June 8, 2017

Beyond the compromise: How legislators and the governor balanced the budget with a dirty band-aid

For most of this year, the budget was the hottest topic for legislators and the governor. Both branches battled, then came to an agreement no one seems enthusiastic about.

The deal suggested by Gov. Susana Martinez essentially amounted to using bonding money normally reserved for state infrastructure to balance the budget. State lawmakers request the bonding money for state infrastructure projects.

Issuing bonds works like a home mortgage: the state borrows money backed by oil and gas revenue and pays it back with interest over the years.

Senate Finance Committee Chairman John Arthur Smith, D-Deming, said the funding method “sets a poor precedent” while Senate Minority Leader Stuart Ingle, R-Portales, said he didn’t “like to do this either.”

And yet, the plan passed with a unanimous vote in the House of Representatives and just two dissenting votes in the Senate.

“It was an unusual circumstance, there’s no doubt about that,” state Sen. Carlos Cisneros, D-Questa and cosponsor of the bill, said in an interview.

The Department of Finance and Administration, the state agency under the Martinez administration that played a big role in crafting the deal, did not respond to questions for this story before press time.

Normally New Mexico funds government operations with oil and gas revenue. But a crash in the price of oil coupled with less overall incoming revenue from various types of tax cuts over the years prompted New Mexico’s budget crisis this year. The state’s reserve funds, which as recently as 2015 equalled more than 11 percent of New Mexico’s recurring revenue, are now less than one percent. In other words, lawmakers can no longer dip into the reserves to resolve budget issues.

And Martinez has remained firm on her “no new taxes pledge”— with an exception for limited increases alongside a massive overhaul of the state’s tax structure that she and lawmakers could not agree on—leaving few options, according to lawmakers like Cisneros.

“I think we were in a box. It was an extraordinary time and we were struggling with how we were going to balance the budget,” he said.

Not a usual tactic

States don’t often dip into bonding money to balance budgets, said John Hicks, executive director of the National Association of State Budget Officers in Washington D.C.

“I’ve only seen it done typically in very tough fiscal times,” he said. “Generally it’s not recommended for just all the structural imbalances and that.”

Hicks said he saw states resorting to this more frequently during the economic downturn of the late 2000s. Since then, he has seen it happen “only a few times in the last few years.” States typically resort to this type of funding mechanism to resolve a short-term budget crisis, and avoid repeating it in future years.

Though he co-sponsored the bill to approve the budget solvency measure, Cisneros argued that bonding money is better spent on projects like repairing degrading state buildings. That’s because the state has to pay back interest on bonds, sometimes for years or decades. The interest rate for spending on the budget bill is estimated to be at 2.29 percent over 10 years, or roughly $9.25 million on $71 million worth of severance tax bonds over that period of time.

Paying this interest back on a tangible, one-time project, like a state building that gains in property value over the years, is wiser  than paying it back on salaries, Cisneros said. State government salaries, on the other hand, are expenses that recur and must be paid for every year.

On the other side of the argument, supporters of the tactic argue using bond money to balance the budget can be seen as a better option to fix a short-term problem than furloughing public employees, furthering cuts to state spending or raising taxes.

Using bond money for the budget isn’t unprecedented. New Mexico also resorted to it during the recession and during a special session in the fall of 2016.

“We’ve done it before, but not to the extent and degree we did for this go-round,” Cisneros said.

Still, New Mexico hasn’t gone as extreme in this practice as, say, the city of Chicago, which recently balanced its budget with loans that are estimated to cost taxpayers $1.1 billion in interest over 20 years. But at the close of the special session last month, lawmakers like Smith warned about this tactic potentially becoming a new normal in the coming years.

A closer look

The budget-balancing plan approved in the special session is a multi-layered process. The legislature approved issuing $81 million in short-term severance tax bonds normally used for school repair projects, commonly known as “sponge” bonds, and redirected them to the general fund. These sponge bonds only earn interest for one day, so the amount the state must pay is estimated to be low, around $80,000, according an estimate by the state Board of Finance.

Then, in an effort to make sure schools don’t lose funding, the plan takes $71 million in long-term, 10-year severance tax bonding capacity normally reserved for capital outlay spending and roughly $10 million more in bonding capacity that would otherwise go to the water project fund and transfers these to the school fund.

These long-term bonds must be paid back at a 2.29 percent interest rate over 10 years. This is according to an estimate by the Board of Finance, which calculated the figure to be paid back at $9.25 million estimated from $71 million.