NM projects $2.45B budget windfall
Money may not grow on trees, but in New Mexico, it comes out of the ground.
Driven in large part by the booming oil and gas industry, projected revenues for the next budget year are expected to deliver another windfall to state government coffers.
Recurring revenues for fiscal year 2024 are projected to reach a record $10.85 billion, including $2.45 billion in “new money,” according to a budget forecast presented Wednesday to the Legislative Finance Committee at a meeting in Chama.
So-called new money is music to legislators’ ears.
It is the difference between the current budget and expected revenues in the next fiscal year, and it opens the door to a host of possibilities, from infrastructure investments to more tax cuts or rebates.
State Sen. George Muñoz, a Gallup Democrat who chairs the powerful Senate Finance Committee, said the top priority for lawmakers should be revamping the state’s tax structure.
“If New Mexico and the Legislature have one chance in 100 years of New Mexico history to do a reset and change the trajectory so we grow, we become self-sufficient, we’re not reliant on single companies or single sources of income to fund 45 percent of our budget,” he said, referring to oil and gas, “this is it.”
Muñoz said lawmakers have long talked about overhauling the state’s tax code to make it more business friendly and reduce the financial burden on residents.
“But we’ve never had this kind of money to do that, so when you want to change the tax structure, you need to have flexibility and recurring revenue to account for any adjustments or mistakes or something that may come along the road,” he said. “If we want to really change, for once and for all, and keep our commitment to reducing tax rates, lowering the [gross receipts tax and] making New Mexico competitive with other states, this is one of the greatest opportunities we could have.”
During Wednesday’s meeting in the gymnasium of Chama’s public elementary and middle school, economists said about 45 percent of the state budget in fiscal year 2024 is tied to the oil and gas industry.
Oil and gas accounts for about two-thirds of the projected revenue growth in the next budget year amid higher prices and continuing increased production.
In May, New Mexico’s oil production was up 41.4 percent from January. Texas’ was down 8.2 percent and North Dakota’s was down 25 percent.
Oil production in New Mexico is projected to grow 4.5 percent in the next budget year.
“New Mexico continues to hit records, with the latest peak production of 1.57 million barrels per day in April 2022,” the budget forecast states. “To date, New Mexico is the only top oil producing state to have recovered above prepandemic production levels.”
While oil and gas is the biggest source of income for the state, other sectors are also projected to flourish in the next fiscal year. Manufacturing, for example, is expected to grow 41 percent. Economists are forecasting a 27 percent increase in leisure and hospitality services.
On top of the surge in oil and gas production and higher prices, inflation is driving up gross
receipts tax collections as a result of rising costs for food, construction materials and other goods and services, as well as personal income taxes linked to higher wages.
“Revenue strength is the result of sustained high inflation raising expectations for gross receipts tax and income tax collections,” state economists wrote in their budget forecast. “Additionally, consumer spending has remained strong, wage growth has been robust, and high oil and gas revenues are supported by global supply-side constraints raising prices and encouraging production expansion.”
The forecast, however, warns of “significant uncertainty” in the economic outlook.
“The recent and forthcoming monetary policy from the Federal Reserve could significantly slow economic growth as rising interest rates dampen economic demand,” the economists’ report states. “On the other hand, a failure to slow high inflation rates would discourage consumer sentiment and erode real purchasing power of households and firms leading to a downturn. The coronavirus continues to add uncertainty as new strains impact consumption, disrupt supply chains, and prevent employment recovery.”
Asked what lawmakers should be the most cautious about, Finance and Administration
Cabinet Secretary Debbie Romero replied: “Growing budgets.”
While state agencies are raising concerns about inflation costs, Romero said the state needs to maintain budgets around the level of the current fiscal year to avoid cuts in the event of a downturn.
“There’s some budgets that still need some tweaking, but we need to stay as close to that trend line as we can,” Romero said in an interview after the meeting. “We’ve had too many downturns in the economy where we end up having to cut budgets, and that’s harder to deal with than just trying to plan better and be more realistic.”
For the current fiscal year, estimated recurring revenues are nearly $9.85 billion, or $1 billion more than projected in December.
That’s money that will also be on the table when the governor and the Legislature hammer out a spending plan in 2023 for the fiscal year that begins July 1.
Gov. Michelle Lujan Grisham, a Democrat running for reelection in November, touted the financial health of the state government.
“The record high revenues we are anticipating are no accident,” she said in a statement. “They are a direct result of responsible fiscal policy on the part of this administration and the healthy economic climate we are fostering.”
Ending reserve balances for fiscal year 2023 are estimated at $3.76 billion, or nearly 45 percent of appropriations, “prior to any legislative action in the 2023 session,” according to the economists’ report.
“Because reserves are expected to exceed 25 percent of recurring appropriations in FY23, excess oil and gas school tax collections, estimated at about $1.25 billion, will flow into the Early Childhood Trust Fund,” the report states. “Additionally, excess federal oil and gas royalty payments above the five-year average, estimated at about $1.35 billion in FY23, will flow into the early childhood trust fund.”
Preliminary reports indicate recurring revenues for fiscal year 2022 were $9.2 billion, an increase of $1.1 billion, or 14 percent, from fiscal year 2021, according to the Consensus Revenue Estimating Group, a collection of economists from three state departments and the Legislative Finance Committee.