On Thursday, March 19, the top New Mexico House Republicans urged Democrat Governor Lujan Grisham to call a special session to address the state’s impending budget crisis. The Republican lawmakers suggested that current spending levels be kept in place and argued that work begin on crafting a new budget plan for the fiscal year that starts in July 1 and based on revised revenue estimates.
On March 19, Governor Michelle Lujan Grisham sent a letter to the NM legislative leaders telling them that she will convene a special session to deal with the imploding oil prices that has caused a budget crisis for the state. The question is when and how? Before such a special session is called, and update on the States revenue estimates and the extent federal emergency assistance must he determined.
In her letter to legislators, the Governor wrote:
“Over the past days, my office has been in communication with legislative leadership and staff about the type of tools that might be available to make such a modification possible, and the legalities of these steps.”
Senator John Author Smith, the powerful Chairman of the Appropriations committee had this to say about the convening of a special session:
“We’re looking not at ‘if’ there will be a special session but when, although we first need to let things settle a bit more… We’re still trying to figure out where things are going, because we’re still on a downward trajectory and we need to wait a bit before we jump.”
WHAT THE HELL HAPPENED
On February 20, the New Mexico legislature ended having enacted a $7.6 Billion dollar budget for the 2020-2021 fiscal year. The enacted budget raised annual spending by $536 million, or by nearly 8% over last year’s budget. The increase in spending was a result of record-breaking oil production in the Permian Basin with the state originally anticipating at least an $800 million increase in state government income during the coming budget year. The legislature also enacted a separate $49.5 million in capital outlay projects. The 2020-2021 fiscal year begins July 1.
During the 30-day legislative, passage of the $7.6 billion budget plan for the 2021 budget year was predicated on oil averaging $52 per barrel. With each $1 drop a barrel in oil prices, the state loses upwards of $22 million in direct oil and gas revenue over a full year. Within one month of adjournment of the New Mexico legislature, the corona virus hit the country and hit New Mexico hard.
On March 10, Governor Michelle Lujan Grisham vetoed the $49.5 million capital spending bill citing the financial crisis over the loss of oil revenues. The Governor had until March 11 to sign off on the state’s $7.6 billion budget bill for the fiscal year that begins July 1.
On March 11, due to concerns over plummeting oil prices and the impact of the coronavirus, Lujan Grisham signed into law the $7.6 billion spending plan but not before exercising her line item veto power. The Governor line item vetoed more than $100 million worth of projects from an accompanying public works package, but such vetoes will not be enough to deal with the loss revenues to the state.
The oil price war between Russia and the Organization of Petroleum Exporting Countries (OPEC) ensued and hit hard the state’s revenue boom and it has caused the state budget surplus from oil production to evaporate. The New Mexico Legislature’s finance analysts had pegged oil prices for the budget year that ends June 30 to average $52 per barrel. The price of oil per barrel has now plummeted to $22 dollars a barrel. A $22 a barrel price will result in between $600 and $700 million in direct revenue loss to the state and nearly $1 billion of gross receipts taxes lost to the state.
WHAT, WHEN AND HOW FOR SPECIAL SESSION PROBLEMATIC
According to Governor Lujan Grisham, when she calls for the special session, it will focus on adjusting the proposed spending levels for the budget year that starts in July 1. It will also address public health needs to deal with the pandemic and crafting an economic relief package for workers, businesses and New Mexico communities.
The governor said her administration was looking into ways to possibly call a special session without all 112 legislators being present in the state Capitol itself as a precaution against the corona virus. The Governor has barred public gatherings of 10 people or more in an effort to slow the spread of the corona-virus, but a special emergency session of the legislature could be deemed and exception, but does not eliminate the effect of exposure of the virus to lawmakers.
IMPENDING OIL PRICE WAR IMPACTING STATE
In 2017, an oil production agreement was entered into between Russia and the OPEC countries. The agreement suppressed world production approaching 2 million barrels of crude oil a day. The suppressed oil production output lead to very stable oil prices of $50 to $60 a barrel of crude oil. The Russia – OPEC agreement expires on March 31, and the oil producers are expected to ramp up production that will flood the global markets with unprecedented levels of supply. A price war will ensue as the oil producers battle it out to see who will last the longest and gain most market share amid low prices.
