Oil price slump may nix raises, state spending
A top economist said Wednesday that Gov. Susana Martinez and state lawmakers should tear up preliminary budgets for the coming fiscal year and assume there will be no new money for pay raises or expanding education and public-safety initiatives.
"I would simply count on no new money," Jim Peach, an energy markets expert and economist at New Mexico State University, told lawmakers during a Senate Finance Committee hearing Wednesday at the Capitol.
Lawmakers on Tuesday convened the 2016 Legislature with the primary mandate to pass a spending plan for the 2017 fiscal year that Gov. Susan Martinez will sign. That document would dictate programs and spending levels for state agencies and public education starting on July 1.
But with a large share of the $6.3 billion state general fund generated from taxes and fees on crude oil production and natural gas extraction, a sense of alarm was evident Wednesday. The price for crude oil fell 6 percent during the trading day to below $27 -- a 6o percent drop from a year ago and the lowest price in a decade.
Sen. George Muñoz, D-Gallup, was among those who said he had checked the markets throughout the day with his smart phone. Before the hearing, one senator joked that at Wednesday's price, one could buy a barrel of crude, toss the oil and do better selling just the the barrel.
Senate Finance Committee Chairman John Arthur Smith, a Democrat from Deming, said there is still disagreement between the Martinez administration and lawmakers on how to proceed.
"The trend reflects we'll need to make real adjustments," Smith said.
In December, the state's consensus revenue forecasting team, which includes staff economists from the Legislature and governor's office, was using revenue tracking data from the summer to push forward a forecast that called for $232 million in new money in fiscal 2017. That forecast relied on the average price for crude oil coming in at about $44 a barrel in the coming 18 months.
But actual tax payments to the state since then show a broad weakening of the state economy.
Gross receipts tax collections, for instance, were down 13 percent for the first four months of the current fiscal year -- July through October. This week's data shows that trend continued into November with gross receipts tax receipts 7 percent below the consensus forecast.
Gov. Martinez has proposed spending that entire amount of new money on targeted pay raises for employees in hard-to-recruit specialties such as technology, child welfare, corrections and law enforcement, as well as new initiatives in education, tourism, public safety, and job training.
Lawmakers had $150 million budgeted for new or expanded programs with additional spending set aside for employee pay raises that would be allocated only if the economy stabilizes.
Both of those forecasts were looking like toast this week.
The reason is that the next fiscal year's budget depends on having at least an 8 percent reserve on June 30.
With energy prices today well below the forecast, that means a smaller reserve. And less money in reserve means fewer dollars can be rolled into spending accounts for schools and prisons in July.
"I think what I heard is that zero is zero," said Sen. Susan Wilson Beffort, R-Sandia Park . "We should keep our budget flat and get our reserves back up to 10 percent."
Peach said he has been analyzing energy prices for a long time and the short-term trends can change quickly. But there are many factors that suggest the surplus crude will be around for several years -- especially with new technology and global competition.
"We've got a lot of oil and no sign that we have an increase in demand. If someone doesn't cut production we're going to have low prices for quite a period of time," said Peach.
New Mexico lawmakers won't get another consensus forecast at least until next week.
Meanwhile, agency budget hearings in both the House and the Senate are continuing.
Economist Jeff Mitchell with the University of New Mexico's Bureau of Business and Economic Research, said he too has reduced his estimates for state job growth in the coming year. "This is the first time we have seen a very significant change in the forecast over three months," he said.
But while money spent on gasoline consumption tends to migrate outside New Mexico to large companies, the dollars saved by drivers will go to local restaurants and retail stores.
"These dollars are much more likely to stick around," he said.