The Legislative Finance Committee (LFC) is a bipartisan panel of lawmakers, both state senators and representatives, who work on the state’s budget year-round. On August 23, the LFC met in Las Vegas, New Mexico where Secretary of Finance and Administration Wayne Propst briefed lawmakers on New Mexico’s revenues and the status of the state’s financial reserves used to help state government pay its bills. Propst was joined by economists from the legislative and executive branches of government to share the revenue forecast. The briefing was one of many that will occur to assist law makers in drafting the state’s annual budget before the 2024 legislative session that will begin on January 16, 2024.
Secretary Propst told lawmakers that New Mexico’s financial reserves have reached upwards of 52% of ongoing state spending this summer resulting in a financial cushion of nearly $4.4 billion. The financial cushion is being fueled by the incredible oil and gas boom and along with strong consumer spending generating gross receipts tax revenues. The windfall is expected to continue.
Propst said New Mexico legislators and Governor Michelle Lujan Grisham can expect almost $3.5 billion in “new money” for next year’s budget. “New Money” is defined as the difference between current spending levels and projected revenue for the fiscal year beginning on July 1, 2024. In otherwards, “new money” is the money left over after the state pays for all its yearly expenses. Because of the state’s economic growth, declining unemployment rates, and the state’s oil and gas industry revenues, the state has far more to spend in new money. Propst told the LFC this:
“We’re living in unprecedented, historic times in the state of New Mexico [when it comes to oil and gas revenues]. … I think we’re in a safe place as a state.”
In December of 2022, New Mexico’s economists estimated how much cash the state would earn from things like taxes and investments. Now, a new estimate shows another $866.2 million they didn’t realize they’d have for the fiscal year 2023 and $790.7 million they didn’t know they’d have for the fiscal year 2024.
This year’s projected revenue growth is a continuation of record breaking financial years for New Mexico. The increase in revenues is once again attributed to oil and gas revenue which makes up roughly 40% of the state general fund. Oil and gas revenues are historically very volatile as the markets can and have had dramatic declines and increases.
New Mexico has surged past North Dakota to become the No. 2 oil-producing state in the nation, behind only Texas. According to state economists, oil production in New Mexico hit a record high in a recent 12-month period, with even steeper increases expected in the coming years.
The revenue is expected to give New Mexico lawmakers tremendous financial flexibility as they start preparing a budget package for consideration in the 2024 legislative session.
Ismael Torres, chief economist for the Legislative Finance Committee, said the incredible growth in oil production is expected to level off and then decline. Production is expected to peak in 2031. Torrez said this:
“These surpluses may not be here forever.”
To guard against a collapse in revenue, the New Mexico legislature has been very conservative and has allocated increases of funding into what are called “permanent funds” that are designed to provide steady income. Permanent funds act like endowment accounts where investments are made and can generate income. Secretary of Taxation and Revenue Stephanie Schardin Clarke told lawmakers the state is “building a bridge from peak oil” to income that grows more predictably through investments.
TURNAROUND FROM SEVEN YEARS AGO
The revenue projections for the last 2 years are a total turnaround from 7 years ago when New Mexico policymakers were faced with major deficits and were force to spend heavily out of the state’s main reserve accounts to help the state government finance essential services and pay its bills. In 2016 and 2017 a dramatic crash in oil prices occurred. The state faced a downgrade in its credit rating and had the nation’s highest unemployment rate.
In order to avoid any and all tax increases despite any need, then Governor Susana Martinez and the legislature responded with a series of budget cuts and sweeping cash out of various state accounts to ensure the state could pay its bills. The state was forced to empty its main reserve accounts. As a result, the state had just 2.4% of recurring spending in reserves in 2016. Most of the reserve funding came from a tobacco settlement fund and it was a reserve of last resort.
As a result of the dramatic turnaround from 7 years ago, the budget approved for this year increased ongoing spending by upwards of 14% to roughly $9.6 billion over last year. In addition to the increase spending, lawmakers phased in reductions in the state’s gross receipts tax rate and twice issued one-time tax rebates to taxpayers.
The legislature’s financial strategy also included the creation of endowment-like accounts intended to generate steady income, even if oil revenue dips. The most notable endowments created were for early childhood education programs. Lawmakers also established new reserve accounts bolstered by automatic transfers of surplus revenue.
According to Secretary Propst, notwithstanding the dramatic turnaround in revenues, the state still faces downwards market risks. A good example of such risks includes disruptions in the energy market spurred by Russia’s attack on Ukraine. There are also upside scenarios that could push revenue even beyond today’s robust expectations.