The Russia and OPEC price war has sent Brent crude, the global benchmark, below $30 a barrel and prompted energy companies including Exxon Mobil Corp. to plan for big spending cuts. Russia and OPEC are boosting their exports just as global oil demand suffers an historic contraction due to the coronavirus pandemic. On March 17 Goldman Sachs Group Inc. the rate of petroleum consumption was dropping by about 8 million barrels a day, or about 8% of global demand. With the price war showing no sign of abating and demand falling, Wall Street is slashing its oil forecasts. Goldman is now predicting that the average will be $20 a barrel during the second quarter. Oil traders privately say the benchmark could even drop into the single digits to force some producers to shut down their wells. That’s something that hasn’t happened since the industry downturn of 1997 to 1999.
No one knows for certain how long the economic shutdown from coronavirus will last, it could be weeks, months and perhaps even more. Additionally, no one knows for certain how long the price war between Russia and OPEC Countries will continue. The two events combined have pushed the price of U.S. benchmark West Texas Intermediate to $20.06 a barrel as of March 19, the lowest price per barrel of crude oil since 1998.
With the expected April surge in world oil production looming as a result of the Russia and OPEC price war, Exxon said that it’s reassessing its previously announced spending cuts. Major oil companies like Exxon-Mobil and Occidental Petroleum have announced immediate investment cuts ranging from 20% to 40% as a result of the plummeting oil prices.
Occidental has announced it will cut spending by 32%. Exxon Oil has said it will lower its global investments from $30 billion to $35 billion. It’s the Exxon cuts that will have the most impact on New Mexico’s oil royalty’s revenue stream. Exxon has already announced it plans to reduce operating rigs by 20% in Permian Basin from southwestern Texas northward into the New Mexico counties of Lea and Eddy counties.
The 20% decline represents upwards of 4 million barrels a day now produced in the Permian. As the crisis continues, further production oil production will drop in New Mexico impacting the state major revenue source. New Mexico reached a historic high of 117 operating rigs this week despite the current prices no doubt as the result of the delay in the crisis taking a strangle hold of the industry. But that is about to change dramatically.
Daniel Fine, an energy researcher with New Mexico Tech in Socorro, in an interview with the Albuquerque Journal, said the situation is dire for the Permian Basin in West Texas and southeastern New Mexico, and for the northwestern San Juan Basin in the Four Corners region. Fine projects the total rig count for oil production in New Mexico will drop to between 50 and 60 in the coming weeks resulting in between 2,300 and 2,700 lost jobs, reflecting layoffs of 40 workers per oil rig.
According to Fine:
“The damage from this crisis will be greater and last longer than the last industry downturn in 2014-2016. Production in the Permian Basin will have to decline by at least 600,000 to 700,000 barrels of oil per day or more before the situation gets any better.”
COMMENTARY AND ANALYSIS
The happenings in the world, country and state are indeed historical in every sense of the word. State officials and oil industry leaders are hoping a modest rebound in oil prices heading into summer as the corona virus contagion slows and businesses and consumer demand bounce back. For now, when it comes to New Mexico’s budget, the worst needs to be prepared for as actually happening and there is no doubt that Governor Lujan Grisham is facing a major crisis.
On July 1, 2020 the recently enacted state budget by the New Mexico legislature will be going into effect. Given what is going on nationally, in cities and state’s all over the country, it is likely that the effects of the corona virus health crisis will be with us for months, not weeks resulting in a dramatic effect on the State’s economy and its revenue sources. The risk of the state going into the red and spending even more than it has coming in has now increase dramatically.
The 2020-2021 budget of $7.6 billion spending is predicated on an average oil price of $50 per barrel. State spending over the last 2 years is up 20% largely because of the surplus generated by the Permian basin oil boom. The price of oil has now plummeted to $22 dollars a barrel. There is no end in sight as to how far oil prices will go down and how long it will last. You can bet the price of oil will continue to decline at least as long as the oil price war between Russia and OPEC continues.
