As booming oil and natural gas production pumps revenue into New Mexico’s budget, state officials are taking steps to insulate the general fund from the notoriously volatile fossil fuel industry.
A legislative meeting last week on the latest consensus revenue estimate showcased the projected impact of legislation enacted this year that aims to shift the state’s reliance away from severance taxes to more sustainable revenue sources.
Stephanie Schardin Clarke, New Mexico’s taxation and revenue secretary, said Senate Bill 26 and previous measures are allowing the state to build “a bridge from peak oil to investment income.”
Senate Bill 26, which was signed into law in March by Democratic Gov. Michelle Lujan Grisham, caps net oil and gas emergency school tax and federal mineral leasing revenue allocated to the general fund at fiscal 2024 levels starting in fiscal 2025. Revenue above the cap but below a five-year moving average will be transferred to the Severance Tax Permanent Fund. Those transfers are estimated to total $523 million in fiscal 2025, rising to $1.87 billion in fiscal 2028.
“We’re building our investments, we’re building our corpus, we’re building our reserves or trust funds so that by the time oil reaches its plateau and comes back down we will be dependent on much more stable investment income,” Schardin Clarke told the Legislative Finance Committee.
Using an assumed rate of return on investments of 5.7% between 2023 and 2032 and 6.75% through 2050, the fund is projected to grow from $7.84 billion this year to $47 billion in 2050, according to a fiscal impact report on SB 26. Over that same time period, additional distributions to the general fund would total an estimated $16.6 billion.
Other legislation passed this year included House Bill 2, which transfers $475 million from the general fund to the STPF in fiscal 2024, and SB 378, which distributes $92 million annually from 2023 through 2033 from the Severance Tax Bonding Fund to the STPF, according to the forecast.
In a report this month, S&P Global Ratings said “2023 might be as good as it gets” for oil and gas producing states with the exception of Texas.
“While we do not expect a sharp pull-back in oil exploration and production, mineral producing states may need to prepare financial tools, including tighter spending controls, conservative forecasting, and upkeep of high reserves to guard against potential strain on their economies and revenues,” the report stated.
Growth in oil and gas-related tax revenue in Texas and Oklahoma has slowed this year.
At New Mexico’s previous revenue forecast in December, lawmakers received a sobering presentation from members of PFM’s management and budget consulting practice, who warned that boom times for mineral-related revenue would inevitably end.
As a result, a revenue gap would have to be filled by “unprecedented” growth in New Mexico’s gross receipts and personal income taxes against a backdrop of small population gains and low labor force participation.
The August forecast for general fund revenue was raised over December estimates by $791 million in fiscal 2024 to $12.6 billion and by $908 million to $13 billion in fiscal 2025, when nearly $3.5 billion in new recurring revenue is anticipated.
Oil production in the state hit a record high of 658.7 million barrels in fiscal 2023, according to an estimate in the forecast, which projected lower production growth in fiscal 2024 and 2025. New Mexico is the second biggest U.S. producer of crude oil behind Texas. Natural gas production reached nearly 3 trillion cubic feet, up 13% from fiscal 2022.
For fiscal 2023, which ended June 30, oil and gas-related revenue for the general fund is expected to have increased 51.1% to $2.19 billion from the prior fiscal year. For fiscal 2024, the revenue is forecast to top $3 billion, then remain slightly lower in fiscal years 2025 and 2026.
The other main sources of New Mexico’s general fund are sales taxes, which generated $4 billion in fiscal 2023, and income taxes, which totaled $3.1 billion, according to the forecast.
General fund reserves are estimated at $4.3 billion or 51% of recurring appropriations in fiscal 2023, growing to $5 billion or 52.5% of the appropriations in the current fiscal year.
The state is living in “unprecedented and historic times,” said Wayne Propst, Department of Finance and Administration secretary.
“Compared to some other times in New Mexico’s history — 2008 the Great Recession comes to mind — I think this demonstrates that overall the state of New Mexico is in a safe place with regards to revenues, expenditures, and its budget,” he told the Legislative Finance Committee.
The governor said the “robust revenue” is proof “that what we are doing in New Mexico’s economy is working.”
“As we see another record year of projected revenue, we will continue building a solid financial future for our state through meaningful and long-lasting investments, always with an eye on stewardship of public dollars and fiscal responsibility,” Lujan Grisham said in a statement.
Some lawmakers fretted about returning to “broke” times that led to fund sweeps to keep the state operating.
“My concern is we really need to be careful on how we’re spending it,” said Democratic State Rep. Harry Garcia.
Democratic State Sen. George Munoz, who chairs the finance committee, agreed that overspending would be a problem.
“If we have small spending growth over the next couple of years, our strategy for independence from oil and gas will happen,” he said.
New Mexico’s robust revenue growth was accompanied by double-digit percentage growth in recurring expenditures in fiscal years 2023 and 2024, according to Sunny Zhu, a Moody’s Investors Service analyst. She noted the governor in April vetoed provisions in a tax relief bill that would have reduced annual state revenue by $1.1 billion.
At the end of fiscal 2022, New Mexico had $1.11 billion of severance tax bonds outstanding that are rated Aa2 by Moody’s and AA-minus by S&P Global Ratings. Depending on the issue, the bonds are secured by either a first or second lien on severance taxes deposited in the Severance Tax Bonding Fund, along with interest earnings, according to Moody’s.
The state’s last issue of severance tax bonds was in 2022 with a nearly $291 million deal to finance capital improvements.
The pros and cons of New Mexico’s oil and gas dependence were cited by Moody’s in a report earlier this year.
“While its economy and finances remain reliant on the energy sector, the state has built up significant general fund reserves with growth in oil- and gas-related revenue in recent years, providing a sound buffer against high inflation and likely less favorable economic conditions ahead,” the report said, noting the state estimates that around 32% of its recurring revenue is derived from the energy industry.
Zhu said the rating agency is monitoring a lawsuit filed against the state in May in Santa Fe County District Court by residents and environmental groups seeking to halt the authorization of new oil and gas production.