New Mexico's revenue pie is a lot smaller than predicted three months ago and is likely to shrink further by the time the state legislative session begins in January.

Instead of a windfall, the state is facing a potential shortfall, though a far smaller one than that of its neighbors in Arizona and California.

Declining oil prices, a woeful Wall Street, cautious consumers and a struggling housing market have all added up to less money for a state dependent on energy and gross-receipt-tax revenues.

The revenue pie is the one legislators divvy and serve up every year to operate government services, pay teachers, build community centers and schools, and more. The state's financial planners have to predict months in advance how much they think will be available to spend in the next year's budget.

Declines in gross-receipts taxes and revenues from oil and gas production could leave legislators with little or no extra money to spend in the next session.

The housing market crash slowed home sales and new construction, causing a decline in gross-receipts taxes, according to the state Legislative Finance Committee.

The big jump in pump fuel prices and now Wall Street's troubles are prompting people to spend less on goods, reducing the state's gross-receipts-tax revenues.

Now, a dip in the price of oil has been good for people at the pump, but not good for the state's coffers. When the price of crude oil and natural gas is high, the state rakes in more taxes from energy production.

Oil and gas

A renovated gym for the Pecos Independent School District, Santa Fe River improvements and grants for renewable energy projects were just a few items funded through oil and gas revenues last year.

A LFC draft report of oil and gas revenues released this week indicates about $1.9 billion of the state's $6.2 billion general fund comes from oil and gas revenues in the form of severance taxes, property taxes and income from royalties and rentals.

Severance taxes from oil and gas production are used to pay for capital outlay projects like bridges, buildings and water pipelines. According to the LFC report, 98 percent of the severance-tax revenues for capital outlay projects are from oil and gas. In 2008, that amounted to $500 million for capital projects including $200 million for public school buildings and infrastructure.

Money from oil and gas also is the primary funding source behind two permanent funds. Interest from those funds benefit primarily school capital outlay projects.

But energy revenues dropped more than expected in the past few months as oil and natural gas prices declined.

The last time the LFC prepared a financial outlook back in July, Wall Street was chugging along and oil was selling at $147 a barrel. LFC staff calculated the average price would be around $122 a barrel. But the price of oil has dropped lower, hitting $77 a barrel this week. The price of natural gas also fell. That threw off all the number crunchers' predictions of how much oil and gas revenue the Legislature might have come January.

According to a draft LFC report produced this month, for every $1 drop in the price of a barrel of crude oil, the impact on the state's general fund is $3.4 million. For every 10-cent price decrease in the cost of a million cubic feet of gas, the general fund loses out on $11 million. Sen. John Arthur Smith, D-Deming, the LFC chairman, estimates the state has already lost more than $400 million.

New Mexico's rich oil and gas reserves have long boosted the coffers of an otherwise cash-poor state. The state is the third-largest supplier of natural gas in the nation and produces 3 percent of the crude oil in the U.S. Higher oil prices pushed up direct state revenues the last two years from oil and gas until it made up more than 20 percent of the state's general fund.

Smith said the state's reliance on oil and natural gas revenues is a "ticking time bomb." The volatile prices and steady decline in production means the state needs to diversify its revenue sources if it wants to maintain the same levels of service in the long run, he said.

Gross receipt taxes

The city of Santa Fe's Finance Department is hoping Santa Fe shoppers will soon be in a holiday spending mood. Teresita Garcia, the city's assistant finance director, said gross receipt taxes were almost flat. The city had budgeted a 4 percent increase over last year's revenues. But from what Garcia sees in the books and hears from the community: "People are not spending. They're being more cautious since the rise in gas prices."

From April to June, the city saw a 4 percent decrease in gross-receipt revenues compared to the same period the previous year for a loss of about $212,000. Then from July through September, the revenues bounced up and down with no gain. If the trend continues, the city could be facing an $850,000 decrease for the entire year, Garcia said.

The Legislative Finance Committee is worried about a similar decline in statewide gross-receipt taxes, which make up about a third of the general funds. Staff say they are seeing a decrease in gross-receipts taxes from construction, home sales and consumer spending.

What's next

Until the last couple of months, New Mexico was better off than many other states, according to a September report by the Center on Budget and Policy Priorities. By July, 29 states had cut spending, dipped into cash reserves or looked for ways to raise their revenues to close budget shortfalls.

In August, state number crunchers estimated $207 million in nonrecurring funds would be left from this year's budget by June 30. About half of that was used for rebates to taxpayers, according to Gilbert Gallegos, spokesman for Gov. Bill Richardson.

Right now, the state estimates about $367 million will be available in new money for the pie that legislators will divvy up in January for 2009-2010, but no one knows what will happen with the financial market, consumer spending or energy prices before then. The LFC, Department of Transportation, Department of Finance and Administration and the Taxation and Revenue Department will produce an updated estimated revenue report around Oct. 21. "That report is designed to give us what the economy in the state looks like and what money we can count on and what money we have on hand," Gallegos said.

Smith said he's recommended the governor require state offices to reduce travel and other expenditures until the session begins. "I would rather be wrong and come in stronger (with revenue) than have to stop government running in May and June," he said.

If the state's revenue declines continue, Smith thinks a special session might be needed prior to the regular legislative session to consider tapping reserve funds.

Gallegos said the governor has directed the Department of Finance Administration to develop a plan in case revenues do, in fact, keep falling. "In 10 days, we'll have a better idea of how all this is going to affect New Mexico revenues," Gallegos said. "At that point, the governor can make some decisions."

The state has $600 million in cash reserves. "The governor would prefer not to dip into those," Gallegos said.

Contact Staci Matlock at 470-9843 or smatlock@sfnewmexican.com.