New Mexico legislators may be sighing in relief at the conclusion of an arduous seven-day special session to address the state's $650 million budget shortfall, but the state's financial woes are far from over, experts say—especially if its leaders aren't open to any and all fiscal measures.

"The governor's perspective is pretty narrow," Nick Johnson, director for the State Fiscal Project at the Center on Budget and Policy Priorities, tells SFR. Johnson's remark is a response to learning of the proclamation issued by Gov. Bill Richardson before the special session. The proclamation stipulated that lawmakers would have to compensate for the budget gap without altering the tax code or making cuts that affect public education.

"Ruling out taxes is not a particularly sensible or logical way to approach the problem of budget shortfall," Johnson, whose think tank is based in Washington, DC, says. "You shouldn't be ruling out anything. Most states are taking a more balanced approach."

The governor's decree had many legislators doubting the effectiveness of the special session.

"The governor's proclamation was like the backbone structure of a bill without any numbers in it," House Minority Floor Leader Thomas Taylor, R-San Juan, told SFR on Oct. 23, the last day of the special session. When asked whether it was possible to resolve the budget gap within such parameters, Taylor said no. "If you read it to the letter, no, you couldn't," he said. "It was a catch-22."

Many Democrats felt equally limited; in the first days of the special session, so many tax-related bills were introduced that a few legislators questioned the proclamation's constitutionality.

"Our hands have been tied," Sen. Peter Wirth, D-Santa Fe, told SFR midway through the session. "[The proclamation] attempts to tell us what the problem is and then goes one step too far to tell us the only way we can get there, which is to cut."

Both Johnson and Alan Auerbach, a professor of economics and law at the University of California, Berkeley, say New Mexico's problem isn't unique—and that one-sided fixes are rarely as effective as those that include both cuts and revenue enhancements, like reducing unnecessary tax exemptions or even raising taxes.

"A lot of states are taking a look at state tax cuts that have happened during the past few years," Johnson says. "It's common for states during good economic times to cut taxes, but then that leaves them to raise taxes in bad economic times."

In 2003, when times were good, New Mexico began cutting taxes—to the tune of $600 million over the past six years, according to Rep. Luciano "Lucky" Varela, D-Santa Fe, the author of one of the current budget bills (HB 17) and deputy chairman of the House Appropriations and Finance Committee. At the same time, spending increased, as did the number of exempt employees in government. The new budget bill, an amalgam of Varela's HB 17 and another house bill, HB 33, calls for cutting 102 of those exempt positions (60 of which are vacant anyway) in addition to moving funds around to keep the state government in operation. The bill also urged lawmakers to re-examine $150 million in unspent capital outlay project funds—a moot point after Richardson ordered a freeze on uncompleted projects, calling them "pork," on Oct. 26. In total, the new bill trims more than $250 million from the budget gap, using federal stimulus money to minimize cuts to public education by paying insurance premiums on school properties and shoring up the general fund.

As adeptly as such "swaps" may address the state's current budget problems, though, many legislators worry that the bill essentially uses nonrecurring money for recurring expenses and programs. The capital outlay funds, for instance, are one-time surpluses, and federal stimulus money will evaporate halfway through the 2011 fiscal year, leaving New Mexico's state budget to pick up the tab for things like Medicaid. All this means legislators may face an even bigger budget problem when they reconvene in January.

"Every single dime of stimulus money has to be replaced," Taylor warns. "Every single dime that we've scarfed out of savings or done with bonds or general fund swaps—all of that is one-time money and, once we've [used] it, we can't do it again."

Taylor also mentions the cost of the seven-day special session, which at $50,000 a day adds up to a not-insignificant $350,000 out of state coffers. An Oct. 23 press release from the state capitol predicted a $400 million deficit in January; the estimate by the New Mexico Independent, which takes into account the decimation of state reserves and the end of federal stimulus funds, is closer to $1 billion.

"We've been fortunate that stimulus money has been coming in," Varela says, "but keep in mind that that's only for a certain period of time. We need to look at revenue enhancements to try to balance the budget and not cut services that are vital."

Varela suggests returning to a more progressive income tax system in which "those that can pay will contribute the most." Though both Varela and Taylor are sanguine about an economic recovery, Johnson cautions against too much optimism.

"The 2011 fiscal year is going to be worse than [this year]," he says. "Unemployment is still rising, so revenues won't bounce back anytime soon."

States will have to find real fixes—scaling back tax credits (Kansas), freezing income tax cuts (Ohio), using combined reporting to get multi-state corporations to pay in-state taxes (Wisconsin). "In a lot of cases, it's taking an existing program and making it more rational," Johnson explains.

Meanwhile, he adds, "It's pretty important to keep a particular eye out for avoiding cuts that will tend to undermine services for low-income families during an economic crunch—not just because those families are hurting, but it's also the economically smart thing to do."

Since programs that serve the poorest people—Medicaid, for instance—tend to be in greater demand during a recession, cutting their budgets can have a magnified effect. "Those are the programs that are getting it from both sides," Johnson says. "If they get less funding, they also see an increase in caseloads."

The key, then, is to establish an efficient and responsible budget plan—one that spends what's necessary and saves whatever is left for "rainy-day funds," Auerbach says. But finding the sweet spot between responsible budget cuts and manageable taxes is far from easy, especially for New Mexico, which in 2010 will have one of the shortest legislative sessions in the US (the Legislature alternates between 30- and 60-day sessions) and the added political complexity of impending elections.

"We have the responsibility, between now and January, to build the budget for 2011," Varela says, citing the possibility of task forces like the Blue Ribbon Tax Reform Commission of 2003. "Hopefully those of us that are running for re-election will be able to go to the public and explain to them how we've balanced the budget, what we expect in terms of the economy turning around, and hoping that we can continue to provide the vital services for the cities and for the state of New Mexico."

Before any of that happens, Richardson must sign, veto or partially veto the new budget by Nov. 12. On Oct. 27, as SFR went to press, the governor was meeting with constituents throughout the day to receive feedback. Posts on the Governor's Office Blog over the last week push back at assertions that the hiring freeze has been ineffective and criticise the news media for not examining spending by agencies outside the governor's domain.

Regardless of what actions Richardson takes now, January will kick off a month-long reckoning. Former Rep. Max Coll, D-Santa Fe, who spent two decades chairing the House Appropriations and Finance Committee, sums it up this way:

"In January, [legislators] are going to have used all the non-reoccurring money they can lay their hands on, and they're not going to have any non-reoccurring reserves to draw from," Coll says. "They're going to have to raise taxes enormously, and it's going to be a dogfight like you've never seen. They're going to have to adjust their spending in January with a meat axe."