N.M. can’t handle another recession

‘Stress test’ shows state doesn’t have enough reserves to weather economic downturn

New Mexico’s cash-strapped government is not ready for another recession, according to a recent analysis highlighting the state’s shrunken financial reserves.

The results of a “stress test” published earlier this month by Moody’s Analytics is just the latest warning over New Mexico’s financial stability following budget shortfalls in recent years that have led legislators to drain reserves and sweep cash out of nearly every corner of government. And though the state is rebuilding its financial reserves, the report suggests New Mexico has fewer tools available to handle an economic downturn than it did before the last one a decade ago.

Moody’s calculated New Mexico needs about 10 percent of its budget in reserves to weather a moderate recession without significant tax hikes or cutbacks in services. New Mexico would need 17.1 percent in reserves to handle a severe recession.

The state is not close to either number.

At the time of the analysis, New Mexico had about 1.1 percent of its budget set aside in reserves.

State officials projected in August the government will close out 2017 with about 5.5 percent in reserves and have about 3.4 percent by the end of June 2018.

That is a far fall from a decade ago, when the state had reserves of more than 12 percent.

The report from Moody’s even makes an example of former Gov. Bill Richardson’s push to issue rebates for taxpayers using some of the state’s reserves in 2008.

But after years of low oil prices and economic stagnation, New Mexico lawmakers have nearly drained the state’s reserves.

In Moody’s state-by-state analysis, New Mexico was less prepared than much of the country. Sixteen states have the funds needed for the next recession while 19 have most of the cash they might require, according to the report. New Mexico was among 15 states with significantly less money in reserves than needed for a downturn.

With the state heavily reliant on tax revenue from oil and gas production and in turn vulnerable to the dramatic swings of the international energy markets, Senate Finance Committee Chairman John Arthur Smith argues New Mexico’s government should aim for double-digit reserves again.

“We were targeting 5 percent. We should have been targeting 10,” he says.

However, with lawmakers facing another tight budget year, saving may not be a priority.

Moody’s is not expecting a recession in the coming months. But the United States is entering the third-longest period of economic expansion in its history, with more than eight years since the last official downturn. And given the cycles of the economy, another recession is inevitable.

The report argues governments will not have some of the same options for weathering the next downturn, having already cut public sector jobs during the last recession and depleted reserves as the recovery moved slowly in some states.

Nationally, state and local government payrolls are still smaller than before the last recession. That leaves governments in some cases with less to cut if the economy dives.

“Though this undoubtedly cut waste and increased efficiency in many governments across the country, it also was a painful and disruptive change to many parts of the economy,” the report’s authors wrote. “The loss of so many mid-wage jobs over so short a time is a big reason that the Great Recession was followed by the not-so-great recovery.”

In New Mexico, the state’s economy has yet to fully rally, with the workforce still smaller than it was at its pre-recession peak 10 years ago.

Another key difference between the pre-recession era and today cuts in New Mexico’s favor, however. States usually face greater demands for spending on social services such as Medicaid when the economy sours and unemployment rises. Moody’s noted New Mexico would likely feel less of a shock in that respect because it has already expanded the health care program under the Affordable Care Act to include hundreds of thousands of adults.

Recessions choke state budgets in several ways. Fewer people working means the state collects less money from income taxes. And it means less spending, in turn driving down the amount of gross receipts tax that buoy not just the state budget but the finances of local government, too.

In an effort to curb the uncertainties of relying on the energy markets to prop up a state budget, lawmakers passed a bill this year requiring the state to stash windfalls of oil and gas tax revenue during the boom years into a special fund to be saved for the busts.

Smith, a Deming Democrat, worries the fund will lull policymakers into complacency. But Julia Ruetten, a spokeswoman for the Department of Finance and Administration, says the state is better prepared with the new fund.

“The state has many of the tools available that the report cites as necessary to weather a future recession; and with the creation of a true ‘rainy day’ fund that the governor signed in to law this spring, the state will be better equipped to address periods of revenue volatility in the future,” Ruetten said in an email.

Moody’s is not expecting a recession in the coming months, but given the cycles of the economy, another recession is inevitable.