December 4, 2017

Cautious optimism as state’s budget situation improves

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New Mexico finally received some good news on the budget after two years of sharp downward trends. Of course, recovering from those losses will still take time.

This morning, two cabinet-level secretaries and the Legislature’s top economist presented revenue estimates to the Legislative Finance Committee that project the state will have $199 million in new funds for the budget next year. Presenters warned they were only cautiously optimistic on the budget surplus because of a number of potential risks that the state has little to no control over.

The news is better than what the committee heard in August, and the revenue is expected to come from larger-than-previously-expected growth revenues from personal income taxes, corporate income taxes and money received from the oil and gas industry. But much of the money, some legislators warned, will be needed to fill accounts and reserves depleted in recent years.

Actions at the federal level could also have large impacts on the budget and how much money legislators will be able to spend next year.

Department of Finance and Administration Secretary Duffy Rodriguez told legislators she was glad that she finally had good news to share.

But she warned the state still needs to rebuild its depleted reserves to ten percent of the budget, after they had been decimated in recent years as the state struggled to pay its bills.

Rodriguez said reserves are projected for nine percent in Fiscal Year 2019, which begins in July of next year. This means the state would need $63 million of the new funds to get to the recommended ten percent level.

Jon Clark, the chief economist with the Legislative Finance Committee, cautioned that much of the new money would go toward rebuilding reserves. Over the past TK years, New Mexico has used $213 million in nonrecurring funds to fill the budget gaps.

“Clearly there are some budget holes that need to be filled with these revenues,” he said.

“We’ve also robbed every corner in the State of New Mexico that we could rob,” Senate Finance Committee chairman John Arthur Smith, D-Deming, said. Smith added that nearly $6 million of the state road fund used to shore up budget shortfalls.

“We’ve got an awful lot of reconstruction that has to take place from a state standpoint,” he said.

Rodriguez and Clark each mentioned the “stress test” done by Moody’s Analytics which said New Mexico would need ten percent reserves to weather a moderate recession and 17 percent worth of reserves to handle a larger downturn on the scale of the Great Recession.

That wouldn’t be the only risk to throw New Mexico’s budget into a crisis again.

“We don’t need a severe national recession for New Mexico to need that reserves level,” Clark warned. He said combinations of a loss of oil and gas revenue and losing some big tax protests could put New Mexico’s budget in a hole even without a recession.

The specter of the impacts of a likely federal tax overhaul also loomed large.

The Senate passed a version of a tax bill last week deep in the middle of the night. The U.S. House and Senate must reconcile language in the bill before sending it to President Donald Trump for his signature.

Independent estimates have said the bill will increase the federal budget deficit by more than $1 trillion. If so, an Obama-era law limiting how much the federal government can spend without offsetting it would kick in and mandate sequestration, which could cost New Mexico hundreds of millions of dollars, largely from federal mineral leasing payments and Medicare spending.

Republican congressional leadership has said this will not take place.

Rodriguez said state economists could not analyze the impacts until there was final language on the federal overhaul. She said it would have major positive and negative impacts, but the severity was not yet clear.

Acting Taxation and Revenue Department Secretary John Monforte said the Medicaid expansion and growth in personal and corporate income taxes kept the state afloat over the last few years.

Still, he was also concerned about possible sequestration.

“We’re dependent on federal funds to a high degree and concern that that would have moving forward,” Monforte told legislators.

Employment has improved in the state, and total employment is expected to reach 2008 levels by 2019, according to Rodriguez. She said that here is a “diversity” of increases in employment by sector, with declines in federal government and mining jobs offset by hiring in other sectors.

“There’ so many things we have no control over, “ Sen. Sander Rue, R-Albuquerque, said.

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