According to the Legislative Finance Committee, a $1 change in the average annual New Mexico price of oil has around a $22 million effect on the state general fund. It is clear even to those who are deficient in math and the multiplier effect that there is a looming financial crisis.
PERMANENT FUND MUST BE AN OPTION
This year, New Mexico’s two largest permanent funds, the Land Grant Permanent Fund and Severance Tax Permanent Fund, funds will pump an all-time high of nearly $1.1 billion into state schools, hospitals and other programs in the coming 2020-2021 budget year that starts July 1. The funding is from investment gains and inflows from taxes and royalties from oil production in southeast New Mexico. But that has changed because of the pandemic.
The Land Grant Permanent Fund (LGPF), also known as the Permanent School Fund, is one of the largest funds of its kind in the country, and every year provides more than a half-billion dollars in benefits to New Mexico’s public schools, universities and other beneficiaries . In fiscal year 2020, the Land Grant Permanent Fund generated $784.2 for New Mexico Schools.
For a number of years, many have advocated that upwards of 5% more from the Land Grant Permanent Fund be allocated for early childhood care and education programs. The Land Grant Permanent Fund is often referred to as the rainy-day fund and if there ever was a rainy day in New Mexico, it is now with the historical pandemic. Now is the time to finally divert more money to address the needs of the state with the fund to substitute money allocated in the new budget for the $320 Early Childhood Trust Fund and the $17 million for the new college scholarship program.
STIMULUS NEEDED FOR NEW MEXICO ECONOMY
Many economists are deeply concerned and feel it is inevitable that the state is headed into another recession. If in fact the state suffers yet another recession, the state economy will need a major stimulus. The $49.5 million in construction capital outlay the Governor vetoed would have been such a good start. Likewise, the $100 million in line item vetoes also contained many construction projects that could have help to stimulate the economy.
The Governor’s veto of the capital outlay bill of $49.5 million with the line item veto of another $100 million is no guarantee that it is enough to avoid a state budget crisis, let alone another recession caused by the pandemic.
Although an estimated $1.7 billion in reserves has been set aside, the dramatic decline in oil prices will diminish that with only a fraction of the money accessible without legislative approval in an emergency. The 2020-2021 budget contains $536 million in spending increases, many which are recurring. The $536 million in spending increases include state employee raises such as 4% for teachers and state employees, $76 million to shore up the PERA pension funds, $320 million for Early Childhood Trust Fund, and $17 million for the new college scholarship program. The enacted budget may no longer be fiscally responsible as a result of the dramatic changes brought on the corona virus pandemic and the plunge in oil production.
In times of crisis, drastic measures at times must be taken. Convening a special session, repealing the 2020-2021 budget and going to a “zero growth budget” are such drastic measures, but indeed must be done. Further, there should be a way that a “virtual reality” legislative session can be convened where both the House and Senate members can participate by telecommunications from their offices or homes.
There is no doubt that the Governor foresees the impending wave of red ink coming her way by virtue of her $149.5 million in veto cuts and now the financial crisis brought on by the continuing plummeting oil and gas revenue. Given the impending financial crisis caused by the coronavirus, Governor Lujan Grisham knows the importance of conferring with legislative leadership and the Legislative Finance Committee to a special session. The special session needs to be convened before the enacted budget goes into effect on July 1. Such a special session should not last more than 1 or 2 days predicated on a new budget being hammered out and agreed to before the session is called by the Governor.
An option is to repeal the new 2020-2021 budget and enact a zero-growth budget making further cuts in spending and agree to make cuts in the programs the Governor was able to secure as a result of the surplus in oil revenues. Further, of the capital outlay projects vetoed by the Governor need to funded again as a means of stimulating the economy.
If the state in fact plunges into another recession, which at this point is far more likely than not, it will be deeper than the 10 year great recession that started in 2008 that had such a dramatic impact on the state. Unless Governor Lujan Grisham acts quickly with a special session before July 1 when the 2020-2021 budget takes effect, she will start to look and sound like former Republican Governor “She Who Shall Not Be Named” and be forced to make drastic cuts, implement layoffs and once again reduce the size of government during the 2020-2021 budget year. The result will once again be major in further damage to government services and inflicting more pain on New Mexico residents.
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