Welcome to the Legislative Roundup, your update on the most important news from the Legislature

2nd Session of the 56th Legislature Starts Tomorrow

Here's hoping everyone had a wonderful and joyous holiday season - even if your favorite team didn't make the playoffs! Tomorrow, at noon, a different kind of team takes the field in the Roundhouse to begin this year's 30-day legislative session, which focuses mainly on producing the FY 2025 state general fund budget. Unlike a 60-day general session, introduction of legislation in a budget session is restricted to fiscal matters, constitutional amendments and any topics the governor designates for consideration (referred to as the Governor's Call). We may get insight into which issue the governor will put on her call when she presents her annual State of the State message to the Legislature tomorrow.

Two new senators will be suiting up: Representative Greg Nibert (R-Chaves) will be sworn in to replace Senator Stuart Ingle (R-Chaves, Curry, DeBaca, Lea and Roosevelt), who retired earlier this year after having served in the Senate since 1985. Nibert is an oil and gas attorney from Roswell. The Chaves County Commission voted 5-0 last week to nominate Jared Hembree to fill Nibert's seat. Hembree is an oil and gas attorney from Roswell and president of the Independent Petroleum Producers Association.

Also joining Nibert as a new senator is Steven McCutcheon II, a native of Carlsbad, who served as an Eddy County commissioner and is a rancher and businessman. McCutchen was appointed to fill the balance of Senator Gay Kernan's (R-Chaves, Eddy and Lea) term. Kernan also retired earlier this year, having served in the Senate since 2002. Legislators appointed to fill terms must run for reelection in 2024 if they wish to retain their seats, and 2024 will be a "mega" election year with all Senate and House seats up for grabs.

The partisan composition of the two chambers remains the same as last year, with Democrats holding commanding margins: 45-25 in the House and 27-14 in the Senate. Other than the selection of Nibert's replacement as House Minority Whip, all other leadership positions in both chambers remain the same as last session.



And over the interim, Senator Crystal Diamond (R-Doña Ana, Hidalgo, Luna and Sierra) got married - congratulations! She is now officially listed as Senator Crystal Diamond Brantley.

Thanks, Oil and Gas Industry, for a Truckload of Cash

New Mexico's oil and gas industry has boomed in the last several years, delivering unprecedented tax revenue into state coffers. Consider that general fund revenues 10 years ago were around $6 billion. Compare that to the expected $12.5 billion when the books are closed on the current fiscal year - and more than $13 billion is estimated for FY 25. The revenue growth from FY 22 to FY 23 was over 20%, which is nearly a $2 billion increase!

Prudently, the Legislature has tucked significant amounts of the "new money" into permanent funds which, through investments, are contributing significant revenue to the general fund and also serve as a hedge against "bust" cycles that may occur (you don't have to go back very far to the bad old days of extreme budget cutting). This year's "new money" (the amount in excess of recurring state spending) is estimated to be about $3.5 billion, a 36% increase over last fiscal year.

Proposed Budgets Increase Recurring Spending

Atypically, the executive and legislative budget proposals are significantly different in terms of total spending: The governor's amount is $10.5 billion, a 9.9% increase, while the Legislature comes in lower at $10.1 billion, a 5.9% increase. State agencies had requested a 10.9% increase. The Legislative Finance Committee (LFC) has established a goal of stretching out the timeframe in which state revenues will fall short of covering recurring spending. The LFC suggests that spending growth should be limited to no more than 6% this year and likely lower in future years, perhaps in the 3% range.

Both proposals include cash reserves over 30% of recurring spending. Additional funding for things such as early childhood programs is available through special funds already set aside for this purpose. As pointed out in the executive budget recommendation, the general fund is but 35.9% of the total executive budget; adding in federal money and contributions from other state funds raises the total budget to $29.3 billion. 

Tax reform is on the agenda in both budget proposals: the governor has set aside $500 million while the LFC has set aside $200 million. At this lower level, gross receipts tax reduction would not be feasible - it's more likely targeted proposals to reform the personal income tax structure or to incentivize environmental initiatives would be in the offing. At a recent Senate Finance Committee hearing on the budget, Department of Finance and Administration Secretary Wayne Propst seemed to suggest the executive might be comfortable with the LFC's amount. Enacting tax reforms or incentives results in recurring losses to state revenues in future years.

