Proponents of increasing distributions from New Mexico’s permanent funds are fond of calling them rainy-day funds, and they alternately argue that drawing more money from them to finance worthy sounding but poorly defined programs is imperative because it’s either pouring now or it will soon be.
When there are wants — or needs — it is inconvenient to acknowledge hard fiscal realities. And so the Senate pulls the lever again on the argument to pull out more cash and put it all on the latest vague incarnation of Pre-K. After all, there’s money in those accounts, supporters argue, so why doesn’t the state tap them to improve the lives of New Mexicans now?
In other words, like a gambler on payday, the state has cash burning a hole in its pocket and plenty of bets to lay that money down on. But just as careless gamblers end up with too much month at the end of the money, New Mexico could end up with too many financial commitments and no corpus to cover them, much less generate interest for future needs.
Lawmakers basking in the warm glow of myriad new social programs to solve our problems would do well to consider the State Investment Council analysis of the newest attempt to tap a permanent fund, SJR 3.
“This proposal greatly increases the risk that the Land Grant Permanent Fund will not be able to continue to deliver the same benefits to the general fund and other beneficiaries as the fund does today.”
That’s important because this in fact is not a “rainy day” fund. It’s a sovereign wealth fund established to provide New Mexico with a meaningful income stream when oil and gas revenues dwindle — either through the passage of time or the rush to wind and solar.
The SIC made the following observations in a white paper last year:
The Tobacco Settlement Permanent Fund can be drained dry to cover state general fund needs. The Water Trust Permanent Fund has not had money coming in since 2008, yet it spends $4 million a year on infrastructure projects and “faces certain depletion.” The Severance Tax Permanent Fund has seen a reduced flow of money coming in, from 50 percent of annual severance tax receipts in the 1990s to 5 percent last year.
And the Land Grant Permanent Fund, created before statehood to finance public schools and universities, state hospitals, jails and other basic government operations, is funded with money from the state’s “vast, but finite natural resources.” Annual distributions from the Severance Tax and Land Grant permanent funds account for about 15 percent of the state’s operating budget.
Yet the proposal from Senate Majority Leader Michael Sanchez, D-Belen, asks voters to amend the state Constitution to boost the annual distribution rate from the Land Grant fund from 5.5 percent to 7 percent, taking additional tens of millions of dollars each year for early childhood education. It’s a worthy expenditure when such programs are well defined with accountability measures, and the dollar amount might seem like playing penny slots since the fund is $11.45 billion. But these programs are not well defined, and House Minority Leader Donald Bratton, R-Hobbs, points out that “the actuaries will tell you that you can’t distribute more than 5 percent and keep the fund whole with regard to its purchasing power. The objective is to make sure it’s there for future generations.”
In that vein, as the SIC points out, Wyoming’s permanent fund distribution is at 5 percent. Yale and Texas A&M endowments are at 5 percent; Columbia at 4.5 percent.
It would also be prudent to examine past experience with the permanent funds. Earlier education-funding raids already have depleted the Land Grant fund corpus by $647 million in 10 years. The Legislative Finance Committee says much of the money didn’t go to intended purposes, and the millions that did go to pay higher teacher salaries were a poor investment if the goal was higher student achievement.
It’s also worth noting that the fund remains “hundreds of millions below the high water mark for assets set in 2007” due to market volatility and lower-than-anticipated returns. Anyone remember the Great Recession and a stock market at 8,000?
Also concerning about SJR 3:
Tying the distribution to a set percentage, allowing it to balloon in good years regardless of need.
Lacking a sunset clause, which leaves it in place in perpetuity unless voters pass another constitutional amendment to reverse it.
And missing a mechanism to reduce the percentage payout if the market falls out from under those finite natural resources that keep money flowing into the fund. The proposal relies instead on a false safety valve of a set rolling average for the principal, ignoring the realities of sharp downturns such as 2008-2009 that can destroy the balance but hide in multiyear averages.
But these large fiscal concerns aside, how will New Mexico spend all these extra millions of dollars diverted from its future? The five-page resolution makes no mention of funding early childhood education programs that utilize best practices, or meet state or national standards, or deliver results. It does not set budgetary limitations for those programs; it simply asks for a bigger cut of the fund.
The bottom line: This proposal puts the state’s sovereign fund at considerable risk to grow undefined programs with no plan to ensure the growth is smart, justifies the investment or is even sustainable. In the long run it would mean less for public schools and state hospitals and jails and other basic and worthwhile government operations, including Pre-K.
SJR 3 takes the permanent out of the state’s Land Grant Permanent Fund. It’s a bad bet for students and taxpayers.
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.