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Saturday, July 26, 2008

Lawmakers Worry About Revenues for Special Session

By Barry Massey
Associated Press
       SANTA FE — Natural gas and oil prices have tumbled recently, causing members of the Legislature to worry that the state's projected $400 million revenue windfall may be melting away like an ice cube on a hot summer day.
    The volatile energy prices are raising questions whether the state should spend nearly $300 million of the one-time surplus money for a tax rebate, other economic assistance and highway financing as proposed by Gov. Bill Richardson.
    Recent energy price changes could translate into an annualized revenue drop for New Mexico between $200 million and $300 million, lawmakers say.
    "This looks very critical to me," Rep. Luciano "Lucky" Varela said Friday.
    "We need to monitor this on a daily basis and see where we are headed. If it looks like it's going to level off or continue to go down, then I think we have serious problems," said Varela, a Santa Fe Democrat who is vice chairman of the Legislative Finance Committee.
    But Richardson remains optimistic about the state's economic outlook and he's not backing off his plan for a special session starting Aug. 15.
    "I've been dealing with pessimists in the Legislature, economists ... that keep telling me the economy is not going to grow and we should be cautious. And I've been bold," Richardson said at a news conference on Thursday.
    He maintained that his spending proposals for the special session were "prudent."
    Some in the Legislature who deal with budget and tax issues aren't so certain, however.
    "I think it's more of a time that we had better be careful rather than sorry," said Sen. John Arthur Smith, a Deming Democrat and LFC chairman.
    According to a financial forecast issued earlier this month, revenue collections should be almost $400 million higher in the current budget year than previously expected. That pool of money is what Richardson proposes to use for most of his spending initiatives, including a $163 million one-time tax rebate.
    According to administration estimates, the state could spend nearly all the windfall and still maintain prudent cash reserves equal to about 10 percent of spending.
    The projected windfall is mostly because of taxes and royalties from oil and gas production. As prices go up, New Mexico collects more money.
    The revenue projections were based on a host of economic factors, including average natural gas prices of $11.50 for each thousand cubic feet of gas and oil prices of $134 a barrel.
    But prices have dropped sharply in the past few weeks — reaching $9.55 as of Thursday for the price of gas at the Henry Hub pipeline in Louisiana, according to a Web site operated by the Petroleum Recovery Research Center at New Mexico Institute of Mining and Technology. Prices were above $13 per unit of gas at the start of July.
    Gas prices in New Mexico tend to be lower, $8.71 per unit of gas Thursday at the Blanco Hub in New Mexico's San Juan Basin.
    Gas prices are particularly critical for state government. Each 10-cent change in price translates into about $12 million in revenues for the state's main budget account, according to the LFC. In contrast, each $1 change in the price of oil means about $4 million in revenue.
    A $2 drop in the unit price of natural gas from the revenue estimate — roughly what's happened recently — would represent about a $240 million decline in revenues annually for the state.
    Oil prices have dropped to their lowest point in weeks — down to about $123 a barrel Friday on the New York Mercantile Exchange. That's about $11 below the revenue estimate average — potentially a $44 million annual revenue drop.
    The recent price declines in oil and gas combined could mean a more than $280 million revenue drop for the state.
    However, energy prices typically have seasonal fluctuations. Natural gas prices, for example, usually increase during the winter because of customer demands from home heating. Futures prices for natural gas also have been dropping and stood at $9.32 for each unit of gas for August delivery and almost $10.43 for January 2009 delivery, as of Thursday.
    Smith and Varela said an updated revenue forecast by administration and legislative economists probably is needed before the special session.
    If current prices remain relatively unchanged, Smith said, "It would seem to me that it would not be prudent to move ahead with a special session if it stays in that range."
    Richardson also wants lawmakers to consider a universal health care proposal during the special session.
    The governor and Legislature are projected to have a pool of $392 million in "new money" in the next budget year to pay for budget increases — such as health care and schools. The revenue forecast for the 2010 fiscal year was based on lower energy prices — natural gas averaging $9.50 per unit and oil at $125 a barrel.
    However, Varela said falling energy prices and the slumping national economy raise questions whether the state can sustain an increase in spending in the next few years to expand health care coverage for uninsured New Mexicans.
    Richardson says lawmakers should move ahead with his initiatives for the special session.
    "My policies are working. Some volatility, maybe so," the governor said of energy prices. "But we've always been able to afford what we need."

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