August 29, 2019

Projections show big budget surplus, thanks to volatile oil and gas money

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The oil boom continues to roll, and thanks in large part to the funds, the latest projection finds New Mexico will have nearly over $900 million in “new money” next year.

That’s what the Legislative Finance Committee was told at a hearing Wednesday. The latest projections show that, buoyed by the oil and gas revenue, the state could see $907 million in excess of what it spent in this year’s budget, the second straight year with massive budget surpluses. 

The increased revenues gives legislators more money to budget for increased spending in areas like education, healthcare and infrastructure and to add to reserves to guard against future economic slowdowns.

Slowdowns could come because of the boom and bust nature of the oil and gas industry, which is over 40 percent of the state’s revenue. And there are some fears that the ongoing trade war with China and other international economic activities could lead to a global recession.

In an LFC Hearing Brief released Wednesday, committee staff noted that revenue volatility makes the projections difficult. While the brief, put together by committee Chief Economist Dawn Iglesias and economist Ismael Torres, cites a Pew study that found New Mexico was less volatile than other energy-heavy states like Alaska and North Dakota, it found that volatility in the oil and natural gas industry is on the rise.

“At the core of New Mexico’s fiscal stability problem is the increasing reliance on volatile revenues from the extractives industry,” the brief states.

New Mexico has sought to reduce the volatility with a “rainy day fund” which puts oil and gas revenue in excess of the five-year average into a fund to help guard against downturns the oil and gas markets. Projections say that nearly $500 million will go into the fund over the next two years which already saw $197 million from the initial deposit this fiscal year.

In his testimony to the committee, retired NMSU economic professor Jim Peach also preached caution and noted that even with the new funds, New Mexico is struggling to recover from the Great Recession a decade ago. Peach noted that, when adjusting for inflation, the $7.4 billion in Fiscal Year 2020 money is “about the same as expected revenue in FY08 or FY09” of $6.2 billion.

Peach also warned that growth outside of the oil patch is weak.

The next legislative session, when legislators will craft a budget, will take place in January and the lawmakers will hear more budget projections as the session nears.