New Mexico budget signed; governor vows continued push for water plan

New Mexico Gov. Michelle Lujan Grisham signed a fiscal 2025 budget last week as she wrapped up action on legislation that did not include a bill to begin financing her $500 million strategic water supply proposal for the drought-prone state.

The $10.2 billion spending plan for the fiscal year that begins July 1, marks a 6.8% increase over the current budget, while maintaining reserves at 32.5% of recurring appropriations, according to a statement from her office on Wednesday.

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"The budget I signed today represents a strong investment in New Mexico's future with funding to improve literacy, help keep New Mexicans safe, expand affordable housing, raise teacher pay, assist tribal governments and much more," the Democratic governor said in the statement. 

Also signed into law was tax legislation that restructures personal income tax brackets and rates for a more than $160 million reduction and includes tax credits for electric vehicles and other clean energy initiatives. The governor used her line-item veto power to remove a severance tax exemption for certain stripper well properties that undertake compliance-related improvements.

Lujan Grisham touted nearly $1.8 billion in capital outlay and general obligation bond appropriations with $325 million allocated to higher education, $100 million for tribal projects, and $104 million for water and wastewater projects. The legislation calls for $570 million of severance tax bonds and $289 million of GOs.

New Mexico last sold GOs in April 2023 in a $223.7 million deal won by BofA Securities in competitive bidding.   

The debt was rated Aa2 by Moody's Ratings and AA by S&P Global Ratings, both with stable outlooks, with the rating agencies citing the state's financial management, reliance on volatile oil and natural gas industry revenue, including severance taxes on extraction, and strong general fund reserves.

"We believe this large budgeted reserve balance will help prepare New Mexico for future volatility associated with its oil and gas-related revenues, which made up a large estimated 32% of recurring general fund revenues in fiscal 2023, and is forecast to rise to 36% of recurring revenues in fiscal 2024," S&P said in its rating report last year.

To help address that volatility, New Mexico is capping the amount of oil and gas-related revenue flowing into its general fund starting in fiscal 2025. 

New Mexico had $541.27 million of GOs outstanding as of Dec. 31, according to a fiscal 2023 annual financial information filing posted on the Municipal Securities Rulemaking Board's EMMA website in January.

That filing also showed $1.073 billion of outstanding severance tax bonds and projections that severance tax bond fund revenue would fall from $2.1 billion in fiscal 2024 to just under $1.6 billion in fiscal 2033. 

Money in that bond fund not needed for principal and interest payments on long-term severance tax debt had been targeted in the governor's proposal to commence financing her strategic water supply initiative with a revised bill that stalled in the state Senate.

Lujan Grisham traveled more than 8,000 miles to Dubai for a United Nations Climate Change Conference in December to unveil a plan to spur private investment to treat brackish aquifer water and water produced from oil and natural gas extraction.

The governor said the plan would harness the power of the private sector by offering companies fixed, long-term contracts so they can build the infrastructure to transform water — currently considered waste — into an industrial water source. 

The treated water, purchased in advance by the state, would be used to attract targeted industries such as green hydrogen creation, wind and solar energy storage, and the manufacturing of electric vehicles, microchips, solar panels, and wind turbines.  

Lujan Grisham asked the Democrat-controlled legislature for an initial $250 million raised from an internal debt sale backed by severance tax revenue. The state would sell overnight senior severance tax notes to the New Mexico Treasurer's Office and the proceeds would flow to the capital project fund where it would be used to purchase the treated water.

With some lawmakers voicing concerns about the financing plan, as well as potentially turning water into a commodity, the amount of short-term debt was shrunk to $100 million in Senate Bill 294, which did not make it to the Senate floor for a vote before the session ended Feb. 15.

At a post-session press conference last month, Lujan Grisham said while she was disappointed the bill didn't pass, she wasn't giving up and would try to fix the proposal's messaging. 

"I'm going to come back, so expect that to be a priority throughout my remaining tenure," she told reporters. 

In January, the state's environment department issued a request for information "from individuals, businesses, academia, government agencies, and other stakeholders related to the sourcing, treatment, delivery, storage, and industrial uses of brackish water and produced water."  

"The Environment Department will continue to solicit feedback on the strategic water supply via the request for information, through March 31 as planned," spokesman Matthew Maez said in an email. "The information will help the Environment Department gain insight to deliver the necessary funding to this program in a future legislative session."

He added the state will not proceed with a request for proposals "until dedicated funding is appropriated by the legislature."

The governor's strategic water supply proposal was included in the state's 50-year Water Action Plan released in January. The state will be short 750,000 to 1 million acre feet of water within the next 50 years, according to the action plan, which also calls for tapping state, federal, and private-sector money for conservation, infrastructure, and water and watershed protection efforts.

About 88% of New Mexico is experiencing some level of drought, according to the latest weekly data from the National Integrated Drought Information System.