Short-term fixes show state’s dependence on oil, feds

by Bruce Krasnow and Milan Simonich, Santa Fe New Mexican

Former Gov. Garrey Carruthers remembers that while U.S. Sen. Pete Domenici was adept at bringing federal money into New Mexico, the now-retired chairman of the Senate Budget Committee used to warn about being too dependent on largess from Washington, D.C., and the need to diversify the economy.

Yet the state hasn’t made much progress, and New Mexico remains one of the slowest-growing economies in the country, said Carruthers, who has a doctorate in economics and now is president of New Mexico State University.

The budget problems that state legislators confronted during the 2016 session again show the fragility of a New Mexico economy that is largely dependent on oil and government. As oil prices have tumbled again in recent months, forcing cuts throughout government agencies and in higher education, lawmakers were reminded of the state’s crippling dependency on government and the boom and bust cycles of oil and gas.

“When this happened in 2009-10, we had to cut and we said it then, and now here we are again,” state Sen. George Muñoz, D-Gallup, said on the floor of the Senate last week. “New Mexico has to change. We need to diversify our economy, and we need to do it rapidly.”

The Legislature’s most cautious member on spending is Senate Finance Committee Chairman John Arthur Smith, D-Deming, who during the monthlong legislative session worried every day about making ends meet, not only for the state budget year that begins in July, but for the current one, too.

“We’re back on faith-based economics. We’d better pray that it gets better,” Smith said midway through the session as he and other senators pared a budget that began with members of the House of Representatives anticipating an infusion of $30 million in new money.

Days later, with state revenue forecasts slumping along with the price of oil, Smith’s committee began cutting $125 million in spending to maintain balanced budgets for this year and next.

But even that may not be enough. Legislators and Gov. Susana Martinez crafted the $6.2 billion state budget based on oil selling for $38 a barrel, a mark that would help meet revenue projections. On Friday, oil in the regional market was at $29.65 a barrel.

To compensate, lawmakers have tapped into reserves and used almost $130 million from dozens of unspent accounts and reserves, sending contingency funds to the lowest levels since 2009.

In the short term, an increase in energy prices is all that matters. If that doesn’t happen, lawmakers could be back in a special session to make more spending reductions.

New Mexico is one of six states cited in a report by the bond rating agency Standard & Poor’s as suffering the most from the oil decline.

And like the others — Alaska, Wyoming, North Dakota, Louisiana and Texas — the governor and lawmakers are using a variety of measures to stabilize public education and other state services.

In a budget message earlier this month, Alaska Gov. Bill Walker said he was proposing to eliminate 300 positions to help close a $3.6 billion shortage. Louisiana is looking at a $1.9 billion deficit and considering both spending cuts and a broad-based sales tax increase to close the gap.

Oklahoma based its budget on $67 for a barrel of oil and expects revenues to fall by 13 percent next year. Like New Mexico, Oklahoma will cut spending and tap into reserves. North Dakota is trying to adjust to a $1 billion shortfall with cuts of about 4 percent.

During the past dozen years, New Mexico has taken some steps to better promote tourism and outdoor recreational activities, and it has taken a lead in film and television production credits. There is Spaceport America in Southern New Mexico, which is poised to attract manned launches as well as drone experimentation.

New Mexico also has moved to make the corporate tax burden more competitive with neighboring states as a way to recruit businesses from elsewhere. But the state has the highest unemployment rate in the country and ranks in the bottom five for job growth during the past 12 months.

Some Democratic lawmakers cited the fact that 600 jobs were wiped out during the 30-day session alone — when businesses, including Sprint and Caterpillar, announced they were leaving New Mexico — as evidence that the Martinez administration has not delivered on the promise of more jobs.

One expert, however, said that criticism is probably not fair. Richard Anklam, a former state economist who heads the New Mexico Tax Research Institute, said the corporate cuts were always going to phase in over five years, putting New Mexico on par with other states.

“Taxes matter on the margin,” he said. “What we did was lift what was seen as an impediment to some.” But thinking that the tax reductions would change the game overnight is just not reality, he said.

