A rebound in oil and natural gas prices is changing the outlook for state government finances in New Mexico as the Legislature drafts a spending plan for the coming fiscal year.

A team of economists from three state agencies and the Legislature said Wednesday state government income is likely to increase by $339 million during the fiscal year that begins July 1 to a total of $7.55 billion. The outlook in December was lower by nearly $200 million.

State government income would exceed current annual spending obligations by 2.3 percent if the new estimate holds true.

The outlook holds major implications for ongoing budget negotiations at the Legislature and for state relief proposals aimed at a post-pandemic economic recovery.

State Sen. George Muñoz of Gallup — chairman of the lead Senate budget-writing committee — said the state will remain in a precarious financial situation once federal relief runs its course, amid a shift in federal energy policy.

“It’s nice to be in this situation, but we have to remember what people went through in the lockdown,” Muñoz said. ”We're all going to have to figure out how to pay for this.”

He said the unapproved federal relief plan proposed by President Joe Biden would provide as much as $1.6 billion to state government, another billion dollars for public education and $838 million aimed at local governments across New Mexico.

The state’s looming financial challenges include a shortfall of at least $450 million in its depleted unemployment trust fund, for the current fiscal year that ends June 30.

Severance taxes and royalties on oil production account for most of the bump in forecast state income, amid higher market prices for oil and surging local production in the final months of 2020.

Muñoz said he has written a letter to the White House asking for an exemption from a recent pause on oil lease and permit approvals on federal land. The Democratic senator believes permitting delays on pipeline infrastructure could make it harder to bring natural gas to market amid surging prices — and even lead to greater releases and burning of excess gas directly into the atmosphere.

Biden has vowed to cut greenhouse gas emissions from oil and natural gas. In January, the administration halted leasing, permitting and other approvals for petroleum development on federal lands by suspending for 60 days the regulatory authority of federal land managers across the country.

The stakes are high for New Mexico state government given its heavy reliance on revenue from oil and natural gas development to pay for basic services, from public schools to prisons.

New Mexico remains on solid financial footing despite aggressive emergency health restrictions on most businesses and a major shift to online work and schooling.

Without major spending reforms, general fund reserves would end the fiscal year at $2.73 billion — equal to 38 percent of annual spending obligations. However, legislators in the Democratic majority and Gov. Michelle Lujan Grisham are pushing for increased spending on health care and public education with a one-time burst of economic relief through business loans, tax breaks and infrastructure grants.

Notes from the Legislature's budget and accountability office include a sobering assessment of the current overall economy.

“The economic forecast is characterized by the further deceleration of economic growth as consumer spending has stalled, corporate debt remains high, restaurants are empty, hotel revenues have plateaued, airport passenger traffic has turned lower, and job postings remain well below average,” the report states. “Still, there are some signs of improvement.”

Copyright 2021 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.

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