SANTA FE, N.M. — New Mexico political leaders are looking for new ways to restore full faith in the state’s credit as they negotiate a solution to a budget crisis ahead of a special legislative session next week.
The state’s credit score was downgraded by a leading ratings agency late last year in response to dwindling financial reserves, and further problems could translate into higher construction costs for roads, schools, airports, prisons and other infrastructure projects.
The Democratic-led Legislature is grasping to rebuild the state’s depleted rainy day funds, even as it confronts the more pressing challenge of funding state government for the coming fiscal year.
In a feud with lawmakers, Republican Gov. Susana Martinez has rejected a list of proposed tax and fee increases. Her vetoes of all funding to the Legislature and state institutions of higher education for the fiscal year starting July 1 have added urgency to negotiations, with universities warning that delays have scared away students, faculty and researchers.
State finance officials on Thursday announced an uptick in tax revenues that eases budget difficulties, and staff economists for the Legislature no longer foresee a deficit next year if vetoed spending is restored.
In 2015, New Mexico had $712 million socked away — a buffer that has been largely exhausted as the state’s oil-dependent economy faltered.
“It’s going to cost the taxpayers more money if the bond rating tanks,” said Rep. Patricia Lundstrom, D-Gallup, chairwoman of the House Appropriations and Finance Committee. “It’s just not good budget practice not to have anything in savings for goodness sakes.”
Lawmakers have been studying new strategies for rebuilding the reserves but have limited options without resorting to abrupt spending cuts or tax increases.
One savings proposal would automatically set aside money from severance taxes on oil and natural gas production in years in when the petroleum business is booming. Savings in an emergency account would be triggered when those tax revenues exceed a five-year average.
Backers of the strategy, including Republican Rep. Larry Larranaga, say it would shield the state from volatility in the oil sector.
Critics say it would work too slowly. The plan could limit access to surges in tax revenue that previously underwrote a commuter railway and a commercial spaceport.
Jonathan Moody, an officer with the Pew Charitable Trust, said New Mexico would be well served by a savings strategy that doesn’t vary from one governor or legislature to the next and can smooth out oil-sector volatility.
“They’re in a downturn right now, they probably can’t save at the moment,” he said of New Mexico policymakers. “This is a wonderful opportunity for them to restructure the rainy day fund and redesign it so that it can be more effective.”
A Pew analysis of state credit downgrades since 1992 emphasized the importance of resuming savings after a fiscal crisis.
New Mexico’s rainy day reserves are currently largely replenished based on year-to-year budget decisions when taxes outpace spending.
The state’s two sovereign wealth funds hold more than $20 billion — trusts that most politicians consider off-limits from annual budget wrangling.
New Mexico expects to finish the fiscal year with a $95 million reserve cushion — less than 2 percent of annual spending.
“We used to have a rule of thumb of talking about 10 percent reserves,” said David Lucero, deputy director of the Legislative Finance Committee.
The governor and many Republican lawmakers have pinned their hopes for shoring up state finances on ambitious tax reform legislation that would do away with dozens of tax breaks.