Report from Santa Fe; Luciano "Lucky" Varela and Thomas Taylor

Music Report from Santa Fe is made possible in part by a grant from New Mexico Tech on the frontier of science and engineering education. For bachelors, masters and PhD degrees, New Mexico Tech is the college you've been looking for. 1 -800 -428 -T -E -C -H. And by a grant from the Healey Foundation, Taos, New Mexico. Hello, I'm Lorraine Mills and welcome to report from Santa Fe. Today we are lucky enough to have Lucky Varela, representative Lucky Varela, who is a Democrat from Santa Fe County, and who is chair of the legislative finance committee and deputy chair of the House Appropriations and Finance Committee. Oh, please help us. We are facing this catastrophic budget issue, a huge shortfall. Please tell us what's going on and what we can do. Well, Lorraine, when I see the sequence of events that have occurred since October of a year ago, and subsequent to that, by the time we got to the regular session, we found ourselves

in a situation that was very difficult, not only for us as legislators, but for the general public. The shortfalls in revenue, the unemployment, this was not only a national problem, but it was a worldwide problem. But it affected us all the way down to Santa Fe, all the way down to the communities, and we had to find a way to resolve the problem. We have been doing that for the last two sessions that we already had, and preparing to have another session now, where we hope that we can stabilize the budget for the state of New Mexico. So that's our charge, and we try our best to be able to do the services that are needed to the best of our ability with the resources that we have. It's difficult, but we have to do it. Well, it's such a fine line, but to balance the expenditures and to match that with enough income to cover those

expenditures, when our income has dropped so much, and look what you've done in terms of expenditures, how much have you cut in the last two sessions? The last two sessions, we were cutting close to $700 million, with some adjustments that we're recommending again for the regular session, we'll be right at $700 million of cuts for... Already, we're coming into the session, having cut that much. We had cut about $500 million in the last two sessions, and then we're proposing some adjustments cuts now to try to come up with a higher number in terms of cuts. You know, the public was looking at what are you doing about all the expenditures that have grown in the last six or eight years, and we need to contain government, but in doing that, you need to minimize or reduce the amount of services, and of course,

the resources that are available to provide services. So that's what we've been doing for the last two sessions, and then during the interim to prepare for this session now, we were building a budget based on information that was not readily available in total, because of the way the recession was working. And the fluctuating price of oil and gas? And the major decline of all the other revenues, and then of course, what kind of stimulus money were we going to get from the federal government? So we had a difficult time coming up with a budget where we would not have to continue to downsize the branch of government or the services that are being provided. And that's what we're doing now. You know, we're proposing a reduction, but in my estimation, our recommendation at the LLC still has a gap of $200 million. So what do we do? How do we fix the $200 million? Do we get some revenue enhancements,

or do we have to cut an additional $200 million out of the budget? So that's where we're at at the beginning of the session, and that's where we need to work to resolve before the session ends. I want to tell people in a way, I do depend on you. They call you the numbers person. You are at DFA for 23 years. You've been a representative for 23 years in addition. And your expertise has always been, you just have that clear, clear mind on balancing budgets and on looking at money issues. So let's look at some ways that that $200 million might be able to be saved. Governor Carruthers had led a government efficiency task force, a committee that went to work, they only had a month, to try to look at some ways that we could cut the expenditures that we could save some money. And do you want to talk about some of those ideas? Yes. And what you think about them, it's important to me to know. When I look at the plan that the governor or Carruthers presented to Governor Richardson, and most

of it is consolidation, merging departments. Some of them seem to me that they're doable. For example, that recommendation would require that education be under one department. Higher ed and the public education would be in one department. Because we need to eliminate that K -12 syndrome that we have for all these years. It's K -20 now, 18 or 20 depending on how much a student wants to articulate. So I think that's a sensible recommendation. And yet one of the problems that they pointed out was in higher ed, we have twice as many non -instructional employees, and that is not the case with the public education department. Well, but in looking at consolidation, the only difference that I see is that even though we may

merge state departments, the rest of the programs at the local levels would remain. And at the local discretion, the same thing with colleges and universities. For the most part, our four constitutional colleges, we can't control the way the Board of Regents responds in terms of the responsibility that they have on the Constitution. But to streamline the top of government for the bureaucracers is our rather than have two secretaries and deputies and so forth. And we would be looking at one secretary that we look at K -18 rather than K -12, then you pause and then you go from 12 on to 18 or 20. This is great. That's a doable recommendation that's in that particular report. The other one that's in that report also is public safety. We have a Homeland Security Department that we created under the Richard's Administration, and I was sponsored by that

