June 18 is the start of the New Mexico special legislative session to deal with the state’s deficit and to adjust the state budget amid historical deficits the result of the COVID-19 pandemic business closures and the collapse in oil revenues. Governor Michelle Lujan Grisham and New Mexico lawmakers are faced with more than $2 billion budget deficit that they will be dealing with during the special session. The state is projecting a $375 million revenue loss for the current budget year and a $1.976 billion revenue loss for the Fiscal Year 2021 budget which begins on July 1, 2020. The Governor and legislative leaders are expected to rely heavily on reserves to fill the shortfall.
GOVERNOR’S SOLVENCY Y PLANS
Governor Lujan Grisham has said her solvency plan would largely protect public schools from budget cuts while leaving the state’s cash reserves at about 12% of spending levels. The Lujan Grisham Administration is recommending using $193 million in reserves to partly cover the current budget shortfall using $873 million to plug the 2021 fiscal budget. Overall spending would be reduced in fiscal year 2021 by $652 million. State agency spending would be reduced by between 1% and 4%. Under the Governor’s proposal, salary increases for teachers and state employee’s government would be cut in half, from 4% to 2%. If the state uses nearly $800 million in reserves to help fill the budget gap, as the Governor is proposing, that would leave the state with upwards of $900 million in reserves representing about 12% of the state’s recurring budget.
During a news conference announcing her solvency plan, Governor Lujan Grisham had this to say:
“I think it’s an incredibly responsible approach. … I feel as good as I can that we’re going to be in the best possible position. … It’s smart, it’s effective and that’s why you have reserves so that you don’t collapse your entire operational system because you weren’t prepared for a rainy day. … We’re prepared and I think that legislators are going to feel like this is responsible investing in our futures and a good solvency plan.”
LEGISLATOR’S SOLVENCY PLAN
Legislative Finance Committee (LFC) solvency plan is to reduce fiscal year 2021 spending by $587 million, not by the $652 million proposed by the Governor, and trim state agency spending by between 2% and 4%. The LFC plan would provide for either 1% or no salary increases for teachers and state employees
In addition to using upwards $800 million in reserves, lawmakers are looking at using about $725 million of Federal “CARES Act” stimulus funding to help close the budget gap. However, budget cuts are also expected.
The LFC is also recommending eliminating the $17 million for a tuition-free college program that Governor Lujan Grisham successfully was able to secure during the 30-day legislative session. The funding is left intact under the governor’s solvency plan.
Disagreement is emerging over what to cut and was highlighted in an LFC meeting. When discussing capital outlay cuts, Democrat House Representative Javier Martinez, Bernalillo, raised concern over the possibility that most of the cut projects would be coming from Bernalillo County and said:
“It’s a big lift for us to carry and looking at that list, there are parts of the state that are not losing any capital outlay, certainly not in the way we [Bernalillo County] are, so I’m just putting that out there for you guys to think about. … With the economy of Albuquerque, that’s where the rest of the state is going to go, I mean, at this point we are the economic engine, it’s not the southeast anymore, it’s us.”
The Governor’s solvency plan and the LFC’s solvency plan do share some common ground in a few areas Both solvency plans will reduce the size of the annual State Government spending to about $7 billion which is roughly the same level spending as that of the current year’s fiscal budget that ends June 30, 2020.. Both call for canceling some approved road construction and other infrastructure projects and reducing the funding for a newly approved early childhood trust fund by $20 million, which would be going from $320 million to $300 million.
On June 17 Governor Michelle Lujan Grisham issued her call on other legislation she wants to be considered during the special session. According to a press release, the Governor wants New Mexico Legislature to consider legislation that includes tax relief for individuals, loans for small businesses and local governments, police reform and election improvements.
Following is the additional legislation she is requesting to be considered during the special session:
1.Requiring police officers to wear body cameras, banning chokehold restraints, and making police disciplinary history a matter of public record. According to the Governor’s press release “these measures have gained traction across the nation in the wake of the May 25 murder of George Floyd, a black man who died while a white Minneapolis police officer knelt on his neck for nearly 9 minutes.” Sen. Joseph Cervantes and Rep. Micaela Cadena are sponsors of this legislation. .
2.Legislation to create a state commission by statute to explore the issue of qualified immunity. This legislation is be sponsored by Speaker of the House Brian Egolf.
3.Legislation to promote and ensure the security and timeliness of remote voting during the pendency of a public health emergency like a pandemic. “New Mexico’s election code currently requires voters to request an absentee ballot before one can be issued. The proposal to be taken up by the Legislature will give county clerks the authority to send a ballot to registered voters with a current mailing address and will allow voters and election administrators to track their ballots through the mail delivery system to help ensure timely delivery of their ballots.” This legislation is sponsored by Sen. Daniel Ivey-Soto and Rep. Linda Trujillo.
4.The Governor is asking “the Legislature to waive penalties and interest for small businesses and individuals who have been unable to make timely property tax and gross receipts tax payments due to the economic impact of the pandemic.” The severance tax support for small businesses and municipalities is being sponsored by Sen. Jacob Candelaria, Sen. John Sapien, Rep. Daymon Ely and Rep. Marian Matthews. The tax relief proposal is sponsored by Sen. Peter Wirth and Rep. Christine Chandler.
5.Legislation “ to approve a proposal to direct the State Investment Officer to invest a portion of the state’s multibillion-dollar Severance Tax Permanent Fund to support loans to small businesses and municipalities impacted by the COVID-19 pandemic. The low-interest, long-term loans would help municipalities meet budget shortfalls and get businesses back on their feet following COVID-19-related closures.”
