salary growth.

Average weekly hours and average weekly earnings

in N.M. are not keeping pace with the U.S.

5

33.0

33.5

34.0

34.5

35.0

35.5

36.0

36.5

Average Weekly Hours Per Worker(Private Sector, Seasonally

Adjusted)

US NM

Source: Federal Reserve Economic Data (FRED)

500

550

600

650

700

750

800

850

900

950

Oct-

06

Ma

y-0

7

De

c-0

7

Jul-0

8

Feb

-09

Sep-0

9

Apr-

10

No

v-1

0

Jun-1

1

Jan-1

2

Aug-1

2

Ma

r-1

3

Oct-

13

Ma

y-1

4

De

c-1

4

Jul-1

5

Feb

-16

Sep-1

6

Average Weekly Earnings (dollars per week)

U.S. N.M.

Source: Federal Reserve Economic Data (FRED)

Average weekly hours are the lowest in a decade.

Mining sector may have finally hit bottom; other

sectors that were growing rapidly are slowing

-5

-3

-1

1

3

5

7

9

11

13

15

17

19

21

Jan-1

1

Ma

r-1

1

Ma

y-1

1

Jul-1

1

Sep-1

1

No

v-1

1

Jan-1

2

Ma

r-1

2

Ma

y-1

2

Jul-1

2

Sep-1

2

No

v-1

2

Jan-1

3

Ma

r-1

3

Ma

y-1

3

Jul-1

3

Sep-1

3

No

v-1

3

Jan-1

4

Ma

r-1

4

Ma

y-1

4

Jul-1

4

Sep-1

4

No

v-1

4

Jan-1

5

Ma

r-1

5

Ma

y-1

5

Jul-1

5

Sep-1

5

No

v-1

5

Jan-1

6

Ma

r-1

6

Ma

y-1

6

Jul-1

6

Sep-1

6

No

v-1

6

New Mexico Employment Level ChangeMonth-over-Month (thousands of jobs)

Education and Health Services Leisure and Hospitality

Trade, Transportation, and Utilities Professional and Business Services

Mining and Logging

Source: Bureau of Labor Statistics, Current Employment Statistics (CES) Survey, November 2016

6

Oil and natural gas prices are now relatively stable

but at half the prices of two years ago

7

$1.00

$3.00

$5.00

$7.00

$9.00

$11.00

$13.00

$15.00

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

$90.00

$100.00

$/m

cf$/b

bl

Current Oil and Natural Gas Prices

CREG Dec 2016 Oil ONGARD Oil Weighted WTI (w/ diff)

ONGARD Gas Weighted HH CREG Dec 2016 Gas

Source: Weighted WTI averaged 33/33/33 EIA, GI, NYMEX, with -$4.20/bbl differential. Weighted HH averaged 33/33/33 EIA, GI, NYMEX.

$60.67

$37.85

$43 est.

$48 est.

$3.78

$2.42

$3.15 est.

$3.31est.

Oil production remains high; gas production

gradually declining

8

Drilling activity significantly down from highs in FY15;

FY17 activity is stagnant.

-

20

40

60

80

100

120

140

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

July

Septe

mb

er

No

ve

mbe

r

Janu

ary

Ma

rch

Ma

y

July

Septe

mb

er

No

ve

mbe

r

Janu

ary

Ma

rch

Ma

y

July

Septe

mb

er

No

ve

mbe

r

Janu

ary

Ma

rch

Ma

y

July

Septe

mb

er

No

ve

mbe

r

Janu

ary

Ma

rch

Ma

y

July

Septe

mb

er

No

ve

mbe

r

Janu

ary

Ma

rch

Ma

y

July

Septe

mb

er

No

ve

mbe

r

Janu

ary

Ma

rch

Ma

y

July

Septe

mb

er

FY11 FY12 FY13 FY14 FY15 FY16 FY17

Acti

ve R

igs

Millio

ns o

f B

arr

els

of

Oil &

T

en

s o

f M

illio

ns M

CF

of

Gas

Monthly Oil & Gas Production and Average Active Rig Count July 2011 to Present, by Fiscal Year

