SANTA FE — Gov. Bill Richardson’s budget staff on Monday offered a view of the state’s deteriorating financial situation and proposed solutions on how to fix it. But not everyone was convinced that the administration’s view of the crisis reflected reality.

“They’re downplaying how serious the problem is at this stage,” Sen. John Arthur Smith, D-Deming, chairman of the Legislative Finance Committee, said of the Richardson administration.

If this year’s budget gap worsened, Smith said, “I wouldn’t be a bit surprised,” especially if the price of oil and natural gas continues on its downward trend.

Rep. Donald Bratton, R-Hobbs, an oil industry veteran, also criticized state economists’ predictions of natural gas prices as overly optimistic. If Smith and Bratton are right, New Mexico could be in for some serious financial pain.

The state is looking at a $450 million shortfall this fiscal year and a gap nearly as large in the next fiscal year. And state lawmakers must tackle both this year’s and next year’s budget gaps during the 60-day legislative session that starts Jan. 20.

“No one knows where the bottom will be,” Bratton told Katherine Miller, Gov. Bill Richardson’s budget secretary, on Monday. Miller appeared before state lawmakers and a roomful of state agency representatives and lobbyists, telling the room that this year’s shortfall can be plugged without making significant cuts.

But some lawmakers say the state can’t close the yawning budget gap by reducing spending alone.

“It’s impractical and impossible to balance the budget on the expenditure side,” said Rep. Luciano “Lucky” Valera, D-Santa Fe, vice-chairman of the Legislative Finance Committee.

Meanwhile, others argued that the state can’t exempt large pieces of the budget pie from the pain.

Smith said education, an area that makes up 60 percent of New Mexico’s budget, likely will suffer some cuts.

“To hold education harmless across the board, then you wipe out some government,” Smith said.

How low will it go?

Such is the nascent debate as New Mexico enters a budget cycle that promises difficult choices ahead.

It is a position New Mexico isn’t used to.

The high price of natural gas and oil in recent years has filled the state’s coffers to overflowing with taxes that producers must pay on the petroleum products extracted from New Mexico’s soil.

The state’s mineral wealth enabled the state to not only commit $5 billion to brick-and-mortar projects over five years but also to cut the state’s income tax rate. But the recent price drop in both energy resources has led to a drop in tax revenue, wreaking havoc with New Mexico’s bottom line.

The current crisis already is beginning to highlight the debate about whether to cut expenses or raise taxes to balance the budget, with some of the debate taking place at Monday’s hearing.

Miller, Richardson’s budget secretary, said state agencies can save the 5 percent ordered by the governor this year by leaving vacancies unfilled and scrimping on supplies. Meanwhile, the state can tap its reserves. And grabbing money meant to pay for brick-and-mortar projects that have since stalled as well as from earmarked funds can generate up to $200 million to help close this year’s gap.

If all goes as planned, the state could end the fiscal year with a balanced budget and healthy reserves, Miller said.

Next year, however, more broad-based cuts might be needed, and agencies and contractors that do business with them will face scrutiny. But public safety, education and health care may escape the worst of it as they are the governor’s top priorities, Miller said.

Already state agencies are reviewing contracts to see if they should be renewed. And there is talk of increasing savings by raising the vacancy rate at state agencies to 10 percent, from 5 percent, Miller added.

But no one -– not Gov. Bill Richardson’s budget team, not legislative staff –- seemed to know how deep the pain will actually go.

And that sets up a tremendous challenge for state lawmakers as they near the 2009 legislative session, which starts next month.

To compound matters, the Legislature likely will negotiate with two governors during the session –- Gov. Bill Richardson at the start, Gov. Diane Denish at the end.

The Washington-bound Richardson expects to be confirmed by the U.S. Senate as commerce secretary sometime in February. Once confirmed, he will resign to head to the nation’s capital.

All of it together -– the finances, politics and uncertainty –- make for the most challenging session in a decade.