CHAPTER 6

Government & the NM Economy

Chapter Advisors

Many thanks to the advisors for this section: Jerry Harrison, New Mexico Health Resources; Ruth Hoffman, Lutheran Advocacy Ministry-New Mexico; Bill Jordan, Voices for Children-New Mexico; Jim Peach, New Mexico State University; Mike Puelle, Associated General Contractors-New Mexico; David Williams, Office of U.S. Senator Tom Udall.


The Federal Government’s Role in New Mexico’s Economy

New Mexico’s reliance on federal government dollars is a double-edged sword. On one hand, New Mexico has grown and prospered from federal government investment in our state. Thousands of federally funded jobs and contracts contribute enormously to our state’s tax base through the national labs, military bases and healthcare services. On the other hand, over-reliance on any single source is not healthy for an economy. For decades, lawmakers and community leaders have urged the state to reduce our reliance on federal funding. So the question remains: How can we diversify sensibly while leveraging existing federal dollars to spur more economic growth?

Government’s Historic Military Role

Since 1846 when General Stephen Kearney captured Santa Fe in the war with Mexico, New Mexico has felt the significant presence and influence of the federal government. This presence shaped not only our economy but our way of life.[1]

Later, World War II resulted in a significant build-up of federal facilities and programs, starting in 1943 when the federal government built Los Alamos as the center for atomic research. These activities led to the September 1945 move of some units from Los Alamos Laboratory to Sandia Base. This move was the predecessor of Sandia National Laboratories. These military activities contributed to the establishment of the Holloman, Kirtland and Cannon Air Force Bases near Alamogordo, Albuquerque and Clovis as well as White Sands Missile Range and Fort Bliss Army Base.

Government’s Role Today

Some 70 years later, the federal government unquestionably plays an enormous role in New Mexico’s economy. The state has experienced considerable growth in federal spending, now up to $29.2 billion.[2] New Mexico is ranked as the most dependent state on federal investments, with federal spending accounting for over 37 percent of state revenue.[3]

New Mexico receives substantially more federal dollars than it contributes. For every dollar we pay in taxes to the federal government, New Mexico receives over three.[4] On one hand, this $3.60 to $1 ratio reinforces the need to diversify our economy so we are less reliant on government spending. On the other hand, government investments unquestionably create economic opportunities. The federal government is a major employer in New Mexico, creating about a quarter of our jobs.[5]

According to the New Mexico Legislative Jobs Council, the state has the potential to add 9,421 new jobs in the government sector by 2023, presuming removable barriers in the areas of leadership, capital and access to a qualified workforce are lifted.[6] Jobs in the government sector include local, county, state and federal government positions.

Annual federal spending in New Mexico amounts to over $14,000 per person, yet (as noted previously in this report) more of our population lives in poverty than almost anywhere in the country.[7] Federal spending can be divided into four categories:[8]

  • Individual Benefits – benefits payments to individuals. Includes Social Security retirement, survivor and disability payments, veterans’ benefits, Medicare, Medicaid, food assistance, unemployment insurance payments, student financial aid and other federal retirement, disability and assistance payments
  • Grants – funding to state and local governments for a variety of programs including healthcare, transportation, education, housing, funding for individuals (e.g. Pell grants), and other nonfederal entities, such as research grants
  • Contracts – contracts for purchases of goods and services, from military and medical equipment to information technology and catering services
  • Salaries and wages for federal employees – includes those employed at our national labs, military bases, veterans’ hospital and Indian Health Service (IHS) facilities

Almost half of federal spending in New Mexico goes toward benefits payments to individuals and a quarter is for government contracts. However, the economic impact of federal funding extends beyond the individuals or groups that receive that directly. For example, individual medical benefits result in healthcare providers and hospitals being paid for their services and staying in business. Likewise, New Mexico businesses and entrepreneurs rely on government contract funding received directly by our national labs and military bases, allowing them to be active consumers in our economy. In turn, healthcare providers, businesses and their employees purchase goods and services in the community.

