State workers would see a drop in their pay raises for fiscal year 2021 and spending for most agencies would be cut significantly under the draft budget overhaul lawmakers began debating Wednesday.

Whittling a record $7.6 billion budget to $7.34 billion — and filling wide spending gaps with cash reserves, pandemic-related aid from the federal government and other measures — is no small task for the New Mexico Legislature as it convenes Thursday for a special session to address a steep decline in projected revenues.

Members of the state House and Senate finance committees met Wednesday to review the plan, which would slash higher education spending by 6 percent — the biggest cut for any single agency — and reduce the 4 percent pay raises for state workers, approved earlier this year, to 1.5 percent for those who earn less than $40,000 a year and 0.5 percent for higher earners.

Funding for the new Early Childhood Education and Care Department, set to take over all services for young children July 1, would be cut by $3.3 million; the spaceport would lose $600,000; and $17 million would be slashed from the Medicaid program.

Lawmakers, however, hope to shift money from the Tobacco Settlement Permanent Fund to fill the Medicaid gap.

Most agencies would see overall cuts of 4 percent, while three — the Health, Human Services and Public Education departments — would have their spending reduced by 2 percent.

Charles Sallee, deputy director of the Legislative Finance Committee, said, “For most agencies, that’s really just pulling back planned spending increases.”

The cuts would address a $2.4 billion shortfall in projected revenues following the economic impact of COVID-19 and a free fall in the oil and gas industry.

This might not be the end of it, warned state Sen. John Arthur Smith, chairman of the Senate Finance Committee.

“We’re $2.4 billion short, quite frankly, and that means that the $7.6 billion instrument we worked on … comes down to about $5.2 billion available for appropriation purposes,” Smith, D-Deming, told the committee during a session Wednesday.

“The best we can do right now is hope that we don’t get more bad news on the revenue side as we move forward for the rest of this year,” he added. “But we’re making a small step during the special session to try and Band-Aid us on … [until] there’s a clear revenue picture in January.”

Sallee also warned that further cuts could be required when lawmakers convene in January for the 2021 regular session.

Public school districts in the state, required to draft their fiscal year 2021 spending plans before the special session began, will have to rework their budgets to address the K-12 education cuts.

Veronica García, superintendent of Santa Fe Public Schools, blasted the draft state budget, arguing it will leave the district with a $3.5 million shortfall. 

Money the district expects to receive from the federal government for COVID-19-related safety expenses will now have to supplement the general operating budget, García said.

She also took issue with reductions in salary increases for school staff. The district, which on Tuesday approved a union contract that calls for 4 percent raises for all teachers and staff, might have to dip into its own cash reserves, García said.

Lawmakers should seek other sources of revenue rather than make cuts, she said. “It’s gonna take you forever to make this up. We were already in trouble. We were starting to dig ourselves out of it, and this is just a big step backwards.”

State Rep. Patty Lundstrom, chairwoman of the House Appropriations and Finance Committee, said she doesn’t expect broader cuts in the draft budget to change dramatically during the special session, which is expected to last until at least Saturday.

“There might be some tweaking,” Lundstrom, D-Gallup, said, but the overall “framework” is likely to remain intact.

Gov. Michelle Lujan Grisham and the Legislative Finance Committee both called for drawing down the state’s reserve funding from 25 percent of spending to around 12 percent, which would leave reserves at $873 million, according to the governor’s proposal.

The draft proposal discussed Wednesday would leave reserves at that recommended level, which would depend in part on whether Congress allows the state to use about $750 million in pandemic aid from the federal CARES Act to shore up spending.

If that doesn’t happen, Sallee said, the state will have to undergo an expensive accounting process and might have to tap into additional money from reserves.

While several members of the House Appropriations and Finance Committee questioned the steep cut to higher education — Lundstrom said she expects a fierce debate on it — lawmakers likely will be able to preserve $5 million for the New Mexico Opportunity Scholarship, an initiative proposed by the governor to ensure all college tuition costs for many in-state students are covered.

The program, initially estimated to cost $35 million, was scaled back during the regular session, with a plan for phased-in increases in coming years.

Outgoing state Sen. John Sapien, D-Corrales, who is not running for reelection after 12 years in the Legislature, argued the state should maintain cash reserves of 40 percent, despite the current economic crisis.

He had suggested the same level of reserves during the regular session, when the revenue outlook was far better.

“And I know that seemed like crazy talk at that time,” Sapien said. “I’m worried that as a government, we’re using old models to try to stay out in front of these new realities that the worldwide market is gonna really make us learn quickly.”