Jon Clark, state investment officer for the New Mexico State Investment Council, has a money problem, but not the negative cash flow kind that many public pension plans are facing.
Inflows into the sovereign wealth fund totaled $8 billion in calendar year 2023. By comparison, average annual inflows prior to 2018 were about $460 million.
New Mexico's inflows are so large, they may push the council to become the overseer of the second-largest sovereign wealth fund in the country. The largest is the $78.6 billion Alaska Permanent Fund Corp., Juneau, and New Mexico council assets of $52.4 billion put it neck and neck with the $52.3 billion Texas Permanent School Fund, Austin.
Council assets, in about a dozen funds, are growing rapidly due, in large part, to changes made by the state of New Mexico last year that diverted a bigger portion of the state’s oil and gas extraction revenues, including from the New Mexico portion of the Permian Basin, to the council to invest.
Oil and gas windfall
Council officials are currently modeling the impact of an estimated $4 billion a year in oil and gas revenues into the funds it manages, Clark said. The council’s 10-year average for oil and gas revenue contributions to the funds prior to 2019 was about $560 million annually.
Before the recent legislative change, much of the oil and gas revenue went to the state budget, causing the state’s revenue streams to go through boom-and-bust cycles and creating havoc on the state’s budgeting process, said Clark, who before assuming the state investment officer post in January had been the deputy cabinet secretary of the New Mexico Economic Development Department.
Now the state will send excess oil and gas revenues from production and federal royalties to one of the council's funds, the $9.5 billion Severance Tax Permanent Fund. The council won’t see those revenues until fiscal year 2025, but council officials estimate the impact would be more than $1 billion a year of new oil and gas revenue into the fund.
“This is a potential game-changer for the STPF, allowing for significant growth that will ultimately result in much higher distributions to the general fund,” Clark said.
The council will parcel out the returns, making more regular distributions back to the state, Clark explained. The hope is that these revenues from the fund will offset expected declines in the state’s oil and gas revenues as the world transitions to alternative sources of energy, he added.
“As oil and gas revenues start to decline over time, we will come in and replace those revenues in lockstep with that decline,” Clark said. “We’re rapidly becoming one of the largest sources of revenue for the state.”
According to the state’s most recent revenue forecast, the council is expected to supply 31% of the state’s budget from investment returns on oil and gas revenues by 2050, second only to the state’s sales taxes, supplying 33%, Clark said.
That percentage from the council could be higher should oil and gas prices spike, much like they did in 2022 and 2023
For example, the $30.2 billion Land Grant Permanent Fund, the largest pool of capital the council manages, has always received royalties for oil and gas production on state lands. However, future cash flow estimates are more than $20 billion higher than historical average receipts due to the rise in oil and gas prices, he said. In 2022 and 2023, the Land Grant Permanent Fund received more than $2 billion each year, a significant increase from the average annual flows of $760 million per year between 2015 and 2021.
If oil prices remain near today’s levels, council officials expect that fund could continue to receive more than $2 billion a year over the next decade, he said.
Unprecedented surpluses
Over the last 25 years, New Mexico had one of the highest revenue volatility of any other state in the country because revenues were so tied to oil and gas and sales tax, Clark said.
Revenues from increased production from fracking and oil price increases gave the state unprecedented surpluses. A handful of years ago, policymakers started setting aside an increasing amount of the surplus to be invested by the council, knowing how unstable oil and gas revenues can be, Clark said.
State officials started with diverting excess oil and gas production tax and federal royalty revenue to the $2.2 billion Tax Stabilization Reserve in 2019 and to the $7 billion Early Childhood Education and Care Fund in 2020. Inflows to those funds weren’t significant until oil and gas prices spiked. The Early Childhood Education and Care Fund, for instance, received $2.8 billion in fiscal year 2022 and $3.2 billion in fiscal year 2023. This was an increase from $166 million in fiscal year 2020 and $335 million in fiscal year 2021.
In December, the council is set to embark on a strategic planning retreat.
As the council's assets become a larger and larger contributor to the state budget, the council must take into consideration the distributions it sends back to the state, Clark said.
“Our current asset allocation is positioned to achieve its target returns with a focus on risk mitigation, but as an organization, we are also now assessing how a less conservative approach to risk could potentially impact state revenues in the long term,” he said.
Asset allocations
Each of the council’s pools of capital has its own asset allocation.
The Land Grant Permanent Fund’s target asset allocation is 20% broad U.S. equity, 20% broad international equity, 15% private equity, 15% non-core fixed income, 12% real return, 12% real estate and 6% core fixed income.
If there’s an economic downturn and the portfolios are more tied to the public markets, then “soon the smooth revenues we’re providing the state don't look as smooth anymore,” Clark said.
That consideration combined with projections of a high level of inflows into the funds the council invests is prompting a fresh look at its asset allocation, he said.
The inflows expected over the next decade present the council “with a rare opportunity in public fund investing to build asset allocations in our growth funds aimed at maximizing the compounding power of our returns,” the council’s fiscal-year 2024 plan says. That plan called for greater exposure to higher-returning risk assets, balanced between equity and credit over lower-returning risk mitigation/liquidity assets, and greater exposure to private market assets than publicly traded assets. The fiscal-year 2025 investment plan will be presented to the council at its Aug. 27 meeting.
Compensation study
The latest change in legislation is not the only source of new capital coming to the council. In May, the council started overseeing a new fund, the Higher Education Trust Fund, which the New Mexico Legislature seeded with a $959 million transfer out of another pool the council manages, the $2.2 billion Tax Stabilization Reserve Fund. Also in May, the council adopted an asset allocation for the new Higher Education Trust Fund that is similar to that of its Early Childhood fund with about 50% of its assets allocated to a combination of public and private equity.
The council is also embarking on a compensation study to ensure they are able to hire and retain the professionals needed to run the funds, Clark said.
“As we get more money to invest, the council will need to add more team members," he said.
Clark can add five new team members to its about 30-member staff, “which is what we need,” he said.
“We oversee the third-largest sovereign wealth fund in the country;" but as the money continues to flow in, “we expect to be second,” he said.
