New Mexico finance officials say the blow to the state’s economy caused by the novel coronavirus hasn’t been quite as bad as expected so far, which could lead state revenues to be higher than anticipated for the past fiscal year.
Still, economic recovery remains a distant goal, and officials are bracing for more cuts to state agencies during what is expected to be a difficult 2021 legislative session.
Gross receipts tax declined less than anticipated in April and May as ongoing projects propped up the construction industry, online sales gave a boost to retail sectors and federal stimulus payments likely helped consumer spending, a leading state economist told state lawmakers Friday.
Additionally, New Mexico’s employment rate didn’t plunge quite as much as officials had feared in the second quarter, and a rebound in global crude oil prices helped push up state oil revenue, said Dawn Iglesias, head economist for the Legislative Finance Committee.
As a result, state revenue for fiscal year 2020, which ended in June, could be between $315 million and $360 million higher than economists forecast two months ago, said Debbie Romero, acting secretary for the Department of Finance and Administration.
“The revenue is actually tracking a little bit better than we anticipated,” Romero told members of the legislative Revenue Stabilization and Tax Policy Committee during a hearing Friday. “So that’s promising.”
Total gross receipts revenue declined 6 percent in April and 1.5 percent in May compared with the previous year as sectors such as leisure and hospitality services, oil and gas, and manufacturing plummeted amid the pandemic, Iglesias said at the hearing.
Yet gross receipts from the construction, retail, trade and transportation industries actually grew in April.
Meanwhile, oil prices have reached higher levels than state economists had forecast in June, with futures markets indicating West Texas Intermediate crude will be priced at over $41 per barrel at the end of 2020.
During the hearing, state Senate Majority Leader Peter Wirth, D-Santa Fe, called the fiscal year 2020 figures “a glimmer of positive news in otherwise incredibly challenging times.”
That news does not revert the overall trend of a huge economic downturn, officials said.
The administration of Gov. Michelle Lujan Grisham is instructing most state agencies to reduce their budgets by another 5 percent next year after they already suffered cuts of between 1 percent and 4 percent during June’s special session, Romero said.
The public education, Medicaid and health department budgets will be exceptions and are expected to cut spending by 3 percent, she said.
“I’m going to tell you it’s been really hard for those agencies to get down another 5 percent off of what they already took,” Romero said.
The instructions to cut more will make for difficult work when lawmakers convene to craft the fiscal year 2022 budget at their next legislative session.
“I think we’re going to see where some of these reductions are actually going to start affecting programs that we may not necessarily want to reduce services,” Romero told lawmakers. “Lots of tough decisions coming up in January.”
The Legislative Finance Committee has said it is recommending New Mexico cut spending by 5 percent to fix a projected $991 million state budget gap for fiscal year 2022.
While oil prices have rebounded, New Mexico’s production has dropped, with its rig count declining from 117 at its peak in March to 49 at the end of July.
State economists don’t expect oil producers to start adding new rigs in New Mexico anytime soon.
“We are not convinced that we’ve necessarily reached the bottom on rig counts,” Iglesias said.
There’s also a long way to go before New Mexico’s economic activity and employment return to pre-pandemic levels, and the recovery ultimately will depend on the trajectory of the COVID-19 crisis itself, Iglesias said.
The longer the pandemic lasts, the more businesses will fold and the more consumer behavior will change in ways that compromise economic growth, she said.
The economist cited a report by the company Yelp noting that 687 businesses have closed in New Mexico since the start of the health emergency, 355 of which were permanent closures.
“We really see that the future is uncertain,” Iglesias said. “We don’t know where things are going. It’s really too soon to tell.”
New Mexico also could face difficulties in using federal stimulus money to fill its budget deficit, Romero said.
The next stimulus bill being debated by Congress could allow states to use previously approved federal funding to plug their budget gaps, but it might require that 25 percent of the money go to local governments, Romero said in comments later confirmed by the Governor’s Office.
In New Mexico, legislators and the governor already have approved plans to allocate those funds, and local governments would receive less than that amount.
“As the money has been distributed for the state of New Mexico, we’re not going to meet that,” Romero said. “And so that could be a problem.”
The secretary said officials have told New Mexico’s congressional delegation about the potential issue.
The state may need to tap more of its Tax Stabilization Reserve fund to fill its budget gap if Congress passes a bill with those criteria, Romero said.
New Mexico already has approved allocating a significant amount of its cash reserves to help patch its fiscal year 2021 deficit, reducing reserves from 25 percent to 11 percent of spending levels.