Full Steam Ahead

New Mexico lawmakers may have created a monster.

It's called the Tax Stabilization Reserve Fund, and it's what would have happened had Dr. Frankenstein tightened those bolts all the way and made the big guy more of a giver.

The fund has long existed in some form as a way to scale down the peaks and valleys of New Mexico's economy, which rides on the waves of oil and gas revenue. But recent changes to state law and how the fund's money adds up over time have made it a much more meaningful way to surf the waves without getting swamped once the ride is over.

In a June opinion letter dutifully published by the Albuquerque Journal, Gov. Susana Martinez wrote that the state was set to deposit more than $20 million into the fund "a year ahead of expectations."

The governor and others may have been off by more than an order of magnitude, doubled.

A frenetic run-up of oil prices at the end of the fiscal year that ended just three weeks after the governor wrote her op-ed means the state expects to push about $500 million into the fund from last year's revenue alone.

How much money the fund gets is determined by the size of the state budget and existing "operational" reserves. Since the budget year starts a few months after the Legislature leaves the Capitol, lawmakers are always looking into the future. Operational reserves are a hedge. Anything beyond those reserves gets marked for the fund—a backup to a backup.

State Sen. John Arthur Smith, D-Deming, says as soon as lawmakers left the building last February after the legislative session, they started to get wind of the growing oil boom, and the funding windfall that might come along with it.

"I immediately got a call from a person in oil and gas who said, 'I can't tell you exactly how much you're going to get from oil and gas, but I can tell you it's going to be a sinful amount,'" Smith tells SFR.

His tipster looks to have been right.

The fund is in line for another infusion because of a change made by lawmakers in 2017. It directs a tax on oil and gas drilling into the fund, and is likely to send another $135 million its way this year.

And when legislators gather next week to hear new revenue estimates, they're likely to get still more good news: A continued oil boom—though, yes, prices are down now—may still pump hundreds of millions more into the fund.

Instead of having $15-$20 million as expected, the Tax Stabilization Reserve Fund could amass much more than $1 billion in just two years to help weather an economic storm.

To show how wildly beyond expectations that is, consider that in 2017, the late Rep. Larry Larrañaga, R-Bernalillo, pitched lawmakers on the plan by telling them at the end of a string of relatively lean years that the state would have had $365 million to put toward a downturn, had the plan been in place for the past decade. That kind of financial security could have helped prop up the state's bond ratings, saving money on the hundreds of millions of dollars New Mexico borrows each year to pay for things like schools, senior centers and libraries.

That $365 million over 10 years looks like a comparative drop in the bucket now.

It doesn't seem likely lawmakers will allow all that cash to make its way to the fund after they've put together next year's budget. By design, it's a true rainy day fund. The money is much harder to get at, giving the Legislature a reason to spend it rather than letting it grow indefinitely.

To access the fund requires one of two scenarios. The governor can make an emergency declaration and a majority of both houses of the Legislature votes to support her. Or, lawmakers can cobble together a two-thirds majority in both houses and get at the money themselves.

At the very least, though, the money from last year and the expected tax revenue this year will go into the fund, boosting its total to more than $600 million in just two years.

These are projections, but with each passing day, analysts and economists become more certain of those numbers.

The fund may grow even more. Right now, the State Treasurer's office invests it and earns about 2 percent. The advantage of that system is the money is ready at a moment's notice. The disadvantage is that it's not earning as much as it could.

"It has been suggested by several [people] that we should consider investing this on behalf of the state. And we're happy to do that if that is your will," State Investment Officer Steve Moise told a legislative panel last week.

Moise's office manages almost $24 billion in permanent funds for the state. Because they can look a bit further down the road for investments, his analysts think they could keep the money accessible and double the return, if not more, without taking on much more risk. Moise made a point of saying he's not advocating a takeover, only offering the services of his office.

The Investments and Pensions Oversight Committee agreed to endorse a bill to let Moise's office do that, and also to put any earnings back into reserves instead of generating money to spend immediately.

"Right now, it actually becomes part of the general fund," State Rep. Tomás Salazar (D-Las Vegas) tells SFR. He chairs the committee and plans to carry the bill next month. "There's nothing wrong with that, that's great as well, but I think the hope was to reinvest in the rainy day fund."

It's not clear Moise's bosses at the State Investment Council will be completely on board with that, but the difference could mean an extra $20-$30 million in earnings every year on the fund—adding each year to a fund that could weather the rainiest of days and provide financial backup for the state for years to come.