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SPONSOR: |
Thompson |
DATE TYPED: |
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HJM |
124 |
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SHORT TITLE: |
Study Amendments Affecting Land Grant Fund |
SB |
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ANALYST: |
Neel |
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REVENUE
Estimated Revenue |
Subsequent Years Impact |
Recurring or
Non-Rec |
Fund Affected |
|
FY03 |
FY04 |
|
|
|
|
|
(Significant)
See Fiscal Implications |
Recurring |
General
Fund |
|
|
|
|
|
(Parenthesis ( ) Indicate Revenue Decreases)
LFC files
Responses
Received From
SUMMARY
Synopsis
of Bill
House Joint Memorial
124 requests Secretary of State and Legislative Council Service to Consult with
the State Land Office regarding proposed Constitutional Amendments affecting
the Land Grant Permanent Fund.
Significant
Issues
Senate Floor Substitute for Senate Joint Resolution 6 proposes to amend
the New Mexico Constitution to increase the annual distribution from the Land
Grant Permanent Fund (LGPF) from 4.7% to:
· 5 percent of the five-year ending average market values,
· 5.8 percent for FY2005 to FY 2012 (.8 is designated to implement education reforms contingent on market values of the LGPF being in excess $5.8 billion); and
·
5.5 percent for FY 2013 to FY2016 (.5 is
designated to implement education reforms contingent on market values of the
LGPF being in excess $5.8 billion)
The land grant permanent
fund (LGPF) was established by the Ferguson Act of 1898 and confirmed by the
Enabling Act for
The LGPF consists of proceeds from the sale of
state lands, royalties from natural resource production, and five percent of
the proceeds from the sales of federal public lands in the state. Rental,
bonus, and other public land income are also distributed to trust
beneficiaries. The common school fund (a subset of the general fund) is the
beneficiary of around 83 percent of trust income. The market value of the fund as of
Under
CS/SJR 6 the value of the LGPF would be approximately $30 billion in FY 2040 or
about $5 billion less than under current law (see figure 1). As expected, General Fund distributions,
which include earmarked public school reform funds are higher under SJR 6
through FY 2017, but thereafter are less than under current statute (see figure
2).
FISCAL IMPLICATIONS
The
notation in the revenue table reflects the uncertainty about the date of the
election. The $77.2 million is the full year general fund impact for FY04.
A
1994 constitutional amendment mandates that 4.7 percent plus administrative
expenses of a 5-year average of the fund’s year-end market valuations shall be
distributed to the beneficiaries. Absent
a spectacular rebound, recent market performance virtually guarantees lower
distributions in the future to LGPF beneficiaries. The forecasts in the table
below are consistent with NEPC’s 8.5 percent return assumption and a 6 percent
distribution policy.
Fiscal Year |
General Fund
Distribution (millions) |
% Increase |
2004 |
356 |
n.a. |
2005 |
352 |
-1.1% |
2006 |
342 |
-3.1% |
2007 |
335 |
-1.9% |
Investment
consultants look at permanent funds as an endowment, not a “rainy day fund”.
This is an important distinction because it implies the current generation is
obligated to pass the fund on to future generations intact. This notion is
often referred to as “inter-generational equity”. Specifically, it means the
inflation adjusted purchasing power of the distributions should not be diminished.
Alternately, it means the present value (a way of adjusting for the time value
of money) of the funds’ corpus and distributions should not be impaired.
Implicit in this standard is the assumed trade-off between the value of a
dollar today and in the future (known as the discount rate). A lower rate makes
future dollars more attractive; conversely, a higher rate implies that today’s
distributions have a higher value than tomorrow’s increased fund balances. Experts
note that the discount rate in these studies has typically ranged from a high
of 15 percent to a low of 5 percent.
In
2002, the State Investment Council contracted with New England Pension
Consultants (NEPC) to review the appropriateness of the permanent funds’ distribution
policy. The following graph illustrates the tradeoff between spending and inflation.
The values on the x-axis are spending policies. The values on the y-axis are
the total loss in real value from increasing spending. For example the loss
from moving from a 4.7 percent to a 4.95 percent distribution is a cumulative
6.2 percent of the funds’ real value. Please note that NEPC analyzed different
proposals; the results for a 6.0 percent distribution policy would of course be
larger.
TECHNICAL ISSUES
OTHER SUBSTANTIVE ISSUES
By
far the most important value judgment underlying the spending policy analysis
is the supposition that the maintenance of the endowment is of greater good to
society than any alternative investment. As a recent Wall Street Journal article
shows, many trustees have and do question this principle. The article’s most
poignant argument for the spend-it-all approach comes from 1913; Julius
Rosenwald, chairman of Sears, Roebuck and Co., declared, "Permanent
endowment tends to lessen the amount available for immediate needs, and our
immediate needs are too plain and too urgent to allow us to do the work of
future generations. "The article
goes on to note that “In the first half of the century, Mr. Rosenwald's fund
gave away the equivalent of more than $700 million in today's dollars. Among many other projects, Mr. Rosenwald
contributed to the construction of nearly 5,400 schools for black children in
the South. In the years following World War I, an estimated 60% of American
blacks who had completed primary school had been educated in Rosenwald
schools”.
The point here is
that the quantitative measures presented in these studies are still governed by
subjective influences; they are not “scientific” nor are they sufficient
information on which to make an informed judgment. The investments that depleted
the Rosenwald endowments had dramatic returns to society but would probably
fare quite poorly by the present value and inflation statistics presented in
the NEPC study. In the end, policy makers must make their own judgments as to
what expenditures have the highest return for society.
SN/njw