Commentary: New Mexico policymakers and citizens received some good economic news recently. Thanks to the much-maligned process known as fracking, oil production in the Permian Basin in Southeast New Mexico is booming.
New Mexico recently became the 3rd-biggest oil producing state in the nation and is now producing more oil than it ever has before. This has all led to a $673 million boost in state revenues.
While the revenue picture has brightened significantly for State government, New Mexico’s overall economic picture remains troubled. The unemployment rate is still the 2nd-highest in the nation at 5.6%. Perhaps even more troubling is the fact that we are one of just three states to have fewer jobs today than we did at the onset of the Great Recession a decade ago.
Given the political situation in Santa Fe it seems likely that the oil and gas revenues will be squandered (or “invested” as the big-government lobby puts it) in more government programs. Gov. Martinez, typically a fiscal conservative, has already allocated an additional $10 million to unproven pre-K programs. Should the Democrats take over all branches of government in January there will be many more spending proposals.
But New Mexico government already spends a lot. According to an analysis by the Oklahoma-based 1889 Institute, when adjusted for our (low) personal incomes New Mexico state and local government spending is among the top 10 among US states in all categories measured! We are the highest in the nation in spending on higher education, welfare, and corrections.
All of this spending has created or at least done little to alleviate our impoverished condition.
So, if more spending is not the answer, what is? There are two important ideas that must be considered as uses for this surplus: tax reform and pension reform.
Revenue-neutral reform of our gross receipts tax has been a bi-partisan talking point for years. We know that our loophole-ridden GRT is a job-killing disaster. It disproportionately impacts both small businesses/entrepreneurs and low-income New Mexicans.
For years the Legislature has “kicked the can” on tax reform. And, it is admittedly tougher to take a leap of faith that a reformed tax system will generate revenues similar to the previous tax system. With a large surplus in Santa Fe, it is time to stop kicking that can and reform New Mexico’s broken GRT once and for all.
The second issue of government employee pension reform is just as important, but less well-publicized. In late 2017 it was reported that despite changes enacted in 2013, PERA’s estimated unfunded liability – the gap between future retirement benefits owed and expected future assets on hand – has increased over the past four years to $4.8 billion from $4.6 billion.
Study after study (including a 2014 report by the Competitive Enterprise Institute) shows that New Mexico’s pension problems are among the worst in the nation. Worse, despite strong stock market gains in recent years, the situation is getting worse.
When the stock market hits the skids or a recession hits New Mexico (and the government retirees relying on these pensions) will be in for a rude awakening. That’s why we need to do something right away and the oil-generated surplus provides a great opportunity.
Michigan is one state that has completely shifted away from the defined benefit model (where retirees are “guaranteed” a return and taxpayers bear the costs) to a defined contribution model where government employees (like their colleagues in the private sector) must plan for their retirements. For the long-term economic benefit of our state such a move must happen eventually. Traditional pension systems are based on funny math and misguided promises from politicians.
Having some extra money available to make the transition happen is very beneficial and could make the process a lot less painful than making the transition in more difficult times.
Paul Gessing is the President of New Mexico’s Rio Grande Foundation. The Rio Grande Foundation is an independent, non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.