GOOD FINANCIAL TIME FOR STATE COMING TO AN END
On February 20, the New Mexico legislature within a few hours before adjourning enacted a $7.6 Billion dollar budget for the fiscal year that begins on July 1. It 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 the time 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 increase spending of $536 million included funding for Governor Lujan Grisham’s major priorities. An Early Childhood Trust Fund of $320 million was approved with the goal of putting $30 million annually toward the cause of early childhood programs needed for many years. The new budget includes $17 million for the new college scholarship program sought by Lujan Grisham which is much less than the Governor had initially requested.
TWO “GUT PUNCHES”
Just when things were looking great with respect to oil and gas royalties to finance state government, BAM the corona virus hits, a global oil price war ensues, and New Mexico gets a two gut punch hit in the process, all within one month since the adjournment of the New Mexico legislature. The global oil price war has hit hard the state’s revenue boom and it has caused the state budget surplus to evaporate literally within 8 weeks. The price of oil per barrel has now plummeted to $20 dollars a barrel.
NEW MEXICO’S RELIANCE ON OIL AND GAS REVENUES
A report by the New Mexico Tax Research Institute released in January, 2020, revealed that the oil and natural gas industry contributed more than $3.1 billion in tax revenue for fiscal year 2019, a dramatic 41% from the $2.2 billion generated the year before. The $3.1 billion was an increase of $910 million from 2018. Oil and natural gas represent 39% of New Mexico’s General Fund revenues, the highest share of all industries in recent history.
The New Mexico oil industry’s historic energy production was enabling unprecedented investment by Mew Mexico in education. In FY 2019, the oil and gas industry contributed $1.36 billion to public education, representing a 28% increase over FY 2018. New Mexico’s highest producing oil and gas counties were Lea and Eddy County.
According to the Legislative Finance Committee (LFC), a $1 change in the average annual New Mexico price of oil has an impact of roughly $22 million on the state general fund. The LFC also said money generated from taxes and royalties on oil and natural gas accounted for roughly 36% of New Mexico’s total revenue for last year. For the enacted budget, oil prices were projected to average $52 per barrel of crude oil produced. According to the Governor’s Office, if oil prices were to hover at $30 per barrel through June, that would mean $138 million less in state revenue than projected for this fiscal year. Oil prices have now plummeted to a staggering $20 a barrel. Upwards of 25% of the state’s spending contained in its budget is for reserve funds.
This year, New Mexico’s two largest permanent funds, the Land Grant Permanent Fund and Severance Tax Permanent Fund, funds were supposed to 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 was supposed to have come from investment gains and inflows from taxes and royalties from oil production in southeast New Mexico. But that has all changed because of the oil price war.
SPECIAL SESSION OF NEW MEXICO LEGISLATURE TO BE CALLED
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. It is likely that the session will be called in mid June. 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.
There is no doubt that the $7.6 billion budget that takes effect July 1 and approved by the NM Legislature will have to be slashed significantly. The state is facing a $1 Billion dollar revenue downturn.
House Appropriations and Finance Committee Chairwoman Patricia Lundstrom, D-Gallup had this to say:
“We’re going to have to do some major re-calibration on the budget. … Everything is going to have to be on the table.”
In government financing the term everything means significant spending cuts, drawing down the state’s reserve levels and repealing one-time spending that was passed in the 2020 session, including the $320 million for a new early childhood trust fund and $180 million for statewide road repairs. Lundstrom also contradicted herself slightly when she added the approach to the new budget would likely not include across-the-board cuts, and that funding levels for health care programs and economic development initiatives should be kept intact.
The state does have what is called “the tax stabilization reserve fund” with funding set aside to deal with financial crisis such as what it happening now. The fund is called “the rainy day fund”. In December, the state was projected to have $1.7 billion in reserves at the end of the current budget year on June 31, or nearly 25% of all state spending.
STATES SHARE OF $2 TRILLION FEDERAL STIMULUS PACKAGE
On March 25, the United State Congress enacted the $2 trillion Corona Virus stimulus package known as the CARES Act. Under the CARES Act, State governments that are leading the coronavirus response, which includes New Mexico, will get support from a $150 billion coronavirus expenditures fund. New Mexico will be eligible for up to $1.25 billion to reimburse costs resulting from the pandemic.
The federal funding legislation will provide immediate relief to New Mexicans. The $2 trillion package includes several provisions that would support New Mexican residents including direct relief for small businesses, emergency resources for hospitals, and direct payments to individual residents.
