March 10, 2020

As oil prices crash, line-item vetoes to state budget coming

A “perfect storm” is hitting oil and gas prices, impacting New Mexico and its reliance on the volatile industry’s tax money, according to the Senate Finance Committee chair. The collapse in the price of oil comes just weeks after the state Legislature passed a budget and days before the governor makes her final decisions on line-item vetoes and other decisions in the budget.

As of now, the governor’s office says the budget will preclude the need for a special session to adjust spending.

Oil prices dropped nearly 25 percent on Monday, the worst day since 1991. Senate Finance Committee chairman John Arthur Smith, D-Deming, said it was because of a “perfect storm” with a dispute between Saudi Arabia and Russia leading the Middle Eastern nation to slash prices and announce an increase in production. This came after weakness in the industry thanks to reduced demand because of effects from the coronavirus and other worldwide economic problems.

Vetoes to the budget

Gov. Michelle Lujan Grisham’s office said, through a spokeswoman, that they are “monitoring the situation very closely.”

And, while the governor’s office said the budget that passed was “fiscally responsible,” spokeswoman Nora Meyers Sackett said, “the governor will be making certain specific vetoes to counteract the potential of downward revenue projections and ensure the state’s reserves are as robust as they need to be.”

In New Mexico, governors are allowed to line-item veto portions of bills with a budgetary impact. 

Smith said last week that he would not object to line-item vetos of some spending in the budget and told NM Political Report Monday he hoped Lujan Grisham would “hit some general fund non-recurring spending heavy right now.”

Money that is only allocated for a single year’s spending, such as capital projects or other one-time expenses, are known as “non-recurring.” Other money, like salaries or Medicaid spending, would be recurring funds.

Lujan Grisham’s office cited an analysis from the state that said if oil were to remain at $30 per barrel through June 2020, it would have “an estimated primary negative impact of $138M to the general fund” in the current fiscal year. There are currently $109.5 million funds in operating reserves and more possible through vetoes.

Monday afternoon, the governor vetoed SB 232, a bill that would have spent nearly $50 million on transportation projects; that money now instead goes to operating reserves. Smith sponsored that legislation.

To access what the governor’s office calls “roughly” $2 billion in overall reserve for the next fiscal year, it would take legislative action.

Smith said he believed even with the downturn in oil prices, the reserves in the recently passed budget would hold at least until the end of the fiscal year, which ends on June 30.

“I don’t think the whiplash on the state budget is really going to be impacted until the start of the fiscal year, the first quarter,” Smith said.

Smith also said that legislative economists were running “several stress tests” on the budget.

The changes started even before Monday’s session, when Exxon Mobil announced last week it would reduce the number of oil rigs in the Permian Basin in Western Texas and Southeastern New Mexico because of weak demand.

As for the more long term impacts Smith wasn’t quite sure.

“The $64,000 question, I guess is the perfect storm I alluded to with the coronavirus and what happened with oil prices, we still at this point and time don’t have a sense of the impact on the economy,” he said.

He noted that economic impacts will range beyond just oil and gas prices; tourism will be impacted heavily.