New Mexico’s $100 Million Miscount Threatens Rating
February 20, 2015
By Jennifer Oldham
(Bloomberg) -- New Mexico can’t balance its checkbook.
Cash in the state’s bank account is at least $100 million short of what’s recorded in the finance department’s ledger, pushing officials to adjust reserves by that amount, to about $650 million.
The blame, the current administration says, lies with the introduction of a new accounting system in 2006. The bookkeeping confusion comes at an inopportune time for the second-poorest state: New Mexico relies on levies on oil and gas extraction for 16 percent of its general fund.
Officials this month cut revenue projections for that area by about $223 million for this fiscal year and next amid dropping crude prices. Standard & Poor’s revised the state’s outlook to negative in November, citing the cash-management practices and dependence on energy.
“Budgets are really tight in New Mexico because of oil and gas prices, and it’s making that $100 million extremely meaningful,” state Auditor Tim Keller said from Santa Fe. “That’s $100 million we can’t use for schools, for health care or for roads.”
New Mexico is the only state where cash balances don’t match the money coming in and going out annually, according to Keller. It is one of four, along with Connecticut, Missouri and Montana, that flunked audits in fiscal 2013, said Sheila Weinberg, chief executive officer of Truth in Accounting, a Chicago-based nonprofit that analyzes state financial data.
In a letter accompanying New Mexico’s Comprehensive Annual Financial Report for that year, auditors wrote that they couldn’t express an opinion on its finances because they were unable to obtain sufficient evidence. The inability to reconcile the books prompted S&P to say that it may lower the state’s AA+ rating, the second-highest level.
“There’s a question about their financial position and what cash they have available,” said Sussan Corson, a New York- based director in U.S. public finance at S&P.
Tom Clifford, secretary for the Department of Finance & Administration, said a “rushed timeframe” for implementing the accounting system in 2006 under previous Governor Bill Richardson and deficient financial practices led to the miscount. “It needed more resources, more staff and to get agencies to coordinate more,” he said.
The imbalance went unaddressed until Republican Governor Susana Martinez took office in 2011 and found the annual financial report hadn’t been audited, Clifford said. “Not only was that a violation of state law, it’s a violation of accounting standards,” Clifford said. “This is the single highest priority of my department.”
Richardson’s representatives said they weren’t to blame for S&P’s revised outlook. The Democrat, governor from 2003 to 2011, “brought the state out of the technological dark ages” with the Statewide Human Resource, Accounting and Management Reporting System, Brian Condit, Richardson’s former chief of staff, said in an e-mail.
The system streamlined financial management and helped officials complete timely comprehensive annual financial reports, he said. New Mexico won a top grade from Moody’s Investors Service in 2010, data compiled by Bloomberg show.
“We have no idea how the Martinez Administration has managed the SHARE system for the more than four years it has been in charge of it or why they can’t balance their books,” Condit said. “They’ve had years to resolve whatever issues they are having. It’s time for them to stop blaming everyone else for their failures and to step up, take responsibility, and lead.”
Martinez’s office rejected that stance. “There is no dispute that the prior administration did not reconcile their books from 2006 until 2010,” Martinez’s communications director, Enrique Knell, said in a statement. “The problem has been addressed on a go-forward basis, but it’s still a challenge to go back in time to reconcile five years of state transactions.”
The state is working on its report for fiscal 2014, which ended June 30, Clifford said. That assessment should have been done by December, said Irfan Bora, director of the master’s program in governmental accounting at New Jersey’s Rutgers University.
“Unless you know what you’ve spent, it’s very hard to budget for the future,” Bora said. “It’s hard to believe during these times we would have something like this.”
The state of about 2.1 million people faces other threats to its credit standing. A weak economic recovery and pension expenses are also a concern, S&P said in November. New Mexico ranks second among states, tied with Wyoming, for reliance on oil and gas-tax revenue, according to S&P. Alaska places first.
New Mexico’s 6.1 percent unemployment rate in December, while the lowest since 2009, compared with 5.6 percent nationwide. About 22 percent of its residents live in poverty, compared with about 16 percent nationally, according to Census data. Only Mississippi has a higher rate, at 24 percent.
For Chris Ryon, a managing director at Thornburg Investment Management in Santa Fe, pension-funding levels are more important than the accounting quagmire. New Mexico’s funding ratio rose to 75.8 percent for the year ended June 30 from 72.9 percent for fiscal 2013, said Susan Pittard, chief of staff for the Public Employees Retirement Association of New Mexico.
That’s still below the 80 percent level that Ryon, who co- manages the $228 million New Mexico Intermediate Municipal Fund, said he prefers. “We are concerned with all the state pensions’ funding levels,” Ryon said.
Investors weren’t deterred at a bond sale this week. The state issued about $142 million of tax-exempt obligations, including a 10-year portion that priced to yield 2.13 percent, Bloomberg data show. The yield was about even with interest rates on top-rated municipal debt. Proceeds will finance work on facilities at public universities, senior citizen centers and libraries.
Disparities in financial record-keeping pervade the books of many of the state’s 100 agencies, making it almost impossible to reconcile accounts going back nine years, said Clifford, the finance secretary. More than 3,000 employees use the accounting system, which tracks the $15 billion state budget.
Officials commissioned a study on the variances between the state ledger and its bank accounts from fiscal 2007 through February 2013. Contractors could match only 2 percent of 160 million entries to a corresponding bank transaction, according to a Jan. 19 memo to lawmakers from Legislative Finance Committee staff.
Hundreds of thousands of transactions totaling more than $836 million are absent from the system, the study found. It estimated that the state could have from $76 million to $400 million less than its records reflect.
Clifford said he requested $3.4 million to create processes to properly record cash balances. It will take about two years to achieve a “clean” annual financial report, he said. Should the imbalance exceed $100 million, the gap would come out of reserves, he said.
“We were stunned about the situation we inherited,” Clifford said. “We think we have a good program to address it - - only time will tell if we are taking the right steps.”
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