OFFICE OF THE STATE AUDITOR. Fund Balance Report State Agencies, Fiscal Year 2016

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1 OFFICE OF THE STATE AUDITOR Fund Balance Report State Agencies, Fiscal Year 2016 March 2017

2 The Mission of the Office of the State Auditor Is To Help Government Work Better OFFICE OF THE STATE AUDITOR PROJECT STAFF Timothy M. Keller, MBA, CFE Sanjay Bhakta, CPA, CGFM, CFE, CGMA Sunalei Stewart, JD, MA, CFE Sarita Nair, JD, MCRP Janelle Johnson, MA Chan Kim, CPA Elise Mignardot, CPA Shannon Sanders, CPA, CFE Andrew Gallegos, MACCT, CGFM, CFE Lisa Jennings, MBA Antonio Baca, CPA Brendan Miller, BA Cindy Padilla, BA Anne Kelbley, BA Guadalupe Jaramillo, BA State Auditor Deputy State Auditor Chief of Staff Chief Government Accountability Officer Senior Analyst Audit Manager Audit Manager Audit Manager Audit Supervisor Audit Supervisor Senior Auditor Senior Auditor Senior Auditor Staff Auditor Staff Auditor The Office of the State Auditor acknowledges with gratitude the invaluable contributions of the New Mexico Legislative Finance Committee. An electronic version of this report is available at To obtain a hard copy of the report, please call the Office of the State Auditor at i

3 TABLE OF CONTENTS EXECUTIVE SUMMARY Page 1 PURPOSE, METHODOLOGY AND SCOPE Page 6 ABOUT THE OFFICE OF THE STATE AUDITOR Page 8 FUND BALANCE BASICS: FUND TYPES Page 9 OVERVIEW OF FUNDS BY FUND TYPE Page 10 UNDERSTANDING FUND BALANCE CLASSIFICATION: GOVERNMENTAL FUNDS Page 11 OVERVIEW OF FUND BALANCES BY CLASSIFICATION: GOVERNMENTAL FUNDS Page 12 UNDERSTANDING NET POSITION CLASSIFICATION: PROPRIETARY FUNDS Page 13 OVERVIEW OF NET POSITIONS BY CLASSIFICATION: PROPRIETARY FUNDS Page 14 FUND BALANCE BASICS: CAPITAL OUTLAY BEST PRACTICES Page 15 MUNICIPALITY CAPITAL PROJECTS FUND BALANCES Page 19 TRENDS ACORSS AGENCIES Page 21 PROPRIETARY FUNDS Page 23 CAPITAL PROJECT FUNDS Page 25 REVOLVING FUNDS Page 27 SPECIAL REVENUE FUNDS Page 29 APPENDIX A: AGENCIES WITHOUT FY16 AUDITS as of 3/01/2017 Page 32 APPENDIX B: STAGNANT FUNDS Page 33 APPENDIX C: CAPITAL PROJECT FUNDS WITH BALANCES Page 35 APPENDIX D: FUND BALANCES BY AGENCY Page 37 ii

4 EXECUTIVE SUMMARY The Office of the State Auditor (OSA) reviewed the 431 funds of 91 state agencies and the State General Fund, to gain insight into overall fund balance trends, changes between Fiscal Year 2014 (FY14) and Fiscal Year 2016 (FY16) and provide transparency and accountability. The balances in these funds have many sources including legislative appropriations, administratively collected dollars, federal grants, money generated by the sale of bonds and earnings from operations. As this report makes clear, nearly all of the fund balances in this report have already been designated for a specific project or program. This means the State must address challenging, complex questions and align priorities if it seeks to put more of these dollars back into the economy. In response to budgetary shortfalls, the State Legislature addressed millions of under-utilized dollars in fiscal years 2016 and 2017, reverting or transferring $1.03 billion to the General Fund and deauthorizing $89.9 million in unused capital outlay. The fund balances in this Report are as of June 30, 2016 and do not reflect any changes resulting from the 2016 special session or the 2017 regular session of the State Legislature. Most fund balances contain dollars previously designated for a particular use by the source of revenue, or by law, regulation or third parties. The executive branch of government is responsible for using most of these funds, while the legislative branch in some cases can decide what to do when funds are under-utilized. The highlights in these areas are as follows: What is a Fund? In a government audit, funds are accounting devices used to account for and report specific aspects of a government's financial activities, such as a particular revenue source or function. What is Fund Balance? The fund balance is the difference between current assets and liabilities in a particular fund. It may differ from the cash balance because it may include things like inventory or accounts receivable. 1 Fund Balances Overall Unspent water-related infrastructure balances continue to increase. Totaling over $512 million and spread across multiple funds, these funds continue to accumulate faster than when they are spent despite the strong need for water and wastewater projects throughout New Mexico. Capital project balances remain very high. Capital project fund balances increased since 2014 to over $1.2 billion. The ten largest municipalities in the state have aggregate capital project funds totaling over $504 million. $43 Million in 'stagnant' funds were not used in last two years. Funds that have changed by 1% or less in the last year raise questions as to whether those funds are being utilized optimally. Despite significant legislative sweeps, thirty-nine funds with an aggregate balance of over $43 million were stagnant, the largest of which were the Department of Transportation state infrastructure bank, the New Mexico Finance Authority primary care fund, and the Energy, Minerals and Natural Resources Department abandoned mine reclamation fund. Of the 39 stagnant funds in FY16, 24 were also identified as stagnant in FY15. This means that over 62% of the funds which were stagnant during this fiscal year have been so since FY14. The OSA defines these particular funds as super-stagnant, and they have an aggregate FY16 balance of $31,632,961. The largest super-stagnant funds are the Department of Transportation state infrastructure bank fund and New Mexico Finance Authority primary care fund. The Department of Transportation had the most stagnant dollars as an agency, with over $23 million that met the stagnant fund balance definition. This is likely because the Department of Transportation combines federal and state dollars for projects and must maintain funds for completed projects during a close-out period. The agencies with the largest infrastructure related balances were the New Mexico Finance Authority, New Mexico Environment Department, and the Department of Transportation. (This excludes the Department of Finance and Administration, which houses the billion dollar severance tax bond fund from which many capital projects are funded.)