The charts below illustrate the legislative and executive budgets at the macro level. How the pie is sliced is very similar in both budgets, with the difference being the higher total level of spending proposed by the executive.

LFC Proposal

Executive Proposal

As the LFC chart illustrates, public education (including higher education) consumes around 57% of the general fund budget, and the ever-growing Medicaid budget another 17%. The slices of the pie left for everything else - including public safety and economic development - is relatively small. The Legislature is increasingly focused on performance metrics that aim to identify high and low performing programs and agencies. Senate Finance Chair Senator George Muñoz (D-Cibola, McKinley and San Juan) has shared publicly his concern that increases in funding aren't tracked and that there's too often little or no data to support whether expanded or new programs are effective.

Cue the Government Accountability Trust Fund (GATF)

Today, legislation should be introduced to establish the GATF (pronounced "gate"). The LFC is proposing what looks to be a first-of-its-kind in the nation approach to incubating expansions of existing programs or launching of new initiatives.

As we understand it, there are two parts: the first is an appropriation of $300 million to be tranched in $75 million chunks over the next four years. Part two is appropriating an additional $630 million to be used in the future. Through a new proposal process, state agencies would apply for expanded or new program money. If granted, ultimately by legislative appropriation, the new initiatives would be closely monitored against a set of metrics and an evaluation process. Winners proceed, losers exit. The goal is to provide a path for innovation that allows decision makers to see what's working and what's not before baking appropriations into base operating budgets.

The governor has not weighed in on this idea, but we're not going to be surprised if she (and likely most governors) won't like having the Legislature tie this kind of can to the tails of executive agencies.

Looking Down The Road: The Party's Over

Looking ahead, production from the goose that lays all the golden eggs is likely slowing down sooner than expected. Including revenue from permanent funds, oil and gas supports about 50% of state recurring spending. For a long time, policy makers have realized the inherent roller coaster risk in over-reliance on a single source of revenue. The problem is what will fill the gap when oil and gas revenues decline - and in no small part due to global and local pressures to reduce consumption of fossil fuels? The answer is far from clear - thus the need to continue to prudently stash away excess revenues that can contribute to sustaining state spending when the inevitable drop occurs, ensure that taxpayers are getting the maximum bang for every buck spent by the state, and clamp down on the rate of spending growth.

Additionally, one-time expenditures that enhance economic progress - like investments in infrastructure - are a must both because the projects are needed, and paying cash now avoids incurring bonded indebtedness, thus saving debt service costs down the road. Finally, public education must step up its game - New Mexico can't continue to wallow in the depths of education failure if growing our economy and increasing the financial well-being of our citizens is to be improved. The lack of a qualified workforce is a key roadblock to attracting and growing business in our state, and expanding New Mexico business is the only way to grow state revenues over the longer term.

Highlights of the Executive Budget Proposal

• 34.2% general fund reserve (as a percentage of recurring spending)
• 3% compensation increase for all state and school employees, with targeted increases for state police and correctional officers
• $500 million for statewide housing initiatives
• $500 million for tax reform
• $250 million to the Conservation Legacy Fund
• $200 million for statewide road projects
• $130 million for lottery tuition 
• $108 million for Opportunity Scholarships
• $100 million for the rural health care delivery fund
• $42 million to implement the state's broadband plan
• $40 million for homeless initiatives
• $35 million for law enforcement recruitment and retention
• $30 million for drought mitigation projects by the State Engineer
• $25 million for LEDA
• $20 million for behavioral health and child welfare services
• $15 million for teacher and professional health care loan repayment
• $15 million for the national marketing and advertising by the Tourism department
• $10 million for roadway beautification
• $10 million to improve enrollment and graduation from nursing programs
• $9.7 million for JTIP
• $850 million for capital outlay (sources to be determined)

