State lawmakers and budget experts float lowering savings targets in next year’s budget

State finance experts and the New Mexico House budget committee chair said in a meeting this week that they will recommend moving more money out of the state’s reserve funds at the 2025 legislative session, citing strong revenue forecasts and what they called wise investments of budget surpluses in recent years.

New Mexico’s newly enacted budget has more than $3.2 billion in several state savings accounts. That equals 32.2% of the $10.2 billion budget lawmakers passed in February. Most of that – $2.3 billion – is held in the restrictive “rainy day” fund, which can’t be spent without a governor-declared revenue shortfall or approval by two-thirds of state lawmakers. 

Before the 2024 legislative session, state lawmakers set a target of keeping reserves at 30% of the annual operating budget. That figure was based on estimates of how much savings New Mexico needs to withstand a sudden downtown in oil and gas prices or a moderate recession.  

But Rep. Nathan Small (D-Las Cruces), chair of the House Appropriations and Finance Committee, said at an interim finance committee meeting Wednesday that it is time to lower that target for next year’s budget. The reserve targets were 20 to 25% in the 2020 and 2021 sessions.

Small cited the other funding sources that the Legislature has created in recent years, like the Early Childhood Trust Fund and a newly created trust that pays for three-year pilot programs for state agencies. That money should also be considered reserve savings, he said, to prevent tax increases or layoffs if oil prices drop or the economy falters. 

“I think it follows very naturally and quite appropriately that we must consider the appropriate reserve target for this state,” he said. “And that, frankly, is no longer 30%.” 

Charles Sallee, director of the nonpartisan Legislative Finance Committee, presented lawmakers with a 180-page budget wrapup that made a similar recommendation. He noted that the state created a number of new funds that act as backups for the reserves and said lawmakers should consider revising its savings targets “given all the money that we’ve socked away in other areas of the budget.”

Reserves remain at 32% despite lawmakers recently transferring out nearly $1 billion for a higher education trust fund, which pays for tuition-free college, and the nearly $400 million tobacco settlement fund. Sallee said Wednesday that the tobacco fund was never really a source of emergency cash amid downturns. 

Small said he anticipates much discussion – “as is appropriate” – on the topic as the Legislature gets closer to next year. The reserve targets are often the topic of debate along party lines. Rep. Brian Baca (R-Los Lunas) said at the meeting that he thought the budget shouldn’t budge from the 30% reserve mark.

“I do support us keeping and maintaining high reserves,” he said. “When we’re looking at the possible downturns… I would be one that would support us not going below 30. And, if possible, even increasing that amount.”

New Mexico lawmakers expect to have more discussion on the matter in July.