New Mexico budget increase follows revenue boost from oil and gas

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New Mexico Gov. Michelle Lujan Grisham and lawmakers are close to agreement on an increase in spending for the coming fiscal year with prospects for bond funding of state and local infrastructure.

Lujan Grisham, a Democrat in her second year as governor, proposed an 8.4% increase in general fund spending at $7.68 billion, which includes a 25% reserve target.

“This budget consists of both bold investments and prudent decisions that continue to fix what was left broken, addressing urgent needs and strategically investing in sustainable improvements over the long term — all at once,” Lujan Grisham said. “We are investing for tomorrow and delivering today.”

At the Roundhouse in Santa Fe, the Legislative Finance Committee is countering with a $7.5 billion budget that represents a smaller 6.5% increase. Lawmakers also want to save $325 million from oil and gas revenue in the state’s reserve fund. They expect an $800 million surplus in general fund income this year beyond the $7 billion in current spending.

Sen. John Arthur Smith, D-Deming, chairman of the LFC, said the modest spending growth comes amid an emphasis on educational reforms and preparations for a downturn in the oil sector.

“New Mexico remains heavily reliant on the booms and busts of the oil industry,” Smith said in a statement prepared for the budget proposal’s release last week. “With the extra cash we’ll have available next year, we can maintain reserves at levels that can withstand another downturn and create endowments that will continue to generate income even when the oil industry is down.”

State revenue from taxes on sales and services is expected to increase by 9% during the current budget year that began July 1 to $3 billion. The increase is tied primarily to record levels of oil production, especially in southeastern counties that cover the Permian Basin.

Annual oil production that averaged 70 million barrels over three decades neared 350 million barrels last year.

"The results of a sharp decline in oil prices and production activity could create a fiscal challenge far more severe than a moderate recession," a report from the LFC noted.

While raising revenue, the oil and gas boom has also increased demands on state and local governments, including schools. Lujan Grisham’s budget would steer more than 47% of all new recurring spending toward educational programs.

The governor’s budget calls for a $200.3 million increase in the public schools budget for a total recurring budget of about $3.4 billion, including a second consecutive year of pay increases for educators and all school personnel.

Lujan Grisham is also proposing $35 million for a new scholarship program designed to make college tuition-free for state residents. While the LFC proposal doesn’t include funding for the program, it plans $35 million in increases for financial aid programs favoring low income students.

Lujan Grisham’s proposed spending on capital needs and deferred maintenance on public buildings across the state totals $2.7 billion in FY21. The sum includes requests for local governments totaling $1.6 billion, state agencies seeking $752 million, higher education institutions, special and tribal schools of $339 million, and senior citizen facilities totaling $39 million.

Funding for capital includes $362.3 million of severance tax and $198.9 million of general obligation bonds.

“To be sure, infrastructure needs continue to outweigh what is available for capital projects,” the governor’s budget statement said. “But the administration is committed to investing for tomorrow while improving delivery of what is needed today as expeditiously as possible.”

In one of the first bills filed for the current session, House Bill 26 by state Reps. Patty Lundstrom, Bobby Gonzales and Michael Padilla, a new state fund of $20 million would be dedicated to highway improvements. The fund would increase to $40 million in 2022.

With about $500 million of general obligation bonds outstanding, New Mexico carries ratings of Aa2 from Moody’s Investors Service, and AA from S&P Global Ratings. Outlooks are stable.

New Mexico is the 36th-largest U.S. state by population, at 2.1 million. Its state gross domestic product, $99.4 billion, is the 37th-largest. The state's wealth levels are among the seven lowest of the states, with per capita personal income equal to 76.7% of the US level, according to a Moody’s analysis of census data.

“The state faces numerous fundamental challenges,” Moody’s analyst Kenneth Kurtz wrote in a June 25 report. “New Mexico's pension liabilities, including both its direct obligation to the Public Employees' Retirement System (PERA) and its indirect obligation to the Educational Employees' Retirement System (EERS), are very large. Its income levels are low, and the state's Medicaid caseload is among the highest in the nation. Economic diversity is also relatively low, with concentration in energy and government employment. Financial reporting practices, while improving, are weaker than typical for a U.S. state.”

New Mexico is the ninth largest producer of natural gas in the nation, with most of the state’s production in the San Juan Basin in the northwestern corner of the state.

The volume of gas production declined gradually after fiscal 2005, but rebounded in recent years primarily due to the production of gas in the Permian Basin as a byproduct of oil production. Gas prices peaked in fiscal 2008 and, like oil prices, remain well below peak levels despite some recovery in fiscal 2017 and 2018.

Throughout the Permian Basin in New Mexico and Texas, natural gas is so cheap that producers are burning it in the field rather than trying to transport it via truck or pipeline to market.

In the gas-producing San Juan Basin of Northwest New Mexico, recovery from the 2008 recession is incomplete, analysts say. New Mexico has one of the highest rates of people living below the poverty level at 19.5%, according to census data. San Juan County has an even higher rate than the state at 24.4%.

Meanwhile, the state is making advances in renewable energy. An Illinois-based company will lease 7,636-acres of state land under a contract signed by Land Commissioner Stephanie Garcia Richard last month.

The state’s largest wind farm is expected to generate enough capacity to power about 6,200 homes using 31 megawatts of electricity from 11 turbines.

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