SANTA FE – New Mexico entered the 2016 budget year in seemingly sound financial shape, with more than $613 million – or roughly 10 percent of state spending – available in various accounts generally described as reserves.
Just over a year later, the state has spent all the money from its primary reserve fund, with calls for the remaining accounts to be drained during a special legislative session that’s expected to be called next month.
And even that drastic step might not be enough to avoid steep spending cuts and other budget-balancing measures, as the state would still be facing a $370 million projected shortfall for the budget year that began in July.
What happened?
In basic terms, New Mexico “over-budgeted” by more than $1 billion in the just-completed and current budget years, as plummeting oil and gasoline prices caused the state’s tax collections to end up falling far short of what had been expected, according to recent estimates.
It’s a pattern that’s been repeated regularly, as a Journal analysis of recent state revenue collections shows volatility – often caused by energy industry price fluctuations – has been as much of a constant in New Mexico as the annual green chile harvest.
In just the past 10 years, there have been three budget years – 2009, 2010 and 2016 – in which recurring revenue levels have fallen by more than 8 percent from the previous year’s levels. And the state ranked eighth nationally in tax revenue volatility over a recent 20-year period, according to the Pew Charitable Trusts.
Such decreases force adjustments to government spending, revenue collections or both. In the mid-1980s, plummeting energy prices led to the Legislature’s approving tax increases backed by then-Gov. Garrey Carruthers. More recently, a national economic downturn that started in 2009 led to budget cuts, more tax increases and five unpaid furlough days for most state workers.
Sen. John Arthur Smith, D-Deming, chairman of the Senate Finance Committee, said this budget crunch could be worse than other recent budget shortfalls because many one-time fixes have already been used and there’s no federal stimulus funding on the horizon, as was the case in 2009. Lawmakers have also approved several recent tax cuts aimed at improving the state’s business climate.
“It’s more challenging because we had other ways of getting assistance,” Smith said. “There’s no federal money to bail us out this time.”
Meanwhile, House Speaker Don Tripp, R-Socorro, said the state’s current budget crunch shows the importance of diversifying the state’s economy so that New Mexico is less reliant on the energy industry.
“It’s not going to get a lot better in the oil and gas industry in the next couple of years,” Tripp said in an interview.
He said he’s opposed to any attempts to take available funds from existing economic development programs, including a “closing fund” aimed at deferring the costs of business expansions and relocations that has been dramatically beefed up in recent years, to balance the budget.
“It would be like a carpenter selling his tools off to pay his monthly bills” if legislators were to reallocate dollars in the fund, Tripp added.
Oil, gas impact
New Mexico lawmakers approve annual budgets based on revenue estimates that are compiled by a team of legislative and executive branch economists.
The revenue estimates have missed the mark by a wide margin in the 2016 and 2017 budget years – estimates released this week were revised downward by a combined $654 million from January – and legislators have complained the inaccuracies make it difficult for them to approve budgets.
Part of the problem might stem from oil and gas price fluctuations having a bigger-than-expected impact on regional economies.
While each drop of a dollar in the price of a barrel of oil means a reduction of about $9.5 million for the state’s coffers, that number doesn’t count overall economic slowing in the state’s oil and gas producing regions. One example of that trend is decreased tax collections from various businesses that rely on the energy industries – including construction, hotels and other services.
“We have sort of underestimated the impact of that industry on our economy,” said Rep. Stephanie Garcia Richard, D-Los Alamos, a member of the House Appropriations and Finance Committee. “There’s actually more of a ripple effect than we had previously determined.”
Economists who put together the revenue estimates may make changes to how they gauge the impact of oil and gas price fluctuations in the coming months, but accurately predicting future revenue collections will remain a tough task.
That mix of uncertainty and volatility is why many New Mexico governors, including Gov. Susana Martinez, have pushed to keep healthy budget reserves, which can be used in case approved spending exceeds revenues and are key to maintaining the state’s bond ratings.
But even robust reserve funds can be depleted quickly. That’s what has occurred in New Mexico since last year, with $617 million from the state’s primary reserve fund being transferred to the state’s main checking account in the 2016 budget year alone.
While some money was also funneled into the primary reserve fund during that time, the fund ended the year with a negative balance. That will have to be backfilled by legislators for auditing purposes, and an account created in response to a 1999 settlement with big tobacco companies is being eyed as one way of accomplishing the task.
However, that would leave little money in the tobacco fund, and the state would still face a projected shortfall for the current budget year.
More trouble ahead
In addition to the shortfalls in the current and just-ended budget years, more budget troubles are on the horizon.
Once the budget gaps for the 2016 and 2017 are resolved, the amount of revenue projected to be available for the coming fiscal year – the one that starts in July 2017 – is $210.9 million less than approved spending for the current year.
House Majority Whip Alonzo Baldonado, R-Los Lunas, said the state’s looming budget crunch will likely require across-the-board spending reductions.
“It’s in front of us – we’ve got to confront it,” Baldonado said.
Meanwhile, Senate Finance Committee Chairman Smith, one of the most respected budget voices in the Legislature, said some economic experts are already suggesting that the revenue estimates unveiled last week during a meeting of the Legislative Finance Committee in Red River are too optimistic in regard to future years.
Even if they end up being accurate, he said, the task facing lawmakers – in a year in which all 112 seats in the House and Senate are up for election – is a daunting one.
“Those numbers we’re trying to overcome are pretty big numbers,” Smith said.
Finance and Administration Secretary Duffy Rodriguez, the Martinez administration’s top budget official, said New Mexico officials plan to look at ways other energy-reliant states deal with big revenue swings.
One idea could be emulating Utah, which has a rainy day fund in which surplus revenue is deposited in cash-rich years. That money can then be used to offset revenue declines.
However, the most obvious way to ease the state’s reliance on the oil and gas sectors may also be the toughest to accomplish.
“The best way to protect New Mexico in the long term is to strengthen and diversify our private sector economy,” Rodriguez told the Journal .
Some Democrats, including Garcia Richard, agree but say the latest revenue numbers show that New Mexico is still too reliant on the energy industry and hasn’t figured out how to accomplish economic diversification.
“I think we’ve taken the first timid steps toward diversification, but we’ve yet to really jump-start the economy,” Garcia Richard said.
