By Jo Mixon
The Special Session convened Thursday June 18, 2020 with the important work of passing budget solvency legislation.The extreme loss of tax revenue as a result of the COVID-19 pandemic and energy market disruptions caused an immediate need. The state was hit especially hard by the jarring amount of revenue lost from diminished oil and gas production and plummeting energy prices. With low production and low prices (in the $30 per barrel range), there is a long way to go before both price and production levels generate the kind of revenue that brings state revenues back. Neither production nor price increases will occur until the economy recovers and demand for energy increases.
Already at the special session, both the Senate and the House of Representatives passed HB1 and SB5, the budget solvency legislation and it has been sent to the Governor for signature. Senator John Arthur Smith, who sponsored the budget bill on the Senate floor and chairs the Senate Finance Committee, said, “This bill will get us to January, but New Mexico has HUGE, HUGE financial problems… The challenges are in the future.” It is readily acknowledged by nearly all legislators that the special session has only begun to deal with the state’s financial problems. More sizable, tough, and fundamental changes will need to be made during the general session of the 55th legislature that convenes in January 2021. So buckle your seat belts.
The Senate adjourned sine die on Saturday after completing its work for this special legislative session. But the House remains in session with two bills yet to be heard. Recessed on Sunday, they will reconvene on Monday, June 22, beginning at 11:00 a.m. If they do not complete their work and adjourn within three days of the Senate sine die, the Senate must return to special session.
At the end of the day, “sanding” the state budget, tweaking various accounts, swapping cash for debt, trimming down capital outlay projects, drawing down half of the state’s reserves and leaning on over a billion dollars of Federal CARES Act and other emergency funding has simply resulted in holding the FY 21 budget flat as compared to FY 20 budget that was approved in February 2020 at the 30-day session.
The primary budget solvency bill was sent to the Governor:
Senate vote HB 1: 30-12 SB 5: 36-6
House vote HB 1: 46-24 SB 5: 68-1
Here are the main takeaways of the Budget “Sanding” bills:
- The budget shortfall for the current fiscal year is resolved for the next 6 months, primarily by spending down half of the state’s previously robust reserves.
- Reserves will be reduced from 26% of recurring appropriations to 13%.
- The size of the state budget for FY 21 was set to grow by 7.6%, most of which was pulled back. Instead, the FY 21 budget will remain at about $7 billion.
- Planned salary increases for state employees were removed or lowered
- School employees and other lower paid workers will still receive pay increases of only up to 1% to compensate for increased health insurance premiums.
- Most state agencies will face across-the-board spending cuts of 4%,
- Medicaid and funding for public schools reduced at a smaller amount.
- $750 million in one-time Federal CARES Act funding will be used to to back fill the budget. (There is some disagreement on how to approach use of the federal CARES Act funds. The Administration thinks US Congress needs to grant additional flexibility before using this funding in a different manor that it is designated, while the state Legislature feels using the funds complies with Congressional intent. Governor Lujan-Grisham believes, and has stated, that she has the authority to direct the use of the funds.)
- $150 million of Federal CARES Act funds will be directed to local governments
- In addition, about another $300 million of emergency federal money has allowed for additional reductions to state general fund expenditures.
SB 3/ HB 4– Small Business Recovery Act of 2020 has passed the Senate and needs a 2/3 vote in the House to pass.This bill utilizes the severance tax permanent fund to disperse loans to small businesses up to $75k each. It will cost the state approximately $500 million– $400 million will be used for small businesses and $100 million for municipalities. This bill will be heard on the House floor today, and it’s fully expected to be an intense debate that could last the entire 3 hours allotted. The Chamber supports this bill and while we appreciate and support the efforts by many legislators to develop a small business loan program to assist small businesses, what they really need is direct support, not more debt.
Congress and the U.S. Treasury have specifically designated “grants to small businesses to reimburse the costs of business interruption” as an approved use of CARES Act funds. However, to date New Mexico has not designated any CARES Act funds for this purpose. We urged our legislature and Governor to use the CARES Act funds as direct financial support to help cushion the severe economic impact on our municipalities and small businesses. And remember, there may not be another $1 billion in federal CARES Act and other emergency revenue available. With the passing of the budget solvency legislation, $150 million will remain for local municipalities with a population of under 500K.
**Taken from the US Treasury website US Treasury Guidance for CARES Act distribution, Frequently asked questions section, Page 7:
Should States receiving a payment transfer funds to local governments that did not receive payments directly from Treasury?
Yes, provided that the transferred funds are used by the local government for eligible expenditures under the statute. To facilitate prompt distribution of Title V funds, the CARES Act authorized Treasury to make direct payments to local governments with populations in excess of 500,000, in amounts equal to 45% of the local government’s per capita share of the statewide allocation. This statutory structure was based on a recognition that it is more administratively feasible to rely on States, rather than the federal government, to manage the transfer of funds to smaller local governments. Consistent with the needs of all local governments for funding to address the public health emergency, States should transfer funds to local governments with populations of 500,000 or less, using as a benchmark the per capita allocation formula that governs payments to larger local governments. This approach will ensure equitable treatment among local governments of all sizes.
For example, a State received the minimum $1.25 billion allocation and had one county with a population over 500,000 that received $250 million directly. The State should distribute 45 percent of the $1 billion it received, or $450 million, to local governments within the State with a population of 500,000 or less.
New Mexico allocation was $1,250,000,000.00 in Cares Act money according to our population. Eligible local governments that certified for direct payment were: Albuquerque city $150,364,461.10 and Bernalillo County $31,818,045.20. Payment to the state was then $1,067,817,493.70. Using the US Treasury guidelines, the state should distribute 45% or $480,517,872.16 to local governments within the state according to population. The solvency bill passed at NM Special Session to “fix” the state budget instead allots $150 million to local NM municipalities with a population under 500,000.
And according to the NLC review of this new guidance, Posted on April 23, 2020 by Chris Hackbarth National League of Cities Director of State & Federal affairs.
Treasury Releases Guidance on Eligible Uses for CARES Act Funding Takeaways:
- A state can transfer payments to local governments provided the transfer qualifies as a necessary expenditure incurred due to the public health emergency and meets the other criteria of section 601(d).
- Governments do have to return unused funds to the Department of the Treasury if they are not used by December 30, 2020.
- Funds may be used to respond directly to the emergency as well as respond to second-order effects of the emergency, such as by providing economic support to those suffering from unemployment or business interruptions due to COVID-19-related business closures.
- The statute says that an expenditure must be “necessary.” Treasury interpreted this term to mean reasonably necessary for its intended use in the reasonable judgment of the government officials responsible for spending Fund payments.
- Funds may not be used to fill shortfalls in government revenue to cover expenditures that would not otherwise qualify under the statute. Many uses of funds are allowed, but revenue replacement is not one.
- The CARES Act also requires that payments be used only to cover costs that were not accounted for in the budget most recently approved as of March 27, 2020. The “most recently approved” budget refers to the enacted budget for the relevant fiscal period for the particular government, without taking into account subsequent supplemental appropriations enacted or other budgetary adjustments made by that government in response to the COVID-19 public health emergency.
Note: It will depend upon whether or not Congress and the US Treasury allow the federal CARES Act money to be used in the budget solvency bill just passed by the New Mexico Legislature. I personally would rather it be put back into our local municipalities and small businesses, struggling to stay open.
Once the House adjourns sine die, we will report on what other legislation has passed.