Oil and gas

And now, the NM boom

Spike in oil production could give state $1.2 billion in new money; experts say proceed with caution

By Andrew Oxford
aoxford@sfnewmexican.com
Posted 8/29/18

To say New Mexico's government will be operating in the black next year might be an understatement.Economists expect the state will be flush.A spike in …

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Oil and gas

And now, the NM boom

Spike in oil production could give state $1.2 billion in new money; experts say proceed with caution

Posted

TAOS -To say New Mexico's government will be operating in the black next year might be an understatement.

Economists expect the state will be flush.

A spike in oil production means the state could have as much as $1.2 billion in new money for the fiscal year that begins next summer. That is an 18 percent increase in revenue over current spending, according to a forecast presented to lawmakers here Wednesday.

Published by a group of experts from the Legislature and several state agencies, the report describes the projected increase in revenue as "astonishing."

Such a windfall would give wide latitude for the next governor, who will take office in January. And it means the financial belt-tightening the state has seen in recent years could be over, at least for now.

But the forecast also calls for caution, noting that most of this money is coming from an oil boom subject to the whim of the energy markets. Analysts recommend budgetary reserves of at least 20 percent to cushion the next downturn.

Lawmakers still face some daunting financial demands, including lawsuits over water rights and funding for education as well as long lists of deferred maintenance on all manner of public structures, including the prison system.

"We have a lot of IOUs," said Duffy Rodriguez, secretary of the Department of Finance and Administration.

The report says New Mexico's average weekly earnings are improving and employment growth is forecast at 1.4 percent for the fiscal year that ends in June, suggesting the state's economy is improving after straggling for years. Gov. Susana Martinez, who leaves office later this year after two terms, took the occasion of the new report to argue the state's economy is diversifying and its private sector booming.

But there is no mistaking what is behind the state's improved finances.

From March to May, monthly oil production spiked to 18.5 million barrels after hitting about 14 million barrels early in the fiscal year. Hydraulic fracturing has allowed oil producers to get more from the ground, more efficiently. New Mexico is now the third-biggest producer of oil in the country, behind Texas and North Dakota.

The growth in gross receipts tax revenue - that is, tax on the sale of goods and services - is driven overwhelmingly by only a couple of counties in the heart of oil country.

"We're relying on the oil industry more now than we ever have before," said Jon Clark, an economist with the Legislative Finance Committee.

Beyond the oil industry, uncertainty lingers.

Some tax revenue is contested in legal claims. Losing just a few of those cases could lower state revenue.

Then there is the risk of another recession, and New Mexico's government is facing big pension liabilities.

Moody's Investors Service downgraded the state's bond rating this summer. It paid particular attention to the state's underfunded pension system.

Adequate reserves - at least 20 percent - would help the state prepare for these risks and improve New Mexico's bond rating, Rodriguez said.

The state already had reserves of about 18 percent coming out of the fiscal year that ended in June.

According to this latest forecast, the state will have reserves of about 34 percent if spending remains at current levels.

Rodriguez and others argue that policymakers should view the spike in revenue as a one-time occurrence rather than a change in fortunes.

Experts said New Mexico has been in this situation before.

Around 2005, the state saw revenue spike for a couple of years, and policymakers approved budgets to include much of that increase, Clark recounted. Then big budget cuts were necessary in the ensuing recession.

"I can see memories just evaporate, disappear overnight," said Senate Finance Committee Chairman John Arthur Smith, a Democrat from Deming and a budget hawk.

Some lawmakers, such as Smith, argue the state could use this as a financial cushion for structural changes, such as broader tax reform rather than a tax cut.

"We have to set New Mexico up for the next 20 years," said Sen. George Muñoz, D-Gallup.

Still, New Mexico has one of the highest rates of poverty and unemployment in the country. Advocates for improving funding for education and social services argued the windfall is cause for the state to end what they view as austerity.

"There's no excuse anymore. We can afford a first-class educational system from pre-K through college," said state Rep. Antonio "Moe" Maestas, D-Albuquerque.

Maestas dismissed the suggestion that revenues could decline if demand for oil dips. He said this year's heightened oil production should be cause for confidence in boosting funding for education, children's services and the judiciary in particular to improve the quality of life in the state.

"If government functions properly, that spurs economic development," he said.

At the very least, a new governor may want to fill many of the positions in state government left vacant amid recent budget cuts, catch up on maintenance at state facilities that had been put off for years and restore the myriad funds emptied out as lawmakers have scrambled to balance past spending plans.

The Legislature met in special sessions two years in a row - 2016 and 2017 - because the state could not cover expenses. Only in the past couple of years has the state budget improved with the fortunes of New Mexico's oil industry.

There might be more money than past years and the current governor, Republican Martinez, will be leaving office at the end of the year, but one thing will not change at the Capitol: the state Senate.

Led by Smith, fiscally conservative Democrats and Republicans in the Senate likely will still be a roadblock to any major new spending initiatives.

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