The relatively short-term benefits of hundreds of millions of dollars in extra cash aren’t worth the costs of making New Mexico’s ‘permanent’ fund anything but.
New Mexico is fortunate to have been born a ‘trust fund baby,’ admitted to the Union a century ago with a land grant permanent fund that generates hundreds of millions of dollars each year for public schools and other state institutions.
Like many trust fund babies, we must resist the understandable temptation to spend too much of our good fortune now or we will regret the decision in the years to come.
Legislation under consideration in Santa Fe would dramatically and dangerously increase the amount of money we take from the fund each year, threatening the fund’s long-term viability and actually reducing the amount of money we can count on in the years to come.
Supporters of the proposal to spend more now make a compelling case, arguing that the extra money is needed to improve our schools and to pay for early childhood programs (Editor’s note: See their arguments here and here). But their well-intentioned reasoning is short-sighted, risky and constitutionally questionable.
We’ve been here before
Distributions from the land grant permanent fund were changed in 1996 to protect the fund from losing value to inflation and to provide public schools and other beneficiaries with a more predictable annual income. Voters that year approved a constitutional amendment to change the distribution from all the fund’s annual earnings to a flat 4.7 percent of the short-term value of the fund — a reasonable amount that offset the need for hundreds of millions of dollars each year in extra taxes and that still allowed the fund to grow, provided that it was invested wisely and inflation remained low.
The fund and its beneficiaries did reasonably well under this new distribution formula. Fund managers, freed from the pressure to invest for short-term gains and buoyed by strong financial markets, grew the fund from about $4.6 billion in 1996 to about $6.8 billion in 2003, when the temptation to squeeze more money from the fund proved too great.
It was in that year that the previous governor successfully persuaded New Mexicans to raise the annual distribution from the prudent 4.7 percent of the fund’s value to a riskier 5.8 percent. The argument then was much the same as it is now — the money was needed for valuable education reforms and the increase would only be temporary, dropping to 5.5 percent by July 2012 and finally down to 5 percent in 2016.
Well, we’re fast approaching July 2012 and we’re already being asked to raise the distribution, this time to a whopping 7 percent of the value of the fund annually from fiscal years 2014 through 2023. But don’t worry, we’re told, the distribution will fall back to less than 5.8 percent after that.
Given this record, it’s not hard to imagine that voters in the early 2020s will be asked to maintain or even raise the distribution once again.
Short-term benefits aren’t worth the cost
The extra money would be devoted to early childhood education programs and would likely be funneled to private companies that provide those services. This is certainly a worthy cause, but the Office of the Attorney General has raised serious questions about whether this arrangement would be legal under the state Constitution and the federal enabling act that admitted New Mexico to the United States.
The land grant permanent fund is not a savings account or a “rainy day fund” to be tapped when times are tough. The state’s general fund reserves serve that purpose. The land grant permanent fund is a trust fund designed to generate steady, annual income for the state, but it can only do that if the amount we take out plus inflation is less than our investment earnings plus new income to the fund.
The current distribution of 5.8 percent pushes that envelope; a distribution of 7 percent would almost certainly shred it, slowly depleting the value of the fund and costing taxpayers more money in the long run.
The relatively short-term benefits of hundreds of millions of dollars in extra cash aren’t worth the costs of making New Mexico’s “permanent” fund anything but.
Smith, a Democrat, is chair of the Senate Finance Committee and represents the Deming-area Senate District 35.