Gas Oil Active RigsSources: EMNRD, Baker-Hughes

Updated: 12/20/2016

OPEC production remains high, and high levels of U.S.

crude oil supply in storage since January 2015 contributes

to global oversupply and oil price suppression

9

900

950

1,000

1,050

1,100

1,150

1,200

1,250

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

U.S. Crude Oil Supply in Storage (million barrels)

Source: EIA, updated 11/29/2016

OPEC reached a deal to cut production but has a varied history of compliance

with its own agreements; uncertainty remains on whether cuts will be enforced

Total GRT vs. Total Wages and Salaries

10

The oil and gas industry shows the greatest level of divergence, but healthcare,

retail, and other industries also show the same issue

20.0

22.0

24.0

26.0

28.0

30.0

32.0

34.0

36.0

38.0

40.0

$0.0

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

$700.0

Q2-

2008

Q3-

2008

Q4-

2008

Q1-

2009

Q2-

2009

Q3-

2009

Q4-

2009

Q1-

2010

Q2-

2010

Q3-

2010

Q4-

2010

Q1-

2011

Q2-

2011

Q3-

2011

Q4-

2011

Q1-

2012

Q2-

2012

Q3-

2012

Q4-

2012

Q1-

2013

Q2-

2013

Q3-

2013

Q4-

2013

Q1-

2014

Q2-

2014

Q3-

2014

Q4-

2014

Q1-

2015

Q2-

2015

Q3-

2015

Q4-

2015

Q1-

2016

Q2-

2016

Q3-

2016

Total GRT vs. Total Wages & Salaries

Quarterly GRT (All Industries) NM Total Wages & Salaries

GRT in last 12 months lagging wages and salaries significantly

Hard to explain but possible data issues – wage and salary data may be incorrect

Wages and salaries increasing despite slow to negative job growth, loss of high-paying jobs, and declining average hours worked per week

Gross receipts tax revenues in July and August

were the lowest for those months in six years, and

September was the lowest in four years.

11

$120,000,000

$140,000,000

$160,000,000

$180,000,000

$200,000,000

$220,000,000

Gross Receipts Tax Revenues Year-over-Year Comparison

FY12

FY13

FY14

FY15

FY16

FY17 YTD

Sources: LFC files, DFA GenFund reports

Health care is the fastest growing industry in the state but remains

largely untaxed; growth in GRT from the industry was just 0.5 percent

year-over-year in FY17 Q1.

Matched taxable gross receipts in FY17 Q1 are

down in nearly every major industry

12

Matched Taxable Gross Receipts by Industry July - September 2016

IndustryMatched Taxable

Gross Receipts

Year-over-Year

Change

Mining, Quarrying, and Oil and Gas Extraction $442,645,142 -38.3%

Utilities $622,505,628 -0.6%

Construction $1,619,371,168 1.1%

Manufacturing $368,985,838 -22.6%

Wholesale Trade $453,465,694 -26.7%

Retail Trade $2,901,049,482 -3.8%

Transportation and Warehousing $142,106,135 -22.7%

Information $632,521,528 -4.3%

Real Estate and Rental and Leasing $301,455,251 -10.4%

Professional, Scientific, and Technical Services $1,738,557,802 -1.0%

Administrative/Support & Waste Management/Remediation $294,914,557 -8.8%

Health Care and Social Assistance $714,910,104 9.6%

Leisure and Hospitality Services $1,157,074,477 0.9%

Other Industries $1,354,500,072 n/a

Total $12,744,062,878 -6.2%

FY17 Q1 revenue collections are down in all major

categories

13

$(30.64)

$4.64

$(37.43)

$(7.42)

$(10.24)

$(33.77)

$(3.68)

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

September YTD Revenue Collections –FY17 versus FY16 (in millions $)

