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FARMINGTON — Farmington's economic future is uncertain, and that has officials hoping for the best while preparing for the worst.

Despite that, one city councilor worries that not enough is being done.

Every year, city officials prepare a proposed budget for the upcoming fiscal year by trying to predict trends in revenues and expenditures.

These proposed budgets are largely based upon numbers from the previous year. During a normal year it's often like looking through a murky crystal ball, but fiscal year 2013 is even more difficult to predict.

The problem centers around projecting city revenue. Part of making projections is comparing the numbers from the past year to trends in society at large.

An example of one of these trends, city officials are worried about the future of Farmington's gross receipt tax (GRT) revenue for 2013, given the falling price of natural gas.

Reduced production

For the first time in 14 years, because of a surplus, the price of natural gas has dropped to less than $2 per million cubic feet.

Added to the low prices is a glut in inventory. Officials predict that the nation's natural gas storage facilities will be full by the beginning of the summer.

The low prices mean that drilling for gas isn't profitable enough to support the cost of extraction, and it's already affecting drilling activity in San Juan Basin.


"Once Chesapeake Energy announced their reduction in dry gas drilling, we've had a reduction of the rigs working in the San Juan Basin by nearly 50 percent," said Farmington City Councilor Jason Sandel, who also owns Aztec Well. "Other operating companies are following suit. That's a real reduction in activity, and in order for us to survive we've had to look at moving to other areas."

San Juan Basin's deposits are dry gas, which sells for nearly half the price of wet gas. The reason is that dry gas has a lower BTU (British Thermal Unit) rating than wet gas.

"Gas prices get based on BTU ratings," Sandel said. "In other areas of the country, gas comes out of the ground more like propane than natural gas so companies get more value for what they are drilling."

The reduction in drilling will have a dramatic effect on the basin if something else doesn't take it's place.

"Prices are rock bottom," said Steve Dunn, Merrion Oil & Gas drilling and production manager. "We are shutting in any wells that we are going to lose money on and continuing to run the wells that we are going to make money on. Most producers are going to be slowing down their capital programs until prices recover. The question is when will that be."

Dunn didn't have an answer.

"The reading I've been doing and the sources we have indicate because there is quite a bit of switching going on from drilling gas to oil, and switching from coal to gas-generated power, the glut in gas will be worked off and prices might start to recover by this winter," Dunn said. "But that could be very optimistic."

According to Dunn, the glut in natural gas is a perfect storm of dramatically increased production from new extraction techniques like horizontal drilling and hydraulic fracking to the economic downturn driving down demand.

Litmus test

Sandel says his company acts as a litmus test. He feels what happens to Aztec Well happens to the city of Farmington approximately a year later.

"It's best illustrated by the shutdown in the gas industry in 2009," Sandel said. "The city really didn't begin feeling the effects until 2010. My rigs came into the yard at the end of 2008, with the full-scale shutdown happening in 2009. The city's GRT wasn't affected until nearly a year later."

The same predictive effect happened when the gas industry saw an increase in activity in the summer of 2010.

"You see that increase reflected in the increase in GRT that we are experiencing right now," Sandel said. "But since the beginning of February, the industry has been falling off the other side, so by November or December we will really start seeing that decline reflected in the city's GRT."

A decline in gas industry-generated GRT could have a dramatic effect on the city's budget because 5.5 percent of the city's GRT revenue is from the mining, oil and gas industry, and GRT comprises 67.5 percent of the city's general fund.

"Extractive industries are clearly a critical component of the city's base economy, while retail and service sector are actually a higher direct percentage of our GRT. We have to keep in mind that a downturn in any base economy, jobs will ultimately have a direct effect on retail and the service sector," said City Manager Rob Mayes.

Retail provides 39 percent of the city's general fund revenue, much of which is driven by gas and oil company employees spending their wages in city stores and restaurants.

"At our lowest point in the crisis, GRT dropped 22 percent from where we were," Mayes said. "FY09 was our lowest year. GRT today has recovered about halfway back to that point, running just under 10 percent of where it was."

What makes 2013 even more uncertain is that the downturn in gas production isn't the only threat to the city's budget looming on the horizon.

Other threats

"Aside from the decreasing price of natural gas, we are also concerned about the legislative and regulatory environment, and its potential impact on economic activity," said Mayor Tommy Roberts. "An example is the EPA's proposed haze rule, which would impact the operation of San Juan Generating Station. The city owns 8 percent of Unit 4."

Not only would the rule demanding costly emission reduction technology possibly affect jobs, it could also raise the price of electricity, causing customers to spend less, which would reduce the city's GRT.

"In the legislative area we are pretty certain that in the next session the state Legislature will consider repealing the Hold Harmless Provision," Roberts said. "A few years back, the Legislature repealed the GRT on the sale of food and certain medicines. In doing so, they realized that would have a significant impact on municipalities, which rely heavily on GRT for their operating budgets."

Since then, the state has held municipalities harmless from the tax repeal by paying them the money they would have received.

With state coffers at an all-time low, legislators are looking for ways to reduce expenditures and the Hold Harmless legislation has become a target.

If the state were to repeal the Hold Harmless legislation, Farmington would immediately lose $5 million in revenue, nearly 10 percent of the city's general fund.

Farmington officials aren't ignoring the problem, according to Mayes, as the projected budget for FY13 takes a possible reduction in city revenue into account.

"General fund revenue is down $1.2 million already this year. We've already accommodated for a $1.2 million reduction," Mayes said. "We are budgeting GRT to be level with FY12's actual receipts. Last year we grew 10 percent and this year we are going to project it to hold steady. We feel like that is a reasonable planning point for this year."

Despite that, Sandel is worried not enough is being done.

"Obviously anything can change," Sandel said. "I'm not making predictions. I'm making more a caution, a voice of conservatism. I think we need to work in a 2.5 percent cushion at least."

One of Sandel's biggest worries is that the city increased spending by 11 percent from FY11 to FY12.

According to Mayes, the budget was increased because it was a recovery year. After years of cuts caused by the financial crisis, the city needed to catch up on supplies, equipment and operating infrastructure.

"I still don't have a really good grasp of what additional services we are getting for those increased dollars," Sandel said. "If it is just capital equipment, then that is a one-time expense and we need to cut that back and wait until Christmas to see what GRT revenues are going to be."

Sandel is worried that if work isn't done now to prepare for the possibility of a severely diminished GRT, then the city could be left holding the bag.

"Programs and services and employees are the hardest things to cut," Sandel said. "I think we need to be identifying some of these things now. If our employee situation is bare bones, than what else is there to cut? If we don't do something we could be left underserved and underfunded, which ultimately leads to a tax increase that I am strongly opposed to."

There is a glimmer of hope.

Extractive companies are exploring the feasibility of an oil play from the Mancos Shale in the basin, and preliminary tests are positive, but the possibility of a potential oil boom is still very much up in the air.

"To offset the reduction in gas production we do have hopes that the shale play will prove positive and beneficial, and there are some promising initial signs," Roberts said. "But it remains to be seen just how quickly that level of activity will increase. It doesn't happen all at once, which is problematic for developing our 2013 budget."