This time, Sen. John Sapien, D-Corrales, is going after the nearly $5 billion Severance Tax Permanent Fund, which gets revenue from oil and gas production. Sapien wants to increase the annual amount taken out of the fund from the current 4.7 percent to 5.5 percent, and use the resulting $35 million to expand early childhood education and child care programs. It’s a worthy goal, albeit penny-wise and pound-foolish.
Like its larger cousin, the $16.2 billion Land Grant Permanent Fund, the Severance Tax Permanent Fund was established to provide New Mexico with a meaningful income stream when ever-volatile oil and gas revenues retreat. To ensure the funds grow and aren’t depleted, withdrawals are statutorily limited. In the case of the severance tax fund, no more than 4.7 percent – or about $220 million – can be spent by the state annually.
The remaining 95.3 percent of the fund is invested in stocks, bonds and other financial instruments by the State Investment Council. As the fund grows, it produces even more money for the state – unless, under raids like Sapien proposes, the corpus is slowly whittled away.
If left in the severance tax fund, Sapien’s 0.8 percent increase in withdrawals would cost the state far more over time than the $35 million per year it would produce in the short term. The Legislative Finance Committee’s fiscal impact report on Sapien’s plan says the fund would have $582 million less in its corpus after 12 years. Eventually, even with the higher distribution rate, the annual disbursement to the general fund would be lower than if the fund had been left alone.
It bears repeating that New Mexico doesn’t have a strong track record of protecting its permanent funds. The state diverts 95 percent of severance taxes before they even hit the permanent fund to pay off bonds, the Tobacco Settlement Fund is a perennial target for general fund concerns that have nothing to do with smoking’s impact (like the lottery scholarship), and the Water Trust Fund has not had new revenue since 2008, but spends $4 million a year on infrastructure and “faces certain depletion.”
The SIC and Senate Finance Committee Chairman John Arthur Smith, D-Deming, have routinely pointed out that the permanent funds are endowment funds whose corpuses must be protected, and going above the current distribution rates isn’t prudent – in fact, other states and universities with such funds keep the distribution rates at 5 percent or less.
For years, lawmakers have tried to raid the Land Grant Permanent Fund – but that’s a taller order, because some argue it would take congressional action. Those efforts have, thankfully for the health of the state budget, been unsuccessful. Meanwhile, Smith points out that the Severance Tax Permanent Fund is a key mechanism that allows the state to borrow money for capital projects – projects that improve the built environment and invest in the state’s future.
And while there is no question investing in early childhood education is also key to the future, as with many such proposals, taxpayers are never given sufficient information to determine which “early childhood education and child care programs” would be funded, let alone how their efficacy would be measured, and by whom.
This is another raid of our permanent funds – and giving up future returns – for feel-good, nebulous, short-term gains.
While we agree results-driven education in general, and early education in particular, can pay dividends in the long run by creating a more marketable workforce and financially independent population, raiding income-generating permanent funds is a shortsighted way of trying to achieve that.
This editorial first appeared in the Albuquerque Journal. It was written by members of the editorial board and is unsigned as it represents the opinion of the newspaper rather than the writers.