According to New Mexico Senator Tom Udall the funding is “targeted primarily to New Mexico as a state government and local/municipal governments.” The legislation includes the expansion of unemployment insurance to cover more New Mexicans and provides additional benefits during this health crisis. The extended unemployment insurance program increases the maximum unemployment benefit by $600 per week and makes sure that workers who are laid-off, on average, will receive full pay for four months.
The bill ensures all workers are protected regardless of their place of work and includes employees at small, medium, and large businesses .
According to an April 3 Channel 13 news report:
“Furloughed workers are allowed to stay on as employees to ensure that when the crisis is over, they will be able to continue work with their employer. The legislation provides $1,200 in direct payments to individual New Mexicans, $2,400 for couples who are married, and $500 per child. The full payment is available for those making up to $75,000 individually and $150,000 for those who are married. The amount is phased out for those who are above the income cap.
The legislation features provisions to support and provide relief to small businesses that were negatively impacted by the coronavirus outbreak.The bill includes $377 billion in small business aid and includes up to $10 million in Payment Protection Program loans for small businesses who have up to 500 employees. The loans will be converted to grants as long as employers maintain their previous payroll through December 31, 2019.
The bill provides over $150 billion for the healthcare system and includes funding for medical facilities and hospitals. It puts $100 billion into hospitals and the health system, over $1 billion into the Indian Health Service, and billions into investments.”
GOOD FINANCIAL TIMES FOR CITY HALL COMING TO AN END
The City of Albuquerque had a fantastic fiscal year that began on July 1, 2019 and that will end on June 30, 2020. It is no exaggeration that the city in a real sense was flush with money during the fiscal year that is about to end.
For the fiscal year of July 1, 2019 to June 30, 2020, the Albuquerque City Council enacted an operating budget of $1.1 billion for the fiscal year. It was the first time in city history that the city operating budget exceed the $1 Billion figure. The 2019-2020 budget represented an overall 11% increase in spending over the previous year.
In April, 2019 a onetime $34.4 million dollar windfall to the city was reported from what was called an “orphan month”. The $34.3 million “one-time, lifetime” boost in revenues could not be applied by the city toward recurring costs. $29 million of the $34.3 million was applied to numerous one-time investments the Keller Administration felt important, including $6 million for public safety vehicles such as police cars for new police cadets, $2.3 million for park security, $2 million for the business recruitment and growth and $2 million for housing vouchers and related programs.
On October 7, 2019 the City Council approved a $30.5 million “Sports -Tourism” lodger tax package on a unanimous vote submitted Mayor Keller to upgrade and build sports facilities throughout the city. Revenue generated by the lodger’s is used to pay off the $30.5 million bond debt. Lodger tax revenues are supposed to be used to promote tourism and tourism functions and facilities and not general sports venues used by the general public.
CITY FINANCING EXPLAINED
The current gross receipt tax added to virtually all retail sales of goods and services is 7.7850%. Businesses collect the tax on each sale made and the money is then sent to the New Mexico Taxation and Revenue Department and each month the state the distributes the city’s portion of tax collected to the city. Retail businesses make up about 25% of all the city’s gross receipts tax collected.
Gross receipts tax is collected and given to the city accounts for 67% of the City’s general fund revenue. The gross receipts tax revenue pays for basic municipal operations and essential services such as police protection, fire protection, solid waste collection, street repairs, animal welfare, parks maintenance, social services and the wages and benefits of over 6,000 city employees. For the current fiscal year that ends on July 31, 202, the city averaged upwards of $41 million in gross receipts tax revenue or $492 million dollars for the year. The remaining 33% of revenues needed to operate the city are generated other fees, other tax revenues and federal funding.
DRAMATIC DECLINE IN GROSS RECEIPTS TAX REVENUES FOR CITY
Under the City of Albuquerque City Charter, the Office of the Mayor prepares the yearly operating budget and normally it is submitted to the City Council on April 1 with the City Council holding budget hearings and making changes and must approve by law a balance city budget by July 1. The operating word is “normally”. All that changed with the corona virus, the mandated quarantine, the mandatory shut down of retail businesses, the loss gross receipts tax revenues and the loss of revenues by the state because of the oil crash.
According to Albuquerque Chief Financial Officer (CFO) Sanjay Bhakta, “It’s going to be brutal” and the city is facing a gaping budget hole due to the anticipated reduction in tax revenue. It is unclear how much the city will have to spend reacting to and battling coronavirus. There are new costs associated with cleaning and cleaning supplies and services for children and seniors. Some existing operating costs no doubt include , the city’s police officers and firefighters that are currently devoting to coronavirus-related matters.
