January 29, 2017

Legislators look ahead to deal with next budget

When state Human Services Secretary Brent Earnest goes before lawmakers to speak about his budget for the Medicaid insurance program, many want to run for cover.

One year, he needed as much as $100 million from the general fund to fully pay for all the new enrollees under the federal Affordable Care Act and provide the same level of service. Last fall, he said he needed another $80 million for the fiscal year that begins July 1.

On Thursday, he told the House Appropriations and Finance Committee that request had dropped to $42 million. “This is a significantly better picture than you saw in the fall,” Earnest said. And that was about the best news lawmakers heard all week.

After spending the first two weeks of the 2017 legislative session scraping together unspent money and cutting services to balance the general fund budget for the current year, lawmakers will begin working anew this week on crafting a $5.9 billion spending bill for fiscal year 2018.

Though it will be a new budget, much of the political realities over the past several years remain intact — balancing a budget with rising costs and no new revenue. That construct is unlikely to change unless Gov. Susana Martinez softens her vow not to raise taxes during her tenure as governor.

“It’s going to be an austere budget without new revenue,” said Sen. John Arthur Smith, D-Deming, chairman of the Senate Finance Committee.

When lawmakers were called back to Santa Fe in October to patch deficits for both the 2016 and 2017 fiscal years, many thought Gov. Martinez had overplayed her hand with fiscal austerity. Moody’s downgraded the state’s credit outlook in part because of dwindling cash reserves, and public attention was focused on spending cuts to higher education and state agencies.

Although Democrats and Republicans in the Senate came together in the special session to put forward a package of bills that would increase some taxes and close loopholes — including collecting gross receipts tax on out-of-state internet sales, most of the measures died in the House, which was then controlled by Republicans.

After Democrats regained control of the House of Representatives with a 38-32 majority, there was hope some of the revenue proposals might gain enough support to override a possible Martinez veto.

Smith said there is still support in the Senate for many of the measures, especially closing the loophole that allows out-of-state internet sellers to avoid paying sales tax in the state. He also said there is support for finding more money for the road fund and backing an effort supported by hospital executives for some fees to be earmarked toward supporting Medicaid.

But with lawmakers back in session, it seems unlikely any effort to boost state taxes or fees would pass with the 10 House Republican votes needed to override a veto by the governor.

At a breakfast meeting with business leaders last week, Rep. Nate Gentry, the Republican House floor leader from Albuquerque, said they would resist the “rush to raise taxes.”

And Gov. Martinez herself has said that the focus of the 2018 budget would be to “right size” government, not increase revenue. To do that, she is looking at more government consolidation.

“I’m pretty sure that any stand-alone tax increase will not be supported by the Republican caucus,” said Rep. Jason Harper, a Rio Rancho Republican who serves on the House Taxation and Revenue Committee.

He is backing a broader measure that would eliminate most exemptions in the gross receipts tax code, a move that would cut the overall rate in half. His bill has not yet been introduced, but includes extending the tax to out-of-state internet sales.

He said the bill includes tax increases and reductions and would would initially raise a bit more revenue to increase state reserve levels. But he sees the entire package as a way to ensure fiscal solvency so lawmakers can’t pick and choose just the tax increases or the reductions according to politics.

“You’ll love 80 percent of the bill and you’ll hate 20 percent of it,” he said. “By putting it in a package, we can all go home and brag about particular aspects we like. It’s a strategy, but I think it’s the only one that will work.”

Even without Harper’s bill, there are some signs that the spending cuts might be coming to an end. A new revenue tracking report indicates that gross receipts tax collections in the state are running ahead of last year. November 2016 was only the second month in the last two fiscal years in which monthly revenue was greater than the same periods in the prior fiscal year, “indicating a possibility the state may have finally hit bottom for revenue declines,” according to a report by an economist with the Legislative Finance Committee.

A full revenue estimate for fiscal year 2018, which begins July 1, is expected in mid-February. That analysis will be used to build the revenue target for the budget.

Smith said one big upside for the forecast is that the price of crude oil has stabilized. A year ago, West Texas crude dropped below $30 a barrel, and that contributed to the fall off in state revenue.

Money flowing into the state from the energy sector comes from royalty payments as well as spending by workers and retail operators. Each $1 change up or down in the price of crude equates to $10 million for the state general fund. The budget for 2018 was drafted based on a price of $48, and today it is $53.

Even with a bit more money, Smith doesn’t see more spending. Most lawmakers want to use any money beyond what is appropriated to restore general fund reserves, now at about 2 percent of spending, to 5 percent or more, one measure watched by rating agencies.

Others want to build up a stabilization fund for Medicaid in anticipation of federal cuts to the program from the Trump administration.

Contact Bruce Krasnow at brucek@sfnewmexican.com.