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Tapping a trust

Pre-kindergarten teacher Stacey Maley guides Gregory Maldonado, with pen, and Dominic Aguilar, behind, in a drawing exercise last year at Sierra Vista Elementary. (Journal File)

SANTA FE — A move to expand early childhood programs with about $170 million a year in additional money from a constitutionally protected education endowment is shaping up as a debate over the future health of New Mexico’s Land Grant Permanent Fund.

Supporters of the new spending are asking the Legislature to consider a constitutional amendment proposal — Senate Joint Resolution 3 — that would withdraw an additional 1.5 percent each year from the $11.45 billion fund.

Proponents say the money would fund programs that would boost New Mexico’s children and lift the state from its dismal education and economic rankings. Critics say the move would threaten the long-term health of the fund, which already provides more than $500 million annually for public education.

The move to further tap the Land Grant Permanent Fund, sponsored by Senate Majority Leader Michael Sanchez, D-Belen, also would lock into place an earlier distribution increase from 4.7 percent to 5.5 percent that voters approved in 2003. That increase initially was earmarked for a three-tiered schedule of public school teacher salary increases.

Absent the change, the distribution rate from the fund is scheduled to go back to 5 percent, starting in 2016, under a sunset provision in the 2003 constitutional amendment.

If passed by the Legislature, the proposed amendment — which has no sunset— would go on the 2014 general election ballot. However, it also might require approval from Congress, which by law has authority over use of the statehood-era endowment.

The proposed constitutional amendment would allow an extra $170 million to be withdrawn from the fund for early childhood programs starting in 2016.

This time around, the new money would be designated exclusively for early childhood programs, including pre-kindergarten classes, in-home visits for first-time parents and child care assistance. Money from the earlier increase would continue flowing to teacher salaries.

Advocates say the early childhood programs improve long-term education outcomes, such as graduation rates.

“We’re going to send a healthier kid to the classroom, which is good for public schools; it’s good for teachers, it’s good for the families and we won’t have to do things like third-grade (reading) retention if we do the things at the beginning,” said former Lt. Gov. Diane Denish, an advocate for the increased spending.

But a government fiscal analysis says the proposed constitutional changes could threaten the long-standing endowment with an “extreme likelihood of having a greatly diminished value” in 20 years.

Sen. John Arthur Smith, a fiscally conservative Democrat from Deming and chairman of the Senate Finance Committee, said he opposes the constitutional amendment because he agrees it would erode the fund’s corpus.

“God only knows, I know about the need out there. … (But) somebody’s got to try and watch the purse strings.”

Smith also said the rapid influx of new money for early childhood programs would flood the system with cash before an effective administration system is put into place for the greatly expanded programs.

Alarm sounded

The State Investment Council, which manages the Land Grant Permanent Fund, is warning legislators that the proposal could cause long-term declines in the fund’s value.

“This (early childhood education) proposal greatly increases the risk that the LGPF will not be able to continue to deliver the same benefits to the General Fund and other beneficiaries as the fund does today,” an SIC evaluation said.

The New Mexico Constitution currently allows 5.5 percent of the permanent fund to be taken each year, providing nearly $527 million this year for public education programs.

Most of that money — about $436 million — is distributed among the state’s public school districts. The remainder is paid to other beneficiaries, such as state universities, the New Mexico School for the Blind and Visually Impaired, New Mexico School for the Deaf and the New Mexico Military Institute.

The fund was built in large part by royalties and leasing payments for mineral resources on state lands set aside for the endowment by Congress in 1910. The money is invested, and those returns are used to fund education.

New Mexico will spend about $166 million this year from its General Fund on existing early childhood programs.

Both Republican Gov. Susana Martinez and the Democratic-controlled Legislature have recommended that early childhood spending should increase for the next budget year by $15 million to $20 million from monies separate from the Land Grant Permanent Fund.

They agree that money should come from expected new General Fund revenues, although they differ on exactly how much.

Projected benefits

Advocates for the constitutional amendment to get more early education funding from the Land Grant Permanent Fund include a coalition of education groups, unions and businesses known as Invest in Kids Now.

The advocacy group is spearheaded by the St. Joseph Community Health Foundation, which independently provides some early childhood education services in the Albuquerque area.

They say the state’s General Fund spending on early childhood services annually falls well below an estimated $225 million need.

“We all know the General Fund cannot support this at this time,” said Allen Sanchez, CEO of the St. Joseph foundation.

If approved, the state would contract with private contractors and faith-based groups to administer the expanded early childhood education programs.

President Barack Obama, during his State of the Union speech last week, proposed a national effort to make preschool classes available to every child by working with states to expand the programs.

Research has found that investments in early childhood education programs improve reading ability during later years of schooling and increase graduation rates, Denish said. The programs are also shown to decrease rates of child abuse and incarceration, she said.

Past experience

Pumping more money into New Mexico’s school system has not always produced improvement in student performance, according to the Legislative Finance Committee.

Voters in 2003 ratified a constitutional amendment to increase Land Grant Permanent Fund distributions from 4.7 percent to 5.8 percent between 2005 and 2012, and then to 5.5 percent from 2013 to 2016 to fund general education reforms and a three-tier teacher pay system that allows teachers who seek continuing education to earn higher salaries.

