Chair of the Action Committee

NM faces difficult choices in budget redo

By Dan Boyd / Journal Capitol Bureau Chief  Wednesday, April 8th, 2020 at 9:21pm

Copyright © 2020 Albuquerque Journal

SANTA FE – New Mexico’s budget surpluses are receding in the rearview mirror, with the state staggering from a one-two punch of falling oil prices and a business slowdown due to the coronavirus.

That double whammy has top-ranking lawmakers bracing for difficult budget decisions during a special legislative session that’s expected to be called this summer.

“We’re going to have to do some major recalibration on the budget,” said House Appropriations and Finance Committee Chairwoman Patricia Lundstrom, D-Gallup, adding that lawmakers will likely have to address a revenue downturn of at least $1 billion.

“Everything is going to have to be on the table,” Lundstrom added.

That could mean spending cuts, drawing down the reserve levels and the clawing back of proposed one-time spending – including $320 million for a new early childhood trust fund and $180 million for statewide road repairs.

However, Lundstrom told the Journal a pared-back spending plan would likely not include across-the-board cuts, saying she would favor keeping funding levels intact for health care programs and economic development initiatives.

“What we’re trying to do is make sure we’re not cutting things that are critical,” Lundstrom said.

But approved pay raises for teachers, judges and other state workers that are now scheduled to take effect July 1 could be reduced – or put on hold.

“All the things we hoped for, they’re back on the table,” said Sen. Steven Neville, R-Aztec.

Neville said there are many “unknowns” about the budget situation, including how quickly businesses can bounce back once a state-mandated closure order is lifted and whether the federal government will approve additional stimulus funds for states.

But it appears increasingly clear that a $7.6 billion budget plan approved by lawmakers in February for the fiscal year that starts in July will have to be scaled back significantly.

That budget plan calls for state spending to increase by roughly $535 million – or about 7.5% – over current levels.

Gov. Michelle Lujan Grisham said last month that a special session to bring spending levels for the coming budget year in line with reduced revenues is inevitable.

But she said her administration wanted more clarity on federal relief funding and new state revenue estimates before setting a session date.

Top lawmakers now say they expect the special session will take place in mid-June.

Rainy day fund

A silver lining for New Mexico amid the increasingly gloomy financial outlook is found in the state’s reserves.

In December, the state was projected to have $1.7 billion in reserves at the end of the current budget year in June, or nearly 25% of state spending.

Even if that number ultimately ends up being smaller, there should still be enough money in reserves to avoid emergency budget-balancing measures for the current budget year, which ends June 30, leading legislators say.

That’s largely due to 2017 legislation sponsored by the late Rep. Lorenzo “Larry” Larrañaga that called for a certain amount of oil and natural gas taxes and royalties to be set aside in cash-flush years.

That rainy day fund, technically known as the tax stabilization reserve fund, has grown rapidly in the past several years – when oil production levels skyrocketed – and is projected to have more than $1.3 billion in it at the end of the current fiscal year.

Given that backdrop, a Tax Foundation report released this week found New Mexico was one of the “best prepared” states for the crisis – along with Wyoming, Alaska, North Dakota and West Virginia.

But the report also noted several of those states could be hit particularly hard due to their reliance on oil and gas-related revenue.

“States like Wyoming, Alaska, North Dakota and New Mexico have rainy day funds that would be the envy of the nation were it not for the unique challenges resource-dependent states face as energy prices plummet,” the report by the nonpartisan group said.

Unlike some other reserve accounts, New Mexico’s rainy day fund can be accessed only by a two-thirds vote in both the House and Senate, an action that could be necessary during the special session.

Outlook unclear

Lujan Grisham said this week that her administration is expecting coronavirus cases to spike in New Mexico by the end of this month or early May.

Once infection rates subside, the governor suggested there would likely be a gradual lifting of the business closure order by sector, but she said no firm plan is in place and said she could not predict exactly when that might happen.

“We have to get the economy going again,” Lujan Grisham said during a Tuesday meeting of the State Investment Council that was conducted by telephone.

Federal funds could help in that effort, and a $2 trillion stimulus package approved by Congress last month included an estimated $1.25 billion for New Mexico. But that money cannot be directly used to backfill state programs, according to the Legislative Finance Committee.

Instead, the money will be spent on expanding unemployment benefits and one-time $1,200 checks for most state residents, though some New Mexicans may not get those funds for weeks.

Meanwhile, Lundstrom said lawmakers may pass a budget adjustment package during the special session, then do more budget-balancing work during the 60-day session that starts in January 2021.

“Our world has changed, and nobody could have guessed it a month or so ago,” Lundstrom said.