Copyright © 2022 Albuquerque Journal
SANTA FE – New Mexico’s revenue growth shows no signs of slowing down, with the state set to enter uncharted budget territory amid surging oil production, high inflation and robust wage growth.
Specifically, new estimates released Monday by executive and legislative economists project the state will have nearly $3.6 billion in “new” money available for the budget year that starts in July 2023 – a figure that represents the difference between forecasted revenue and current spending levels.
In August, the amount of projected new money was pegged at about $2.5 billion.
“With this revenue forecast, there’s an opportunity knocking at our door,” Sen. George Muñoz, D-Gallup, said during a Legislative Finance Committee hearing at the state Capitol. “No one in our state’s history has ever had this opportunity.”
Overall, projected revenue levels for the coming budget year, if they materialize, would mean total state revenue would have more than doubled over the last seven years.
The record-high revenue levels could also allow state lawmakers and Gov. Michelle Lujan Grisham to approve tax relief for New Mexicans, additional teacher salary increases and other initiatives during the 60-day legislative session that starts next month.
But effectively spending the money could prove challenging, due in part to a state labor participation rate that – at about 56% of the working-age population – is significantly below the national average.
In addition, roughly $310 million in allocated budget dollars went unspent during the most recent fiscal year, in part due to federal pandemic funds being used to supplant state dollars.
Finance and Administration Secretary Debbie Romero, the top budget official in the Lujan Grisham administration, said risks exist to the record-high revenue forecast, including supply chain shortages and the ongoing Russian invasion of Ukraine.
She also urged lawmakers to target spending during the upcoming legislation session at one-time needs like water projects, rural health care and broadband expansion – and to limit future spending obligations.
“Those are the once-in-a-lifetime things we should invest in while not growing our recurring budget,” said Romero, who plans to retire at the end of this year.
Both the Democratic governor and the Legislature are expected to release their own spending plans next month, before the start of the 60-day session. Lawmakers will then approve a budget for the fiscal year that starts in July 2023 once the session is underway.
Oil and gas leads
The revenue explosion that began in 2020 and has accelerated over the last two years has made New Mexico more reliant than ever on the oil and natural gas industries, with revenue from those extractive sources projected to make up nearly 40% of direct state revenue in the coming budget year.
In all, about two-thirds of the projected revenue growth for the coming budget year is expected to come from revenue derived from the oil and gas industries, according to legislative economists.
Sen. Steven Neville, R-Aztec, said advances in oil field technology, like horizontal drilling, have paved the way for increased production levels – propelling New Mexico to become the nation’s second-highest oil producer behind only Texas.
But he said if oil prices were to drop significantly for a prolonged time period, it could torpedo the state’s revenue collections.
“If that drilling stops, our revenues will plummet fairly quickly,” Neville said.
Meanwhile, the revenue explosion also means higher-than-expected inflows into several state trust funds.
That includes an early childhood trust fund – established in 2020 – that is projected to have its balance surge to nearly $5.4 billion by the end of the current fiscal year – and more than $7.8 billion by the end of next year.
Rep. Patricia Lundstrom, D-Gallup, the LFC’s chairwoman, said during Monday’s hearing that legislation will be proposed to add additional beneficiaries, such as behavioral health treatment programs, to the rapidly-growing fund.
The huge inflows into the early childhood trust fund and another state savings account could be just temporary, however, as the legislation that set up the funds calls for distributions to be made when excess oil and gas revenue exceeds a five-year rolling average.
With revenue levels reaching high levels for several consecutive years, that means the inflows might largely dry up by 2027, top state officials said.
“There may be an excess of money now – and a shortage of money later,” LFC economist Ismael Torres said.
While Lujan Grisham has not yet released a full spending plan for the coming year, the governor on Monday touted recent investments in affordable housing, education, public safety and health care.
She also said last week she would push for funding during the upcoming 60-day session to provide free school meals to all New Mexico public school students.
“Our fiscal success will enable us to double down on the investments we know are working and explore innovative new strategies that move the needle and move New Mexico up in the rankings,” Lujan Grisham said in a statement.
New Mexico legislators this year used the state’s revenue windfall, in part, to provide tax rebates of up to $1,500 per household and trim the state’s gross receipts tax rate for the first time in decades.
But lawmakers could face pressure to provide more financial relief in light of the new revenue estimates, with the chairwoman of the House Taxation and Revenue committee recently telling the Journal changes could be considered to both the state’s personal income tax code and the gross receipts tax.
One longtime state senator, Republican William Sharer of Farmington, said during Monday’s hearing that “now is the time for real tax reform.”
However, broad tax cuts could also mean less money available in future years, especially if the current oil-fueled revenue bonanza ends.
The 60-day legislative session is scheduled to begin Jan. 17.
2022 – $9.7 billion (up from $9.2 billion in August)
2023 – $10.8 billion (up from $9.8 billion in August)
2024 – $12 billion (up from $10.9 billion in August)