Oil boom drives NM revenues to record high

Aug 28, 2018

Record High

Dan Boyd | Albuquerque Journal | August 22, 2018 

TAOS – After several cash-lean budget years that prompted spending cuts and other austerity measures, a big revenue boom has hit New Mexico. 

State lawmakers will have an estimated $1.2 billion in “new” money available in the coming budget year due to unprecedented oil production levels and overall economic growth, according to new revenue figures released Wednesday by legislative and executive economists.

The state is on track to spend $6.3 billion this budget year, while revenues are expected to reach $7.5 billion for the 2020 budget year, which starts next July 1.

New money is defined as the difference between projected incoming revenue and current state spending levels.

“Hopefully, we won’t foul this thing up,” Sen. John Arthur Smith, D-Deming, vice chairman of the Legislative Finance Committee, said after the revenue estimates were presented at a meeting in Taos. “It’s great news for the entire state, but we still have huge economic problems.”

The eye-opening revenue figure could allow for state spending levels to hit an all-time high, and give lawmakers options to increase spending on public schools, health care and other programs next year, when a new governor will be in office.

One legislator even raised the possibility of its paving the way for a funding boost for several University of New Mexico athletics programs that are scheduled to be eliminated.

However, economists cautioned that the projected revenue growth – an 18 percent spike from current spending levels – is based primarily on taxes and royalties associated with oil drilling in southeastern New Mexico, a historically volatile revenue source.

“This spike is unprecedented,” Legislative Finance Committee chief economist Jon Clark told lawmakers. “We’re relying on the oil industry more than we ever have before.”

Clark and other economists recommended lawmakers maintain cash reserves of at least 20 percent of state spending – or more than $1 billion.

In addition, the state’s two large public retirement systems are facing long-term funding concerns and lawmakers have been ordered by a judge to come up with a plan by April to ensure at-risk public school students, including Hispanics, Native Americans and English-language learners, receive an adequate education.

Rep. Patricia Lundstrom, D-Gallup, chairwoman of both the LFC and a key House budget-writing panel, said the revenue boom will allow lawmakers to backfill funding for programs that were cut in recent years.

But she cautioned that not all state agencies will receive budget increases, saying, “I would not suggest that will necessarily be the case.”

“I’d be very interested in restoring those four sports, but I’ll be taking a very close look at everything else for UNM,” Lundstrom said.

‘Economic driver’

New Mexico is among the most volatile states in the nation when it comes to annual revenue streams, and it has historically relied heavily on oil and natural gas taxes and royalties to help pay for state government operations.

There are now 104 active drilling rigs in the state, up from 62 year a year ago, according to the New Mexico Oil and Gas Association, whose executive director, Ryan Flynn, on Wednesday called the industry the state’s “economic driver.”

Specifically, surging oil production in the Permian Basin in southeastern New Mexico accounted for 85 percent of the state’s forecast revenue growth since January, according to the LFC.

The oil boom has also had a ripple effect on other industries, as two oil-rich counties – Lea and Eddy – accounted for roughly two-thirds of the state’s gross receipts tax revenue growth in the budget year that ended in June, according to the Department of Finance and Administration.

There has also been economic growth, albeit slower, in Bernalillo County and other parts of the state, including in the construction, manufacturing and retail sectors. And the state’s jobless rate dropped significantly over the past year – from 6.1 percent to 4.7 percent.

But 12 New Mexico’s counties, most of them largely rural, still posted declines in their gross receipts tax collections in the most recent budget year, and the state continues to have one of the nation’s highest poverty rates.

“While we are seeing rising revenues at the state level, not every county is experiencing this,” Clark said.

At a state level, the revenue boom has already allowed New Mexico to replenish cash reserves that were depleted during the recent economic downturn and $177 million is projected to be set aside next July in a recently created “rainy-day” fund that would be available to lawmakers for future budget crunches.

Political implications

The state’s revenue uptick could also play a role in this year’s election season.

Republican gubernatorial nominee Steve Pearce urged using the available dollars to increase funding for public schools, infrastructure needs and the state’s mental health system, while also potentially allowing for tax cuts for the elderly to be enacted.

He also said his opponent, Democrat Michelle Lujan Grisham, would curtail the oil drilling boom, an apparent reference to her plan to bolster the state’s renewable energy industry.

For her part, Lujan Grisham also cited infrastructure and education as top budget priorities, while claiming Pearce had voted against renewable energy and career education programs while a member of Congress and, previously, the state Legislature.

Meanwhile, acting Taxation and Revenue Secretary John Monforte attributed much of the state’s budget turnaround to the policies of outgoing Gov. Susana Martinez, who inherited a budget shortfall upon taking office in 2011.

Some lawmakers and economists have questioned that claim, and Senate budget guru Smith said Wednesday that lawmakers had already been working on fixing a previous budget crunch before Martinez became governor.

In a statement Wednesday, the two-term Republican governor described the revenue boom as the “largest budget surplus in New Mexico history.”

“By right-sizing government, cutting taxes and strengthening our economic development tools we are growing and diversifying our economy,” Martinez said. “Our private sector is booming, and we are creating new jobs and bringing investment to our state.”