6. The Governor is asked in her call for “Legislature to temporarily endorse gubernatorial flexibility and authority to assist businesses amid a public health emergency or pandemic – for example, to potentially allow liquor delivery or electronic notary services.” These proposals and other potential items will be sponsored by Sen. Mary Kay Papen and Rep. Antonio “Moe” Maestas.
7. Legislation to address institutional racism is on the Governor’s call for the special legislative session. The measure would require state agencies and groups receiving state funding, to develop policies that decrease institutional racism, and require state agencies to carry out statewide evaluations of race and gender gaps in hiring, promotion and pay. They would then be required to develop plans to address any discrepancies found, as well as provide anti-racism training to employees. The legislation is sponsored by Senator Linda Lopez, Representative Patricia Roybal Caballero, and Representative Javier Martinez. A similar bill was passed in 2017 before being vetoed by then-Governor Susana Martinez. Governor Lujan Grisham did include a message during the regular 2020 session for the legislation (SB90, “Policies to Decrease Institutional Racism”), but the session ended before the bill could be brought to a vote.
The press release for the Governor’s call is here:
“SHOW ME THE CAPITAL OUTPUT MONEY”
When the New Mexico legislature begins the special session, it has the option to turn to unspent funding for approved capital outlay projects. Last year the legislature approved upwards of $933 million worth of capital outlay projects when the state was flush in money due to the oil drilling boom in southeastern New Mexico.
The state also has about $1.2 billion in unspent funding for approved capital outlay, and some of that money can be reallocated by legislators to offset the drop in projected revenue. According to the Legislative Finance Committee (LFC), the $1.2 billion in total unspent capital outlay funds was appropriated for 2,212 projects statewide.
Democrat State Representative Javier Martínez, the co-chair of the House Taxation and Revenue Committee, said lawmakers could scrutinize infrastructure projects from previous years that have been delayed or have not begun. Capital outlay funds revert automatically if they are not spent in five years, though project funding can be reauthorized by the Legislature.
Finance and Administration Secretary Olivia Padilla-Jackson, the top budget official in the Lujan Grisham’s administration said that legislative and executive staffers were working to make recommendations about clawing back approved capital outlay funding from certain projects, including those for which work has not started.
Examples of large unspent capital outlay appropriations from 2019 are $4.1 million for a new museum of contemporary art in downtown Santa Fe, $6 million for security cameras and fire suppression systems at the University of New Mexico and $5.4 million for a road extension between Sunland Park and Santa Teresa.
New Mexico’s capital outlay system for funding improvements to roads, bridges, dams and water systems has come under scrutiny for its secrecy and lack of efficiency. Attempts to overhaul the system, which allows each lawmaker to appropriate a designated amount of money for infrastructure projects, have been unsuccessful at the Roundhouse.
Not all targeted projects might have to be scrapped, as it’s sometimes possible to shift projects’ funding source from general fund dollars to new bonds backed by future state tax dollars. The process, referred to as a capital outlay “swap,” has been used in recent years to help plug previous budget holes.
COMMENTARY AND ANALYSIS
For the full 8 years under the former Republican Governor Administration, the state was hit hard because of the great recession to the extent that state government was dramatically downsized. It was done in order to avoid any all tax increases to maintain the Republican philosophy that all tax increases are bad and government is too big and needs to be downsized.
During the last two years under first term Democrat Michell Lujan Grisham, the State was able to get things back on tract primarily because of the massive surplus resulting from the oil and gas revenues associated with the oil boom. Just as the state was pulling out of the 10-year great recession, the country and state get hit and get hit hard in the gut with the corona virus pandemic. The pandemic resulted in business closures and layoffs with the stock market crashing and the New Mexico oil industry imploding because the price of crude oil went from $50 a barrel to $20 a barrel. There is no doubt that the slashing of the state budget will have to be done, but the extent is still unknown.
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.
REPERCUSSIONS OF ANOTHER RECESSION
Many economists believe the state is headed into another recession. If in fact the state suffers yet another recession, the state economy will need a major stimulus. After passage of the 2020-2021 budget, the Governor vetoed $49.5 million in construction capital outlay projects and the legislature could go back an reallocate that money for construction projects to stimulate the economy. Likewise, the $100 million in line item vetoes also contained many construction projects that could help to stimulate the economy with reallocation.
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. The $536 million in spending increases included in the 2020-2021 budget for state employee raises such as 4% for teachers and state employees, the $76 million to shore up the PERA pension funds, the $320 million for Early Childhood Trust Fund, and $17 million for the new college scholarship program enacted may no longer be fiscally responsible and could be cut as a last resort to balance the budget. Further, many of the vetoes of capital outlay could be reenacted again as a means of stimulating the economy.
If the State in fact plunges into another recession, which is highly likely, and its much deeper than the 10 year great recession that started in 2008, Governor Lujan Grisham will start to look and sound like their former Republican predecessors saying “cut, slash and reduce taxes at all costs” and she just might wind up serving only one term as Governor.
A FINAL WORD
Unless the votes are already lined up and a consensus on all 6 of the additional items on the call, adding the 6 legislative priorities is way too much of a heavy lift for a 4-day special session. Adding law enforcement reform measures in and of itself could be the subject of a special session and should also include responsible gun control measures. At this point, the special session should exclusively concentrate on enacting a responsible budget on not take on controversial issues that will only “muddy the waters”.