5 EXECUTIVE SUMMARY (continued) The New Mexico Public Schools Insurance Authority, Office of the Attorney General and Department of Game and Fish topped the list of agencies with aggregate fund balance decreases. The Department of Workforce Solutions, Office of the State Treasurer, and the General Services Department topped the list of agencies with fund balance increases. Transparency and Accountability Recommendations Through the annual audit process, OSA has a window into fund balance data for all state agencies, but getting a detailed understanding of why money accumulates in funds is far more complex. Understanding our government s basic spending should not be as challenging as it has become. For example, the OSA does not have access to data that explains whether monies within a fund are encumbered, meaning that there is already a purchase order in place to spend those monies. The current system requires reporting to various oversight agencies and many checks and balances on agency operations, but lacks meaningful centralized reporting that is electronic, easy to compare and accessible to the public. For example: Although the Legislative Finance Committee (LFC) and Department of Finance (DFA) track most capital outlay, some capital project funds are subject only to agency-level supervision. This creates significant challenges for policy makers who are trying to assess fund balances statewide. Proprietary funds are basically government-run businesses. However, unlike privately held businesses, these funds are not required to undergo meaningful review to determine if they have enough money to operate and whether they may be able to return money for the general operations of their agencies or to the State General Fund. Special revenue funds are tracked at the agency level and do not report centrally on the substance of their use, except to the extent they have performance measures associated with them. Revolving loan funds represent a large share of fund balances overall. While by nature these funds replenish themselves, they may pose concerns when accompanied by stagnancy or a lack of accountability. Best practices suggest that revolving loan funds should track and report on several metrics, including their impact on the communities receiving funds and the status of their projects. This report details best practices to help the executive and legislative branches of government mitigate unnecessary accumulation of funds relating to infrastructure or capital outlay, including fully funding projects in the early stages, ensuring state and local priorities are aligned, following existing guidelines from LFC and DFA, cutting red tape, requiring project progress audits and establishing and enforcing specific expiration or reversion dates. The OSA also provides details on a sample of municipality capital projects fund balances to shed light on how money is accumulating and being spent at the local level. A spreadsheet with the data used in this report is available to the public on the State Auditor s website at 2

6 EXECUTIVE SUMMARY (continued) Largest FY16 Fund Balances, By Agency (Excluding net investment in capital assets and Board of Finance bond fund) Agency FY16 Balance FY15 Balance FY14 Balance 1. New Mexico Finance Authority $505,363,449 $500,001,655 $458,552, Department of Workforce Solutions $424,110,326 $232,364,954 $139,012, New Mexico Environment Department $375,161,277 $369,555,754 $353,316, Department of Transportation $315,053,453 $313,703,260 $393,120, Office of the State Treasurer $263,556,687 $159,679,720 $221,035, New Mexico Mortgage Finance Authority $252,525,000 $245,095,000 $242,230, Office of the State Engineer-Interstate Stream Commission $79,809,033 $72,511,420 $67,302, Public Education Department $63,321,199 $55,507,768 $56,460, Department of Game and Fish $57,554,252 $62,821,560 $60,948, Economic Development Department $56,053,272 $43,235,763 $19,888, Department of Information Technology $44,392,395 $42,573,564 $33,909, Energy, Minerals and Natural Resources Department $39,467,991 $32,503,341 $33,750, Taxation and Revenue Department $38,821,190 $34,405,773 $33,746, Children, Youth, and Families Department $33,709,686 $25,086,933 $23,261, Corrections Department $27,922,977 $25,951,858 $17,739, Department of Finance and Administration $24,270,686 $24,855,024 $21,597, Department of Public Safety $24,266,958 $24,888,087 $22,997, Regulation and Licensing Department $22,995,701 $25,325,103 $22,403, Department of Health $17,721,767 $15,032,736 $15,171, New Mexico Public School Facilities Authority $15,967,133 $1,337,976 ($14,927,811) 3 A complete listing of fund balance by agency is available in Appendix D.

