As state legislators prepare to return to Santa Fe for the new legislative session in mid-January, the main topic on their minds is how to utilize the $1.1 billion budget surplus projected for fiscal year 2020. Special interest groups, state agencies, municipalities, counties, courts and anyone who interacts with state government have been hard at work putting together wish lists for how these surplus dollars should be spent. Lawmakers can expect the Roundhouse to be filled with people seeking money for all sorts of projects and programs.
While the $1.1 billion surplus has received considerable media attention, less attention has been given to projections showing a $1.2 billion surplus is also likely for the current fiscal year. These budget surpluses are the result of a booming oil and natural gas industry in southeastern part of the state. The volatility of oil and natural gas prices, however, means these large budget surpluses can disappear as quickly as they materialize. In fact, oil prices have dropped by more than $25 per barrel since November. For every dollar oil prices decline, the State of New Mexico losses $9.5 million in state revenues. Most New Mexicans vividly remember 2015 when oil prices took a nose dive and government spending had to be cut dramatically and state reserves were nearly exhausted to keep the state’s budget balanced.
Yet, let’s assume these projected budget surpluses are realized, so does that mean the special interest spending frenzy can begin? The answer is No! The $1.2 billion surplus projected for the current fiscal year is needed to restore budget reserves. Sufficient reserves, at least 30 percent of “recurring” state spending, must be created to help cushion a future economic downtown or possible federal budget which can result in state revenues plummeting. Higher reserves can also help to improve our state’s bond rating which has recently been downgraded.
The $1.1 billion surplus estimated for fiscal year 2020 is already spoken for if you look closely at the many unfunded liabilities and other budgetary problems needing attention. For example, a Santa Fe district court has ruled the current funding mechanism for New Mexico’s public schools is unconstitutional. Whether that decision is correct or not, the likely outcome will be hundreds of millions of dollars in new money being provided. The outgoing Martinez Administration has already proposed spending about $430 million more next year for public education. The Lujan Grisham Administration will likely request more.
The state budget faces numerous significant financial liabilities which must be paid for — such as the state’s film tax credit, public employees and teacher retirement systems, Medicaid, and fixing problems at numerous state departments and agencies. Plus, there are hundreds of millions of dollars in tax protests awaiting adjudication. If the state losses those challenges, next year’s projected $1.1 billion surplus could be significantly less. As the chart below shows, setting aside resources to meet the most obvious budget challenges results in next year’s projected surplus quickly evaporating.
$430 million Address the court’s decision on public school funding
$250 million NM Film Tax Credit unpaid liability by the end of FY 2020
$320 million Tax protests still pending
$65 million Maintain Medicaid services
$46 million Minimum needed to address state pension funds’ $12.5 billion unfunded liability
$21 million Fix problems at the Department of Youth and Family Services
$18 million Ensure sufficient funding for the Department of Corrections
$1.150 billion Total
Addressing these liabilities means there is no new money available for improving higher education, properly funding our courts and local prosecutors, meeting infrastructure needs, or allowing the new governor to fund her budget priorities.
In other words, these unprecedented budget surpluses are really nothing more than a budgetary illusion. The state legislature and the new governor now have the unique challenge of trying to satisfy everyone’s wish lists when there is no new money remaining.