President Obama appears at a Maljamar, N.M., oil field in 2012 to promote his energy policy.

DALLAS - New Mexico's reliance on its severance tax fund to support annual bond issues threatens to undermine the fund's future growth targets, a consultant's report shows.

The report from R.V. Kuhns & Associates said the fund derived from taxes on oil and gas produced in the state has less than a one-in-three chance of maintaining its value in the next 25 to 50 years without substantial structural changes.

In addition to providing debt-service coverage for an array of local bond issues, the severance tax fund provides about $180 million annually for public schools.

About 95% of New Mexico's severance taxes are now designed to be bonded for capital projects, with only 5% going to the permanent fund, according to Charles Wollman, spokesman for the New Mexico State Investment Council. The split was 50-50 just 15 years ago, he said.

"This concern is something the council has noted and tried to remedy the past few years as the fund failed to recover to 2007 highs, in large part due to diminished inflows," Wollman said.

The issue rises as New Mexico prepares to price its 2014 issue of severance tax bonds in a competitive sale Tuesday. This year's deal is $199.2 million, according to the preliminary official statement.

Moody's Investors Service, which rates the bonds Aa1, says the expected sale volume is about $174 million.

Standard & Poor's rates the debt AA. Both agencies have stable outlooks.

Despite the investment council's concerns about the severance tax revenue provided for the schools, the bonds maturing in 10 years come well secured, analysts said. Still, volatility of the revenue source brings cautionary notes.

"The volatility of severance tax revenues was demonstrated by a dramatic 32.2% decline in fiscal 2010," Moody's analyst Kenneth Kurtz noted in his May 16 report. "Revenues recovered modestly in 2011, growing by 4.7%, and then more strongly in 2012, growing by 26.2%. In 2013, tax revenues declined by 10.5%."

After this issue, the state will have $838 million in senior and $73 million subordinate severance tax bonds outstanding. About $133 million of outstanding principal to be retired in July 2014 and all principal to be retired by 2024, according to Standard & Poor's.

Severance taxes on the extraction of minerals in the state are derived primarily from oil and natural gas. In fiscal 2013, severance taxes on oil and natural gas accounted for 96.8% of total severance tax revenues.

Standard & Poor's analyst Sussan Corson said she expects severance tax collections will continue to provide good debt-service coverage during the bonds' relatively short 10-year life, despite the potential cyclicality in severance tax revenues.

The $4.5 billion Severance Tax Permanent Fund (STPF) was created by the New Mexico Legislature in 1973, as a way to save and invest the severance taxes not being used that year to bond capital projects.

Voters later approved constitutional protections for the STPF against legislative appropriation, which coupled with investment returns, allowed the fund to grow.

The State Investment Council is required by law to transfer 4.7% of the fund to the general budget each year, regardless of how much revenue flows into it. For the fiscal year 2014 budget, that amounted to $182 million.

With the bull market of recent years, the council has grown the fund through returns on investments. The returns raised the fund's value from $3.16 billion in 2008 to $4.43 billion last year. Despite the strong returns, the fund's total value remained about $400 million less than the pre-recession peak in 2007.

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