On May 13, legislative economist told the New Mexico Legislative Finance Committee that state revenue collections for the current budget year are up by more than $440 million than was projected in December, 2021
According to legislative economist, the surplus continues to be the ongoing surge in oil production in the Permian and an increase in statewide wages and employment levels that have resulted in a significant boost in personal income tax revenues. Gross receipts tax collections are up by $248 million projected 4 months ago in large part because of inflation and the rising cost of goods and services.
The overall state revenue windfall the state has been experiencing for almost the past 2 years has allowed the legislature to increase state spending to $8.5 billion or upwards of 14% for the 2022-2023 budget year that starts on July 1 and ends on June 30, 2023. Under the 2022-2023 enacted budget, teachers and state employees were given salary increases and taxpayers will be getting rebates of up to $1,000 per family.
A breakdown of which revenue sources are up and provided by the state economists to the Legislative Finance Committee for the current fiscal year that ends June 30 is as follows:
• Gross receipts tax – $248.4 million up
• Personal income tax – $243.7 million up
• Mineral production taxes – $20.5 million up
• Corporate income tax – $43.8 million up
In addition to New Mexico’s increase revenues, the state will be receiving more than $26 billion in federal pandemic relief funds.
INVESTMENT INCOME DOWN
The LFC was also told that the states Investment income is down by $111.2 million. The reason given for the decline is that rising interest rates have caused investments managed by the State Treasurer’s Office to decline in value.
WHAT TO SPEND IT ON
The large cash infusion to the state no doubt will allow for more spending in areas considered critical, such as education. Legislative Finance Committee Director David Abbey said lawmakers need to consider setting aside much of the new money in endowment funds for college scholarships or other purposes. Abby told the LFC the state’s Opportunity Scholarship program, which covers all tuition and fees for qualifying New Mexico students, should be considered.
The Opportunity Scholarship program received $75 million in total funding during the 2022 legislative session which ended in February. The scholarship program could eventually end up costing more than $100 million per year to maintain, according to legislative data.
REACTION BY LEGISLATORS
Upon hearing of the new projected revenue increase, Senate Majority Leader Peter Wirth, D-Santa Fe had this to say:
“It feels like we’re in a position where we really have an opportunity to make significant investments right now. … This is an opportunity that in the 18 years I’ve been here, I’ve never seen before.”
LFC members expressed concern over New Mexico’s ongoing reliance on the oil and gas industries as a revenue source. The oil, gas and mineral extractive industries make up about 38% of state revenue during the 2021 budget year. The reality is that as revenues decline from oil and gas production, the budget still grows and there would be a need for budget cuts unless the revenues are replaced with a new revenue source.
Republican members of the LFC said during Friday’s meeting that the interim Revenue Stabilization and Tax Policy Committee needs to take a cautious approach to spending budget surpluses given the uncertainty over future oil and gas production.
While some Democratic lawmakers have raised concern over the extractive industry’s role in climate change, Sen. Bill Burt, R-Alamogordo, said additional state regulations on oil and gas operations could “choke” production and hurt state revenue levels.
Currently, much of the state’s revenue windfall is flowing into an early childhood trust fund established in 2020. That’s because lawmakers set up the fund to benefit from robust tax collections on oil and natural gas production.
However, the fund’s explosive growth – it’s projected to balloon to more than $4 billion by 2025 – has prompted lawmakers to consider legislation that would make it easier to use the fund for other child-related programs.
At least some of the state’s revenue windfall might have to be put to use replacing federal funds and covering obligations that include increased taxpayer contributions into the state’s teacher retirement fund.
In all, those recurring budget needs could total $266.3 million for the fiscal year that starts in July 2023, according to legislative data.
TAX STABILIZATION FUND AND THE EARLY CHILDHOOD TRUST FUND
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.
In August, 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 links to quoted source material are here:
COMMENTARY AND ANALYSIS
The biggest area for certain that will likely get significant attention and more attention in the January, 2023 legislative session is that of the Public Education System. Least anyone forget, it was in July, 2018, that Santa Fe District Court Judge Sarah Singleton ruled in the a the land marker education case of Yazzie v. Martinez case that the state of New Mexico violated the constitutional rights of at-risk students by failing to provide them with a sufficient education.
The Court ruling centered on the guaranteed right under the New Mexico Constitution to a sufficient education for all children. The lawsuit alleged a severe lack of state funding, resources and services to help students, particularly children from low-income families, students of color, including Native Americans, English-language learners and students with disabilities.
New Mexico has been struggling for decades to diversify its economy, wean itself off of federal government spending and reducing its heavy reliance on the oil and gas industry where the state gets nearly 40% of its revenue from. When the oil and gas industry booms, New Mexico becomes flush with money and when it busts, the state revenues plummet causing financial crisis.
With $3.7 billion In Federal Infrastructure Investments and Jobs Act Funding, the allocation of $478 million in federal pandemic aid out of $1.1 Billion in pandemic relief and the $1.6 billion of projected windfall from oil an gas revenues, the state’ s decades long financial woes may finally be coming to an end, but the state is still too reliant on oil and gas revenues.
The next 4 years of government expenditure of billions may prove to be a once in a lifetime opportunity not only to address the state’s failing education system but to diversify the state’s economy.