The LFC has reviewed the estimated $634 million added to education budgets after the 2003 tapping of the permanent fund.

The three-tier teacher pay system funded by the increased permanent fund distribution has not resulted in significant gains in student achievement, the LFC reported in 2009.

S ince 2005, reading test scores in New Mexico have not improved beyond 50 percent proficiency. Math scores have increased from about 30 percent proficiency in 2005 to about 43 percent last year.

“The differences in student achievement between licensure levels, in general, were not significant, especially in light of vastly different compensation, and achievement gains were insufficient to increase proficiency levels on a large scale,” the 2009 LFC analysis concluded.

Another proposal this year, House Joint Resolution 10, sponsored by Rep. Jim Trujillo, D-Santa Fe, would make permanent the 5.5 percent distribution rate without adding new funding for early childhood education programs.

Critics cite financial threat

The effort to increase distributions from the permanent fund has met broad opposition from legislative Republicans, at least one key Democrat, and large business groups, including the Greater Albuquerque Chamber of Commerce, the Association of Commerce and Industry and the New Mexico Business Roundtable.

Opponents say increasing the permanent fund distribution for early childhood education would put the fund on an unhealthy track.

Terri Cole, president and CEO of the Greater Albuquerque Chamber of Commerce, called the move “predatory” and, in the way advocates propose to spend the money, probably unconstitutional.

She said the business groups agree with the need to expand access to early childhood education programs and applaud the Legislature for proposing new General Fund money for the programs.

But Cole also said the proposal would injure the permanent fund and violate laws that prohibit distribution of land funds through private or faith-based groups, as supporters of the new distribution propose.

“There is no way to get around the fact that if this passes, it will hurt the state permanent fund, and it simply is illegal based on our Constitution,” Cole said.

The chamber endorsed the 2003 constitutional amendment to increase the distribution rate for education reforms, but Cole said many business leaders are disappointed by a lack of clear results from that funding.

House Minority Leader Donald Bratton, R-Hobbs, said the state should consider other revenues to fund early childhood education rather than strain the permanent fund.

“I think we have to have the self-discipline if we want to go above and beyond,” Bratton said. “Whether it be for pre-K or K-12 or higher ed, then we need to step up to the plate as citizenry and levy the taxes or create the tax structure to accomplish that without taking from past generations’ self-discipline to preserve the fund.”

Fiscal analysis

The SIC analysis warning of potential losses to the permanent fund compares the account — one of the largest of its kind in the U.S. — to other endowments around the country that cap their annual withdrawals around 5 percent per year.

Exceeding that 5 percent distribution rate puts that fund at risk because market variabilities, such as inflation and lower-than-expected investment returns, might not create enough new money to cover the increased withdrawals without beginning to deplete the fund.

The SIC noted that a 3.5 percent inflation rate over 20 years, coupled with stable oil and gas revenues and an average investment return of about 6 percent, would mean losses for the state’s permanent fund.

“Without even contemplating potential diminishment of Land Office contributions or higher inflation, this projection puts the LGPF at an extreme likelihood of having a greatly diminished value 20 years from now.”

The average investment return for the permanent fund over the past 20 years has been nearly 7.4 percent, according to the SIC.

Supporters dispute threat

Supporters of using the permanent fund for early childhood education programs say the SIC analysis is overly conservative.

Myra Segal, deputy policy director of New Mexico Voices for Children, an advocate of the new funding, said the Land Grant Permanent Fund should be treated differently from other endowments because it has two main sources of revenue: investment gains and royalties on oil and gas leases.

“According to even conservative assumptions in the (SIC) analysis, the corpus, or the principal, will not go down. It’s just going to grow slower,” Segal said.

The proposal to expand the permanent fund withdrawals includes a safety point that would stop the early childhood funding if the five-year fund average were to drop below $8 billion.

However, the SIC analysis warned that trigger point would fail to catch short-term losses, meaning the permanent fund could lose 75 percent of its total value in a single year, declining to a net value of less than $3 billion, and still allow the increased distributions to continue unless the Legislature intervened.

The constitutional proposal would allow the Legislature to stop or slow withdrawals with a three-quarters vote by both chambers.

Endowment basics

  • The state Land Grant Permanent Fund is expected to distribute $526.8 million to its beneficiaries this year. That annual distribution represents 5.5 percent of the $11.45 billion fund’s rolling five-year average value, currently $9.58 billion.
  • More than 83 percent of the permanent fund distribution each year is dedicated to help fund public schools around the state. For the 2013 fiscal year, schools’ share of the distribution will be about $436 million.
  • About $47.8 million of this year’s distribution stems from a 2003 constitutional amendment that increased the annual distribution rate from 5 percent to 5.5 percent to fund education reform programs and increased teacher salaries.
  • A proposed constitutional amendment to raise the distribution rate by another 1.5 percentage points to fund early childhood education programs — bringing the total distribution to 7 percent — would increase the annual distribution by about $170 million per year starting in 2016.

— This article appeared on page A1 of the Albuquerque Journal