March 7, 2020

Senate Finance chief says he’s OK with possible spending vetoes

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Only two weeks after crafting and approving the state budget, the New Mexico Senate’s top finance chief has told Gov. Michelle Lujan Grisham he would have no problem if she decides to pare back spending.

“I’ve already sent word to the executive branch that if they feel vetos are necessary, I’m not going to be objecting to those,” said Sen. John Arthur Smith, the influential chair of the Senate Finance Committee. “The last thing I want to do is go back into special session.”

Why such drastic talk only two weeks after the House and Senate agreed on a $7.6 billion budget for fiscal year 2021? To put it briefly, coronavirus.

U.S. oil prices closed at their lowest point in almost four years Friday. ExxonMobil, a major oil producer, said this week it will slow production growth in the Permian Basin, which straddles New Mexico and Texas. And the Federal Reserve announced its first emergency interest rate cut since the 2008 financial crisis over COVID-19 concerns.

The sudden drop in oil prices and the growing — yet still largely unclear — economic impact of the coronavirus could be damaging to New Mexico’s revenue, Smith said, particularly since 45 percent of it is now dependent on oil and gas.

“I would encourage the executive branch to be very, very careful on where we’re at right now,” said Smith, D-Deming. “I think we have a completely different picture for oil and gas two weeks out of the session.”

Lujan Grisham has until Wednesday to sign House Bill 2, the main budget legislation. Under state law, governors can perform line-item vetoes on the budget, meaning they can strike individual parts of appropriations bills.

Only two weeks after crafting and approving the state budget, the New Mexico Senate’s top finance chief has told Gov. Michelle Lujan Grisham he would have no problem if she decides to pare back spending.

“I’ve already sent word to the executive branch that if they feel vetos are necessary, I’m not going to be objecting to those,” said Sen. John Arthur Smith, the influential chair of the Senate Finance Committee. “The last thing I want to do is go back into special session.”

Why such drastic talk only two weeks after the House and Senate agreed on a $7.6 billion budget for fiscal year 2021? To put it briefly, coronavirus.

U.S. oil prices closed at their lowest point in almost four years Friday. ExxonMobil, a major oil producer, said this week it will slow production growth in the Permian Basin, which straddles New Mexico and Texas. And the Federal Reserve announced its first emergency interest rate cut since the 2008 financial crisis over COVID-19 concerns.

The sudden drop in oil prices and the growing — yet still largely unclear — economic impact of the coronavirus could be damaging to New Mexico’s revenue, Smith said, particularly since 45 percent of it is now dependent on oil and gas.

“I would encourage the executive branch to be very, very careful on where we’re at right now,” said Smith, D-Deming. “I think we have a completely different picture for oil and gas two weeks out of the session.”

Lujan Grisham has until Wednesday to sign House Bill 2, the main budget legislation. Under state law, governors can perform line-item vetoes on the budget, meaning they can strike individual parts of appropriations bills.

“The governor is always concerned about the future revenue outlook,” Lujan Grisham spokesman Tripp Stelnicki said when asked about Smith’s comments, pointing out that the governor targeted 25 percent in reserves. “She is always looking ahead and is always, and has always been throughout this budget process, emphasizing fiscal conscientiousness.”

Asked about the possibility of line-item vetoes, Stelnicki said the governor’s approach was “balanced, aware of outlook but not panicked or reactive, evaluating merits of every line.”

“I would not say the approach is now to hunt for line-items in response to economic news,” he added.

In reference to ExxonMobil’s announcement, Stelnicki said the office believes the company’s “overall commitment to New Mexico has not changed.” 

The oil giant said it would reduce output growth in the Permian Basin by around 10 percent over the next two years, yet is maintaining its plan to nearly triple production in the basin by 2024, according to Bloomberg News. 

To be clear, the most recent oil production data showed the oil boom in the Permian was stronger than ever. New Mexico produced 32.8 million barrels in December, the highest monthly output in the state’s history.

While that data is from before coronavirus emerged, just this week New Mexico’s total rig count actually increased to 116, according to Baker Hughes.

Economists say it’s too early to tell whether those trends will change and whether there could be any disruption to New Mexico’s revenue projections. That’s largely because the virus’ impact on the global economy and energy markets is still unknown.

“I don’t know enough yet to know if this is going to turn into a recession,” said Jim Peach, a New Mexico State University economics professor emeritus. “I don’t know anyone who could tell you that.”

What is clearer is oil would have to remain at its current lows for months before it would significantly impact New Mexico’s revenue outlook, Peach said.

U.S. West Texas Intermediate crude fell 10 percent Friday to $41.28, its lowest close since August 2016, after the Organization of the Petroleum Exporting Countries failed to reach a deal to stabilize prices after coronavirus hurt global demand, Reuters said.

Even if oil prices did stay at those levels, they’re unlikely to have an impact on revenue for fiscal year 2020, which runs through the first half of this year. It’s the $797 million in “new money” — part of the overall estimate of $7.882 billion in revenue — that the state projects it will receive next fiscal year that could be in question, Peach said.

“Next year, could we be in trouble? You bet,” he said.

Allen Davis, manager for oil-rich Eddy County in southeastern New Mexico, said some producers in the area could cut back their production somewhat, especially smaller, local companies that might have more trouble sustaining their cash flow than the majors. But he doesn’t expect the boom to end.

“With the price at $40, it will certainly result in some belt-tightening and delays in some of the projects,” said Davis, who is Chevron’s former operations superintendent for the Delaware Basin portion of the Permian. “I don’t necessarily see it as a bust.”

“Folks are going to pull their horns in a little bit and watch,” he added. “The resource base in the basin is so large. I don’t think they’re going to walk away. I think they’ll ride this out, be as efficient as they can.”

Still, Smith is worried.

“If we had known a month ago what we know right now, I’m not certain our oil revenues would be projected where they were,” he said. “We may see some vetoes on nonrecurring general fund monies.”