State faces massive revenue shortfall

By Jens Gould
Posted 5/14/20

The last time state economists released revenue forecasts, New Mexico had a massive oil boom with no end in sight. Oh, how times have changed.

Those same economists released dire revenue projections on Wednesday (May 6), suggesting New Mexico could take in between $1.7 billion and $2.4 billion less than originally expected during the next fiscal year as the novel coronavirus pandemic and plummeting oil prices take a major toll on tax revenue and royalty payments.

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State faces massive revenue shortfall

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The last time state economists released revenue forecasts, New Mexico had a massive oil boom with no end in sight. Oh, how times have changed.

Those same economists released dire revenue projections on Wednesday (May 6), suggesting New Mexico could take in between $1.7 billion and $2.4 billion less than originally expected during the next fiscal year as the novel coronavirus pandemic and plummeting oil prices take a major toll on tax revenue and royalty payments.

"The outbreak of the novel coronavirus that causes COVID-19, along with the global responses to contain the spread of the virus, places significant strain on New Mexico's finances," the economists wrote in the document.

The group of legislative and executive branch economists noted the new projections were not an official revenue forecast, but rather a review of the state's income sources aimed at helping policymakers. State legislators are expected to hold a special legislative session in mid-June in an attempt to patch the most pressing gaps in the $7.6 billion budget approved for the 2021 fiscal year.

When legislators convened earlier this year, they crafted a budget based on state economists' December estimates, which projected revenue of $7.88 billion for fiscal year 2021. That figure could now drop as much as 30 percent to just $5.49 billion.

It's not just next year's budget that will take a hit. Revenue for the current period, which ends June 30, could be between $368 million and $483 million short of projections, the economists said.

That's greater than the $259 million previously estimated to be in the state's operating reserve at the end of the period, meaning there will be "insufficient" funds to cover appropriations unless spending is reduced or the state taps another reserve fund, the document said.

And while the budget passed for fiscal year 2021 set aside 25 percent in reserves, those balances likely won't be enough to cover the huge revenue declines projected for the next fiscal year, the economists said.

Looking further into the future, the state is likely to have a tough time with fiscal year 2022 as well, as revenues could be between $1.7 billion and $2.5 billion less than previous estimates for that period.

For each fiscal year the economists analyzed, the lesser projected shortfall refers to a scenario in which there would be a "U-shaped" economic recovery, meaning revenues fall sharply in fiscal year 2021 and then mount a modest recovery in fiscal year 2022.

The larger estimate in each projected range would occur if there's an "L-Shaped Recovery" marked by a "prolonged and deeper economic contraction," the document said.

The path state revenues ultimately take will depend on the spread of the virus, how New Mexico and the rest of the United States decide to reopen their economies, and how long it takes consumer confidence to recover.

Other factors include global oil markets, New Mexico oil production and whether temporary layoffs in the state become permanent.

Regardless of the type of economic recovery the state sees, it's inevitable that business closures and layoffs will cause gross receipts and income tax revenues to fall sharply, while low oil prices and falling production will hurt royalty payments and tax collection from drilling.

Even in the "U-shaped" scenario, the rig count in the Permian Basin would fall by 70 percent through the end of this year, and oil production would drop 30 percent in fiscal year 2021, the document said.

Under the more pessimistic scenario, it would take five years for employment to recover to pre-pandemic levels.

So far, legislators have mentioned a wide array of possible budget cuts, from reducing planned pay raises to cutting back on money for the state's pension reform.

They also plan to tap into the state's reserves and are hoping for federal funding from yet another coronavirus-related stimulus package that could be forthcoming from Congress.

Gov. Michelle Lujan Grisham said Tuesday she would also support an effort to tap New Mexico's Land Grant Permanent Fund to help the state shore up the shortfall, although the chairman of the Senate Finance Committee already has expressed opposition to the idea.

The projections were issued by economists from the Legislative Finance Committee, Department of Finance and Administration, Taxation and Revenue Department and Department of Transportation.

This story first published in the Santa Fe New Mexican, a sibling publication of the Taos News. 

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