LFC Reports State’s Historic Revenues  Spike To “Once In A Century Opportunity”; $3.8 Billion Surplus Projected;  Severance Tax Revenues Up By $343 Million; $4 Billion In Outstanding Capital Funds Reported

On August 16, during a meeting of the influential New Mexico Legislative Finance Committee held in Chama, New Mexico, legislators were told the state will have a staggering projected $2.5 billion in “new” money during the 2023 budget year that starts on July 1, 2023.  The total revenue is forecast is to rise from $9.2 billion in the fiscal year that just ended to nearly $10.9 billion for 2023.   The projections were reported by the LFC executive economists.

The LFC economists reported that the $2.5 money, which represents the difference between current spending levels and projected new revenue, is in addition to a projected budget surplus of nearly $3.8 billion for the current fiscal year and with upwards of $2.6 billion to go into the state’s early childhood trust fund.

The LFC economist report indicated New Mexico’s economy will experience slower than national economic growth in the near term but will have relatively faster growth in 2023.  The LFC economist report said the state’s economic outlook is tied to inflation, monetary policy, and other broader economic mechanisms as the national outlook.”

The projected $10.9 billion in revenue for the coming fiscal year will be more than double the $5.4 billion in revenue the state took in a little over a decade ago during the 2011 fiscal year.

WHAT’S DRIVING THE SURGE

According to the economic projections reported, the revenue flow is showing no signs of slowing down.  It is inflation related consumer spending, strong wage growth and increased oil production that is spiking the state’s revenue flows to historic heights.  The Legislative Finance Committee (LFC) chief economist Ismael Torres told the committee this:

“Consumer spending has remained strong, wage growth has been robust, and high oil and gas revenues are supported by global supply-side constraints raising prices and encouraging production expansion. … It’s remarkable to see New Mexico is the only state that has recovered to pre-pandemic levels [in oil production]”

What is driving the historic surge in surplus revenue is oil production in the state’s Permian Basin. Oil and gas revenue strength is pushing severance tax and federal royalty collections higher above their 5-year averages.  Upwards of two-thirds of the projected revenue growth for the fiscal year 2023-2024 budget year will come directly from oil and natural gas receipts.

Torres told the committee that New Mexico is projected to produce 590 million barrels of oil during the current budget year.  The state is becoming more and more reliant on oil and natural gas as a revenue source.  A whopping 35% of the state’s direct revenue comes from the oil and gas industry and it is up from 31% of all revenues during the fiscal year just ended.

While oil and gas is New Mexico’s biggest source of income, other sectors also are projected to flourish in the next fiscal year. Manufacturing is expected to grow 41%, and economists are forecasting a 27% increase in leisure and hospitality services.

LFC economists noted that inflation is driving up gross receipts tax collections as a result of rising costs for food, construction materials and other goods and services, as well as personal income taxes linked to higher wages.

SPENDING INCREASES

State spending has increased by about 30% over the past 3 years, with Governor Lujan Grisham signing off this year on a $8.5 billion state budget.  Lujan Grisham has increased spending dramatically over the last 3 years for public education, teacher pay raises, early childhood development programs, economic development programs, tax incentives, rebuilding the state’s mental health care system decimated by the previous Republican Governor, crime initiatives and law enforcement pay raises and tax rebates for state residents.

Democratic Governor Michelle Lujan Grisham who is seeking a second term sought to take credit for the record-high revenue levels and said this in a statement:

“The record-high revenues we are anticipating are no accident.   They are a direct result of responsible fiscal policy on the part of this administration and the healthy economic climate we are fostering.”

The spending growth drew sharp criticism from TV weatherman Republican Governor candidate Mark Ronchette who said he would push to use surplus funds for annual rebates and tax cuts if elected.

“ONCE-IN-A-CENTURY” OPPORTUNITY

The revenue surge could prompt a feeding frenzy in a state with high Medicaid enrollment levels, ageing roads and bridges, and a public school system that for years has been among the worst in the nation.

Gallup Democrat Senator George Muñoz called the revenues a “once-in-a-century” opportunity and said this

“If we want to really change, for once and for all, and keep our commitment to reducing tax rates, lowering the [gross receipts tax and] making New Mexico competitive with other states, this is one of the greatest opportunities we could have. … You can change the complete path of this state … Your phones are going to be ringing off the hook [with demands on how to use the new revenues].”

