Permanent funds are not our mad money
New Mexico’s permanent funds are doing what they’re supposed to do — delivering money to the state — and most of it goes to support public education. Each month, the state receives $80.68 million from the permanent funds — in this fiscal year, the state will receive nearly $1 billion.
The annual disbursement from the permanent funds makes up 15 percent of the state budget. It is important for planning purposes that the annual dollar amount be predictable and consistent, and that it keeps up with inflation. We need the money to last in perpetuity — that’s why it’s called a permanent fund.
Think of it like this: It’s a bad idea to drain your 401(k), individual retirement account or other retirement assets to eliminate credit card debt or to pay off current obligations. It’s bad because there are often severe penalties on any amount you withdraw early. Plus, taking money out of your 401(k) means that you permanently lose out on the chance for those funds to grow over time, which is the whole point of investing for retirement.
The permanent funds’ distribution rates are conservatively set to allow the endowment to grow at a rate that at least equals inflation. Currently, the Land Grant Permanent Fund pays out 5 percent and the Severance Tax Permanent Fund pays out 4.7 percent of earnings. These percentages are slightly higher than the average endowment pay-out rate, which is 4.4 percent. However, our funds predictably and consistently provide money to support public education and our state General Fund.
The higher the distribution rate, the greater the risk that inflation will erode the value of the investment account over time and investment earnings won’t keep up with the needed, predictable payout each year.
Increasing the spending rate now will reduce the value of the permanent funds and result in lower spending in future years. This would shift the payout structure to benefit the current generation at the expense of future generations.
Remember the story of the tortoise and the hare, and the lesson that “slow and steady wins the race?” Investors refer to it as the “tipping point,” where the fund with the higher spending rate is eventually caught. When this happens, the lower spending rate ultimately provides more revenue.
Voters raised the distribution rate for the Land Grant Permanent Fund in 2003. If the rate had not been increased, the Land Grant Permanent Fund would be $1.4 billion greater and the payouts would be larger in 2018. Remember, the larger the fund, the larger the annual distributions. The hare won the race in New Mexico, but we lost hundreds of millions of dollars in the process. We can’t let that happen again.
There is renewed political pressure to take additional distributions from the permanent funds and spend the money to fund everything from early childhood education and public safety to mental health, and to increase the length of school days. Attempts to take more from the permanent funds reveal both an extremely shortsighted approach and a fundamental misunderstanding of the permanent fund process.
My first job was as a kindergarten teacher, and I’ve taught second grade and middle school, and twice served as a school superintendent. I’ve served on the House Education Committee for 16 years. Together, my wife of 44 years and I have 80 years of experience as educators.
I value and support education. I also support fiscal responsibility in state government. I believe the permanent funds should be protected.
New Mexico’s permanent funds prosper when they can do what they are supposed to do: support the state, now and far into the future. Weakening them to meet immediate needs, with no regard for tomorrow, will impact future funding for education and other essential services, and will harm the financial well-being of our state.