State budget forecast is better than expected

With revenue bouncing back, anticipated cuts from pandemic may not happen

While the uncertainty of the coronavirus pandemic and the recovery of the oil sector still loom large, the latest revenue projections for the state of New Mexico are much more optimistic than the grim predictions from June.

State agencies no longer are being asked to reduce general fund spending by 5 percent for the fiscal year that begins July 2021, as new estimates are now projecting revenues of nearly $7.4 billion — a huge improvement from the $6.2 billion forecast six months ago.

“We are asking analysts to come in with flat budgets for agencies, and there may be a couple — maybe a handful of agencies — that may be just above that,” Debbie Romero, acting secretary of the state Department of Finance and Administration, said in a virtual briefing Tuesday before the Legislative Finance Committee.

“We feel confident that there’s sufficient recurring money to maintain budgets at a flat level,” she added.

A better-than-expected recovery in oil and gas, a major revenue source for the state that took a massive hit when the pandemic slowed drilling activity, helped fuel the

improved budget outlook.

A spokeswoman for Gov. Michelle Lujan Grisham said the administration was “cautiously optimistic.”

“Things can change, but we feel better about the outlook now than we did earlier this year,” Nora Meyers Sackett wrote in an email. “We’re hopeful we can avoid the cuts we had worried might be necessary.”

Asked whether the new numbers would allow the governor to be more aggressive in pursuing some of her projects, including a plan for free college tuition, Sackett said the executive budget recommendation isn’t due until next month.

“Our expectation is that in coming weeks we will have more to share … as the 2021 [legislative] session comes into clearer focus,” she wrote. “Of course, there are still some unknowns about how it will take place, but the governor’s overall priorities have not changed.”

Rep. Patty Lundstrom, chairwoman of the House Appropriations and Finance Committee, said the focus for the upcoming fiscal year will be education, health care and helping small businesses.

“We’re not out of the woods by any means, but we can see the light at the end of the tunnel,” said Lundstrom, a Gallup Democrat who co-chairs the Legislative Finance Committee.

Lundstrom said a salary increase for all state employees is on the table.

“We’re still looking at the number,” she said, adding that at least 1 percent or “maybe even 2 percent” could be recommended.

Romero, the acting finance department secretary, said general fund revenue for the current fiscal year is expected to drop by about 10.9 percent, leaving reserves at $2.4 billion, or 33.4 percent of state spending.

However, Lundstrom said the number is expected to shrink to about 25 percent amid plans for a $250 million infrastructure roads package and what she called an “essential air service” economic development initiative for small communities that will be unveiled soon, among other programs.

In fiscal year 2022, recurring revenues are expected to grow by 5.4 percent over the current fiscal year.

“We predict $169 million in ‘new money,’ ” Henry Valdez, a finance department spokesman, wrote in an email. “If the forecast holds, and the state’s recurring appropriations are the same as fiscal year 2021, the Legislature may have an additional $169 million to work with.”

In this fiscal year, the 10.9 percent revenue drop equates to $857 million.

“About 70 percent of that is due to oil and gas-related declines, so that’s losses in gross receipts tax collections due to drilling activity and royalty revenue for production on federal land,” said Dawn Iglesias, the Legislative Finance Committee’s chief economist.

Although the state expects production to continue to decline into the first half of 2021 before leveling off, “a big part of the upward adjustments from June to now has to do with less-than-expected declines in the Permian Basin,” Iglesias said.

“That’s because updated analysis from a variety of energy analytics firms are saying that the [declines in the Permian Basin] are expected to be less severe than other basins, and that’s because of our low break-even costs,” she said.

While the newest revenue estimates look more promising, Republican leaders in the House continued to raise concerns about the “forced economic shutdown imposed” by the governor.

“The only reason our state is close to breaking even is because of federal action, and not because of any real leadership being provided by our state’s executive and Legislature,” Rep. Jim Townsend of Artesia, the House minority leader, said in a statement.

Iglesias said the state would have needed to pull nearly $1.1 billion from reserves to cover the current budget had federal stimulus funds not been made available to offset general fund expenditures.

Though significantly better than the June forecast, the revised revenue estimates are not without risks, including the ongoing economic uncertainty from the COVID-19 pandemic and the timing and size of another federal stimulus package, among other factors.

“There’s still a lot of uncertainty about the pandemic,” Romero told lawmakers. “We know that there’s a vaccine coming. I think that what’s still to be determined is how it’s going to be rolled out and what the impacts are going to be and how quickly we can see some results.”

Taxation and Revenue Secretary Stephanie Schardin Clarke said the forecast “in some ways” assumes “a very large federal stimulus” occurring in the first quarter of the 2021.

“One thing that you’ll see throughout the forecast is that it does paint a stabilized and somewhat more positive outlook than we’ve seen this spring and through the summer, but I want you to keep in mind that we need to continue to exercise restraint,” she said.

Schardin Clarke also said the state isn’t expected to regain its pre-pandemic employment levels until 2025.

“The deepest job losses have been in the mining sector, which is affected indirectly through the pandemic by the shocks to both supply and demand in the oil markets,” she said.

The biggest risk to the state budget is always the oil market and whether prices or production will increase or decline more than expected, Iglesias said.

Oil and gas contributes as much as $3 billion a year to the state budget.

“The fact that those prices recovered sooner than expected and that production declines are less than expected … is the biggest part of the increase in our revenue expectations from the June forecast to now,” she said. “If prices did happen to recover sooner than we expect now in our revenue forecast or if production levels off or resumes growth faster than we think, the general fund could actually see pretty sizable revenue increases even without an actual economic recovery within our state.”

But as it stands now, the latest revenue projections for the state are “very positive,” Lundstrom said.

“Six months ago … I was worried sick that we’d be cutting a billion dollars out of this budget,” she said. “Thank goodness that that didn’t happen.”