LEGISLATORS BEGIN DEBATE ON WHAT TO DO WITH SURPLUS
New Mexico law makers are already beginning to discuss what do to do with the surplus. The first will be to again put more funding into “rainy day” permanent funds but other ideas are emerging. The ideas being discussed include everything from tax reform, health care, education and infra structure.
While some of the money will be set aside for permanent funds, like the Early Childhood Trust Fund, State Senator Pat Woods, who represents Curry, Quay, and Union counties, says these programs are overfunded and hopes to put more money in future funds. Woods said this:
“We have so much money in the program right now that we are not able to, we are about to the maximum, of what we can employ for state government. … We have a lot of unfilled vacancies in state government, but we are not having any luck filling them – therefore we can’t produce much more programs.”
With the extra money in the budget, New Mexico House Republican Minority Leader Ryan Lane wants to tackle tax reform which is borders on a Republican broken record. Lane said this:
“I think we need to take a hard look as legislators as to why are personal income taxes are so high when we have such a surplus. … I think we should tackle some comprehensive tax legislation to really put more money back into our New Mexico working-class taxpayer pockets.”
Higher education is always a big focus for state Democrats and it to borders on another broken record. They say this is a unique opportunity to fund education while also saving for future years, when the budget may not be as big. Democrat Sen. George K. Muñoz, the LFC Chairman who represents Cibola, McKinley, and San Juan counties, said this:
“Now we are able to hold state budgets at a certain level, hold education across the board, keep in place opportunity scholarships which is full education, free education. That is what [the surplus] … really enables us to do.”
Senator Muñoz also said the approach should be to invest and move the state from oil and gas reliance and he said this:
“We need to see past the dollar signs and focus on planning for the future because these high-revenue years won’t last. … we still have much work to do for New Mexicans, but we have an opportunity as well to move the state toward less reliance on oil and gas. … New Mexico has never had this opportunity before.”
Democrat State Rep. Nathan Small, and vice chairman of the LFC who represents Doña Ana County, agreed that the state should invest in education, as well as public safety and infrastructure. He brought up improving behavioral health care in the state. Small said this:
“Substance use treatment, investments in health care, investments to expand reimbursement, so that there are more health care professionals who can see and serve New Mexicans.”
Small also said the state is in position to make wise spending decisions and avoid wild swings in the annual budget. Small put it this way:
“We’re in such a different era. … We have the opportunity to exit the roller coaster and get onto a steady climb to a broad prosperity for our state.”
Broadview area Republican Sen. Pat Woods suggested the strength in New Mexico’s oil and gas industry is masking other economic weaknesses, such as the state’s persistently low labor force participation rate. Woods said this:
“I have a hard time quite believing that we can replace the extractive industries in our state with the wealth of simply investing out of state.”
Farmington Republican Senator Bill Sharer said the state needs to invest the extra cash ostensibly to diverse the economy. Sharer said this:
“We don’t want to squander $3.5 billion when we can use it for investments that will allow us to weather economic downtowns. The question is, where do you put the money where it grows? New Mexico certainly has issues it needs to address but the focus should be how to take today’s money and turn it into future money.”
GOVERNOR’S TAKE ON WHAT TO DO WITH SURPLUS
New Mexico law makers and Governor Michelle Lujan Grisham will likely once again consider another round of tax rebates. Over the last fiscal year, the state paid residents more than $780 million in rebates. When asked about the possibility of another round of rebate checks, the governor’s office responded with this statement:
“The robust general fund proves that what we are doing in New Mexico’s economy is working. … As we see another record year of projected revenue, we will continue building a solid financial future for our state through meaningful and long-lasting investments, always with an eye on stewardship of public dollars and fiscal responsibility.”
Links to quoted news materials are here:
DÉJÀ VU ALL OVER AGAIN
As Yogi Berra has been quoted as saying “It’s deja vu all over again!”
It was on August 16, 2022 during a meeting of the LFC held in Chama, New Mexico, that legislators were told by LFC executive economists the state would have a projected $2.5 billion in “new” money during the 2023 budget year that started on July 1, 2023. The total revenue was forecasted to rise from $9.2 billion in the fiscal year that ended on June 20, 2022 to nearly $10.9 billion for 2023.
During the August 16, 2022 LFC meeting, Gallup Democrat Senator George Muñoz called the then project $2.5 billion in additional revenues a “once-in-a-century” opportunity. Muñoz said at the time:
“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].”
On December 12, 2022 the Legislative Finance Committee released its Consensus Revenue Estimate for fiscal year 2024. It was reported that New Mexico’s revenues had ballooned even further with the state’s revenues from oil and gas production increasing at record levels. The new estimates released project the state will have an astonishing $3.6 billion in “new” money available for the budget year that starts on July 1, 2023.