bill. We elevated that department to cabinet level, but we have a public safety component there. We have a Department of Public Safety also. So the recommendation is to merge public safety department with Homeland Security, and it all involves securing the public. So I was somewhat intrigued by that recommendation that could possibly be done. The only concern that I have is how long will it take for us to do it and do it right? You know, I was with Governor Apolaka when we did the first cabinet departments, and it took us a whole interim just to execute what the legislature had passed. And it was very difficult because we merged boards and commissions and agencies, and it took us all the entire interim. So I'm looking at considering what the Governor is proposing, but not try to do all of it or

most of it in a 30 -day session. You know, it's a fiscal session that the Governor wants other issues on there, and that takes time. So I would rather, if we're going to do government reorganization, let's do it right, let's take our time, let's get input, and then present it to the new administration. That doesn't mean that this governor would not be involved. He could be involved in terms of preparing the plan before we turn it over to a new administration. There was one other item on that plan I wanted to ask you about. According to the research that Governor Greathers did, New Mexico has more twice as many state employees as the national average. Why do you think that is? And what can we do? Is that a place we need to cut? Well, you know, there's been debate about that in the past, and some people say that New Mexico is what the fifth largest state in the Union. So geography is a factor? Yeah, it is. In order to be able

to provide services to all individuals in the different areas of the state, you need to have sufficient employees to do that. It's not to say that we can't downsize government. We haven't been able to fund over 3 ,000 vacancies. They're just there. So, you know, in order to look at a smaller government in terms of employees, you know, we need to eliminate all those vacant positions and just have the core positions that are needed to provide the necessary services for the general public. The other is to look at the exempt positions, you know, the state. We have at the state level of over 500 vacant, I mean exempt positions. And, you know, I don't think we need those many positions. So all this reorganization and streamlining of government would involve looking at the components, looking at boards and commissions also. We have a multitude of boards and commissions that perhaps we could combine. So it's going to be an

effort that's going to take some time. So I'm hoping that the governor will be patient enough to work during the interim and bring a good plan to the next administration. So the legislature has come up with their proposal, their budget. The governor has come up with his budget and he's also said everything is on the table. So how do you think they're there? How is this going to work? Well, let me give you a comparison of both recommendations. In order to implement the LFC recommendation, we would need about $135 million new dollars to balance that budget and to implement the recommendations that were made by staff. The only part of that recommendation that I do not support at this time is cutting the salaries of state employees by 2%. We've already furloughed people. We're taking away vacant positions. We're not providing any additional salary increases. So for me,

I would not look at cutting the salaries of public employees by 2%. We can do it with the entire budget. The other recommendation by Governor Richardson would require $237 million and the only way that either one of these recommendations can be accomplished without further cuts is to enhance the revenue, to raise taxes. And I'm prepared to do that if we have to do it. And what tax increases do you think would be acceptable? Well, we have talked about a list of, I don't know how many, it must have been 20 or 30 different revenues. Secret tax, drink tax, the whole menu that was provided by that task force that the governor represented. They were there not to recommend but to identify all these different taxes that come to the state. So, but in order for us to be able to have a manageable tax package, I would like for us to consider our two major

broad -based taxes. That's the gross receipts tax and the income tax. People have asked why don't we eliminate the food tax, you know, the credit. And the public is not wanting us to do that. Absolutely not. The other recommendation that is coming to us is look at what we did with the income tax and take the highest brackets and the passive cert tax to tax. People perhaps from $200 ,000 up to whatever amount of money they have. Because they did benefit from huge tax cuts when Richardson took office. More than the middle class and the low income. Because our tax rate was 8 .7 before we cut it down. Our lowest one was 4 .7. We're all down at 4 .7 now. Everybody's paying that effective rate. So, it's not a progressive tax anymore. We need some progression in the income tax because that was intended to be progressive based on the

ability for an individual to pay the tax. I thank you so much for coming to give us your very valuable perspective on it. Our guest today is Representative Lucky Verella, Democrat from Santa Fe County. Thank you so much for joining us. Well, thank you for inviting me. And now we're joined by Representative Tom Taylor, Republican from San Juan County, who is a Republican floor leader in the New Mexico House of Representatives. Thank you for joining us. Well, you've been here for 11 years and I often think at the beginning of a session that you are so perfectly skilled because you speak this other language called LF language. And I think by the time I've been here for a month, a month of the session, everything will sound like that for me. Can you just give us a little greeting in your language? Well, it's now if I was to Bill Fee, Bill Fee, Hillfear to Delphi, and talk about very, very selfish use in stealthy golf ever, Mill Fent. Absolutely, I will understand

