Budget questions driving debate

Legislators disagree over how much state should set aside in rainy day fund

SANTA FE — As New Mexico enjoys a revenue boom — after a financial crisis just two years ago — legislators are struggling with how much they should set aside for the next rainy day.

The debate boiled over Wednesday as the chairman of the Senate Education Committee took aim at state economists who warned that this year’s surge in revenue may not last.

Sen. William Soules, D-Las Cruces, questioned whether state officials are being too cautious by recommending the Legislature maintain reserves of 20 to 25 percent of state spending levels. He said he had reviewed a report from an international credit rating agency that recommended New Mexico keep about 17 percent in reserves.

Soules’ comments came as lawmakers face pressure to sharply boost spending on schools — after a landmark court ruling that said New Mexico isn’t providing at-risk

students with an adequate education.

Economists working for the legislative and executive branches of government have repeatedly warned lawmakers this week about the potential for an economic recession sometime in the next few years and highlighted volatility in the oil industry — a critical source of state revenue. The price per barrel of oil has fallen from about $75 in October to closer to $51 this month, for example.

Soules suggested some of the economists’ fears are unfounded.

“You all have been pretty lousy over the last few years at predicting the future,” Soules said Wednesday during a meeting of the Legislative Education Study Committee.

Investing in the people of New Mexico — through spending on schools and education — would help the state grow in a sustainable way, less susceptible to wild swings in oil prices, he said.

The economists responded that they’re simply trying to prepare lawmakers for the wide range of potential outcomes in the next budget year, not discourage them from making their own policy decisions about how much to spend.

Just a $1 change in oil prices can result in a $17 million change in annual state revenue, they said.

“The oil industry is prone to sudden shocks,” said Dawn Iglesias, an economist for the Legislative Finance Committee. “It’s up to you as lawmakers to decide what level of risk you want to protect against in the event of a downturn.”

The state Department of Finance and Administration this week recommended reserves of at least 25 percent in the short term and higher reserves in future years. Legislative economists suggested at least 20 percent, in addition to other cautionary measures aimed at ensuring the state has enough cash in case of another budget crunch.

The back-and-forth came as New Mexico enjoys a massive bump in revenue, thanks largely to an oil boom in the Permian Basin. The state may run up a surplus of $950 million this year, unless more spending is authorized.

Altogether, the budget now authorizes about $6.3 billion in general-fund spending this fiscal year, which ends June 30.

For the next fiscal year, state economists are projecting about $7.4 billion will be available, though they’ve stressed that there’s uncertainty over how much money will actually materialize.

Responding to Soules, some legislators pushed back on the idea that the state’s economists are too cautious.

“We know due to global events totally out of our control, things can change overnight,” Sen. Jeff Steinborn, D-Las Cruces, said.

Sen. Craig Brandt, R-Rio Rancho, said he understands the difficulty in trying to project future revenue.

“I love the fact that we have all of this new money,” he said. “Don’t count on it being there in a year. Don’t count on it being there in two years.”

No one has offered a firm estimate on how much it will cost to boost school funding to satisfy the landmark court ruling. A judge gave the state until mid-April to assemble a funding plan that meets constitutional requirements.

Just two years ago, the state nearly depleted its cash reserves. Moody’s Investor Service downgraded New Mexico’s bond rating as recently as this summer — the state’s second downgrade in two years — citing high pension liabilities and other factors.

Soules, meanwhile, said the state must walk a line between reasonable frugality and holding too much money back during a time when there are tremendous needs. He pointed to a “stress test” analysis conducted by Moody’s.

In 2017, Moody’s Analytics estimated that New Mexico needs 17 percent in reserves to withstand a severe recession.

But state economists said Wednesday that New Mexico is increasingly reliant on the oil sector — something that isn’t captured by an analysis that examines past years.

About 80 percent of this year’s revenue growth, for example, is directly related to the oil and gas industry, legislative economists said in a report this week.

New Mexico is on pace for a record year in oil production. And just last week, the U.S. Geological Survey said that New Mexico and Texas are home to the largest pool of oil and gas reserves ever announced by the USGS — a finding that prompted U.S. Interior Secretary Ryan Zinke to say “Christmas came a few weeks early this year.”