New Mexico lawmakers debate state cash reserves

Dec. 18—Most Republican and Democratic legislators agree on at least one thing: The unpredictability of critical oil and gas money that fuels the state's budget demands lawmakers set aside a hefty cash reserve.

Revenue projections, strapped to the fortunates of oil and gas, often rise like a rocket — and can plummet like a falling star.

Still, the state's reserve funds remain a source of contention, with some lawmakers pushing to save more for a rainy day and others eager to invest as much as possible into improving state services or other projects.

As recently as six years ago, lawmakers had to dip into cash reserves to cover budget gaps when oil prices fell and projected revenue dropped, or to address unexpected emergencies.

The specter of 2016, when declining tax revenues left a $654 million hole in the state budget, remains fresh for some in the Legislature, who remember when the reserve fund for day-to-day operations was empty. Though the state may be in the midst of record revenues today — analysts projected an astounding $3.6 billion in new money last week — many lawmakers are determined to keep reserves at about 30 percent of the state budget.

"For me, 30 percent would be the floor; 40 percent is probably the high, but if we don't have [reserves], we're in trouble" when revenues suddenly drop, said Sen. Bill Sharer, R-Farmington.

The push and pull over reserves likely will come to the fore in January, when the 60-day legislative session commences. For many, the issue isn't simply about math, but philosophy: spend now, or save for later?

Sharer said he differs from Democrats who, he noted, often say: "We have needs today, so let's deal with the needs today; what you are warning about might not happen."

But "experience tells us otherwise," Sharer said.

Rep. Ryan Lane, R-Aztec, said cash reserves of between 28 percent and 34 percent of recurring spending would suit him. But, he added, because the state is dealing with historic revenue projections and would could be a record-busting $12 billion budget, "we don't want to sit on all that money."

Taxpayers helped build those reserves, and they should get some of the money back in the form of improved services, Lane said. The Governor's Office also has talked about another round of income tax rebates like the ones passed during this year's session, which would cost about $1 billion total.

Still, others wonder if lawmakers should aim higher when it comes to keeping a larger share of the budget in reserve.

"I have seen times when the economy and revenue have crashed so deeply we had to scrape cash balances from every state agency just to meet the payroll for state employees," said Sen. Nancy Rodriguez, D-Santa Fe.

The desperation in the 2016 budget crisis extended into local communities, where school districts' reserve accounts also were swept to help plug the state's budget holes amid fears of layoffs and furloughs. That's why many legislators say finding the right mix of reserves is not merely an academic or philosophical enterprise.

There are more recent examples of reserves' importance as well.

They come in handy when other factors — such as the impact of the coronavirus pandemic — start shaking the state's financial foundation, said Rep. Patty Lundstrom, D-Gallup.

At times like that, the reserve money "keeps the lights on, keeps schools functioning, keeps our health care system going," said Lundstrom, chairwoman of the House Appropriations and Finance Committee.

How long could current reserves keep the state running?

Pretty long, it appears.

The Pew Charitable Trust recently issued a report saying New Mexico could run on its savings alone for 100.8 days. Only Wyoming, Alaska and North Dakota — all states that are also heavily dependent on oil and gas money — topped that figure, with 349 days, 150 days and 112 days, respectively, while Connecticut comes close with 100 days.

The 50-state median for operating reserves is 42.5 days, the report says. Washington state has the lowest amount of reserves, the report says, with just enough to get by for four days.

The report says these "rainy day funds in most states are collectively projected to have reached new highs by the end of fiscal year 2022, building on record gains the year before."

Reserves are "an essential fiscal tool that helps states weather the ups and downs of the business cycle," the report says, noting looming economic threats could weaken state budget conditions "raising the possibility of budget gaps."

Based on the Legislative Finance Committee's general fund revenue estimate issued Monday, New Mexico has almost $3.7 billion in its reserve fund.

Gov. Michelle Lujan Grisham's minimal target for a reserve account is 25 percent, spokeswoman Nora Meyers Sackett wrote in an email. But Lujan Grisham proposed 36 percent in reserves last year, she noted.

Sen. George Muñoz, D-Gallup, said he expects a vigorous debate on reserves in January, probably centering on "how much is too much and how much is not enough?"

"There's got to be a balance," said Muñoz, chairman of the Senate Finance Committee.

The push for balance has increased over the years, said former state Sen. John Arthur Smith, a conservative Democrat from Deming who served as chairman of the powerful Senate Finance Committee for years.

He recalled years when the reserve balance was around 10 percent of the state budget until "we learned that wasn't enough when the bottom fell out of natural gas and oil" about 10 years ago.

Smith said the reserves have since been built up as "a product of financial boom with the state through oil and gas. I don't think it was by design to have 30 percent or more reserve."

The range of reserve funds has fluctuated over the years depending on the state's economy, Ismael Torres, chief economist for the Legislative Finance Committee, in an email.

"Going into the recession, reserves were at 17 percent of recurring spending before being drawn down to 5 percent of recurring spending in 2010," he wrote. "The largest drawdown in a single year during that time was from 2008 to 2009 when reserves fell from 13 percent to 6 percent" of recurring spending.

Lundstrom said she thinks most lawmakers from both parties want to aim for the 30 percent mark, though some suggest "23 to 25 percent. There's always some debate about what the reserves should be."

Ultimately, she said, a reserve fund "is a very good financial indicator of either good or poor health, and in our case, it is good health."