7 EXECUTIVE SUMMARY (continued) Legislative Actions to Address Under-Utilized Funds The State Legislature can address under-utilized funds in a number of different ways. Reversions: When appropriations are made from the State General Fund by the Legislature, the Legislature can require the remaining balances of those funds to be transferred back to the General Fund at a specific date. Fund sweeps : When positive fund balances are under-utilized and can be used for other purposes, the Legislature can sweep all or portions of those balances, essentially transferring them to the General Fund or to be used for other purposes. Transfers: The Legislature may transfer an amount sitting in one fund balance to another fund in order to meet the purpose of that fund. For example, the Legislature transferred $147.5 million in tax stabilization reserves to the general fund operating reserve to support spending and avoid cuts during the 2016 regular session of the State Legislature. Capital Outlay de-authorization: The Legislature approves capital outlay. If projects are delayed for various reasons, the Legislature can de-authorize the funding. During the second special session in 2016, $89.8 million in capital projects were de-authorized. Sanding : This occurs when the Legislature reduces agency operating budgets by a particular amount, either on an agency-by-agency basis or across the board. This happened during the second special session of the 2016 Legislature, wherein state agency general fund appropriations were reduced by 5.5 percent, higher education institution appropriations were reduced by five percent, and district court and district attorney appropriations were reduced by three percent. Intercepts: The Legislature can preemptively intercept a stream of revenue going to one place and send it to another. The Legislature intercepted monies from certain New Mexico Finance Authority funds in The following is an overview of the legislative actions taken in 2016 and 2017 to date to address underutilized funds. The figures presented in FY16 annual audit reports and this report reflect activity resulting through June 30, Any legislative actions taken in the October 2016 special session or the 2017 regular session will not be reported until FY17 in agencies audits and the 2017 OSA Fund Balance Report. In total, the Legislature attempted to revert or transfer over $1.1 billion dollars in FY16 and FY17. After vetoes totaling over $62 million from the Governor, they were able to revert and transfer a total of $1.03 billion. A few highlights of these legislative actions include: During the 2016 regular session, the Legislature passed House Bill 311, which swept $282.9 million in funds, including transfers from reserve funds and others, such as the tobacco settlement fund. The Governor vetoed one item in House Bill 311, which would have swept an additional $14 million from the Economic Development Department and reverted it to the General Fund. During the 2016 second special session, Senate Bill 2 swept a total of $315.9 million in funds. In addition, Senate Bill 8 de-authorized $89.8 million in unused capital projects funding. Details on those projects can be found here. Finally, Senate Bill 9 reduced agency appropriations from the General Fund, sanding their operating budgets, for a total of $149 million. To date in the 2017 regular session, the Legislature swept another $190 million in sweeps and transfers, pursuant to Senate Bills 113, 154 and 114 and House Bills 4 and 452. Senate Bill 113 would have swept much more, but the Governor vetoed several line items, including vetoes of a $4 million sweep of Local Economic Development Act (LEDA) funds from the Economic Development Department and another $2.9 million from the Department of Transportation s state infrastructure bank. 4

8 EXECUTIVE SUMMARY (continued) The OSA s FY15 Fund Balance Report identified large and stagnant funds. The following are such funds that were the subject of legislative action in 2016 and 2017 to address underutilized balances. Agency & Fund Name 2016 Regular Session House Bill 311 Legislation and Amount Swept 2016 Special Session Senate Bill Regular Session Senate Bill 113 Office of the Attorney General Consumer Settlement Fund $1,000,000 Department of Finance & Administration 911 Enhancement Fund $6,000,000 New Mexico Public School Insurance Authority Risk Fund $6,000,000 $10,000,000 General Services Department Unemployment Compensation Fund $8,750,000 General Services Department Public Property Reserve Fund $1,000,000 $699,300 Department of Cultural Affairs Art in Public Places Fund $2,500,000 Department of Workforce Solutions Penalty and Interest Fund $1,000,000 Environment Department Rural Infrastructure Revolving Loan Fund $1,500,000 $1,000,000 $6,500,000 Environment Department Air Quality Permit Fund $3,000,000 $2,635,600 Aggregate Fund Balances, by Fund Type, in FY16 FY16 Fund Balance Classifications Nonspendable Restricted Committed Assigned Unassigned Unassigned - deficit Fund Type Grand Total Capital Projects Funds $ - $1,238,393,414 $9,385,978 $ - $5,983 ($618,271) $1,247,167,104 Special Revenue Funds $1,263,584 $456,460,723 $35,362,944 $1,810,921 $1,834 ($5,592,384) $489,307,622 General Funds $72,023,721 $292,624,947 $31,894,806 $6,263,944 $9,760,898 ($19,144,020) $393,424,296 Debt Service Funds $7,957,571 $275,147,610 $ - $ - $ - $ - $283,105,181 State General Fund $ - $111,357,355 $36,371,919 $ - $ - $ - $147,729,274 Proprietary Funds (see page 14 for classifications) $1,642,103,022 Grand Total $4,202,836,499 5