Source: LFC Files

Risks to Forecast

14

Revenue & Reporting Risk

Issues with data availability and reliability

Uncertainty on cause for large declines in corporate income tax (CIT) and

gross receipts tax (GRT) revenues

Wide array of tax expenditures; professional data-mining to find tax

loopholes

Los Alamos National Laboratory contract could go to non-profit

Energy volatility

Significant variability in market pricing

Global oversupply

Application of advanced technologies and doing “more with less”; jobs in the

mining industry have not recovered

Consistent negative growth in general fund investment

pool end-of-month balances since May 2015

15

September through November were each worse than the month

before, but December improved slightly for percent decline

-33.9%

-32.1%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

-2,500

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

pe

rcen

t ch

an

ge y

ear-

ov

er-

year

mil

lio

ns

$

State General Fund Investment Pool Balances

FY 2017 FY 2016 FY 2015

FY14 to FY15 % change FY15 to FY16 % change FY16 to FY17 % change

Source: State Treasurer's Office

16

17

2017 Session:

• Address solvency; “now money” is harder to find

• Recurring revenue is less than current spending

• Spending outlook: many agencies are already down 8-10%

from FY16; challenges in providing services

18

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

-$100

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

Mill

ions

General Fund Reserves (Total and Percent of Recurring Appropriations)

Other Reserves Tobacco Permanent Fund

Tax Stabilization Reserve % GF Reserves Source: LFC Files

FY17 general fund reserves projected to be negative; revenue

down 9 percent in FY17 Q1 year-over-year

FY16 general fund reserves at lowest point in at

least 15 years

Appropriations exceeded revenues in FY15 and

FY16; expected to exceed revenues for FY17

19

$4,500

$4,650

$4,800

$4,950

$5,100

$5,250

$5,400

$5,550

$5,700

$5,850

$6,000

$6,150

$6,300

$6,450

mill

ions

Appropriations: General Fund and Temporary Funds

General Fund Federal Funds

Other Funds Recurring Revenue

Source: LFC Files

• Recurring revenues in FY17 at lowest point since FY11

• FY17 appropriations lower than FY09

Medicaid is crowding out spending – it has more than

doubled its share of the state’s operating budget

20

• Medicaid’s share of the budget is up 8 percent since FY01; public and higher

education’s shares of the budget are each down 3 percent from FY01

• Agency budget cuts are significant – up to 10 percent in FY17

32%

34%

36%

38%

40%

42%

44%

46%

48%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Percent Share of General Fund Operating Budget, FY96-FY17

HEALTH, HOSPITALS & HUMANSERVICES (W/O MEDICAID)

MEDICAID

PUBLIC SAFETY

HIGHER EDUCATION

OTHER

PUBLIC EDUCATION*

* Secondary axis (right)Source: LFC Files

Spending growth since FY15 trending downward in

every category except Medicaid

21

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

FY13 OpBud FY14 OpBud FY15 OpBud FY16 OpBud FY17 OpBud

Decline in General Fund Operating Budget by Category, FY13-FY17 (year-over-year % change)

HEALTH, HOSPITALS &HUMAN SERVICES(EXCLUDING MEDICAID)

MEDICAID

PUBLIC SAFETY

PUBLIC EDUCATION

HIGHER EDUCATION

All OTHER

Source: LFC Files

FY17 general fund spending on higher education is down 7 percent from

FY16, spending on public education is down 2 percent, and spending on

health and human services excluding Medicaid is down 6 percent

State government has cut nearly 3,000 jobs since FY09

22

21,790 21,914

21,115 20,747

20,471

20,494

20,494

20,710

20,334

19,863

19,066

17,901

17,475

17,983 17,796

17,390

$1.00

$1.05

$1.10

$1.15

$1.20

$1.25

$1.30

15,000

16,000

17,000

18,000

19,000

20,000

21,000

22,000

23,000

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

pers

on

nel

ap

pro

pri

ati

on

s(i

n b

illio

ns)

nu

mb

er

of

FT

E

Personal Services and Employee Benefits Appropriations, Baseline FTE Headcount and Authorized FTE

