Good news from New Mexico’s oil patch is boosting revenue growth for state government, economists said Thursday, providing a projected cash cushion of over 11 percent by the end of June for the state’s general operating fund.
And so far, there is no shortage of ideas for how to spend that money — possibilities range from additional dollars for crime prevention in Bernalillo County to state employee pay raises, as well as to expanded tax breaks for National Guard service, the film industry, local shopping, residential solar projects and pilot training. Gov. Susana Martinez also is hoping to reduce the gross receipts tax burden on manufacturing and service businesses by removing tax pyramiding.
Economists, however, warn that the money flowing into New Mexico’s coffers from oil production is volatile — and the state is coming out of two years in which budgets were slashed because of falling revenue. That collapse was related to a fall in oil prices, which brought less drilling, spawning industry layoffs and less spending by business and consumers in oil-dependent corners of the state.
The consensus revenue forecast presented to state lawmakers Thursday added some $158 million to last month’s prediction for what the state expects to take in this fiscal year in taxes and royalties. Likewise, the forecast adds $93 million in revenue for the 2019 fiscal year, which begins July 1.
The majority of the boost is due to record crude oil production in the southeast corner of the state, which includes part of an area known as the Permian Basin.
“About 70 percent of the year-over-year growth in FY 18 revenues is due to gains in severance tax collections and oil- and gas-related rents and royalties, and gross receipts tax revenue from Eddy and Lea counties,” according to the presentation to a House committee by Legislative Finance Committee economists Jon Clark and Dawn Iglesias.
In fact, despite the emphasis by both the governor and lawmakers to diversify the economy, the rapid rise in crude oil prices — from $46 a barrel last summer to $65 a barrel today — means 9 percent of total state economic activity is tied to energy revenue, perhaps the highest ever. Driving the extraction is new technology and horizontal drilling that is pushing the United States past Saudi Arabia in the volume of crude oil mined from its territory.
“We are more dependent on oil and gas than we ever have been, and it’s getting worse,” Clark told the House Appropriations and Finance Committee on Thursday afternoon.
But Rep. James Townsend, R-Artesia, said one thing different during the current boom is that producers can export crude oil, and pipelines to move the crude from New Mexico to ports in Texas are already under construction. He said that might result in a steadier production level, unlike the past cycles in which production has fallen steeply during economic downturns in America.
“That opens a market that producers in New Mexico have never enjoyed,” Townsend said. “I’ve read articles that they’re here for the next 50 years.”
The new numbers mean the state’s $6.1 billion general fund, the pot of dollars used for day-to-day operations, including public education and criminal justice, would close out the fiscal year June 30 with a surplus of $679 million, or 11.2 percent.
The forecast also estimates fiscal year 2019 revenues at $6.37 billion, which means the Legislature and Gov. Susana Martinez have $292 million in so-called new money to build their spending plans during the 30-day legislative session. New money is defined as the amount of unspent tax dollars above current appropriations.
New Mexico is one of just a few states where the Legislature and the governor submit their annual budgets by using the same revenue number that is reached by a consensus forecasting group, which includes experts from the administration and the Legislative Finance Committee, the budget arm of the Legislature. Once that number is published, the spending priorities for services such as education, Medicaid and courts often differ, but the total bottom-line appropriation amount is the same.
The official forecast for budgeting is released in December and often not revised before the lawmakers convene a month later. This year, a lot changed, and there was wide agreement that previous signs of strong revenue growth had become a reality, said Clinton Turner, chief economist with the state Department of Finance and Administration.
The cratering revenue in recent years also affected New Mexico’s cash reserves, which dropped to below zero and forced two special legislative sessions to balance the books. Moody’s Investors Services cut the state’s bond rating, which increases the borrowing costs for capital projects.
With reserves replenished, lawmakers and the governor hope the state’s AAA rating will be restored. On June 30, 2012, the end of the first full year that Martinez oversaw the budget, the cash balance was $713 million. Reserves peaked at the end of 2006 just short of $800 million, or 16 percent of spending.
House Appropriations and Finance Committee Chairwoman Patricia Lundstrom, D-Gallup, was among those Thursday who said the growth in energy should be viewed as a wake-up call. “We have high growth in one industry that generates all the revenue,” she said. “We need to expand the base, and we need to continue our good budget practices.”