Less than week after the New Mexico House of Representatives passed a trimmed-down spending plan, a key Senate Democrat is saying that deeper cuts are needed to keep the state solvent in the wake of tumbling energy prices and steadfast reluctance from Gov. Susana Martinez to raise taxes.
“We no longer have a structural deficit, we have an actual deficit,” said Sen. John Arthur Smith, a Deming Democrat who chairs the Senate Finance Committee. He emphasized that the money coming into state coffers cannot support general fund spending for services such as education and public safety.
“I don’t think it’s anyone’s fault,” he said. “We’re in a free fall right now with state revenues. This free fall is not something I’ve ever experienced, and I’ve been here 28 years.”
Smith said he was among Democrats who backed the Republican governor in reducing the tax burden for businesses in order to make the state more competitive — and that is still sound long-term policy.
But the budget situation today is more urgent because no one can reasonably predict when energy prices will rebound.
As Smith was talking, the price for a barrel of crude oil fell Thursday to $26.19, the lowest level since 2003.
New Mexico’s budget picture is like that of many oil-patch states where state government gets a big boost from payments by oil companies on crude pumped within the state’s boundaries. As those prices went up — and surpassed $100 a barrel in mid 2014 — that money came pouring into the state government, which turned around and boosted spending for education and other initiatives.
Martinez and lawmakers also shored up reserve funds — and just eight months ago the general fund reserves stood at more than $700 million, almost 12 percent of spending.
Reserves have since been spent down and are estimated to be only 6 percent by the end of June. If revenues don’t stabilize, the House budget bill would give the governor authority to take another $63 million without calling lawmakers back for a special session. That would essentially reset reserves at 4 to 5 percent of the operating fund, half of what Martinez herself has said is desirable.
A spokesman for the state Department of Finance and Administration said it is important not to overstate the problem. Ninety percent of the revenue decline is related “directly or indirectly to lower oil and gas prices and production activity,” said Julie Ruetten, communications director for the agency.
“As we move forward, much of that pain is in the rear-view mirror,” she said. “Thus, we should not see similar decreases in the future.” But the administration acknowledges that spending needs to be curtailed and it is taking steps “to limit spending on non-essential purposes, which would include things such as non-essential purchases and non-essential travel, across all state agencies.”
“It is not appropriate to consider raising taxes as these would hit hardworking New Mexicans and small businesses at the worst time,” added Ruetten.
Smith agrees that Martinez and her financial staff needs flexibility to move money in an emergency. “We want to give the executive latitude and avoid a special session,” he said. “If we’re going to work through this, the executive and the legislative branch will have to pull together.”
But Smith doesn’t think the reserves alone will be sufficient without another $100 million in either spending reductions or one-time revenues from unspent fund balances that can be transferred into day-to-day operations.
Revenue tracking continues to show money coming into the state has fallen off a cliff compared with a year ago.
The total recurring revenue collected for November is down 25 percent from 2014, while Gross Receipts Tax receipts from July through November are down 11 percent. The total dollars that flow into the state land office for the fiscal year through January are down 32 percent from a year ago.
State Treasurer Tim Eichenbeg reports that cash on hand for the general fund is down 17.5 percent from a year ago.
One example of how the oil and gas slowdown has affected budgets is what has happened to the city of Hobbs in the Southeastern New Mexico oil patch. Gross receipts taxes distributed to the city dropped to $4 million in January, down from $7.2 million in January of 2015.
The budget proposed by the Republican-controlled House calls for $80 million in new spending with with $74 million in sweeps of existing money from other accounts. It would also move $147.5 million from a tax stabilization account into more liquid operating reserves.
At one time the state was estimating the average price for crude this fiscal year at $44. That number has since been lowered to $37. In fiscal year 2017, budget estimates use a price of $38.
State Land Commissioner Aubrey Dunn said his office is reevaluating its revenue estimates and is using $30 crude as a benchmark for 2017. He also said there has been an increase in the number of energy companies that have canceled commitments to drill on state trust land, leaving no optimism about prices coming back soon. “They’re just allowing them to expire,” he said of leases.
Sen. Linda Lopez, an Albuquerque Democrat, said the Department of Finance and Administration’s estimate for the impact of various tax cuts put forward by Martinez — and supported by many Democrats — has been wrong. Lopez is asking for the governor to agree to some tax increase.
“People are really worried about losing jobs,” Lopez said. “We need something now.”
Smith himself is backing a bill to hold off on additional corporate tax reductions for a year, a move that could net $25 million for the state. He also is sponsoring measures to boost sales taxes and gas taxes, neither of which he expects will move forward.
“We’re going to believe what she says, that she’s going to veto any revenue generating measures,” said Carlos Cisneros, D- Questa. “It would be an act of futility for us to do any revenue generating this year.”
Smith doesn’t shy away from his support for the tax cuts passed in the final hour of the 2013 session, saying they have made the state more competitive. But some of the errors in estimating the cost were masked by the boom in energy.
“Oil and gas covered the sins of our mistakes, ” he said. “Oil and gas can’t do that anymore.”
Smith spent an hour talking with the governor and her staff about a possible path forward. He agrees with giving Martinez flexibility before calling lawmakers back into a special session. But he is also urging the governor to move forward with a hiring freeze for all agencies except the Department of Corrections.
“The last place we want to go is layoffs,” Smith said.
A report released by New Mexico State Auditor Tim Keller suggests there may be $1.2 billion in unspent capital dollars and $1.4 billion in other business and enterprise funds. Keller’s office reviewed 400 different fund accounts from 86 agencies.
Smith doesn’t deny there is unspent money, and both the House and the Senate will be looking at those accounts to see what can be transferred over for government operations. But the biggest unspent money from Keller’s list is capital money earmarked for certain projects — and most of those projects are bonded from severance taxes and legally can’t be transferred to the general fund.
And if more money is swept from elsewhere is state government, it would be a one-time boost.
“You might get it fixed for now,” Smith said, “but you still have a problem for next year. Everybody wants an instant turnaround and that’s not going to happen. It’s going to take us a while to dig out of this one.”
Contact Bruce Krasnow at (505) 986-3034 or [email protected].