The rebounding oil and gas industry continues to be a big driver in the state’s swelling revenues, which could reach record highs next year if the economy doesn’t falter.
Analysts told lawmakers Friday the state could have a record $9 billion in its operating budget during the upcoming fiscal year.
That’s a $1.6 billion increase over this year’s spending levels — which they said would be more “new money” than was projected in August.
But they tempered the glowing forecasts with a cautious note, saying much of the windfall is tied to the oil and gas industry, whose fluctuating market can take back as quickly as it gives.
Oil prices dropped 16 percent in the week prior to Wednesday, and they could fall further if the U.S. economy slips into a recession in the coming months and demand for oil decreases, state Taxation and Revenue Secretary Stephanie Schardin Clarke told the Legislative Finance Committee.
She also warned the coronavirus’s new omicron variant could have adverse economic impacts if it proves to be more infectious and causes worse illness than current strains.
It’s already affecting the stock market and oil prices, she said.
“If it is a more concerning or dangerous variant, then that could push the global economy back toward a recession, and that’s why it’s having such an impact on the markets,” Schardin Clarke said.
She noted these more sobering factors arose after the team prepared the report.
Still, state Rep. Patty Lundstrom, a Gallup Democrat and committee chairwoman, refused to let the gloomier prospects dampen her jubilance about the predicted revenue growth.
“This presents an unparalleled opportunity to continue making responsible and deep investments in our communities while keeping robust reserves over 30 percent,” Lundstrom said in written statement issued during the hearing.
If the projections hold, the $9 billion in recurring revenues would well surpass the $8.2 billion in the current fiscal year.
There would be substantially more money to fund health care, education, transportation, public safety, business assistance and other public services.
A fatter budget is certain to generate spirited discussions on spending in the 30-day legislative session that will begin Jan. 18.
Although the projections don’t count the billions of dollars in federal stimulus and infrastructure money the state is receiving, a couple of lawmakers questioned how much federal money as a whole is pumping up New Mexico’s finances.
State Rep. Jack Chatfield, R-Mosquero, said he was curious about the ripple effect stimulus money has had from residents spending it on goods and services and generating gross receipts tax revenue.
Ismael Torres, the committee’s chief economist, said he could put together an analysis on how stimulus spending boosts state revenues.
“I think that would be a more accurate reflection of what the economy is really cranking out on its own,” Chatfield said.
Lawmakers will meet Monday for the start of a special session to discuss redistricting and how to dole out roughly $1.6 billion in federal pandemic aid.
Higher consumer spending — which hasn’t been discouraged by inflation — and higher wages spurred by a labor shortage have contributed to heftier state revenues.
Records on gross receipt taxes show a robust surge in spending this year, putting more money in state coffers, Torres said.
But the oil and gas industry is driving most of the revenue increase, Torres said.
This forecast comes the same week the New Mexico Tax Research Institute released a report stating the industry pumped a record $5.3 billion into state and local coffers this year and almost $3 billion into the state’s general fund.
Torres said while Texas’ and North Dakota’s oil production is down 8.5 percent and 21.5 percent, respectively, since January 2020, New Mexico’s is almost 28 percent higher than its pre-pandemic levels.
The upward trend could change, though it’s too early to tell, Torres said. The recent drop in oil prices could be an overreaction to the new coronavirus variant combined with constraints on oil supply, he said.
The team uses various scenarios from Moody’s to determine how the revenue forecast might change, and the fossil fuel industry has the most potential impact, Torres said. “A low oil price scenario … that continues to be the most significant risk to the general fund.”
Those statements echo detractors’ concerns about the state relying so heavily on tax revenue from a volatile industry.
Citing Pew Charitable Trust’s research, state Finance and Administration Secretary Debbie Romero said revenue fluctuations tend to be greater in economies dependent on natural resources — “which we are,” Romero said. “The volatility analysis highlights the need for both healthy reserves and careful budget planning.”
State Sen. George Muñoz, D-Gallup, agreed the larger sum must be treated with care, especially with the increasing chance of an economic downturn.
“The more you spend, the more you’d better book in reserves,” Muñoz said. “Recessionary pressures could change this whole scenario. Then we’re coming back to make cuts.”