‘Unprecedented’ times: NM revenue boom to generate $3.5B in new spending capacity

LAS VEGAS, N.M. — Seven years ago, New Mexico policymakers scraped every dollar out of their main reserve accounts to help the state government pay its bills.

A forecast shared Wednesday offers a remarkably different picture.

Fueled by an incredible oil and gas boom and strong consumer spending, New Mexico’s financial reserves reached about 52% of ongoing state spending this summer — a financial cushion of nearly $4.4 billion.

And the geyser is still spewing.

New Mexico legislators and Gov. Michelle Lujan Grisham can expect almost $3.5 billion in “new money” in next year’s budget — the difference between current spending levels and projected revenue for the fiscal year beginning next summer.

“We’re living in unprecedented, historic times in the state of New Mexico,” Wayne Propst, secretary of finance and administration, told lawmakers Wednesday.

He joined economists from the legislative and executive branches of government to share the revenue forecast Wednesday with members of the Legislative Finance Committee, a bipartisan panel of lawmakers who work on the budget year-round.

This year’s revenue growth continues a string of robust financial years for New Mexico policymakers. Oil and gas revenue makes up roughly 40% of the state general fund, though estimates vary, and the income is volatile.

To guard against a collapse in revenue, New Mexico in recent years has plowed cash into endowment-like accounts — called permanent funds — that are designed to provide steadier income.

Stephanie Schardin Clarke, secretary of taxation and revenue, said the state is “building a bridge from peak oil” to income that grows more predictably through investments.

After hearing the presentation, Rep. Nathan Small, a Las Cruces Democrat and vice chairman of the Legislative Finance Committee, said the state is in position to make wise spending decisions and avoid wild swings in the annual budget.

“We’re in such a different era,” he said. “We have the opportunity to exit the roller coaster and get onto a steady climb to a broad prosperity for our state.”

Seven years ago, a bust

The explosion in revenue follows a crash in oil prices that rattled the Capitol in 2016 and 2017, when the state faced a downgrade in its credit rating and, at one point, had the nation’s highest unemployment rate.

Lawmakers and then-Gov. Susana Martinez responded with a series of solvency measures that included budget cuts and sweeping cash out of various state accounts to ensure the state could pay its bills.

“It was awful,” Rep. Gail Armstrong, R-Magdalena, said Wednesday as she contrasted this year’s revenue forecast with what lawmakers faced six and seven years ago.

The state, in fact, emptied its main reserve accounts and had just 2.4% of recurring spending in reserves in 2016 — much of it in a tobacco settlement fund, a reserve of last resort.

Armstrong encouraged lawmakers Wednesday to be mindful of how much they’ve grown sending since the hard times.

The budget approved for this year, for example, boosts ongoing spending by about 14% — to roughly $9.6 billion — over last year.

Endowments, rebates

In addition to spending growth, lawmakers have phased in reductions in the state’s gross receipts tax rate and periodically issued one-time tax rebates to taxpayers.

Their financial strategy has also included the creation of endowment-like accounts — for early childhood education and other purposes — intended to generate steady income, even if oil revenue dips. Lawmakers also established new reserve accounts bolstered by automatic transfers of surplus revenue.

“I think we’re in a safe place as a state,” Propst, the Cabinet secretary for finance and administration, said Wednesday.

The state’s revenue stream, of course, faces some downside risks, he said, such as potential disruptions in the energy market spurred by Russia’s attack on Ukraine. But there are also upside scenarios, he said, that could push revenue even beyond today’s robust expectations.

Sen. Pat Woods, R-Broadview, suggested the strength in New Mexico’s oil and gas industry is masking other economic weaknesses, such as the state’s persistently low labor force participation rate.

“I have a hard time quite believing that we can replace the extractive industries in our state with the wealth of simply investing out of state,” Woods said.

Wealthy outlook

Oil production in New Mexico hit a record high in a recent 12-month period, according to state economists, with even steeper heights expected in the coming years. New Mexico has surged past North Dakota to become the No. 2 oil-producing state in the nation, behind only Texas.

Ismael Torres, chief economist for the Legislative Finance Committee, said the incredible growth in oil production is expected to level off and then decline. Production is expected to peak in 2031.

“These surpluses may not be here forever,” Torres said.

In the meantime, the revenue is expected to give New Mexico lawmakers tremendous financial flexibility as they start preparing a budget package for consideration in the 2024 legislative session.

“New Mexico has never had this opportunity before,” said Sen. George Muñoz, a Gallup Democrat and chairman of the Legislative Finance Committee.

The 30-day legislative session begins Jan. 16.