The link to the Consensus Revenue Report is here:
On December 12, 2022 Muñoz had this to say about the $3.6 billion increased revenues:
“With this revenue forecast, there’s an opportunity knocking at our door. … No one in our state’s history has ever had this opportunity.”
Cabinet Secretary Debbie Romero of the Department of Finance and Administration told the LFC that risks exist to the record-high revenue forecast. Those risks include supply chain shortages and the ongoing Russian invasion of Ukraine. She also suggested to limit future spending obligations. She urged lawmakers to target spending during the upcoming legislation session to one-time needs like water projects, rural health care and broadband expansion. Romero said this:
“Those are the once-in-a-lifetime things we should invest in while not growing our recurring budget.”
During the last three years, New Mexico’s revenue levels have steadily increased due to surging oil and natural gas production. The spike in revenue is expected to continue over the coming year. According to the Consensus Revenue Report the latest projections by fiscal year for the last 2 full years are:
2022 – $9.7 billion, up from $9.2 billion in August
2023 – $10.8 billion, up from $9.8 billion in August
2024 – $12 billion, up from $10.9 billion in August
COMMENTARY AND ANALYSIS
Election after election, we hear New Mexico politicians running for office at all levels and elected officials from both parties repeatedly point out that we routinely rank high on the bad lists of crime, hunger, poverty, and low on the good lists of income, child well-being, places to retire, quality of education and jobs. With the historic surpluses, the state now has for the first time in its history the financial ability to really address these issues.
New Mexico, as one of the poorest states in the union and has always suffered from the inability to invest in itself to turn its economy around. The state suffers from a “poor me” mentality, and now that there is money available that can be transformative, our elected leaders do not know what to do with the surplus. With the now historical surpluses that will likely last for the foreseeable future, some economists say as many as 10 years, our state leaders need to stop saving for a rainy day and for the first time in the state’s history start investing in ourselves and spend on transformative projects and diversification of our economy.
WHAT NOT TO SPEND SURPLUS ON
Given the enormous amounts the state is now spending on education and what the state will be spending because of the enacted constitutional amendment, this years $4.4 billion surplus would be better spent elsewhere and not on public education. Public education is a reoccurring expenditure that must rely on continuing taxation. During her first term, Govern Lujan Grisham undertook to fully fund the state’s efforts to reform the State’s public education system and she was highly successful. Lujan Grisham succeeded in securing over $1 Billion dollars for public education during the 2019, 2020, 2021 and 2022 legislative sessions. In addition to the dramatic increases in public education funding, Lujan Grisham administration created the Early Childhood Department, issued mandates to the Children, Youth and Families and Public Education departments. An Early Childhood Trust Fund of $320 million was also created. The base pay for teachers has been increased by upwards of 20% and have risen to $50,000, $60,000 and $70,000 depending on the level of years of teacher experience. The ball is now in the Public Education Department’s court to start to produce results now that so much funding is in place.
Likewise, the new surplus should not be spent on another round of tax cuts and rebates. There have now been two rounds of tax rebates that the surplus has been spend on. In 2022, the legislature enacted the first round of tax rebates that cost $529.7 million. According to the state Taxation and Revenue Department, upwards of 850,000 of New Mexico’s 1.1 million taxpayers, or about 77%, received the rebates. Tax credit of $25 to $175 per child starting in 2023 was also enacted. In 2023, the legislature enacted a second waive of tax rebates of $300 for individual taxpayers and $600 for married couples which cost upwards of $1 Billion. About $440 million or half of the initial cost of the tax package went toward issuing rebates issued to all New Mexicans who filed tax returns in 2021.
Whenever surpluses in state revenues occur, Republicans always begin to salivate and proclaim all taxation is bad and that rebates and tax reform are desperately needed and the only way to go. The Republican tired and old political dogma has always been that tax revenues are the people’s money and anything in excess of what is actually needed over and above essential government services should be returned to the taxpayer. It is a short-sighted philosophy believing that only essential, basic services should be funded with taxpayer money such as public safety. If that were the case, there would be no public libraries, no museums, no zoos, no mass transit expansions and no memorial monuments.
SPEND SURPLUS ON ECOMOMIC DEVELOPENT AND STATES GROWTH INDUSTRIES TO PROMOTE ECONOMIC DIVERSITY
It’s no secret that the biggest problem with New Mexico’s economy and state funding is the state’s reliance on revenues from the oil and gas industry. 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 and politicians calling for no tax increases and slashing of budgets and government.
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 another projected surplus of $4.4 from oil an gas revenues, the state’ s decades long financial woes are turning around.