that completely toward the end of the session. And although people are approaching the biggest crisis really that we've had in a long time in the budget situation. And so, can you parse that for us? What do you think? We have the issue of balancing our expenditures and our income. What is one of the approaches that you think will work to help solve our problems? Well, I think the first thing is how we look at this problem. Really, it's a great opportunity that the state has. I mean, it's tough on everybody, but it's a great opportunity. Governments, by their very nature, when they have extra money, always have places to spend it. And so, we tend to just roll along doing the things we always do without ever looking back. This is an opportunity to really take a look at what we do to make sure that it's reasonable, that it's efficient, that we don't need to drop some things, change some things, prioritize. We can't do that when there's money. So, this is a really tremendous opportunity for state government

to take a look at itself. Beyond that, how do we fix the problem? It's huge. You know, over the past few years, we've been outspending our revenues. Even though our revenues have been tremendous during that period of time. And the fact of the matter is, in 2008, our revenues were 6 .1 billion. This year, in 2010, we're projecting it at 4 .6 billion. That's a billion and a half dollar difference. So, you can undo all of these discussions. You hear about how much we're short and how much we have to make up. That is the spending difference between the two years, or the revenue difference. So, that gives you an idea of a magnitude of the problem. If we hold education harmless and health care and human services harmless and higher ed harmless, that means we eliminate the rest of government. To really put it in perspective. Which is impossible. It's impossible. So, we have to recognize the magnitude of the problem here, which is really great. Simply, we

can't tax our way out of this problem. We have grown government to a size larger than we can sustain here in New Mexico. And so, our charge is going to be a figure out a better way to provide services to people. I want to go back to what you said about an economic downturn is a good opportunity to cast a cold eye on what needs to be done. Governor Gary Careathers, who is now the dean of the School of Business at New Mexico State, was appointed to be head of a task force named government efficiency. And he came up with some really interesting solutions. But he called it right sizing. We can only right size government when we are forced to make the cuts. Were there any of his recommendations that struck you as being a good idea? Well, you know, at this point, really haven't seriously reviewed all of that at this point. I think at one point that always needs to be made is that

government is not a business. There are many differences. Business has a profit motive and government has a service motive. And the two will never reach the same conclusion in a process. So, when we talk about government efficiency, again, my comment is, up until now, everything we've seen in the state and in our nation, in both health care and education and things like that, we've talked about these reforms. They're not reforms. They're rearrangements. They take all of the existing rules and regulations that are in place. And they mix those up and try and rearrange them so that the solution works better. And it just will not work. You have to eliminate that from your thinking and say, heck with the rules. Let's develop a solution and create rules then that accomplish what our solution is, rather than the other way around. You just can't do it that way. And so, you know, gazing

at the first things mentioned in the efficiency thing, it's a rule -based process. We need a creative -based process, one that looks at a new way of doing things, thinking outside the box as the rule -based thinkers. Well, that kind of creativity often comes when you have the leisure of time to examine the upsides and downsides of some of the changes. But we have, literally, a gun to our head. Eulomakers have 30 days to solve this problem. And some of the suggestions that came from Governor Krothers' report, with a whole task force, he worked with a group of very talented people, they pointed out that we have more state employees. We have almost twice as many as a national average. Why do you suppose that is? Well, as I said at the outset, we are simply bigger than we can handle. And government and state government, unfortunately, is people mainly. We have added about 6 ,000 positions in the last seven years to state

government. That's well over a 25 % increase. We simply can't sustain that. So, I don't know if you call that efficiency or not, but the fact of the matter is there are definitely too many people. But beyond that, what are those people doing? What services are we really providing to the people in New Mexico? How can we do those in a different way, or not more necessarily more efficient, but in a different way, so that we can provide that service at much less cost, and with fewer people? Well, the Governor had said, I mean, we've got the legislature, the LLC, the legislative finance committee has some suggestions. I think you're a member of that, you're a member of the legislative council, you're a member of the Revenue Stabilization and Tax Policy Committee. So, you have been forced to swim in these financial waters quite a bit. If you are thinking out of the box, and we're filming this before the session, actually begins the day before,

what are some ideas you would bring to the table if everything's on the table? Well, one of the things we have to look at is go back over the last decade and see what mandates that we state government have created for ourselves. You have to do this, you have to fill out these forms. All of those things that we have required ourselves to do, we need to look seriously at all of the things that federal government has required us to do. And question those, you know, God didn't ride any of these rules, we did. And so it's important that we take a look at what we've done to ourselves in this process. Number one, we've gotten to the point where we regulate everything to the nth degree, and it's real important that we take a look to see if those regulations really accomplish what they're supposed to. And I think that is the very first place to look. Excellent. Some of the other places that were suggested was eliminating some useless or perhaps boards and commissions whose function has been fulfilled, and we can let them go. Emerging several departments together, of

