NOTE: As provided in LFC policy, this report is intended for use by the standing finance committees of the legislature.  The Legislative Finance Committee does not assume responsibility for the accuracy of the information in this report when used in any other situation.

The LFC is only preparing FIRs on bills referred to the Senate Finance Committee, the Senate Ways and Means Committee, the House Appropriations and Finance Committee and the House Taxation and Revenue Committee. The chief clerks are responsible for preparing and issuing all other bill analyses.

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(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates/Conflicts with/Companion to/Relates to

SOURCES OF INFORMATION

State Land Office (SLO)

LFC Files

SUMMARY

Synopsis of Bill

House Bill 131 is introduced on behalf of the Legislative Finance Committee. The legislation proposes to change the distribution of some federal mineral royalties. Under current law, except for annual appropriations to the instructional material fund and New Mexico Institute of Mining and Technology's bureau of mines and mineral resources, all of the state's share of mineral royalties is distributed to the public school fund (basically General Fund). The bill proposes that the state's share of revenues deriving from prepayment of royalties be distributed as follows: revenues equal to what the state would have received if there were no prepayments are to be distributed to the public school fund; the difference is to be distributed to the common school permanent fund.

Background

Last year, the federal government passed the Royalty Simplification and Fairness Act, allowing oil and gas producers from marginal wells to negotiate with the federal and state governments to prepay royalties that would be owed over the life of the wells. The law requires that both the state and federal government agree to the prepayment. Marginal oil wells are defined as wells producing less than 15 barrels per day; marginal gas wells are defined as wells producing less than 90 thousand cubic feet of gas per day. Production from such wells constitutes 16 percent of federal land production.

FISCAL IMPLICATIONS

The fiscal implications of the proposed law are unknown because it is unknown how many producers will be interested in participating in the program and how negotiations will proceed. Just determining the amount owed will be a difficult and perhaps contentious task requiring estimates as to production quantities and future prices over the expected life of the well. It will also require agreement on the discount rate to be used in determining the present value of production against which the royalties are to be assessed. Last year, the Department of Finance and Administration estimated that if royalties were prepaid on all eligible wells, public school revenues could increase by more than $200 million beginning in FY2000 and then fall by $20 to $25 million per year thereafter.

It is important to note that while the bill's proposed changes as to the way these revenues would be distributed would be revenue neutral in the year the payment is made, the proposal to send the remainder to the common school permanent fund will result in smaller distributions to the school fund for several years thereafter. This is because the interest earnings on those additional dollars will be considerably less than the revenue that would have been collected in annual royalty payments by the fund. On the other hand, those smaller distributions will continue forever while the royalty payments would have a finite life.

ADMINISTRATIVE IMPLICATIONS

Last year DFA reported similar legislation noting that the administrative issues involved may be complex as they will include negotiations between the state, federal government and industry. It will be important to determine who will represent the state in these negotiations.

SUBSTANTIVE ISSUES

• The State Land Office issued an FIR saying that the New Mexico Commissioner of Public Lands supports the concepts included in the bill. Their FIR is attached.

RP:BT/gm

Attachment