December 30, 2020

2020 Top Stories #2: State budget impacts of pandemic, oil bust

New Mexico State Capitol (CC BY-ND 2.0) by Mr.TinDC

State legislators finished the 2020 legislative session with a $7.6 billion budget in February that expanded spending 7.5 percent across the state’s departments, with more than 45 percent of all new recurring expenditures going toward what Gov. Michelle Lujan Grisham called the “education continuum,” from early childhood programs to higher education. 

Then the pandemic hit in March, which brought the state’s economy to a grinding halt. And in April, a price war between Russia and Saudia Arabia drove the price of oil into negative territory for the first time ever. 

In May, a group of state economists from the Consensus Revenue Estimating Group (CREG) warned that recurring revenues for Fiscal Year 2020 (FY20) could decline between $370 million to $480 million below forecasts from the previous year. That meant the state wouldn’t have enough money to cover FY20’s spending, the economists said. 

CREG is comprised of staff from the Legislative Finance Committee, Taxation and Revenue Department, Department of Finance and Administration, and Department of Transportation.

Predictions for FY21 didn’t look much better. The group predicted recurring revenue in FY21 could drop between $1.8 billion to $2.4 billion below earlier forecasts, leaving the state’s reserve balances “insufficient” to cover projected revenue declines for FY21. 

The group projected recurring revenue for FY22 to be 17 percent to 28 percent ($1.3 billion to $2.1 billion) below the $7.6 billion FY21 budget legislators passed earlier in the year. 

The pandemic had created an “unprecedented economic event causing supply and demand shocks simultaneously,” the group noted, adding that the state’s “high degree of sensitivity to changes in the oil and natural gas markets” had exacerbated the economic issues. 

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“IHS and Moody’s forecasts anticipate a prolonged period of very low oil prices that has already led Permian producers to drastically cut spending plans and shut-in wells,” the group said. “The effects will be particularly detrimental to general fund revenues.”

Legislators headed into a special session in June to adjust the budget as the pandemic raged on. Cobbling together a revised budget amid the downturn meant cutting back on some of the spending that had just been authorized a few months prior, and pulling money out of the state’s cash reserves. 

The final budget, which passed the legislature along party lines and was signed on 1 July by the governor, reduced spending by $415 million and lowered cash reserves to about 11 percent of spending levels. The governor vetoed some $30 million in budget cuts before signing the budget. 

“We must recalibrate our state’s budget to meet these challenging times,” Lujan Grisham said at the time. “However, we should not lose sight of the important work that is still needed to create lasting opportunities for all New Mexicans.” 

Six months later into the pandemic, the state’s finance department expects general fund revenue for FY21 to decline 10.9 percent. That spurred Lujan Grisham to request state agencies to reduce spending requests by up to 5 percent for FY22. 

Those spending cuts will have impacts for the state’s two environmental regulatory departments that oversee oil and gas extraction activities in the state. The Oil Conservation Division, which regulates oil and gas, is facing a 20 percent budget cut over FY21 levels. 

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But the outlook for FY22 has improved in recent weeks, as energy production has picked back up in the Permian and oil prices recovered sooner than expected. The latest forecasts released by the Legislative Finance Committee shows recurring revenues for FY22 increasing by 5.4 percent, and the state is expected to see $169 million in “new money.”