9 PURPOSE, METHODOLOGY, SCOPE PURPOSE As the Governmental Accounting Standards Board (GASB) has observed, Public accountability is based on the belief that the taxpayer has a right to know, a right to receive openly declared facts that may lead to public debate by the citizens and their elected representatives. Key to the public s understanding of government financial reporting is fund accounting, which is the use of accounts segregated based on the sources and uses of the money within them. The objective of this report is to bring purpose, transparency and accountability to fund balances of state governmental entities that are examined within the agencies annual financial audits. This report is the third in a series, with subsequent volumes to follow annually, which will provide comparative data and enable the public to track state agency fund balances on a year-to-year basis. METHODOLOGY AND SCOPE In compiling this report, the Office of the State Auditor used the most current audits of state agencies, available as of March 1, 2017, for the period spanning July 1, 2015 to June 30, 2016 (Fiscal Year 2016, or FY16). If FY16 audits were not available, those agencies were omitted from the report. State agencies that had not completed and released an FY16 audit as of March 1, 2017, are listed in Appendix A. Of the excluded funds for which public Fiscal Year 2015 (FY15) data was available as of February 20, 2017, the Department of Homeland Security and Emergency Management (FY15 balance $37,961,740) was the highest. The figures in this report pertaining to FY15 may in some cases differ from the figures in the OSA report entitled Fund Balance Report State Agencies, FY2015. The reasons for such discrepancies include the following: (1) some funds were omitted as described above, and also removed from FY15 data so as to make aggregate data comparable; (2) some agencies submitted adjusted financial statements after the publication of the FY15 Fund Balance Report; and (3) the OSA corrected any errors to FY15 data that were discovered during assembly of this report. This report discusses the State General Fund separately from other agency funds. Aggregate data excludes the State General Fund unless indicated otherwise. This report excludes all fiduciary fund and permanent fund data. Fiduciary funds account for assets placed under the government s control when a governmental unit acts in a fiduciary capacity such as a trustee or agent. Permanent funds account for and report resources that are restricted to the extent that only earnings, and not principal, may be used for purposes that support the reporting government s programs. These unique situations are not appropriate for comparison with other fund data. Fiduciary funds include the public employees retirement fund, educational retirement fund, retiree health care fund, judicial and magistrate retirement funds, volunteer firefighters retirement fund, deferred compensation fund, and permanent funds include the land grant permanent fund, severance tax permanent fund, tobacco settlement permanent fund, and the water trust fund. This report compiles the fund balances and fund balance classifications as determined by the author of the audit, which is in most cases an Independent Public Accountant (IPA) who conducted the audit (with the exception of those audits conducted by Office of the State Auditor staff). The Office of the State Auditor did not change or adjust any of these balances or classifications, except as noted herein. All fund balances are as of June 30, This report does not reflect any activity that may have occurred in funds between July 1, 2016 and the date of issuance, nor does it reflect any changes resulting from the 2016 special session of the State Legislature. Other agencies may have more recent data. For example, the Legislative Finance Committee has quarterly reports on certain capital outlay projects that are more recent and the Department of Finance tracks certain capital projects through the Capital Project Management System. 6

10 PURPOSE, METHODOLOGY, SCOPE (continued) Under applicable government accounting and auditing standards, the audit of an entity includes the audit of any component units. A component unit is a separate legal entity from the primary government, but is included in the primary government s audit because the primary government is financially accountable for the entity. This report includes all component unit funds as part of their respective primary governments, except for the Public Education Department, whose list of component units includes all state-chartered charter schools and the Department of Vocational Rehabilitation (DVR). This report does not include the fund balances for charter schools, but does include DVR funds. Some agencies account for programs within a general fund. To the extent this information was consistently available year over year, this report includes that data. For example, the Taxation & Revenue Department accounts for several programs as committed and restricted positions within its General Fund. When this information was not available on a consistent basis, this report discusses the fund as a whole. Similarly, some general funds include net investment in capital assets, a fund balance classification typically used for proprietary funds. Where general funds were incorrectly reported as net investment in capital assets, the OSA reports these as non-spendable fund balances. Negative dollar amounts are shown in red and in parentheses. Negative balances may result from a variety of causes. Sometimes, an agency must expend money from a special revenue fund before seeking reimbursement. This may suggest an accounting question as to whether the agency should have recognized the reimbursement revenue as a receivable when the expenditure occurred. In other instances, a negative fund balance is due to accounting practices or internal controls. For example, the Department of Military Affairs and State Armory Board in FY16 posted a deficit that was attributable to a investment overdraw in the State General Fund Investment Pool. In other funds, the unique nature of their assets and liabilities results in a negative balance. For example, the General Services Department maintains several risk management funds that post negative balances because of estimated losses on claims. Finally, negative balances may suggest that an agency is having difficulty living within its means, and may indicate that an agency cannot meet the burden of its current expenditures. The OSA used professional judgment in making a number of determinations in this report. In determining the list of revolving funds, the OSA used professional judgment in reviewing the names and descriptions of funds. The list of revolving funds may not be comprehensive. In determining the definition of stagnant funds, which is not a standard government accounting term, the OSA also used its judgment to balance the inherent static nature of some funds against the public s right to know when balances are not changing. OSA also exercised professional discretion in excluding the primary fund for severance tax bond proceeds when calculating the list of top ten fund balances. 7

11 ABOUT THE OFFICE OF THE STATE AUDITOR THE OFFICE OF THE STATE AUDITOR The New Mexico Office of the State Auditor is a constitutionally established, separately elected office in the executive branch of state government. The State Auditor maintains independence from both the Governor and the Legislature while examining and auditing the financial affairs of state and local entities. When the State's leaders prepared the New Mexico Constitution in 1911 for impending statehood the following year, they created a strong, independent Office of the State Auditor to oversee how government officials spend taxpayers' hard-earned dollars. As the New Mexico Supreme Court stated in 1968, the office of state auditor was created and exists for the basic purpose of having a completely independent representative of the people, accountable to no one else, with the power, duty and authority to examine and pass upon the activities of state officers and agencies who, by law, receive and expend public moneys. Thompson v. Legislative Audit Commission, 79 NM. 693, 448 P.2d 779 (1968). Included in the OSA s statutory mandate is the requirement that the financial affairs of every agency be thoroughly examined and audited each year by the State Auditor, personnel of the State Auditor s Office designated by the State Auditor, or Independent Public Accountants approved by the State Auditor. The OSA also has the authority to cause the financial affairs and transactions of an agency to be audited in whole or in part. These two statutory provisions grant the State Auditor the authority to conduct both annual financial audits and special audits. The Audit Act, New Mexico Statutes Annotated 1978, Sections to , and the Audit Rule, NMAC 2.2.2, are the laws and regulations under which the OSA operates. The New Mexico Office of the State Auditor is responsible for tracking financial audits and agreed upon procedures for over 1,000 state and local governmental entities. This report focuses exclusively on state agencies. The OSA exercises a regulatory role in ensuring the work conducted by the IPAs maintains a high level of quality and is in compliance with applicable accounting and auditing standards. However, the OSA does not determine whether the opinions, findings or fund balances of an audit, as reported by the IPA, are correct. The OSA reviews the reports to ensure an appropriate level of quality, but the views expressed in an audit are based on the IPA s professional judgment. THE GOVERNMENT ACCOUNTABILITY OFFICE The New Mexico State Auditor established the Government Accountability Office (GAO) to inform and report to the public statewide issues relating to the use of public funds. The GAO is a key step towards fulfilling the Office of the State Auditor s constitutional mandate to bring transparency and accountability to the use of public funds. As part of the OSA, the GAO is uniquely positioned to aggregate and synthesize audit data in a way that is accessible and useful to the public. Annual financial audits of state and local governments contain a vast amount of information about our state s finances. The GAO aggregates and analyzes this information to provide insight into how the government spends our taxpayers dollars. 8

