SANTA FE, N.M. — A New Mexico endowment fund created in the 1970s to provide future generations with a lasting bank account is not growing as intended – and might eventually decline, two former legislators told the State Investment Council on Tuesday.
Revenue flowing into the Severance Tax Permanent Fund increasingly has been diverted to pay off state bonds, they said.
The presentation sparked a debate on whether the fund should be treated as an enduring state trust fund or one the state can rely on during the “rainy days” of troubled economic times.
The revenue source of the “permanent fund” is New Mexico taxes on the extraction of minerals, including oil and natural gas, that will one day be exhausted.
Slightly less than $400 million of the $3.6 billion in severance taxes paid to the state from 2002 through this year has been deposited in the fund, former state Reps. Phillip R. “Bob” Grant and John Bigbee testified.
Grant and Bigbee were among the legislative sponsors of a 1973 measure to establish the fund, which now has a balance of about $3.7 billion.
The issuance of new bonds was limited until 1999 by allowing only half of the previous year’s severance tax revenue to be used in paying down debt on outstanding bonds. The rest of the money was then deposited in the fund.
The Legislature, however, has gradually changed that ratio over recent years and 95 percent of such tax revenue can now be used to pay off bonds.
In the budget year that ended in June, just $6.5 million of the $299.5 million collected in severance taxes ended up being deposited in the fund.
“I think what we’re doing is selling the farm by depleting this endowment,” Bigbee told SIC members, including Gov. Susana Martinez.
Several current state lawmakers attended Tuesday’s presentation, though their opinions differed as to how the endowment funds – New Mexico has three other similar funds – should be handled.
Rep. Larry Larrañaga, R-Albuquerque, expressed concern over the declining percentage of tax revenue being funneled into the Severance Tax Permanent Fund and said he’s considering legislation that would cap the amount of money that could be spent yearly on bond-financed public works projects.
However, Rep. Jim Trujillo, D-Santa Fe, said money from the permanent funds should be available for pressing current needs, such as public education.
“Ultimately, it’s the public’s money,” Trujillo said. “If they say they want to spend it tomorrow, let them.”
While the Legislature is constitutionally barred from changing the percentage of the yearly distributions without state voters’ approval, lawmakers can control how much tax revenue is deposited into the funds without a statewide vote.
The Severance Tax Permanent Fund is overseen by the State Investment Council, which decides how the money in the fund should be invested.
A distribution from the fund is made annually – the size of the distribution is based on an average of recent earnings – into the state’s main operating account.
Despite the declining percentage of tax revenue funneled into the fund, the fund’s balance has grown over recent years since interest earnings have outpaced distributions. Even with a severe market downturn in 2008, the Severance Tax Permanent Fund has grown by an average of 7.7 percent annually since 1994, according to the State Board of Finance.
In a memo provided to SIC members, Board of Finance Interim Director Stephanie Schardin Clarke pointed out severance tax bonds are used to pay for public works projects, which also represent an investment in the future.
Most recently, lawmakers approved an $86.5 million package of public works projects during a special session that ended Sept. 24, though the Martinez administration had pushed for an even longer list of projects.
Both Bigbee and Grant argue the current formula for depositing money into the severance tax fund will eventually cause the fund’s value to decline, harming a future income source for when oil and natural gas deposits are depleted.
The fund’s original architects claim that since 2002, more than $1.3 billion that could have been deposited in the fund based on the previous formula has instead been spent on bond payments.
“If we don’t get back to putting more money in the Severance Tax Permanent Fund, we’re going to be in pretty dire straits,” Grant said.