New Mexico’s oil windfall is set to continue next year, but it may be dialed down a notch.

State economists slightly lowered their projections for next year’s revenue as oil production growth is beginning to slow, according to forecasts released Monday.

In fiscal year 2021, the state is projected to receive $797 million in “new money” — a step down from the $907 million that had been estimated four months ago. That’s largely because the state is now expected to produce 360 million barrels of oil in the next fiscal year, down from the 400 million barrels that had been previously projected.

“The information at this time says [oil production] growth in 2020 and 2021 is not going to be as strong as we thought it would,” Legislative Finance Committee chief economist Dawn Iglesias told legislators at a hearing Monday. “The forecast reflects this.”

Total recurring revenue for the state’s general fund is now projected to be $7.882 billion next fiscal year, compared with an estimate of $7.991 billion released in August.

Despite the slight decrease, the projections still represent a remarkable turnaround from just three years ago, when New Mexico had to drastically cut spending to contend with a projected deficit. The state remains on track for another year of record-high oil production next year amid technological improvements and lower production costs in the Permian Basin.

The revenue forecasts for fiscal year 2021 are particularly important in the lead-up to January’s legislative session because lawmakers will rely on them to make key decisions related to passing a new budget. “New money” is defined as projected recurring revenue for the next fiscal year minus current state spending levels.

In response to the new estimates, Gov. Michelle Lujan Grisham said her priorities will be to invest in education, health care and infrastructure. She added the projections underscore the need for New Mexico to diversify its revenue away from oil and gas.

“We have tremendous opportunity to invest in our children, our schools and our economy and to build the future of our great state, starting now,” Lujan Grisham said in a statement. “But we must always be fiscally conscientious, we must always be building our reserves, and we must continue to aggressively move toward the day we are not overly reliant on one volatile revenue source.”

Indeed, the state’s revenue estimates remain “heavily dependent on the oil price and volume expectations in the forecast,” according to a report released by the Legislative Finance Committee. Nearly 70 percent of the revenue growth the state experienced between fiscal years 2018 and 2019 was related to the energy industry, it said.

Given that dependency, state revenue would likely plummet if there were a serious drop in oil prices.

“An unexpected drop in oil prices would send the state’s energy revenues into a tailspin,” the report said.

The report also urged the state to maintain high levels of reserves and to keeping recurring budget growth under control, given that some forecasting agencies say a recession could occur in the U.S. as soon as next year.

Still, the economists stressed the risk of a recession isn’t New Mexico’s biggest concern.

“New Mexico would be impacted by a U.S. national recession but much more heavily impacted by what happens in the oil markets,” said Taxation and Revenue Secretary Stephanie Schardin Clarke.

The Lujan Grisham administration is targeting a reserves level of 25 percent for the next budget, said Olivia Padilla-Jackson, the state’s finance and administration secretary. The Legislative Finance Committee is recommending reserves of between 20 percent and 25 percent.



At the hearing Monday, legislators voiced nearly unanimous concern regarding the lower forecasts and the state’s increased dependence on oil and gas.

State Sen. John Arthur Smith, chairman of the Senate Finance Committee, pointed out that an estimated 45 percent of general fund revenues are dependent on the oil and gas industry, according to the forecasts. That’s up from around 35 percent in 2016.

“The state of New Mexico is tremendously at risk,” said Smith, D-Deming.

“I think this presentation underscores the tremendous need for us to be careful in how we approach our budgeting and reserves this year,” added Rep. Melanie Stansbury, D-Albuquerque.

Sen. John Sapien went even further, calling for a “moratorium on recurring spending increases.”

“We’re creating our own disaster,” said Sapien, D-Albuquerque. “I will continue to turn my mic on and question any recurring spending we latch on to in this session.”

Oil production is expected to be lower than previously thought next year because energy companies are now favoring shareholder returns over investment in drilling new wells as their stock prices have declined. Well productivity also has slowed.

“The oil industry is shifting focus to investment value rather than high production,” according to a separate report released by the state Department of Finance and Administration and the Taxation and Revenue Department.

In addition, global oil supply is forecast to outpace demand next year, and weaker demand could put downward pressure on prices, that report said.

Padilla-Jackson said the lower forecasts demonstrate the need to approve a new permanent fund for early childhood education.

“While New Mexico continues to benefit greatly from a strong energy market, the latest reduction in the energy revenue forecast is exactly why we have to be strategic about the use of this revenue source,” she said. “Building an early childhood trust fund with energy revenue windfalls does this by reducing our operating budget exposure to market swings while building a legacy fund for New Mexico children.”

Padilla-Jackson proposed the fund during a presentation to legislators at a meeting in Red River in August.

In August, she said the state could conceivably allocate around $300 million a year to build the fund to $1 billion within three fiscal years, and the fund could initially generate $50 million annually for early childhood education.

The updated forecasts were calculated by the Consensus Revenue Estimating Group, known informally as the “revenue estimators” — a collection of economists from three state departments and the Legislative Finance Committee.

General fund revenue for the last fiscal year, which ended in June, was $8 billion, which was higher than the previous estimate of $7.92 billion. Revenue is expected to be $7.776 billion for the current fiscal year, which runs through June 2020.

New Mexico produced 29 million barrels of oil in August, a monthly record high, according to the U.S. Energy Information Administration. Total output was 249 million barrels last year, which was nearly double the output in 2014 and almost four times production in 2010.

Reporter

Jens Gould covers politics for the Santa Fe New Mexican. He was a correspondent for Bloomberg News in Mexico City, a regular contributor for TIME in California, and produced the video series Bravery Tapes.

(1) comment

Chris Mechels

A truly terrible idea, wrapped around our impulses to help children. Let the oil money go to he State Trust Fund, as it always has. This separate trust fund is equivalent to raiding the general trust fund, but wrapped in new language. Despicable.

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