12 FUND BALANCE BASICS FUND TYPES Governmental Fund Types are used to account for most typical governmental functions. The acquisition, use and balances of the state's expendable financial resources and the related current liabilities (except those accounted for in proprietary funds), are accounted for through governmental funds. There are five types of governmental funds: General Funds are used to account for and report all financial resources not accounted for and reported in another fund. The general fund is the operating fund of the agency. Special Revenue Funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects. Examples of special revenue funds include the irrigation works construction fund, 911 enhancement fund, job training incentive program fund (JTIP), lottery tuition fund, highway improvement bond fund and the oil reclamation fund. Capital Projects Funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays, including the acquisition or construction of capital facilities and other capital assets. Examples of capital projects funds include the public school capital outlay fund and the severance tax bond appropriations fund. Debt Service Funds are used to account for and report financial resources that are restricted, committed or assigned to expenditure for principal and interest. Examples include severance tax and general obligation bond debt service funds, mortgage housing bond debt service funds and the GRIP road bond debt service funds. Permanent Funds are used to account for and report resources that are restricted to the extent that only earnings, and not principal, may be used for purposes that support the reporting government s programs. Permanent funds are maintained for the benefit of the government or its citizenry. Two New Mexico examples at the state level are the children s trust fund and children s trust fund next generation within the Children, Youth and Families Department. Proprietary Fund Types are business-like funds for transactions. These funds are considered selfsupporting in that the services rendered by them are generally financed through user charges or on a cost reimbursement basis. There are two types of proprietary funds: Enterprise Funds are used to account for any activity for which a fee is charged to external users for goods or services. Examples include many revolving loan funds like the water project fund and the funds created for different types of activities of the New Mexico Mortgage Finance Authority. Internal Service Funds are used to account for the provision of goods or services by one department or agency to other departments or agencies of the state, or to other governmental units, on a costreimbursement basis. Internal service funds should only be used if the state is the predominant participant in the activity. Examples include the funds through which the Department of Information Technology accounts for its telecommunications services to other state agencies. This report combines the two types of proprietary funds for ease of understanding. 9

13 OVERVIEW OF FUNDS BY FUND TYPE The 91 state agencies the OSA reviewed had a total of 431 funds. Although more than half (63 percent) of funds were special revenue funds, the balances in those funds comprised only 12 percent of overall fund balance. In contrast, the 62 proprietary funds accounted for the largest share with 40 percent of overall fund balance. Number and Percentage of All Funds, by Fund Type in FY16 (431 Total, excluding General Fund) Dollar Value of Funds, by Fund Type in FY16 (excluding General Fund) 10

14 UNDERSTANDING FUND BALANCE CLASSIFICATION GOVERNMENTAL FUNDS Under Government Accounting Standards, all fund balances must be classified by the degree of restriction on their use. The following chart illustrates these fund balance classifications. Fund Balance Classifications in Governmental Funds Non-Spendable: This portion of the fund is not in spendable form (for example, inventories) or is legally required to remain intact. Restricted: The constitution, statute or third parties have limited this portion of the fund to a use for a purpose more specific than the fund as a whole. Committed: The agency s highest level of decision-making authority has set aside this portion of the fund for a purpose more specific than the fund as a whole. Assigned: This portion of the fund may be used for any purpose permitted for the fund as a whole. Unassigned: In General Funds ONLY, this is the residual classification and funds can be used for any purpose within the agency s purview. In other governmental funds, any deficit is classified as unassigned. Example: Human Services Department General Fund, FY16 11

