Too much spending threatens a $4.5 billion fund

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Posted: Apr 23, 2014 4:40 PM
Too much spending threatens a $4.5 billion fund

TOO MUCH MONEY GOING OUT: The New Mexico State Investment Council received an analysis showing that the $4.5 billion Severance Tax Permanent Fund is on a downward track. Photo by NM Watchdog.

By Rob Nikolewski │ New Mexico Watchdog

SANTA FE — The Severance Tax Permanent Fund (STPF) isn’t looking so permanent these days.

The fund, worth a whopping $4.5 billion, is managed by the State Investment Council (SIC) and gets its money from taxes on oil, gas and mineral extraction on state lands.

Each year, about $180 million goes to the state’s general fund, with the Legislature using that money for tax bonds on projects such as water infrastructure, tribal spending and public schools. The money reduces the burden on New Mexico taxpayers.

Since the Oil Patch in New Mexico is booming, you would think the fund is in great financial shape.

Think again.

During a monthly SIC meeting at the Roundhouse on Tuesday, members were told an analysis shows the fund has just a 22.6 percent probability in the next 50 years of being greater or equal in size, according to projected contributions.

“It could be half its size in the coming decade,” SIC Director of Communications Charles Wollmann told New Mexico Watchdog.

Why? Because there’s more money going out than coming in. As recently as the 1990s, about 50 percent of severance tax revenue was used for bonding capital projects with the other 50 percent transferred to the STPF.

But in recent years the distribution has swung to 95 percent for bonding programs, with just 5 percent going to the permanent fund.

In fact, in fiscal 2013, by the time the Legislature had taken money for various capital projects, Wollman said the the fund received just $339. For you math majors, that’s just 0.0000000753 of the  fund’s total value.

The STPF works on an expected rate of return on investments of 7.5 percent, but in to keep the corpus of the fund stable, the analysis says, investments would have to outperform 75 percent of their peers.

“We’d have to hit it out of the park,” Wollmann said.

By contrast, the Land Grant Permanent Fund, the state’s other mammoth investment fund worth more than $13.5 billion, is in much better financial shape going forward.

The analysis predicted that fund has a 51.2 percent of maintaining its current balance in the next 50 years. Financial experts say a 50 percent rating is optimal because it reflects the fund is not weighted too heavily in favor of current or future recipients.

For example, if a fund has a 75 percent chance of keeping its 50-year balance, it’s weighted too heavily for future withdrawals, while a 25 percent estimate is weighted too much in favor of spending for today.

Here’s one of the slides the SIC members saw Tuesday, looking at the long-range forecast for the STPF, using a “middle contribution scenario:”

severance tax permanent fund slide from the sic

Why did the distribution change from 50-50 to 95-5?

In 1999, after a court-ordered “school equalization” ruling resulted in more money spent on low-income communities, the Legislature increased severance tax bonding to 62.5 percent. Lawmakers then raised the rate to 87.5 percent in 2000 and to 95 percent in 2004.

While Tuesday’s report was alarming, warning signs about the STPF’s long-term health have been discussed in Santa Fe for going on two years.

In the just-completed legislative session, a bill in the House would have reduced the bonding percentage from 95 to 87.5 percent. The bill, by Rep. Jason Harper, R-Rio Rancho, passed three committees but did not reach the Senate.

Just before the 30-day session started, Senate Majority Leader Michael Sanchez, D-Belen, told the Albuquerque Journal he didn’t like the bill.

“It takes away from tribal and colonias funds, and from the state engineer for water adjudication, albeit in small amounts,” Sanchez said. “But those allocations are important to those entities.”

In the meantime, the SIC will be under a lot of financial pressure to maintain the STPF in the face of projections of a diminishing corpus of the fund.

“That really puts us in a hole to grow the fund,” Wollmann said.

Contact Rob Nikolewski at rnikolewski@watchdog.org and follow him on Twitter @robnikolewski