Bhakta reported that the lodgers tax revenues are also down and in March came in at 29% lower than the same date last year. The decline in lodger tax revenues can be blamed on the hotel industry’s more recent struggles and decline in room occupancy. Bhakta said he’s concerned that what has happened with the lodgers tax may also happen with gross receipts tax.
$100,000 A DAY SPENT ON CITY RESPONSE
During the April 7 meeting of the Albuquerque City Council, Bhakta, told the council that the City is spending about $100,000 per day on its response to the corona virus. According to Bhakta, the expenses include employee overtime, cleaning supplies and “information technology” programs. The corona virus has yet to peak, and the daily expenses will go up before they go down and there is no way of determining when the health crisis will end.
The biggest problem is not the daily expenses to the city. Its anticipated that the city’s budget will take a major hit in the form of lost tax revenue. 67% of the City’s general fund revenues is from its share of gross receipts tax collected by the state. It is the general fund that is used to finance basic essential services such as police, fire and street maintenance and other basic city services.
City ordinance requires adequate reserve for each fiscal year to deal with unexpected contingencies. CFO Bhakta reported to the City Council the city does have a slight cushion of about $50 million in operating reserves set aside due to higher-than-expected gross receipts tax revenue over the past 7 months, but it’s not enough to absorb the expected losses in revenues. The challenge is having an adequate reserve for the fiscal year that begins July 1, which is mandated by city ordinance.
According to CFO Bhakta, the City will have a better sense of the loss of revenue in mid-May when the city gets its March gross receipts tax distribution from the state Taxation and Revenue Department.
CITY’S SHARE OF $2 TRILLION FEDERAL STIMULUS CANNOT BE USED AS BUDGET SUPPLEMENT TO MAKE UP FOR LOST REVENUES
The $2 trillion-dollar federal stimulus packaged known as the CARES Act has $150 billion for payments to the state, tribal and local governments. Each state is guaranteed at least $1.25 billion, but local governments with more than 500,000 people can seek their own direct share from their state’s pot. A spokeswoman for U.S. Sen. Tom Udall, D-N.M., said the local governments must file requests that are then certified by the U.S. Department of the Treasury.
The problem with the $2 Trillion stimulus is that the legislation restricts the funding to “costs that are necessary expenditures incurred due to the coronavirus public health emergency between March 1 and December 30. It is expected that the city of Albuquerque will qualify for upwards of $150 million. However, the stimulus money can not be used for expenses outlined in existing budgets. In other words, the federal relief is not intended to make up for lost tax revenues like the city is faced with and which will have a crippling impact on the city’s budget.
News coverage can be found at these links:
COMMENTARY AND ANALYSIS
For the full 8 years under the former Republican Mayor Administration and the former Republican Governor Administration, the city and state were hit hard because of the great recession to the extent that essential services were dramatically cut and city and state government were dramatically downsized all done in order to avoid any all tax increases to maintain their philosophy that all tax increases are bad and government is too big and needed to be downsized
Last fiscal year, both the City and State were finally able to get things back on tract primarily because tax revenues increased and a massive surplus resulting from the oil and gas revenues associated with the Permian Basin oil boom. Just as the city and state were pulling out of the 10-year great recession, the country, state and city get hit and get hit hard in the gut with the corona virus pandemic resulting in business closures, layoffs and the stock market crashing and the New Mexico oil industry imploding because the price of crude oil has gone from $50 a barrel to $20 a barrel.
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.
It is likely the City will not see another $1.1 billion dollar budget this year and not likely to see another for a number of years to follow. City hall is facing another period of declining revenues to the point that its budget will have to be slashed once again. The extent of the city’s financial crisis will no doubt be reflected in the Keller Administration’s proposed 2020-2021 budget, a budget that was supposed to have been released on April 1, but this is not normal times and city hall no doubt scrambling to figure out what to do during the financial crisis it faces.
It is also likely that the State will also suffer and that the slashing of the budget will have to be done, and fast. 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. Now is the time to finally divert more money to address the education needs of the state with the fund to substitute money allocated in the new budget.
Further, now is the time to allocate funding form the “tax stabilization reserve fund” to deal with the budget crisis. The real problem is will it be enough to deal with the crisis or will the state deplete the entire reserve of $1.7 Billion within the upcoming year with no way of replenishing it because of the oil industry bust.
If the State and the City in fact plunge into another recession which is highly likely and its much deeper than the 10 year great recession that started in 2008, Governor Lujan Grisham as well as Mayor Tim Keller will start to look and sound like their former Republican predecessors saying “cut, slash and reduce taxes at all costs” and both just might wind up serving only one term as Governor and Mayor.