Senator Munoz proclaimed the spike in state revenues   could allow New Mexico to avert the big budget swings consisting of   cycles of spending growth followed by cuts that have plagued the State for at least the past decade if not longer.  Muñoz suggested $1 billion of the state’s additional revenue could be used to overhaul New Mexico’s tax code, even though such changes could have lasting budgetary impacts.

WORDS OF CAUTION

Despite the optimism expressed by Senator Muñoz, other committee lawmakers and top state budget officials expressed caution, saying the recent revenue growth will likely not be sustainable in the long term.  Finance and Administration Secretary Debbie Romero had this to say:

Finance and Administration Secretary Debbie Romero warned lawmakers that they will have to consider supply chain issues, a possible economic recession and volatility in the global energy market and the impact of the ongoing Ukraine conflict on energy markets as risks to the state’s revenue forecast.  Romero said this:

“I think the number one thing to be cautious about is growing our budgets.”

Gallup State Representative Patricia Lundstrom, the LFC’s chairwoman, said year-over-year spending growth should be kept in line with the state’s annual average over the past decade.

Links to quoted news sources are here:

https://www.sfreporter.com/news/morningword/2022/08/18/state-economists-forecast-25-billion-revenue-boom/

https://www.abqjournal.com/2525070/nm-revenue-explosion-continues-as-lawmakers-weigh-next-steps.html

https://www.usnews.com/news/best-states/new-mexico/articles/2022-08-18/oil-gas-revenues-to-drive-new-mexicos-next-budget-windfall

Oil, gas revenues drive New Mexico’s projected budget windfall (lcsun-news.com)

SEVERENCE TAX REVENUES UP

On August 20, Taxation & Revenue Secretary Stephanie Schardin Clarke in a news release reported that Severance tax revenues are projected to increase from $644 million in Fiscal Year 2022 to $987 million in Fiscal Year 2023, and increase of $343 Million. Federal and state rents and royalty revenues are projected to increase from $808 million in Fiscal Year 2022 to $1.01 billion in Fiscal Year 2023.

The improved revenue projection suggests total general fund reserves will increase to about 36.7% of recurring appropriations, or $2.73 billion, at the end of Fiscal Year 2022 and 44.8%, or $3.76 billion, at the end of Fiscal Year 2023.

In addition, Cannabis Excise Tax has an estimated general fund revenue of $22.7 million for Fiscal Year 2023 and revenue is forecasted to grow by about 10.6% per year

Finance And Administration, Taxation And Revenue Secretaries Report General Fund Revenue Outlook To New Mexico Legislative Finance Committee

LFC CAPITAL OUTLAY QUARTERLY REPORT

On August 19, 2022 Legislative Finance Committee released its report on the state capital outlay. It was reported that the state has nearly $4 Billion in outstanding capital funds that will be spent.

According to the report, strong state revenues and an influx of federal funds have contributed to historically large investments in capital projects at the same time supply chain, construction cost, and labor issues are slowing progress on the projects, contributing to outstanding balances of $3.8 billion across about 4,600 active projects.

The following key points are listed in the August LFC Capital Outlay Quarterly Report:

  • “At the start of FY23, outstanding capital outlay funds totaled approximately $3.8 billion, including projects authorized by the Legislature through 2022 ($2.1 billion), earmark projects ($295.6 million), supplemental severance tax bonds for public schools ($539.2 million), and special appropriations to capital projects ($905.9 million). The last figure represents uncommitted and unspent funds from $977.4 million in special appropriations during the 2021 special and 2022 regular sessions.
  • The Board of Finance split the severance tax bond sale for new projects into two issuances due to market conditions. Roughly $322.5 million was sold in June, with a second sale planned for September.
  • Roughly 4,600 active projects are underway.
  • Funds for state-owned projects have been spent more quickly than local project funds, with 56 percent of statewide appropriations through 2021 expended compared with 39 percent for local projects.
  • Severance tax bonds are the primary source of outstanding balances, accounting for 65 percent of unexpended funds ($1.5 billion). Other major sources include general fund ($360.5 million) and general obligation bonds ($239.6 million).”

