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Copyright © 2019 Albuquerque Journal
Second in a five-part series: Behind the Boom
ARTESIA – Three years ago, New Mexico lawmakers were scrounging for dollars to patch a gaping budget hole.
But things have changed quickly, and the state is now swimming in revenue – an estimated $7.8 billion in the current budget year – that’s derived mostly from an oil drilling boom in the state’s southeast corner.
The windfall has already allowed lawmakers to increase teacher salaries, restore depleted state cash reserves, expand a high-profile film incentive program and earmark nearly $400 million for highway construction and repairs around New Mexico.
House Speaker Brian Egolf, D-Santa Fe, said the record revenue has also allowed lawmakers to increase spending on public schools – in response to a landmark court ruling – and expand services to New Mexicans with developmental disabilities.
“It’s beyond our wildest expectations from a budgetary perspective,” Egolf told the Journal.
However, the bonanza has also prompted growing debate at the Roundhouse about how the oil revenue should be spent – and how much of it should be set aside.
Rep. Jason Harper, R-Rio Rancho, said the state should hold at least 30% of spending in cash reserves – roughly $2 billion – in case projected revenue for the coming budget year does not materialize.
Harper said there are indications that oil production in the Permian Basin is beginning to slow down, which would affect state revenue growth.
“Future legislators and governors are going to be cursing our names,” he said.
He and some other Republican lawmakers have proposed returning some of the oil-driven budgetary windfall to taxpayers in the form of rebates.
“I can’t imagine anybody in the state not wanting to pay a little less in taxes or not wanting to get a little more money coming to them,” House GOP floor leader James Townsend said during an interview at an Artesia coffee shop.
But Democratic legislative leaders have other ideas on how the money should be spent.
Egolf said he’s not fond of the idea of returning the money directly to taxpayers via rebates, saying the revenue windfall can make more of an impact if spent on public schools or other state programs.
“Every time it’s been tried, it hasn’t made much of a difference in economic activity,” he said.
Gov. Michelle Lujan Grisham, a Democrat who took office in January, said that as a taxpayer, she understands the appeal of a rebate check, but said she’s not sure such money would actually be invested in growing New Mexico’s economy.
The first-term governor has in recent months announced several initiatives that would be funded by the current budget windfall, including a New Mexico endowment fund for early childhood programs and an expanded college scholarship program that would essentially make higher education free for all state residents who meet certain qualifying criteria.
If approved, Lujan Grisham said the proposals would bolster New Mexico’s economy in future years and address the state’s chronically high poverty rates, while still keeping cash reserve levels of 20% or higher.
“I have an opportunity that we will continue to work diligently to not squander,” she said during a recent interview in her office on the fourth floor of the state Capitol.
“I’m the governor of a state I believe in, and I feel really good about the circumstances we’re in,” Lujan Grisham later added.
Clouds on the horizon
While state officials have talked for years about the need to diversify New Mexico’s economy, the state is currently more reliant on oil and natural gas revenue than ever before, at least from a budgetary standpoint.
Oil and gas revenue now makes up about 38% of direct state revenue collections, and roughly 47% of all revenue sources, according to the Legislative Finance Committee.
In addition, two counties in New Mexico’s oil patch – Eddy and Lea counties – accounted for 90% of the state’s overall gross receipts tax revenue growth during the 2019 budget year, according to LFC figures.
“The Permian right now looks like the richest place in the world,” LFC director David Abbey said during a hearing earlier this year.
But there are some reasons for concern.
The last time New Mexico saw revenue levels exceed a 10-year rolling average for several years in a row was in 2006 through 2008. Those years were followed by a steep economic downturn that led to sweeping spending cuts, state worker furloughs and other budget-balancing measures.
Also, some experts have expressed concern that newly drilled oil wells are becoming less productive, more rapidly than in past years. That means a slowdown in drilling could cause oil production levels to drop precipitously.
“I don’t want to sound like a pessimist, but this could all go away in an instant,” said Jim Peach, a retired economics professor at New Mexico State University who has periodically testified before legislative committees in recent years.
He said lawmakers would be wise to tackle issues that would not require multi-year funding commitments, such as overhauling New Mexico’s gross receipts tax code – by lowering the base rate and eliminating tax breaks – and shoring up the state’s two public retirement funds, which both have high unfunded liabilities.
“We could fix the tax system now, and it would be very difficult to do that during a downturn,” Peach said, adding that the state’s revenue windfall would provide a cushion in case the fiscal impact of the tax changes proves difficult to predict.
