On Friday, August 28, during a Legislative Finance Committee (LFC) held in Taos, it was revealed that the State is experiencing an all-time high windfall of more than nearly $1 billion higher than what was projected in February of this year. The estimates released to the legislative committee by executive and legislative economists project that New Mexico will have nearly $1.4 billion in additional money in the coming year. The $1.4 Billion is the the difference between expected revenue and the state’s current $7.4 billion budget. The cause of the windfall is surging oil and natural gas production and a rise in consumer spending.
The projected revenue total does not include more than $1.5 billion that will automatically flow into a state “rainy day” fund and an early childhood endowment fund over the next two years. It also does not include the $1.75 billion in federal relief funds that have only been partially earmarked by the Lujan Grisham administration.
According to a report to the Legislative Finance Committee:
“Revenues are up $851.3 million from the February 2021 estimate, due primarily to higher-than-expected gross receipts tax and income tax collections that accompanied increased consumer spending and growth in high- and mid-wage employment in the first half of 2021. … Additionally, strong recovery in the oil and gas markets are pushing severance tax and federal royalty collections well above their five-year averages, resulting in large transfers to the newly created early childhood trust fund.”
REVENUE PROJECTIONS
Two separate funds were created by the New Mexico Legislature to ensure that there is adequate funding to continue to provide essential services and deal with bad economic times such as when the pandemic hit and at the same time state revenues plummeted as a result of the oil boom bust.
The two funds are the Tax Stabilization Fund and the Early Childhood Trust Fund.
The Tax Stabilization Reserve Fund is referred to as the “rainy day fund”. It was created by the legislature in 2017. The revenues for the fund come from royalties or tax collections on the oil and natural gas industries that exceed a five-year rolling average.
The Early Childhood Trust Fund was created by the legislature in 2020 at the insistence of Governor Michelle Lujan Grisham. The funds revenue source is the same revenue source when total state cash reserves amount to 25% or more of the state’s approved spending level. Funds also come from mineral leasing payments on federal land. The trust fund makes annual distributions to help fund early childhood programs statewide, a major priority of the Lujan Grisham Administration.
According to the Legislative Finance Committee, both funds are projected to spike considerably over the next 2 fiscal years with the following projections made:
TAX STABILIZATION RESERVE:
Fiscal year 2021: $1.8 Billion Fiscal Year 2022: $2.2 Billion Fiscal year 2023: $2.3 Billion
EARLY CHILDHOOD TRUST FUND:
Fiscal year 2021: $334.7 Million Fiscal Year 2022: $505.4 Million Fiscal year 2023: $283.6
Note that based on revenue estimates released a total of $1.8 billion is projected to be in the Tax Stabilization Reserve fund at the end of the current fiscal year that started on July 1, 2021 and ends June 30, 2022, or more than half the state’s estimated $3.1 billion in total reserves. Also not that upwards of $1.1 billion is projected to be transferred into the Early Childhood Trust Fund over a three-year period ending in June 2023.
House Speaker Brian Egolf said in a statement that the revenue projections were proof that Democrat’s policies are working and said:
“With roughly $1.4 billion in new revenue, investments in infrastructure, families, and communities will continue to be central to our work to diversify and guarantee sustainable, long-term growth for our state. ”
According to the Legislative Finance Committee over the last decade New Mexico’s revenue levels have gone up and down from as low as $5.7 Billion in 2013 to now a projected $8.8 Billion in 2023. and fluctuated widely from year to year”. The reported breakdown by fiscal years is as follows:
2013 – $5.7 billion
2014 – $6 billion
2015 – $6.2 billion
2016 – $5.7 billion
2017 – $5.7 billion
2018 – $6.8 billion
2019 – $8 billion
2020 – $7.8 billion
2021 – $8 billion (estimated level)
2022– $8.1 billion (estimated level)
2023 – $8.8 billion (estimated level)
The link to the Journal article reporting on fiscal years breakdowns is here:
https://www.abqjournal.com/2423653/nm-revenue-levels-projected-to-soar-to-all-time-high.html
GOVERNOR’S REACTION
Governor Michelle Lujan Grisham’s press secretary Nora Meyers Sackett said in a statement that the Governor’s Office has been conducting preliminary agency-by-agency budget meetings in recent weeks in order to make a formal budget recommendations this fall. According to Sackett:
“[The Governor is] incredibly optimistic about [the revenue projection.] It underscores and validates the sound fiscal stewardship of her administration, which has, despite the unprecedented events of the last 18-plus months, put New Mexico in perhaps its best financial position in more than a decade. … The governor’s budget priorities have been clear throughout her term and they are unlikely to change. [Those priorities are] public education, economic development, environmental protection and crime and criminal justice reform. … Within that framework is where we will continue to focus our efforts to respond to and invest in the areas New Mexicans care most about.”