There are 10 sectors or industries that have been identified as having the best shot at diversifying New Mexico’s economy. Those industries identified are:
Film & Television
Value Added Agriculture
Recreational Cannabis And Hemp Industries
Two in-depth reports on each one of these industries can be found in the the postscript below.
The Governor Lujan Administration and the New Mexico legislature should make every effort to promote and fund public/private partnerships with each industry, provide tax breaks and incentive to those industries and make available economic development funding to encourage investment in the state.
SPEND SURPLUS ON TRANSFORMATIVE PROJECTS
Debate is now hot and heavy on how to spend the historic surpluses should be spent. There is indeed a lengthy list on what the surplus can be spent upon. The list includes:
Major infrastructure needs such as roads and bridge repair, funding for wastewater projects, dams and acequia projects, the courts, law enforcement and the criminal justice system, funding for our behavioral health care system, job creation endeavors, economic development programs, funding for the Public Employee Retirement funds to deal with underfunded liabilities and benefits are all likely topics of discussion during the upcoming 2023 legislative session. A civil mental health and drug treatment court with hospital facilities and transitional housing with services is something long overdue. All merit serious consideration and funding with the historic surplus.
What all too often is totally ignored because lack of revenues are major capital outlay projects that are for the benefit of the general public and that improve the overall quality of life. Roads and water projects are such priorities. Dozens of bridges across some of the most rural parts of the state are rated in either poor or critical condition, requiring millions of dollars to repair or replace. It will cost an estimated half-billion dollars just to bring all of the state’s bridges up to fair condition. New Mexico is getting millions of dollars in federal funding to help repair roads, bridges and tunnels in the state. In fiscal year 2023-2024, $549.4 million is going toward the state and be used to fund different programs aimed at improving safety and reducing carbon emissions. The funding comes from the Bipartisan Infrastructure Law that gives $59.9 billion in fiscal year 2023 to states across the country.
MAJOR CAPITAL OUTLAY PROJECTS SHOULD BE IN THE MIX
Given the sure magnitude of the surplus, it is likely municipalities, citizens and interest groups will be asking for funding for special capital projects such as swimming pools, parks, recreation facilities, sport facilities, such as soccer stadiums, and entertainment venues. The Governor and the legislature should listen and fund such projects while they can.
For the last two years, the New Mexico United soccer team has been trying to get taxpayer money to build a soccer stadium. In 2020, the soccer team was able to secure $4 million in state funds. In 2021, Albuquerque taxpayers were asked to support a bond to pay for the stadium, but it was rejected. With a $3.8 in surplus revenue, the legislature should consider fully funding the facility which will be about $16 million.
Other major capital outlay facilities and projects that has been discussed for decades is improving the New Mexico State Fair and all of its aging facilities. In particular, demolishing the 60-year-old Tingly Coliseum and building a multipurpose entertainment and sports facility with the capacity of upwards of 20,000 has been a dream of many a Governor, State Fair Commission and Fair Managers.
On February 25, 2019 it was reported that there is a need for such a facility and EXPO New Mexico was in the final stages of conducting a feasibility study on the construction of a new arena on the state fairgrounds. Tingley Coliseum has been around since 1957 with capacity for 11,000. Over the years it’s been remodeled and upgraded but it is still a state fair rodeo venue. The state and Albuquerque for decades has needed a large capacity, multipurpose entertainment venue of upwards of 20,000.
The upcoming 2024 New Mexico legislative session begins on January 16, 2024. it is a 30-day session known as the short session. The session will be confined to financial and budget matters subject to the Governor Michelle Lujan Grisham’s call and what she will allow to be placed on the agenda.
Governor Lujan Grisham and the New Mexico Legislature will over the next few months decide how to spend the surplus. The Governor and the New Mexico Legislature will release their own, separate, proposed budgets and spending plans in early January before the start of the 30-day session. Budgets will be drafted based on the revenue projections and will include how much in reserves for any possible future budget shortfall. During the legislative session, there will be a consolidation and a consensus budget formulated that lawmakers will then approve for the fiscal year that will start on July 1, 2024 and end June 30, 2025.
Indeed, the 2024 legislative could be a “once in a century opportunity” to really solve many of the state’s problems that have plagued it for so many decades. It should also be viewed as an opportunity to spend to diversify the state’s economy and build facilities that are needed and that will have a lasting impact on the state’s quality of life for decades to come.
Governor Michelle Lujan Grisham will have an extraordinary opportunity to propose transformative projects for the surplus. The real question is will she play it safe as she has done the last two years because she was running for re-election and concentrate on tax rebates to garner favor with voters or will she concentrate on transformative projects and investing in economic development to diversifying our economy?