DALLAS — New Mexico will take bids Tuesday on about $220 million of severance tax bonds to fund hundreds of local projects, ranging from an animal carcass digester in Albuquerque to upgrades on the Toltec and Cumbres scenic railroad on the Colorado border.

The bond sale is an annual event following the New Mexico legislative session in which lawmakers divide severance tax revenue for a variety of bond projects in their districts.

Issuance of long-term senior severance tax bonds has varied slightly on a year over year basis, in the range of $100-$200 million, with the exception of some years when no capital bill is approved.

Recovering from the Great Recession in 2010, the legislature did not pass a capital outlay bill for fiscal year 2011. Last year, the legislature approved a relatively small $106 million.

Derived largely from oil and gas production, the severance tax revenues do experience some volatility based on market conditions. Revenues fell 32% in fiscal year 2010 and 26% in 2012.

With ratings of AA from Standard & Poor's and Aa1 from Moody's Investors Service, outlooks are stable.

"The ratings reflect the volatility of the pledged revenue stream, which consist primarily of taxes on the production of natural gas and oil in the state, offset by coverage levels in excess of the additional bonds test, requirements to maintain 12 months' debt service on deposit in the Bonding Fund, and the rapid payout of outstanding bonds," wrote Kenneth Kurtz, analyst at Moody's.

The high ratings and short maturities help attract interest from institutional investors averse to risk, according to Stephanie Schardin Clarke, director of the New Mexico Board of Finance.

"The state has a strong following of traditional bidding groups, and regularly receives 10 or more bids on its issues," said Schardin Clarke. "The bond structure is fairly straightforward, and a competitive sale offers the utmost transparency."

Fiscal Strategies Group of Berkeley, Calif., and Public Resources Advisory Group of Los Angeles serve as the board's financial advisors.

Brownstein Hyatt Farber Schreck acts as bond counsel and disclosure counsel.

The term of severance tax bonds is limited to 10 years, which provides comfort to investors who might be concerned about the economic life of the state's energy reserves, Schardin Clarke said.

The state also has a long-standing policy of issuing only 10% of legal capacity in any given year, which ensures that the tax base for repayment is not at any time overly-leveraged, she added.

State law creates an additional bonds test that limits the amount of new bonds that can be issued. That limit provides a ratio of at least two times coverage of debt service from pledged revenues.

"Investors will note that New Mexico Severance Tax Bonds are secured by a pledged revenue stream that is only available for payment of bond debt service," Schardin Clarke said. "Legal protections and policies prevent the dilution of that revenue stream."

In April, Gov. Susana Martinez authorized $218.1 million in severance tax bonds, vetoing $4.4 million. This year, more than 60% of the capital projects signed into law had a regional or statewide impact, according to Martinez.

"When capital outlay funds are used correctly, they can result in substantial construction projects that support small businesses and new hiring, and they can provide for an investment in infrastructure projects that stretch across local jurisdictions, which often times have price tags that local governments would not be able to afford on their own," Martinez said.

Martinez also noted that there were many fewer unfinished projects that required reauthorization of previous years' capital dollars.

"I am still disappointed, however, that so many legislators continued to use a grab bag approach to capital outlay," the Republican governor added. "Despite much talk about 'shovel ready' projects during the legislative session, legislators still included local projects in the bill that are anything but 'shovel ready.'"

Martinez said that there were still projects that were funded at far less than 10% of their total cost, meaning the funds could not be used in any useful way. Some projects that aimed to use 10-year bonds for will not serve a public use for that amount of time, she added.

Martinez said that lawmakers persisted in including projects that community officials, when asked, said that they did not need or want. Other projects might have qualified for a different form of funding that might be more appropriate, she said.

"When we invest wisely, better prioritize, and put a premium on construction projects that improve our infrastructure, we can put New Mexicans to work and maximize the impact of these bond dollars," Martinez said.

This year's projects include numerous centers for senior citizens across the state, juvenile justice facilities, mental health clinics, public safety facilities and improvements to local jails.

Some of the larger projects include $4.5 million for improvements to dams in Springer, N.M. and San Miguel County and $3.2 million related to water lines and wastewater infrastructure in Santa Teresa, N.M., home to a large international point of entry.

The bill provides $2.8 million to remove an inoperable carcass and tissue digester in Albuquerque and to replace it with a new one. The digester performs the ghastly task of chemically dissolving animal carcasses and tissue that might contain high-risk infectious disease.

The Toltec and Cumbres scenic railway that weaves through the Rocky Mountains between Northern New Mexico and Southern Colorado will get $850,000 to improve the tracks and steam locomotives to bring the tourist attraction up to federal standards.

Natural gas accounts for 37% of New Mexico's fiscal year 2013 severance taxes, with 58% from oil and 5% from coal production. Carbon dioxide, copper, potash, and other minerals account for the balance.

A decline in natural gas prices since 2009 is largely the result of increased national gas production due to new hydraulic fracturing technology, known commonly as "fracking."

Due to improvements in the national economy, New Mexico projects that natural gas prices will rise to $5.60 by 2016, and that natural gas severance tax receipts will rise to $174.7 million in fiscal 2016 from $152.6 million in fiscal 2013.

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