LEGISLATORS DEBATE ON HOW MUCH IS ENOUGH FOR A “RAINY DAY”
The 2022 legislative session is a 30 day session, called a short session, and is convened to deal almost exclusively with the budget, financial matters and taxation. It is the Governor who set the agenda in those sessions. The 30 day session begins January 17, 2022.
The debate between legislator’s is already beginning as to how the additional funding should be used.
Representative Patricia Lundstrom, D-Gallup, the chairwoman of the Legislative Finance Committee, said that she has asked legislative staffers to look into possible changes to the Early Childhood Trust Fund including a possible cap on the fund’s total balances. Lundstrum had this to say:
“I don’t want money sitting in funds when we have so many needs”.
Senator George Muñoz, D-Gallup, the vice chairman of the Legislative Finance Committee suggested the revenue windfall should be spent on one-time expenditures not part of the state budget and had this to say:
“There’s going to be a lot more money than we know what to do with in the next few years, but it’s not going to last forever. … Now is the time to tackle the structural issues of New Mexico. We’re going to think big … We’re not going to pull around our little wagon anymore. … We’re going to load our armored trucks, and we’re going to develop and make New Mexico grow. ”
House Majority Leader Javier Martínez, D-Albuquerque, had this to say:
“[The tax stabilization reserve fund] is getting pretty big, and I think we need to take a look as a Legislature at how it’s structured.”
Representative Antonio “Moe” Maestas, D-Albuquerque, proclaimed the state could withstand 2 consecutive decade long economic downturns, given the amount of money in the savings funds and said:
“Money sitting in an account is actually counterproductive to the future of our state.”
Senator Crystal Diamond, R-Elephant Butte, said legislators should be mindful of the historic volatility of oil and gas revenues noting the impact of the COVID-19 pandemic and said:
“We do not know what the future holds, and as such, we should think twice before spending exorbitantly simply because our coffers appear to be full today.”
Republican Senator Pat Woods raised concerns about widespread inflation and said:
“I think New Mexico is very flush with money. … And it’s all about the money that poured into this state.”
The links to quoted source material are here:
https://www.abqjournal.com/2423653/nm-revenue-levels-projected-to-soar-to-all-time-high.html
COMMENTARY AND ANALYSIS
Although New Mexico’s financial out look is looking better, it is too easy to forget how quickly things can change practically overnight.
It was in 2019 that 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. Public schools and higher education received $1.36 billion from state oil and gas revenue in FY 2019, up a staggering $300 million from FY 2018. It included upwards of $1.06 billion for primary and secondary education, and $302 million for state universities, colleges and other higher education institutions.
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.
https://www.abqjournal.com/1410518/nm-earned-31bn-in-oil-gas-revenue-in-fy-2019.html
https://www.nmoga.org/FuelingNewMexico
On February 20, 2020, 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.
https://markets.businessinsider.com/commodities/oil-price?type=wti
Passage of the $7.6 billion budget plan for the 2021 budget year was predicated on oil averaging $52 per barrel. The price of crude oil per barrel plummeted to an alarming $20 dollars a barrel and was expected to go down even further. 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.
Just when things were looking great in 2019 with respect to oil and gas royalties to finance state government, BAM the corona virus hits, a global oil price war intensified, and New Mexico got hit even harder in the process, all within one month since the adjournment of the New Mexico legislature on February 20, 2020. The global oil price war hit hard the state’s revenue boom, harder than anyone expected. It caused the state budget surplus to evaporate. The New Mexico Legislature’s finance analysts had pegged oil prices for the budget year that ends in June to an average $52 per barrel but oil prices per barrel of crude hit an all time low $21.
As the result of the financial crisis in revenues, Governor Lujan Grisham was forced to call a Special Session on November 24, 2020 to deal with the revenue shortfall and pandemic relief.
One thing is for certain is that New Mexico lawmakers did not envision the spike of billions of revenues in such a short period time. After all the financial gloom and gloom of the past two year, New Mexico is rebounding. Governor Michelle Lujan Grisham and the Legislature will soon be releasing their own separate proposed budgets before the start of next year’s 30-day legislative session. Both those budgets will act as the blue prints for enactment of a final budget. Let’s hope the legislature and the Governor thinks big and invests widely in infrastructure and economic development that will improve the lives of all New Mexicans and that will leave a lasting legacy well beyond the times when they are no longer in office.