$823 MILLION IN THE 2022 CAPITAL BILL WAS ROUGHLY EVENLY SPLIT BETWEEN LOCAL AND STATEWIDE PROJECTS

“In Senate Bill 212, the 2022 Legislature appropriated $396.2 million to 79 statewide projects and $394.2 million to 1,147 local projects, with the local project funds distributed at the discretion of individual senators, representatives, and the governor.

Major statewide appropriations in the bill include

  • $20 million for a Department of Public Safety administration building in Albuquerque, • $20 million for new small homes at the New Mexico Veterans’ Home,
  • $20 million for a film academy, • $26 million for public safety radio communications infrastructure, and
  • $75 million for maintenance and repair of public schools. Appropriations to local projects in 2022 fell into several major categories
  • $87.2 million for water, wastewater, solid waste, and utilities projects; • $48.5 million for law enforcement and public safety projects;
  • $46 million for highways, roads, and bridges;
  • $35.2 million for parks and recreation projects; and
  • $33.1 million for public school projects. Both the number and average dollar value of appropriations to local projects have increased since 2018, but it remains difficult to fully fund critical infrastructure with capital outlay.

The $394.2 million appropriated to local projects in 2022 represented a 563 percent increase over the $59.5 million that went to local projects in 2018. The increase in revenue has allowed lawmakers to fund more projects at higher amounts.

For instance, 222 water, wastewater, dam and acequia projects received capital outlay in 2022 compared with 86 in 2018, and the average value of those appropriations was 204 percent higher in 2022.

Nevertheless, most of those appropriations were likely insufficient to fully fund the projects. The average capital outlay appropriation to water projects was roughly $298 thousand in 2022.

 In comparison, the average project award from the Water Trust Board was $2.1 million.”

The link to the full August 19 LFC Capital Outlay Quarterly Report which list projects is here:

Click to access Capital%20Outlay%20Quarterly%20Report%20August%202022.pdf

COMMENTARY AND ANALYSIS

The upcoming 2023 New Mexico legislative session that begins January 17 is a 60-day session. The is no doubt the debate on how to spend the historic surpluses is now underway.  Job creation, economic development,  public education,  early childhood care development programs, the courts and law enforcement funding, funding for our behavioral health care system destroyed by the previous Republican Governor, major infrastructure needs such as road and bridge repair,  complete funding of the 222 water, wastewater, dam and acequia projects identified by the 2022 legislature, major capital outlay projects,  funding for  the courts and the criminal justice system, funding for the Public Employee Retirement funds to deal with underfunded liabilities and benefits  and tax reform will all be likely topics of discussion during the 2023 legislative session.

Indeed, the 2023 legislative session could very well turn out to be a “once in a century opportunity” to really solve many of the state’s problems that have plagued it for so many decades.

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About

Pete Dinelli was born and raised in Albuquerque, New Mexico. He is of Italian and Hispanic descent. He is a 1970 graduate of Del Norte High School, a 1974 graduate of Eastern New Mexico University with a Bachelor's Degree in Business Administration and a 1977 graduate of St. Mary's School of Law, San Antonio, Texas. Pete has a 40 year history of community involvement and service as an elected and appointed official and as a practicing attorney in Albuquerque. Pete and his wife Betty Case Dinelli have been married since 1984 and they have two adult sons, Mark, who is an attorney and George, who is an Emergency Medical Technician (EMT). Pete has been a licensed New Mexico attorney since 1978. Pete has over 27 years of municipal and state government service. Pete’s service to Albuquerque has been extensive. He has been an elected Albuquerque City Councilor, serving as Vice President. He has served as a Worker’s Compensation Judge with Statewide jurisdiction. Pete has been a prosecutor for 15 years and has served as a Bernalillo County Chief Deputy District Attorney, as an Assistant Attorney General and Assistant District Attorney and as a Deputy City Attorney. For eight years, Pete was employed with the City of Albuquerque both as a Deputy City Attorney and Chief Public Safety Officer overseeing the city departments of police, fire, 911 emergency call center and the emergency operations center. While with the City of Albuquerque Legal Department, Pete served as Director of the Safe City Strike Force and Interim Director of the 911 Emergency Operations Center. Pete’s community involvement includes being a past President of the Albuquerque Kiwanis Club, past President of the Our Lady of Fatima School Board, and Board of Directors of the Albuquerque Museum Foundation.