(total of top 20 agencies)

Total Appropriations Authorized FTE Baseline FTE Headcount

Source: LFC Files

FY16 ending headcount down 2 percent from FY15 and

down 14 percent from FY09

23

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

New Mexico Salary Increase vs. U.S. Market

NM Salary Increase WorldatWorkSource: SPO

High annual turnover and vacancy rates

24

1% Increase Cost

(in thousands)

FTE

Affected

Annual

Turnover Rate

Current

Vacancy Rate

CYFD

Youth Care Specialists $120.8 234 22% 26%

CPS Social Workers $291.1 517 29% 18%

Nurses $15.5 20 Unknown Unknown

DPS

State Police Officers $864.2 667 7% 20%

Forensic Scientists $23.5 44 20% 30%

Dispatchers $39.2 102 26% 22%

DOH

Nurses $681.5 321 25% 21%

Miner's Hospital

Nurses $69.3 36 25% 29%

Judiciary

Judge pay $286.5 167

Court Clerks $277.3 700 32% 12%

Statewide Average 14% 13%

Source: LFC Files

Compensation Increase Cost, Vacancy, and Turnover Rates for High-Demand

Positions

25

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

FY14 FY15* FY16*

4th Grade Scores Proficient or Above

All Reading ED Reading All Math ED Math

ED - Economically Disadvantaged

*PARCC Assessment Source: PED

Pension fund solvency remains

threatened

26

Investment returns weak in recent years

Investment return assumptions (discount rates) too high

Payroll, salary and mortality assumptions too optimistic

Amortization or “funding periods” longer than the minimum 30 years

(in millions of dollars)

Valuation dateActuarial Value of

Assets

Actuarial Accrued

Liability

Unfunded Actuarial

Accrued Liability (3-2)Funded Ratio (2/3)

Annual Covered

Payroll

UAAL as % of

payroll (4/6)

(1) (2) (3) (4) (5) (6) (7)

The market value of

the assets held,

adjusted for deferred

gains and losses.

The present value of

projected benefits

attributable to service

already rendered.

The portion of liability

being amortized over

time. Having a UAAL

does not always mean

a plan is underfunded.

The funded condition

of a pension plan

over a 30 year

amortization period.

An upward trend is

desirable.

A measure of total

salaries for all plan

members provided

w ith benefits through

the terms of a plan.

A measure of a

plan's solvency. A

downward trend is

desirable.

30-Jun-11 $11,855.2 $16,826.4 $4,971.2 70.5% $1,935.0 256.9%

30-Jun-12 $11,612.0 $17,788.0 $6,176.0 65.3% $1,994.3 309.7%

30-Jun-13 $12,438.2 $17,057.4 $4,619.2 72.9% $2,049.7 225.4%

30-Jun-14 $13,482.8 $17,784.4 $4,301.6 75.8% $2,102.3 204.6%

30-Jun-15 $14,074.9 $18,786.5 $4,711.6 74.9% $2,248.3 209.6%

30-Jun-16 $14,654.8 $19,474.2 $4,819.4 75.3% $2,135.2 225.7%

30-Jun-11 $9,642.2 $15,293.1 $5,650.9 63.0% $2,523.8 223.9%

30-Jun-12 $9,606.3 $15,837.0 $6,230.7 60.7% $2,495.3 249.7%

30-Jun-13 $9,828.5 $16,362.3 $6,533.8 60.1% $2,516.9 259.6%

30-Jun-14 $10,715.0 $16,971.3 $6,256.3 63.1% $2,538.9 246.4%

30-Jun-15 $11,472.4 $18,014.4 $6,542.0 63.7% $2,610.3 250.6%

30-Jun-16 $11,899.7 $18,536.4 $6,636.7 64.2% $2,612.0 254.1%

Source: ERB, PERA, and LFC Files

(in millions of dollars)

Public Employee Retirement Association (PERA)

Educational Retirement Board (ERB)