By Bruce Krasnow

Falling tax revenues have left a $654 million hole in the state budget, and New Mexico lawmakers learned Wednesday that the reserve fund for day-to-day government operations is completely drained.

That operating deficit includes a $223 million carryover from spending during the fiscal year that ended June 30, and a projected $431 million shortage for the 2017 budget year, now in its second month.

Legislative Finance Committee members heard the bad news from legislative staff and members of Gov. Susana Martinez's Cabinet. The numbers were more dire than anticipated because the general fund reserve balance ended fiscal 2016 in the negative.

"We're down to zero reserves," noted Sen. George Muñoz, D-Gallup, who raised concerns about how the bleak fiscal picture will affect borrowing costs.

The Legislature is expected to convene next month in a special session in Santa Fe to transfer money to the operating budget from an account containing cash tobacco companies paid to settle a lawsuit.

The governor has yet to formally set a date for the special session. But even with the Legislature transferring money from the tobacco settlement account, general fund reserves would still total only $130 million, or 2 percent of recurring revenue, perhaps the lowest ever. That is down from over $700 million just 14 months ago, at the end of the 2015 fiscal year.

Rep. Patricia Lundstrom, D-Gallup, and Carlos Cisneros, D-Questa, were among those Wednesday who questioned whether the Martinez administration knowingly spent money the state didn't have, which would be a violation of state law.

"We need to balance our budget by constitution," Cisneros said. "Where does this leave us?"

Duffy Rodriguez, Cabinet secretary for the Department of Finance and Administration, said her staff "is working diligently every day" on a plan to restore the fund balances and show a positive year-end balance for 2016. Some of the solvency measures will include dipping further into unspent account balances and reallocating money from idle capital projects. Those measures will be brought to lawmakers in the special session.

Legislators who have been through previous periods of falling revenue said both Democrats and Republicans will eventually come together and do what is needed.

"We have an obligation as a Legislature to do the right thing," Senate Minority Leader Stuart Ingle, R-Portales, said. "It may not please everyone."

"It's not a crisis," Rep. Larry Larrañaga, R-Albuquerque, said after seeing the forecast. "We'll just have to make a midyear adjustments like we do every year."

Based on current revenue and the governor's vow not to approve any new taxes, the fiscal cliff deepens with a $211 million shortage projected for 2018 and reserves remaining at zero.

Beyond patching 2016 spending, Martinez believes the budget for the 2017 fiscal year can be reset by cutting state agency spending. She has ordered a 5 percent budget reduction for departments under her control. Vacancy rates at many agencies, including the Corrections Department, already are at 20 percent.

Estimates released Wednesday indicate the state collected $5.67 billion in revenue in fiscal 2016, about the same amount as 2010, but down 8 percent from 2015. The consensus revenue forecast calls for a $5.7 billion general fund in 2017 and $6 billion in 2018. The Legislature and the governor approved this year's budget at $6.2 billion.

The tobacco settlement fund balance stands at approximately $220 million, just about enough to pay the 2016 bills, according to economists.

"It's not the best way to do it," said Cisneros, who sits on the finance panel, "but it's the quick and dirty way to shore it up."

The state depends heavily on oil and gas revenues, which have slumped lately due to low prices. Gross receipts and income tax payments from affected companies and workers also have crippled the budget. That impact has rippled across the state's rural areas.

"Rural New Mexico is struggling everywhere," Ingle said, "not just the oil patch."

The state Taxation and Revenue Department also reported that big data programs that analyze tax payments by companies are resulting in more refunds due to hundreds of tax credit laws on the books, and the state some months pays out more in corporate income taxes than it collects. Specific incentives for economic development also have cost the state more than anticipated, said Taxation and Revenue Secretary Demesia Padilla.

Both Ingle and Rodriguez support going into the tax code and fixing the loopholes that are costing the state millions. "They won't be called tax increases," Ingle said, "but we'll be redoing the language to make it work."

Meanwhile, lawmakers continue to have concerns about reserve funds, saying there is not enough money to weather a another recession or natural disaster.

David Abbey, staff director for the Legislative Finance Committee, said bond rating agencies such as Moody's have a good relationship with state officials and may not downgrade the credit picture if lawmakers act quickly. Once budget transfers have been made, books for the 2016 fiscal year will show a positive balance.

"I think I've outlined the legal reasons to address this expeditiously," he told lawmakers. "The longer you wait, the harder it is to do. You can't save money that has already been spent."

Operating reserves are separate from the $20 billion in state endowments that have built up over the decades from severance taxes on oil, gas and other resources extracted from state lands. Earnings from those investments transfer into general fund operations for state universities and schools based on earnings and are earmarked by the constitution.

And the state is not at risk of bouncing checks -- at least for now --because there is over $1 billion on deposit with the New Mexico State Treasurer's Office that is part of the general fund but reserved for specific projects or services, such as inspections or licensing.

Martinez has reiterated her pledge not to raise taxes during her tenure as governor, and Rodriguez, her Finance and Administration secretary, said that with the spending cuts the reserve funds can rebound without the need for higher taxes or postponing tax breaks promised to corporations.

Rodriguez said nothing is off the table and the administration will look at education spending, but not classroom money. She said spending cuts and solvency transfers should bring fiscal 2017 reserves to 5 percent. "That would be important to bond rating agencies," she said.

Rep. Larrañaga remembers a revenue crisis in 1986 when lawmakers borrowed general fund money from fee-supported services in the highway department. He wondered Wednesday if money from state hunting and fishing licenses used to support the Department of Game and Fish could be tapped, then repaid.

"We're trying to look at everything," he said.

Democratic leaders say there needs to be a gasoline tax increase or a boost in alcohol and tobacco taxes to balance the next year's budget and avoid further cuts to government services and public education.

Sen. Howie Morales, D-Silver City, said state services are suffering.

"We're not cutting anymore," he said. "We're amputating."

While lawmakers are receiving updates on several government programs during the Legislative Finance Committee's three-day meeting in Red River, no formal action is expected.

(c)2016 The Santa Fe New Mexican