The crash in energy prices has torn a monster hole in the state of New Mexico’s budget, and lawmakers said Wednesday they will have to tap further into reserves, capital projects and emergency funds to fully pay for education and other essential state services.
The revised general fund forecast calls for just $30 million in new money above current spending of $6.2 billion — down from the December estimate when lawmakers were planning on $232 million for employee raises, expanded programs in public safety and education, and Medicaid expansion.
Almost all of that was off the table Wednesday. Gov. Susana Martinez and lawmakers now must sweep extra dollars from every state program just to keep the lights on for current services.
“There’s going to be some pain out there, some real pain,” said Sen. John Arthur Smith, a Deming Democrat who chairs the Senate Finance Committee, which reviewed the new financial numbers Wednesday.
“Wow,” said a stunned Larry Larrañaga, the Albuquerque Republican who chairs the House Appropriations and Finance Committee, where most spending requests originate. “It’s not just oil and gas.”
The revenue tracking shows that the economic downturn that started in the oil and gas industry has rippled into other sectors — shaving money from broad-based tax receipts imposed on the sale of goods and services.
The challenge for the governor and lawmakers is that it will take some $100 million in new money just to operate current programs, including a boost to the Medicaid insurance program that pays for expanded coverage for low-income working adults under the Affordable Care Act.
Transferring money from elsewhere into the general operating fund means less money on capital outlay projects and new initiatives — and lower reserves, which means less margin for error.
“When revenue has declined so much, where is the bottom?” David Abbey, director of the Legislative Finance Committee, told lawmakers. “I’m going to continue to be worried about it.”
Gov. Martinez is already looking at a ban on nonessential travel and state hiring to avoid layoffs, according to one lawmaker.
When Martinez came into office as the national recession was fading, she chastised predecessor Bill Richardson for leaving the state with what she termed a “structural deficit,” a projected gap between revenues and expenditures that had to be resolved by her administration and lawmakers with emergency measures. Democrat Richardson and the Legislature had moved forward with large cuts in income and gross receipts taxes when revenues were strong, but imposed a hiring freeze and spent down state reserve funds to avoid layoffs in his final year of office.
In her speech to open the 2016 session of the Legislature last week, Martinez reiterated:
“Working together, we have put state government on firm fiscal ground, balancing our budget each year without raising taxes. We’ve restrained government growth and built up a strong savings account.
“It hasn’t been easy. We had to overcome the largest structural deficit in state history, federal budget cuts, a federal government shutdown, and the steepest oil and gas price crash in decades. Energy prices continue to pose very real and concerning challenges.”
Martinez has backed tax cuts intended to make the state more competitive for business, and now faces her own fiscal cliff.
“I think when all is said and done we’re going to have a deficit,” said Sen. George Muñoz, D-Gallup, a finance committee member who heard Wednesday’s presentation.
Likewise, the economists who drafted the revenue forecast wrote that there is not just uncertainty over oil production levels, but also the rate at which retail transactions are migrating to the Internet where they are not taxed by New Mexico. Another hit on revenue is the result of tax breaks granted by the state, described by the forecast as “continued higher rates for payment of tax credits.”
The state ended fiscal year 2015 with general fund reserves of $713 million — 11.6 percent of general fund spending.
Reserves on June 30, 2016, are expected to have dropped to $379 million, or 6.1 percent of the general fund.
In early December, lawmakers heard a report that lower gasoline prices were boosting consumer spending in other areas, such as retail stores and restaurants, and that was offsetting lost revenue from energy production. But in just six weeks that picture changed.
Estimated revenue to the state has been revised downward by $144 million — with $88 million of that due to lower gross receipts tax payments by shoppers and business owners.
Tom Clifford, the Department of Finance and Administration secretary, said the consensus estimate uses actual data and market projections about energy futures prices — and those have changed in a short period of time.
As a rule of thumb, a $1 decline in the price of a barrel of crude oil leads to a $9.5 million decline in general fund revenue.
“I don’t think they were rosy-eyed when they did this in December,” Clifford said of revenue projections. “The fact is the facts have changed.”
He added that the state has solid reserves and can work through the 2017 budget with cooperation from cabinet secretaries, the governor and lawmakers.
“As long as we’re careful, we’ll be able to work our way through this,” Clifford told the Senate Finance Committee. “In coming months, state agencies will prioritize spending.”
But borrowing from other funds means that money would eventually have to be replenished — and that can mean years of no new initiatives at a time when education, public safety and job growth remain a priority for voters.
Democrat Luciano “Lucky” Varela, a Santa Fe Democrat, was among those still trying to catch his breath when he heard the new forecast. Varela was hoping there would be enough money to give state employees a small raise starting July 1.
“New Mexico is going to be hurting if we don’t look at revenue enhancements,” he said. “We can’t live with the current revenue.”
The budget review process for the July 1 budget year is well underway. More than half of the state agencies and commissions have presented their spending proposals to House committees. Those spending levels were based on the December forecast and now have to be re-crafted.
“What we have done for the past two-and-a-half weeks has set us up to fail,” said Rep. Dennis J. Roch, a Logan Republican.
Lawmakers on Larrañaga’s committee said they don’t want to do across-the-board cuts and that agencies should come to them with priorities.
According to Smith, “We’re all going to have to suck it up.”
Contact Bruce Krasnow at 986-3034 or [email protected].