Unspent capital funds in New Mexico hit $5 billion

New Mexico lawmakers are mulling changes to capital financing programs as the amount of untapped funding allocated to projects from state appropriations or raised through bond issues is at a historically high level due to rising construction costs and a dearth of construction workers. 

The state’s Legislative Finance Committee this week reported an estimated $5 billion in outstanding capital outlay balances across about 4,900 projects as of Sept. 30, the end of fiscal 2024’s first quarter.

That includes unspent funding from state appropriations or raised through the issuance of severance tax bonds, which are backed by a lien on oil and gas production tax revenue.

A truck passes a horizontal drilling rig in Lea County, New Mexico. Taxes on oil and gas extraction back state severance bonds.

Bloomberg News

The historically big backlog is being driven by escalating construction costs and a shortfall in qualified construction workers, according to Cally Carswell, the legislature’s capital outlay analyst. 

“You are likely to receive several billion dollars in new capital outlay requests for the 2024 session in a construction market that is already saturated if not oversaturated, where it’s difficult to start new things or even complete some of the projects we already have in the pipeline,” she told lawmakers Tuesday. 

She said the situation “underscores the need for serious project vetting, for effective prioritization of requests and appropriations, and better coordination of capital outlays with other funding sources.”  

State Rep. Tara Lujan expressed interest in making changes. 

“If we’re already at capacity of our workforce for these projects that we have that probably are not going to get complete for a number of years, then we really need to restructure this and reform this completely,” she said. 

In the meantime, the committee is awaiting responses due next week to a survey asking local governments to report projects that are delayed or stalled due to cost overruns with the goal of providing information that could allow the legislature to prioritize the completion of existing projects before funding new ones.

Carswell also warned that full utilization of severance bond debt capacity could jeopardize New Mexico’s bond ratings and suggested capping annual bond capacity at a lower level would generate savings that could be directed to a new capital reserve or to the Severance Tax Permanent Fund.

Current long-term debt capacity is at 86.2% based on estimates for 10 years of revenue, 10 years of debt at current interest rates, and other factors. At the end of fiscal 2022, New Mexico had $1.11 billion of severance tax bonds outstanding that were rated Aa2 by Moody’s Investors Service and AA-minus by S&P Global Ratings.

A future decrease in volatile oil and gas tax revenue is also a concern.

“Declining severance tax revenues are likely to make it difficult for the state to both finance new capital projects and to maintain the investments it is making today,” the Legislative Finance Committee report said. “This challenge will weigh on the general fund as it becomes a replacement source for capital at a time when general fund revenues will already face headwinds from declining oil and gas production.”

Oil production in New Mexico hit an estimated record high of 658.7 million barrels in fiscal 2023, according to the state’s August revenue forecast, which projected lower production growth in fiscal 2024 and 2025.

The state has taken steps to insulate its general fund from swings in fossil fuel-related revenue. Senate Bill 26, which was signed into law in March by Democratic Gov. Michelle Lujan Grisham, caps net oil and gas emergency school tax and federal mineral leasing revenue allocated to the general fund at fiscal 2024 levels starting in fiscal 2025. Revenue above the cap but below a five-year moving average will be transferred to the Severance Tax Permanent Fund. 

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