January 27, 2020

Republicans caution against overspending as reserves hit all-time high

Laura Paskus

Rarely has the phrase “financially prudent” been so hard to define at the Roundhouse. 

Amid the backdrop of a flush revenue stream and looming legislative races in November, Republicans are hammering away at Democrats and Gov. Michelle Lujan Grisham in the early days of the 2020 session — contending they are overspending in a state inextricably reliant on the unpredictable oil and gas industry.

Yet Democrats say their spending plan is fiscally responsible, and key components of their argument are backed by the influential Legislative Finance Committee. 

An estimated 45 percent of general fund revenues are now dependent on oil and gas, and GOP members argue that when that contribution declines, the state will be hard-pressed to find funding for new budget increases in early childhood and higher education the governor has proposed this session.

Lujan Grisham is proposing a $7.68 billion budget for fiscal year 2021, including a $74 million increase to the Early Childhood Education and Care Department, $200.3 million more on K-12 education, a 4 percent pay raise for teachers and $35 million for the Opportunity Scholarship program.

For Minority Leader Jim Townsend, R-Artesia, Minority Whip Rod Montoya, R-Farmington, and other Republicans in the Legislature, the governor’s proposed 8.5 percent spending increase from last year is “irresponsible.”

“When we say it’s irresponsible, those words are not hyperbole. It is a fact — it’s irresponsible. We know what the sustainable track is,” said Montoya, who has introduced legislation to put a measure on the ballot that would dramatically limit the amount that state government can spend in surplus budget years.

Republicans, who are badly outnumbered in both the House and Senate, are working on unveiling a budget counterproposal that is far more conservative.

The governor’s budget recommendations include a 25 percent reserve target and creating a new Early Childhood Trust Fund that would receive an initial appropriation of $320 million.

Although reserves are at a historic high, Republicans argue the state should stow away closer to 30 or 35 percent of its revenue.

But Lujan Grisham defended her spending proposal late last week, saying her administration aims to create sustainable funds for an eventual decline in oil prices or downturn in the economy. 

“It disappoints me a little because I’m saving a ton. … I think we’ve been reasonable and frankly really smart,” Lujan Grisham said, adding the state is still playing “catch up” following years of belt-tightening amid a severe 2016 drop in oil prices.

She said individual GOP lawmakers have actually pushed for more spending on capital outlay projects in their home districts in exchange for a lower reserve target.

“These are the very same Republicans who are asking me about the capital outlay and aren’t interested in the 25 percent reserve,” Lujan Grisham said.

Montoya and Townsend said the 25 percent in reserves called for in the governor’s and the Legislative Finance Committee’s budget recommendations would pay for government services for only about three months in the event of an oil price crash or economic downturn. 

Yet calculations by state economists cited in the governor’s budget recommendations project the state’s reserves would withstand a two-year downturn in the economy or a decline in the oil and gas market.

State Rep. Patricia Lundstrom, D-Gallup, chair of the House Appropriations and Finance Committee, argued lawmakers have put in place “guardrails” such as the Tax Stabilization Reserve set up in 2017 to help it through an economic downtown.

Lundstrom said she has not heard similar criticism of overspending from GOP colleagues on the panel she chairs. She added that spending money is a good way to get returns to the state in the form of income and gross receipts taxes.

“Those things come back into our coffers,” Lundstrom said. “We wouldn’t see those things if it just stayed in a savings account.”

Lundstrom added that state economists predicted roughly 10 years of stable revenue from New Mexico oil and gas fields.

Still, some Republicans say they are concerned about committing to recurring funding with a revenue stream that is inherently impermanent.

“If you knew you were gonna lose your job tomorrow, would you want just three months, or would you want to run it out a little bit?” argued Townsend.

Rep. Jason Harper, R-Rio Rancho, said the state should raise its budget by 3.5 percent per year to safeguard its finances against a downturn, citing his own calculations based on growth, inflation and population.

Harper, a member of the House Taxation and Revenue Committee and the Legislative Finance Committee, said the governor’s proposed 8.5 percent spending increase is too high. The state budget rose about 12 percent last year.

“That means we’re going to have to make serious cuts in the very near future,” said Harper, referring to the next oil crash or economic downturn.

“Because we’re putting all the money in education, that’s where the cuts are going to go,” he said. “Are we going to be upset to be cutting teachers’ salaries after just bragging about raising them the most they’ve ever been raised and all that? It’s going to be political suicide.”

Senate Minority Floor Leader Stuart Ingle, R-Portales, expressed concerns about committing budget surpluses to recurring expenses rather than one-time expenditures such as roads and other infrastructure spending.

“We’ve got to be pretty careful” about new spending, he cautioned, especially when it comes to creating new departments because “they never do get smaller.”

But he acknowledged that 25 percent in reserves is higher than New Mexico has ever had.

“Oh God, yes,” Ingle said.