Attempts in recent years to overhaul the gross receipts tax system have been unsuccessful at the Roundhouse, but some top-ranking lawmakers have suggested a new push could be launched during the upcoming session.
Sharing the wealth
New Mexico is not the only governmental entity that has faced weighty decisions over energy-driven revenue windfalls.
Alaska gives some of its oil wealth to qualifying state residents in the form of annual dividend payments, ranging from $845.76 per person in 2005 to $2,072 per person in 2015,when oil prices were high.
But that has led to problems during bust cycles, and the state has been struggling to pull itself out of a multi-year recession.
In contrast, Norway puts most of its oil money in a sovereign wealth fund that’s invested outside of Norway and has grown to roughly $1.1 trillion – or about $200,000 per each resident of the Scandinavian country.
But some Norwegians have questioned why more of the money is not returned to citizens, either directly or via government spending.
To date, New Mexico has stuck to a middle path of sorts, as it has a permanent fund that has grown rapidly in recent years due to investment gains and oil revenue flowing into the fund.
In fact, the New Mexico State Investment Council oversees the world’s 35th largest sovereign wealth fund, recently ranking between the Ireland Strategic Investment Fund and a fund run by the nation of Oman, according to the Sovereign Wealth Fund Institute.
Specifically, the $19 billion Land Grant Permanent Fund makes an annual distribution for public schools and other beneficiaries based on a 5% rolling average of the fund’s value. The amount for the current budget year is an all-time high of $784 million.
State lawmakers also set up a “rainy day” fund in 2017 designed to save some of the revenue from cash-flush years for future use.
With the state’s coffers now bulging, some lawmakers and advocacy groups say the time is right to prioritize spending on public schools, even after education spending was increased by $446 million – or roughly 16% – during this year’s legislative session.
“Maybe we give it a lot of money – but we’ve never given it enough money,” Rep. Christine Trujillo, D-Albuquerque, said during a recent legislative interim committee hearing at the Roundhouse.
The push for more education dollars is playing out in both the Legislature and the courts, as the plaintiffs in a landmark lawsuit focused on whether New Mexico is meeting its constitutional requirement to provide a sufficient education to all students – particularly Native Americans, English-language learners and those with disabilities – have filed motions challenging whether the state has complied with a judge’s 2018 ruling.
Shifting political winds
While the oil boom has brightened spirits at the Roundhouse after several gloomy years of budgetary belt-tightening, it has also shifted the political dynamics at play.
Just as oil production levels were steadily increasing to unprecedented levels in New Mexico, Democrats swept all statewide offices in 2018 and expanded their majority in the Legislature.
Egolf, who has traveled several times to both southeast New Mexico and Texas to meet with oil industry officials, said that has prompted a mutual acceptance, albeit a wary one, between top-ranking Democrats and the oil companies that have historically been aligned with Republicans.
In fact, House Democrats’ designated legislative caucus committee got a $5,700 campaign contribution this year from energy giant Chevron, which also donated to Lujan Grisham’s gubernatorial campaign last year, and another $5,000 from Conoco Phillips.
At the same time, oil companies have continued to make big campaign contributions to GOP candidates and committees, too.
But the oil boom is also fueling plenty of political thunder.
President Donald Trump, during a September campaign rally in Rio Rancho, touted New Mexico’s oil production and a spike in business applications statewide as proof of the effectiveness of his administration’s policies.
“The Democrats want to completely annihilate New Mexico’s economy,” Trump said.
Not surprisingly, Democrats have staunchly denied that charge, and Lujan Grisham said her nine-sector plan will diversify the state’s economy. Renewable energy is one part of that plan, but the governor said she sees the oil industry as a partner and predicted that oil and natural gas companies will invest in green industries in the not-too-distant future.
“For me, it’s less of a balancing act and it really is a complete energy transition,” Lujan Grisham told the Journal.
The first-term governor has also faced growing political pressure from climate change activists who say New Mexico is trading short-term wealth for long-term destruction.
She said she understands that emotional response, but that New Mexico will benefit from its leaders taking a long view.
“We’re addressing every single sector,” Lujan Grisham said. “I’m not picking on one and I’m not ignoring another because I think it has a budget impact.”
Total state spending growth in last two years
State revenue growth attributable to oil and gas in one-year period
Estimated NM cash reserve for current budget year