15 OVERVIEW OF FUNDS BY FUND BALANCE CLASSIFICATION GOVERNMENTAL FUNDS The 89 state agencies OSA reviewed had a total of 369 governmental funds, with balances that were distributed as follows. An overwhelming majority (94 percent) of the money in governmental funds is restricted, and another three percent is committed. The prevalence of restricted funds suggests that the majority of the money sitting unspent in funds is awaiting some other action before it can be put to use for a purpose that has already been determined. This may occur for a variety of reasons; for example, because an appropriation was inadequate to fund a project fully, a project is in the preliminary stages, an agency is awaiting matching funds from the federal government or a local agency, funds are accumulating for a particular purpose more quickly than they can be spent or the action requires additional approvals. Amount and Percentage of Fund Balance in Governmental Funds, Excluding the State General Fund, By Classification, in FY16 Non-Spendable: $81,244,876, 3% of state governmental fund balances are not in spendable form (for example, inventories) or are legally required to remain intact. Restricted: $2,262,626,694, 94% of state governmental fund balances are limited by the constitution, statute or third parties to a use for a purpose more specific than the fund as a whole. Committed: $76,643,728 3% of state governmental fund balances have been set aside for a purpose more specific than the fund as a whole by the agency s highest level of decision-making authority. Assigned: $8,074, % of state governmental fund balances may be used for any purpose permitted for the fund as a whole. Unassigned: (-$15,585,960) The amount of state governmental fund balances that can be used for any purpose within the agency s purview aggregate to a negative amount. Less than one percent of governmental fund balances statewide are available for general purposes. This is an expected result because unassigned funds generally revert to the State General Fund at the end of a fiscal year. Negative balances may result from a variety of causes. Sometimes, an agency must expend money from a special revenue fund before seeking reimbursement. This may suggest an accounting question as to whether the agency should have recognized the revenue as a receivable when the expenditure occurred. In other funds, the unique nature of their assets and liabilities results in a negative balance. For example, the General Services Department maintains several risk management funds that post negative balances because of estimated losses on claims. 12

16 UNDERSTANDING NET POSITION CLASSIFICATION PROPRIETARY FUNDS In proprietary funds, the balances are known as net position rather than fund balance. Net position focuses on net worth, taking into account full accrual as opposed to fund balance, which focuses on liquidity, taking into account what is available within the scope of the modified accrual concept. The following diagrams illustrate the net position classifications for proprietary funds. Fund Balance Classifications in Proprietary Funds Net investment in capital assets: The net amount invested in capital assets (original cost, net of accumulated depreciation and net of capital-related debt). Restricted: The amount of net position for which limitations have been placed by creditors, grantors, contributors, laws, and regulations. Internal actions through enabling legislation (which is legally enforceable) and constitutional provisions may also lead to restricted net position. Unrestricted: The amount of net position that is not restricted or invested in capital assets, net of related debt. Example: New Mexico Finance Authority Public Project Revolving Fund, FY

17 OVERVIEW OF FUNDS BY NET POSITION CLASSIFICATIONS PROPRIETARY FUNDS The 91 state agencies the OSA reviewed had a total of 62 proprietary funds with balances totaling over $1.6 billion. Similar to the government funds, the data from proprietary funds shows that nearly all (88 percent) of net position is restricted, meaning that this position has limitations on it from creditors, grantors, laws, regulations or constitutional provisions. Additionally, 6 percent represents net investment in capital assets. Some examples of net investment may be computer or telecommunications hardware in the Central Telephone Services proprietary fund of the Department of Information Technology, or vehicles in the General Services Department s State Transportation Pool proprietary fund. Although some agencies have positive unrestricted balances with respect to the uses permitted in the proprietary fund, those balances are still restricted to those specific uses. In other words, that money is not generally available for agency operations. Amount and Percentage of Positive Net Positions in Proprietary Funds, by Classification, in FY16 Net investment in capital assets: $104,257,017, 6% is invested in capital assets (original cost, net of accumulated depreciation and net of capital-related debt). Restricted: $1,439,451,849, 88% is subject to limitations placed by creditors, grantors, contributors, laws, and regulations. Internal actions through enabling legislation (which is legally enforceable) and constitutional provisions may also lead to restricted net position. Unrestricted: $98,394,156, 6% is not restricted or invested in capital assets. 14

18 FUND BALANCE BASICS CAPITAL OUTLAY BEST PRACTICES Standard financial operations typically require certain amounts of dollars to be held as fund balances. Typically fund balances are used to offset funding gaps between fund expenditure and fund reimbursement, similar to the way a business would utilize working capital. Funds are also commonly used to store dollars for purposes of future spending, contingency spending and future debt repayment. This practice is similar to how a business would use various types of savings and investment accounts. Considering these uses, there is nothing inherently wrong or right about accumulating funds balances. However, just as with a business, agencies have a responsibility to control fund balances to keep those dollars working toward their intended purpose and into the economy. Put another way, every dollar held in a capital outlay fund is a dollar that is not circulating in the economy. Considering this basic tenet of economics, it is always prudent to consider standard best practices for the management of fund balances. In New Mexico, capital project funds are most vulnerable to balance accumulation. Capital projects are typically fixed asset investments, including roads, bridges, water projects, schools, buildings, construction, environment projects, long-term technology or other investments designed to last at least 10 years. Capital projects are typically performed by private contractors or through state purchasing of goods and services. Because capital projects may require initial investment in planning, matching funds from other sources and complex procurement issues, agencies often accumulate fund balances while navigating hurdles and delays. The following recommendations are based on standard best practices of financial management as applied to New Mexico public fund management and capital investment. They include recommendations to address this challenge in the different branches of government and stages of project development. The Legislature and local legislative bodies should: Fully Fund Projects Up Front Historically, infrastructure projects have been funded on a piecemeal basis. The infrastructure funding process involves a negotiation process among the Governor, the Legislature and agency capital requests or appropriation requests. The process often results in funding projects in small, affordable chunks in the hopes that, over the course of several years, projects can be fully funded. However, project costs often escalate over time, and even project needs can change over the course of the years it takes to fund projects in this manner. To ensure funding matches actual cost estimates, legislators should attempt to fully fund projects within a single appropriation once the planning and design phase is complete. Require Matching Funding to Be In Place Relatedly, many projects are partially funded as part of a project funding package that includes multiple funding sources such as dollars from federal, state and local governments. While rational, this practice can also lead to suboptimal fund balance accumulation and project underfunding. Although federal and local laws and regulations can be a barrier, securing state funding for projects after matching funds are in place can mitigate this problem to the extent possible. Monitor Projects Centrally Today in New Mexico, no single entity or individual has a comprehensive list of all the state-funded infrastructure projects in progress. The information is spread across 500 plus funds and many different state and local agencies. Furthermore, many projects are tied up at the local level, into which the state has low visibility. Accordingly, the public and policy makers cannot effectively monitor the progress of already funded projects. This also makes any kind of accountability extremely difficult. 15