Highlights of the LFC Budget Proposal

• 30% general fund reserve
• 4% compensation increase for all state and school employees - 2% cost of living and 2% to "properly place" employees on pay scale (additional funds provided for health insurance)
• $663 million to GATF for future years and $300 million for first four years
• $200 million for tax reform
• $300 million to the Conservation Legacy Fund
• Increase distribution from Early Childhood Trust fund to $250 million
• A 1% increase for Children Families and Youth department
• $152 million from GATF funds to pilot educator clinical practice programs and other education initiatives
• $120 million for rural health care providers
• $100 million to the Water Trust fund
• $80 million for student aid for high-demand workforce training certificate programs and apprenticeships (over four years)
• $50 million to the Housing Trust fund
• $45.9 million to eliminate deficits in the patient compensation fund
• $26 million for public safety radio communication infrastructure statewide (capital outlay)
• $20 million for broadband implementation
• Capital outlay: $410 million from the general fund; $90 million from other state funds and $269 million from general obligation bonds (if approved by voters in November). No issue of severance tax bonds (currently there is more that $5 billion in outstanding capital outlay spread over more than 5,000 projects)
• Other capital outlay of significance: $55 million for new humanities complex at UNM; $15 million to complete Comprehensive Cancer Center at UNM Health Sciences Center; and, $10 million for the FUSE Makerspace at CNM

Beyond the Budget - Issues, Issues and More Issues

On Friday, the GACC Board of Directors will meet to finalize this year's legislative agenda that provides the Chamber's position on many issues that might arise during the legislative session. The following are some of the key issues on our radar screen:

• Tax Relief: Given the largess in the coffers, providing significant tax relief to New Mexico's businesses and families should be a top priority. Eliminating gross receipts tax pyramiding and reforming the personal income tax structure away from its current "flat tax" nature are top priorities. No new taxes or tax increases should be enacted.
• Higher Costs To Employers: Proposals to implement a paid family and medical leave program, to further increase the minimum wage, to increase taxes on businesses and business owners or increase unemployment insurance premiums should all be put on the shelf. 
• Economic Development: Programs such as LEDA, job training, tourism marketing and advertising consume a very tiny portion of the budget and deserve full funding.
• Workforce Development: Enhancing investments in technology growth, upscaling training facilities and programs, vastly expanding our health care workforce development and health care funding are among the many steps needed if the state's economic base is to be grown rapidly enough to significantly offset the loss of jobs and revenues in the energy production sector.
• Public Safety: Employers demand an environment that is safe for their businesses, their employees and their families. It's time to take decisive action to fix the problems of a "catch-and-release" pretrial system, to keep violent offenders in jail pending trial, to lower the boom on fentanyl trafficking and to ramp up behavioral health facilities and programs to help non-violent offenders get back on the right track. We also need more law enforcement personnel and modern technology to bolster their efforts. 
• Education: Concentrate efforts to turn poor-performing schools around, to battle absenteeism, vastly improve literacy and make much more transparent to the public how schools and students are actually performing. A focus must also be placed on developing school leadership - effective leadership is a key to high performance.
• Infrastructure: Develop a strategic water supply, boost road construction and maintenance and expand broadband access. 

Stand by for our complete legislative agenda that will go into much more detail! 

Signing Off from Santa Fe

Once again, it is our honor to represent the business community before the New Mexico Legislature and to bring you the news and views of what's going on in the Roundhouse. We have a great team in place both to advocate and to keep our chamber investors and key stakeholders in the know.

It was once said that one must either get into politics or get out of business. We have no intention of seeing anyone go out of business - so we're ready to roll up our sleeves and do the best we can to meet our goal: "to make our city and state a great place to start and grow a business and a safe, exciting place to work and raise a family."

We'll see you for opening day tomorrow with a full report on the Governor's State of the State message and other important insights. Until then, have a wonderful evening. 

The Legislative Roundup, published during the New Mexico Legislative Session by the Greater Albuquerque Chamber of Commerce, provides information on local and state public policy and business issues that affect you.

For questions, please email D'Val Westphal at dwestphal@greaterabq.com.