Legislative finance staff: proposed federal cuts could force New Mexico to use reserves or reduce services

Legislative Finance Committee economists told state lawmakers Tuesday that broad proposals under discussion in Washington could put as much as $1.5 billion of recurring pressure on New Mexico’s budget and sharply accelerate the state’s shift from the multi-percent growth used to build recent budgets.

"There's a lot of uncertainty right now," said John Courtney, deputy director at the Legislative Finance Committee, describing a federal framework under discussion that calls for as much as $2,000,000,000,000 in deficit reduction nationwide and said the final details will determine what hits states.

The committee's chief economist, Ismael Torres, said the LFC's presentation separated two risks: revenue risks that follow changes in the national economy and direct budget risks caused when specifically federal program dollars stop flowing to the state. "This presentation is a very high level discussion of risks. It does not represent in any way a detailed analysis or expectation of outcomes," Torres said.

Why this matters: New Mexico is more dependent on federal employment and federal program dollars than most states, the analysts told members. LFC staff showed that Medicaid and other Health and Human Services programs make up the largest share of House Bill 2 federal exposure (LFC's December estimate showed roughly $11.8 billion of fed funds exposure in HHS), and that a proportional change in federal Medicaid funding could have large implications for the state budget and for major health-care providers.

Details of LFC’s analysis

- LFC’s preliminary, proportional extrapolation of committee targets in the House concurrent budget resolution (passed Feb. 25, per the presentation) suggested large committee-level savings on the order of hundreds of billions across 10 years, with major pressure projected for committees that oversee Medicaid, nutrition and education programs. Torres emphasized the analysis assumes uniform proportional application and that the reality will depend on committee-level decisions and implementation details.

- Examples shown to the committee included a national Medicaid savings target (presented as roughly $860 billion nationally in the LFC slides) and a modeling scenario that would amount to a 12–13% proportional reduction in total Medicaid spending for New Mexico. Torres said that would translate to roughly $1.1 billion in reduced federal Medicaid revenues for New Mexico under that proportional assumption.

- The LFC stress test also modeled a moderate recession scenario that, combined with the programmatic reductions, could reduce the state's general fund by about $1.4 billion under that scenario.

Agency and provider perspectives

Representatives of New Mexico agencies and major institutions described how those federal changes would affect specific programs.

- A Department of Transportation official told the committee the state receives roughly $540 million annually in federal apportionment from the Federal Highway Administration and said the department did not expect core apportionments to be at immediate risk but that some competitive grant streams tied to prior administration climate goals (NEVI, CMAQ and similar programs) could change. "We don't anticipate that our federal apportionment funding is at risk right now," the DOT speaker said, adding concern about execution of awarded grants that exceed $300 million.

- The secretary-designate for the Department of Health, Gina de Blasio, said public health grant funding is concentrated in federal grants — she estimated the department’s public health budget at roughly $266 million, about $187 million of which is non-general-fund (largely federal) — and said cuts would put public-health surveillance and outbreak response work at risk.

- Michael Richards, senior vice president and CEO of the UNM Health Sciences Center and health system, outlined institutional exposure: about $246 million a year in federally funded research, risks to indirect rates and research portfolios, roughly $45 million in student support funds at risk, and substantial clinical revenue tied to Medicaid reimbursement. He told the committee much of UNM’s enhanced Medicaid-directed payments require annual renewal with CMS and warned that even single-digit reductions in Medicaid and Medicare reimbursement could push the health system to a negative margin.

- The Department of Children, Youth and Families representative said CYFD typically draws down about $75 million in federal funds through programs and said the agency has a $95 million budgeted non-general-fund component; a 10% federal reduction applied to that drawdown would create an estimated $30 million hole for CYFD unless backfilled.

- Troy Clark, president and CEO of the New Mexico Hospital Association, warned the sustainability payments enacted last year (described in his testimony as roughly $1.5 billion a year statewide for hospital sustainability) must be renewed annually with CMS and that renewal remained pending.

What the committee learned and next steps

Torres and LFC staff recommended continuing monthly monitoring and detailed agency-level inventories of federal exposure. "The reserves buy you that time," Torres said, describing a playbook starting with reserves to allow legislative deliberation on structural adjustments.

Committee members pressed for stepped scenarios — e.g., 5% to 10% across-the-board reductions, what backfill would cost, and timing — and asked staff to produce more granular spreadsheets for departments and the Legislature to review. Senators also urged an inventory of direct federal contract work and contractor employment (labs and other contractors were raised repeatedly as important secondary exposures). LFC staff acknowledged those contractor flows are less well captured in the state's budgeting spreadsheets and pledged follow-up analysis.

Limitations and caveats

LFC staff and witnesses repeatedly emphasized the presentation's high-level nature and the dependence of impacts on congressional choices and implementation. Torres told lawmakers the presented $1.5 billion illustrative backfill number aggregated proportional scenarios and did not include all possible education exposures or institution-specific grant dependencies; the staff repeatedly cautioned that the distribution across programs is unlikely to be strictly proportional in practice.

What's next

Members directed LFC and executive staff to continue stress-testing scenarios, to sharpen department-level exposure inventories, and to prepare options for the Legislature if federal reductions appear and require state backfill or program changes. LFC staff said they will provide updated analyses as decisions in Washington become clearer and recommended the Legislature consider using reserves to buy time while planning structural responses.