19 FUND BALANCE BASICS CAPITAL OUTLAY BEST PRACTICES (continued) Include Specific Expiration Date or Reversion Dates Unspent fund balances contain slices of appropriations from different historical years. Some funds may be decades old, although most funds are from more recent appropriation cycles. Many infrastructure funds typically have a three-year window, but there are no limits on the number of times a project can be reauthorized in order to extend this time period. Furthermore, agency requirements may vary widely. As result funds can accumulate, unchecked, for years, unless there is direct executive or legislative action to move those funds or revert them back to the general fund for future appropriation. Best practices recognize that it is very important to establish and enforce any automatic reversion or expiration dates built into appropriations that may prevent the completion of projects. Best practices also acknowledge that at some point, for dollars allocated to a project that are not encumbered, reauthorization must cease and the funds must, at some point, revert and be used for other purposes. Having a firm drop- dead date to spend dollars would go a long way toward ensuring that unspent funds are recycled back into the state appropriation process. Follow Existing Legislative Guidelines In 2016, the New Mexico Legislative Finance Committee collaborated with the Association of Counties, New Mexico Municipal League, and Department of Finance and Administration to outline guidelines for the prioritization and management of capital projects. Currently these guidelines are located online here. However, these guidelines, while strongly encouraged, are not mandatory. The guidelines applicable to the legislative authorities include: Require grantees to justify outstanding projects with no activity or expenditures to determine if the projects need additional funding to complete, or if funds should be reauthorized for a different purpose. Leverage state funds with local, federal or other sources when possible to fully fund a complete project or usable phase. Consider that even minimal local contribution is known to improve project completion and success. Combining legislator funding to complete large regional projects is encouraged. Fund projects listed in Local Infrastructure Capital Improvement Plans (ICIP). All projects should be planned and prioritized to match demand for funds with supply of funds and to best utilize all funding sources available. Before a project is funded, the grantee should be consulted to ensure the project is a local priority and the operational and maintenance costs can be adequately addressed. Water projects should be funded using criteria established by existing state programs such as: Safe Drinking Water Act of 1974, Clean Water Act of 1977, and Water Project Finance Act. Funding for economic development purposes pursuant to the Local Economic Development Act (LEDA) requires special project documentation. The Legislative Council Service requires that the project participation agreement accompany the request for drafting. Non-Governmental Funding: If a capital request is from a non-governmental entity (nonprofit or private), require requestor to obtain prior written confirmation from an eligible political subdivision agreeing they will own the capital asset and are willing and able to enter into a lease or operating agreement to comply with the Anti-Donation Clause of the New Mexico Constitution. The State Board of Finance will not issue bonds until the project demonstrates anti-donation compliance. 16

20 FUND BALANCE BASICS CAPITAL OUTLAY BEST PRACTICES Any executive branch agency administering capital outlay (state capital outlay bureau, agencies like the Environment Department, mayor s offices, NMFA, OSI) should: Ensure Local and State Priorities are Aligned Another key best practice for capital funding and expenditure is to ensure that before a project is funded, the required decision makers have priorities aligned. Often state-level appropriations may come to local governments that have differing priorities. When the state and local body have different infrastructure priorities, it greatly increases the likelihood that funds languish unspent. Follow Existing Legislative Guidelines As described above, the Legislative Finance Committee guidelines applicable to the executive branch agencies and their partners include: Demonstrate project will reduce potential or actual health and safety hazards and liability issues or will provide sustainable infrastructure for community needs. Demonstrate all necessary plans, funds, and resources will be in place to complete a project within a reasonable timeframe (12 to 18 months) following enactment of the capital bill. Leverage state funds with local, federal or other sources when possible to fully fund a complete project or usable phase. Consider that even minimal local contribution is known to improve project completion and success. Entities receiving capital outlay must be compliant with the State Audit Act and Executive Order Before a project is funded, the grantee should ensure the project is a local priority and the operational and maintenance costs can be adequately addressed. Establish a $50,000 minimum level for projects funded from severance tax bonds, unless a lesser amount is needed to complete a project. Larger projects are more likely to realize savings to state and local governments, reduce future year operating expenditures, provide for completion of projects in a timely manner, and streamline state and local administrative efforts. Severance tax bond projects, after authorized, must meet expenditure timelines required by the Internal Revenue Service Code of Confirm that the project will be able to encumber 5% of funds within six months of bond issuance and expend 85% of funds within three years of bond issuance. Water projects should be funded using criteria established by existing state programs such as: Safe Drinking Water Act of 1974, Clean Water Act of 1977, and Water Project Finance Act. Monitor Projects Centrally and Cut Red Tape Today in New Mexico, no single entity or individual has a comprehensive list of all the state-funded infrastructure projects in progress. The information is spread across 500 plus funds and many different state and local agencies. Furthermore, many projects are tied up at the local level, into which the state has low visibility. Accordingly, the public and policy makers cannot effectively monitor the progress of already funded projects. This also makes any kind of accountability extremely difficult. 17

