N.M. in a ‘death spiral?’ It doesn’t add up

William Baldwin, who writes about investment strategies for Forbes Magazine, has decreed New Mexico “a death spiral state,” one of 11, among them California, New York, Illinois, Ohio and Hawaii.

Baldwin says people in these states “can look forward to a rising tax burden, deteriorating state finances and an exodus of employers.”

“To lend money to (the states) perched on the precipice requires a leap of faith,” Baldwin wrote. “So does buying a house in those locales.”

In the words of Bill Smith, a former Journal copy editor, it sounds like a load of donkey dust to me. His facts don’t seem to be entirely in order, his assumptions are flawed, and, most damning of all, the markets clearly don’t agree with him.

He puts New Mexico on his list for two reasons. We have more “takers” – people in the state drawing money from state and local government – than we have “makers” – people gainfully employed in the private sector – and we rank in the bottom half of a credit-worthiness study by Conning & Co., a Hartford-based risk analysis firm that advises the insurance industry.

Baldwin defines takers as the number of state and local government workers, plus the number of people on Medicaid, plus one additional taker for each $100,000 of unfunded pension liabilities (he doesn’t say so, but I assume he means state and local government pensions). That burden, unsupported by a robust private sector, will result in much higher taxes that force employers and prosperous citizens to leave the state, Baldwin says.

Built into his analysis is a conviction that a) New Mexico will raise taxes significantly and b) that people’s decisions to live and work in a state are largely made by a state’s taxation. There is little evidence for either conviction.

New Mexico has navigated one of its most difficult economic periods and daunting budget cycles without raising taxes. There has been little interest in raising taxes by either the Republican administration or the Democratic-controlled Legislature.

Moreover, New Mexico’s oil and gas industry, which contributes 25 percent of the state general fund, is booming. New Mexico has revenue sources to support its “takers” – rather an insulting word for the state’s teachers, firefighters and police officers, let alone the children, who make up most of our Medicaid population – not available to Hawaii.

Of course, some people want to live in low-tax states. Anyone wishing to avoid New Mexico personal income tax need only step over the line into Texas or take a short drive to Nevada, and some people do. Most do not. One cannot say it never happens, but there is very little economic literature to show state tax rates force people to abandon their homes and relocate their businesses.

I can’t make Baldwin’s numbers add up either.

State and local governments in New Mexico employ 162,800 people, including educators, out of a nonfarm work force of 805,100, according to the Workforce Solutions Department. We have 522,131 people on Medicaid, according to the Human Services Department. Baldwin cites a paper by Joshua Rauh of Northwestern University and Rovert Novy-Marx of the University of Rochester for his pension data. The papers of theirs that I’ve found show New Mexico has $12.9 billion in unfunded state and local government pension liabilities, or 129,000 per $100,000.

Baldwin got a taker-maker ratio of 1.53, the worst in the country. Using his formula I get 1.27.

Baldwin does not adjust his findings for the fact that 70 percent of the money New Mexico spends on Medicaid comes from the federal government, which sharply reduces the burden on our taxpayers. Normally Medicaid enrollment is lower, but hard economic times have pushed more people onto the rolls, probably temporarily. Nor does Baldwin acknowledge, as the data show, that government employment in New Mexico is declining. Conning’s state rankings are designed to tell investors the risks of investing in one state’s bonds compared to another’s. New Mexico ranks 33rd, up from 36th earlier this year. Conning bases its rankings on state economic output, employment growth, per capita income, housing price changes, general fund solvency and other factors.

Conning ignores the fact that New Mexico owns the country’s third-largest sovereign wealth fund (behind Alaska and Texas) and the 32nd-largest fund in the world. We rank behind China and some oil-producing nations and ahead of Brazil. New Mexico has many problems, but solvency isn’t one of them.

Just ask the market. Our debt gets AA and AAA ratings. When the state Finance Authority scandals hit, the market for New Mexico debt didn’t even hiccup. The market knows we’re going to pay our bills.

Conning’s analysis clearly is picking up two truly disturbing trends: our stubbornly slow employment growth and our weak housing sector. It is clearly not giving too much weight to our economic output, which is higher today than it was before the Great Recession began and has been growing over the past few years.

None of this means that New Mexico isn’t troubled. We have too much poverty and too few jobs. We do rely entirely too much on the public sector and on oil and natural gas production. The good news is that our recent economic downturn got a lot of New Mexicans energized to do something about it.

To characterize our state as in a death spiral is just silly.