course, everybody squawks at that because they like their autonomy. And I'm just so worried actually about how this is going to, as we stand on the brink of this, is it going to be smooth sailing? Will there be good communication? You represent what's called a minority party in the house. And in the past year, we've seen a lot of very toxic partisanship. How do things look on the brink of this session for communication between the Democrats and the Republicans? Well, you know, sometimes it appears that it's a little more harsh than it actually is. There are very few personal issues, really, in the legislature. I mean, I feel like I can disagree with people across the aisle and still go out to dinner with them. I don't really feel that there's that kind of an issue there. I think that this year is unique in that because there is no money, because

it's clear that we have to come to some conclusions that we're interested in working definitely across the aisle to figure out solutions there. We need to have good, reasonable solutions to the problem. It's, in some cases, a lot easier than during sessions when there's a lot of money. That's what Aubrey Dunn and John Rashan used to say back in the day. It was easier governing when there was not much money. But this is so painfully a painful shortage of money. I've been through it twice. Twice while I was mayor of Farmington, we had to make, you know, double -digit reductions in our budget. We did so twice without eliminating one single city service. And we did that by changing the way we do business. And, you know, you think about some of the companies that are out there today that are in these changing worlds like electronics, like the Internet and that sort of thing. Think about the drastic changes in their business plans from month to month. Yeah. I mean, it's incredible the

speed with which they change the way they physically do business. We're doing it the same way we did 20 years ago. And we need this kind of pressure to give us the impetus to make those changes. Because in business, the imperative has literally changed or died. Yes. Yes. Now, speaking of Farmington, bring us word from Farmington. What's happening with oil and gas up there? How does that affect the rest of the state? Oil and gas, of course, is really the lifeblood of the state. Depending on the year in 2008, it was easily a third of the revenues of the state. This year, it's down into the 20 % range, maybe. But the fact of the matter is that it's important because every state employee, every person receiving any kind of benefit from the state, a huge portion of that comes from oil and gas. They've been under tremendous pressure over the last few years with increased regulation, putting us at a

disadvantage with other states. This movement with some of the environmental issues that are out there that have really overreacted to the point so that we have kind of the perfect storm. We had the falling prices in gas and oil. Of course, in our area, it's natural gas. And of course, that's tough by itself. But then on top of that, we had this continuing march of regulations that made it more and more expensive to drill into produce natural gas in our area. So if we're not drilling holes, we have a declining reserve that I'm declining production. And so the result of that is that with those two things in place, the other side of this is real problematical for an area like us. Because right now, the independence in our area are all investing their money in other places. We have many of the rigs in San Juan that have gone to Pennsylvania to drill in the shale. Those are long

-term ventures. They're not coming back next week. We have all of those shale plays around the country that have a great effect on the future of natural gas. And I mean, we're talking quadrillions of cubic feet of natural gas that we have available in this country. So you have the situation where the majors that are in our area, the budgets that they're sending in to New Mexico are less than they were. Marginal wells, all of a sudden, are not reasonable to stay on the lines. So we're plugging some of those. So that's causing the production rates to even fall considerably more. And then you add something like the pit rules, which is only a few thousand dollars a well anywhere from 30 ,000 to a quarter of a million depending on the size of the hole. It's real easy. I mean, you can think about that. If you were drilling a well, and you say, well, I can drill it here. I can go across the line and drill it for 20 ,000 less. I mean, it has a major effect. It's kind of, it's a very depressing situation. And so, as we come out of this downturn in international economy,

I'm not sure how the recovery is going to be for our area of natural gas. Well, it's wonderful to have that background because I didn't well in a way tells us how we got in the hole that we're in. And unfortunately, we're in a hole because we've run out of time. But I want to thank you, Representative Tom Taylor, the Republican floor leader of the New Mexico House of Representatives. Thank you so much for taking the time to join us. Thank you. It's been a pleasure. And I'm Lorraine Mills. I'd like to thank both Representative Taylor and Representative Lucky Verella for taking the time to be with us today on report from Santa Fe. We'll see you next week. Report from Santa Fe is made possible in part by a grant from New Mexico Tech on the frontier of science and engineering education. For bachelor's, master's, and PhD degrees, New Mexico Tech is the college you've been looking for, 1 -800 -428 -TECH. And

by a grant from the Healey Foundation, tells New Mexico.