21 FUND BALANCE BASICS CAPITAL OUTLAY BEST PRACTICES (continued) Many local governments have expressed frustration at the amount of time and paperwork necessary to draw on state capital funds. Likewise, many agencies administering capital projects have expressed frustration at the inaccuracies and slow submission of that paperwork. The bottom line is that wherever it is possible to cut red tape and increase technical assistance without compromising accountability, the executive branch should work to do so. Based on research conducted at OSA, the fund balance report is the most comprehensive report of infrastructure dollar allocations in the state of New Mexico. However, OSA figures are limited to the level of detail that is provided in the annual audit. Because agencies are not required to share their project listings in their annual audits, there is currently no centralized reporting of pending construction projects. The creation of a task force or czar position to monitor and track these projects and help cut through red tape with respect to permitting and agency coordination would provide needed transparency and accountability to the process. Conduct Project Audits Measuring progress of any given pending capital project in the state varies from agency to agency, and often such responsibility lies with a local government entity or school district. As a result there is no uniform or trackable method to determine overall progress toward completion, or lack thereof, for projects. Embedding progress audits into the appropriation, or requiring capital project audits by administrative agencies, would systematically ensure appropriate accounting and measurement of progress for capital projects. To learn more about capital outlay, visit: Legislative Finance Capital Outlay and Debt Department of Finance Capital Outlay Bureau 18

22 NEW MEXICO S TEN LARGEST MUNICIPALITIES TOTAL CAPITAL PROJECTS FUNDS BALANCES IN FY16 Municipality Total Capital Projects Fund Balances Capital Projects $ Per Capita* Albuquerque $328,191,667 $587 Las Cruces $56,332,602 $554 Alamogordo $39,341,405 $1,279 Santa Fe $29,730,365 $354 Carlsbad $18,839,778 $651 Roswell $13,194,842 $272 Rio Rancho $11,281,401 $120 Hobbs $3,827,600 $100 Farmington $3,508,742 $82 Gallup $731,191 $31 Grand Total $504,979,593 In addition to state agencies, New Mexico s largest municipalities have a significant amount of money in capital projects funds. Municipalities use capital projects funds for various purposes, from basic street improvements to major infrastructure projects like airports. It is also important to note that funding for these project funds often originates from various sources, such as local gross receipts tax revenues, state bond proceeds, and federal grants. For example, the City of Las Cruces capital grant projects fund provides for the financing and construction of projects at the airport and various other grant projects. Its source of funding is from federal and state grants, and local matching funds. The table above may reflect a number of different dynamics. Municipalities may accrue money in capital project funds while they wait for approvals, architectural and engineering work, matching funds or public notices. It is possible that smaller municipalities are inherently more efficient, given the lower capital projects balances in less populated municipalities. In contrast, Rio Rancho, the third largest municipality in the state, has a considerably lower capital projects balance per capita than its larger counterparts, Albuquerque and Las Cruces. Finally, capital project funds may not be exclusively for new projects. For example, Alamogordo has two capital projects funds which are funded primarily by a fraction of municipal gross receipts increments authorized by the City Commission in 1986 and The monies in these funds are dedicated for the costs of maintenance and repairs related to water treatment facilities, and construction and improvements of municipal streets, roads and bridges, so large balances do not necessarily signal a problem. *The OSA used 2015 population data to generate per capita figures. 19

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24 Highlights Excluding the State General Fund, the biggest share of the state s fund balances over $1.6 billion resides in proprietary funds, which are the enterprise and business funds of the government. This is followed by capital project funds, which total over $1.2 billion. Overall fund balance has decreased, as did special revenue fund balances. Meanwhile, proprietary, general, capital projects and debt service fund balances have all increased. However, the detail at the agency and fund levels tell a more complex story. While many individual fund balances and agency aggregate fund balances have increased, many others have decreased. Changes in Fund Balance between FY14-FY16, By Fund Type 21 Changes in Ten Largest Fund Balances between FY14, FY15 and FY16 Fund Name Fund Type FY16 Balance FY15 Balance FY14 Balance Board of Finance Bond Funds Capital Projects $1,151,286,904 $1,161,453,760 $1,190,950,957 Unemployment Insurance Trust Enterprise Fund Proprietary $409,091,758 $215,981,007 $125,193,665 Wastewater Facility Construction Loan Fund Proprietary $300,344,024 $291,071,684 $275,150,820 Public Project Revolving Fund (PPRF) Proprietary $286,347,610 $296,654,476 $241,549,000 New Mexico Mortgage Finance Authority Funds Proprietary $253,520,000 $246,098,000 $241,549,000 Department of Transportation General Fund - State Road Fund General $167,371,619 $136,270,417 $176,412,887 Drinking Water State Revolving Loan Fund (DWSRF) Proprietary $139,722,604 $129,295,623 $113,786,463 Department of Information Technology Equipment Replacement Fund Proprietary $48,569,397 $43,885,536 $39,726,714 Department of Transportation 2014A Bond Project Capital Projects $47,509,155 $77,059,916 $80,002,398 New Mexico Finance Authority Water Trust Board Fund Proprietary $43,016,131 $37,485,323 $37,720,991