Legislators approved New Mexico’s corporate tax cuts in 2013 after a controversial vote in the state House of Representatives. At least some members who opposed the cuts at the time said then-House Speaker Kenny Martinez, D-Grants, conducted the vote after the deadline that ended the session. Speaker Martinez said the vote was lawful. He declined to recognize members who wanted to debate the measure, knowing even a brief filibuster would kill it.

Gov. Martinez and her Cabinet secretary of economic development, Jon Barela, were elated when legislators authorized the tax cuts. Barela, as early as the summer of 2013, said businesses began inquiring about setting up shop in New Mexico. But so far, the tax cuts haven’t offset job reductions by Intel, Sprint and other corporations.

After the tax reductions, New Mexico was in the running to house a battery plant for Tesla Motors, a maker of electric cars. But the company chose a site in northern Nevada, closer to its California headquarters. In fact, New Mexico has not had a major job creator since Intel moved into Rio Rancho 25 years ago, according to the January edition of the New Mexico Economic Summary published by the Legislative Council Service and the Legislative Finance Committee.

There are still serious challenges for New Mexico: the bulky and complicated structure of the gross receipts tax laws, schools, public infrastructure and the workforce.

“Education and workforce, all are priorities,” Anklam said. “… Changing your economy, changing your tax structure, that doesn’t happen in a term of an elected official. It’s not a short thing, it’s a long-term thing.”

U.S. Sen. Tom Udall, D-N.M., said the most important way to improve the state’s economy for the long term failed in the state legislative session that ended last week.

“I’m disappointed that the state Legislature did not advance a measure to let voters decide whether to amend the constitution and invest in the most effective early childhood programs,” Udall said. “If we fail at improving the well-being of our children, we fall behind on everything else — including long-term economic growth.”

Proposals by Democrats in the Legislature to use a portion of the $14 billion land grant endowment failed for the sixth consecutive year. Republicans in the Legislature, along with Smith and numerous other Democrats, oppose using the endowment for another program because they say it will deplete the fund for future generations.

Veronica Garcia, executive director of New Mexico Voices for Children, expressed a view similar to Udall’s. She said the state Legislature should have taken a stand by freezing corporate tax cuts to help people who need it the most. “The already glacial pace of phasing in pre-K education has essentially been halted,” Garcia said.

Aubrey Dunn, the state land commissioner, was among those who opposed using the land grant endowment for early childhood education. He said the endowment, which contributed more than $655 million to New Mexico’s public schools this year, has to last for generations.

Anklam said that Smith and Dunn, a Republican, are right that New Mexico needs to increase its gas tax as a way to boost the general fund and to pay for needed road and transportation improvements throughout the state. New Mexico

That makes more sense than spending down reserves or borrowing from the road funds to pay for government operations. “If you’re a fiscal conservative, it’s the right answer,” Anklam said.

But Martinez made campaign promises not to raise taxes. Sen. Steve Neville, R-Aztec, who sits on the Senate Finance Committee, said the reluctance was not just from the governor but from Republican members who worried that taking more money from consumers would slow the economy further.

Senate Majority Leader Michael Sanchez, D-Belen, a senator for 24 years, said his idea for diversification is to put the emphasis on small businesses. New Mexico, he said, may land a mammoth corporation on occasion, but those businesses haven’t lasted or haven’t maintained employment levels.

Carruthers said it’s possible the state is trying to do too much and might be better off focusing on a few things it knows it can accomplish — and be able to measure if the goals are being met, something that is difficult with tax cuts.

He would put that emphasis on workforce development, with a focus on delivering needed career skills in universities and community colleges and avoiding duplication of those efforts.

“We have enough land; I think we have enough water to do what we need. What we really lack is an internationally competitive workforce,” he said. “If I had one dollar to spend, I would put it there.”

He also said there needs to be more private-sector leadership, similar to what is happening in the Las Cruces border area, where business owners have made investments of their own money and expertise to grow jobs.

“New Mexico is a rich state with a rich culture and a rich landscape. We’re rich in so many ways, ” Carruthers said. “We just don’t have any money.”

Copyright 2016, Santa Fe New Mexican (http://www.santafenewmexican.com/news/local_news/state-s-short-term-fixes-show-dependence-on-oil-feds/article_d1410b24-d867-11e5-afbc-bb69f39e5079.html)