Diversifying Government Contractors

As the previous chart notes, one quarter of New Mexico’s federal funding comes from contracts with federal agencies. A substantial portion of the contracts are with the U.S. Department of Defense (DOD). The DOD budget and funding priorities can fluctuate greatly. In anticipating these fluctuations, the DOD makes funds available to help government contractors diversify their funding sources so they are not as fiscally dependent on DOD contracts. The Defense Industry Adjustment Fund, which includes $1.6 million of committed state money, is anticipated to pay for a multi-year program that began earlier this year.[9]

In the case of a budget downturn, one way to prevent New Mexico from losing the businesses contracted with the national labs is to help them transition to a private sector-oriented business model.[10] While the DOD may always be the labs’ primary customer, the labs’ ability to agilely transition to commercially viable work not only increases the likelihood they would continue to thrive under a federal budget cut, but also diversifies the economies of the communities in which they are located.[11]

In 2005, community leaders from around the state convened at a New Mexico First town hall to find ways to reduce the state’s reliance on federal funding and create a more diversified New Mexico economy.[12] Considerable progress has been made toward these goals, but there is more to do. Key ideas included:

  • Accelerate the creation of entrepreneurial private sector and nonprofit entity spin-offs from work done at our national labs and facilities. This would include expanding effective business assistance programs and entrepreneurial incubators and reducing regulations that are impediments to entrepreneurial efforts.
  • Expand the mission of the national laboratories to develop new technologies in the areas of alternative energy sources, telecommunications, health and desalination of water that would also meet the mission of other federal agencies. This broader mission would allow the labs, entrepreneurs and businesses to work with and tap into the resources of federal agencies other than DOD.
  • Create and empower a public-private coalition of experts to determine economic sectors that best contribute to New Mexico’s growth based on our resources and strengths. The coalition would also structure an investment strategy to recruit and expand businesses.
  • Align higher education funding and mission specialization with identified industries that would contribute to New Mexico’s economic growth. This includes awarding state funded scholarships for emerging and critical professions in New Mexico (e.g. science, math and technology) on the condition that graduates work in New Mexico for a specified time.

Changing Role of Federal Healthcare Dollars

Just as the federal government is the major funder for our national labs and military bases, Washington is also the major funder for healthcare benefits and services in New Mexico. Healthcare and educational services industries are projected by the New Mexico Department of Workforce Solutions to be the largest growing job sectors over the next decade.[13] New Mexico’s healthcare industry employs over 140,000 people, most of them working in the private sector as doctors, nurses and other healthcare professionals.[14]

“Getting families and children access to health insurance not only helps families, it helps our schools, healthcare system and economy,” said Erik Lujan of Native American Professional Parent Resources and member of Taos Pueblo.

However, expanded insurance means the state needs more healthcare professionals. The goal to expand the healthcare workforce is a widely supported state priority with major economic development impacts.[15] Thirty-two of New Mexico’s 33 counties, including Bernalillo, have a shortage of primary, dental and mental health providers.[16] New Mexico has established infrastructure for educating and training healthcare providers. The state now has two universities (UNM and NMSU) together preparing a wide array of healthcare providers including doctors, nurse practitioners, physician assistants and pharmacists. Additional campuses in New Mexico train nurses and healthcare technicians.

These activities grow the workforce needed for families, but they also influence efforts to recruit businesses, industries and professionals to move to New Mexico. Access to a full range of healthcare providers and services can make a difference in whether they move to and stay in New Mexico.[17]

New Mexico’s Medicaid Funding Shortfall

For the reasons above, most people agree that all New Mexicans need health insurance. The federal Medicaid program addresses this need for low-income people. Medicaid insures 850,000 New Mexicans, more than one-third of the state’s population. About 250,000 of those people are newly enrolled in Medicaid since 2014.[18] Financing this program is a complex and immediate problem that will take the work of expert groups of diverse stakeholders to find and promptly implement effective, long-term solutions.

In 2016, the legislature and governor – facing a serious state budget shortfall triggered in part by falling oil prices – reduced the 2017 Medicaid budget by $86 million.[19] However, because Medicaid is funded mostly by the federal government with a smaller state match, New Mexico’s $86 million budget cut creates an actual cut of over $400 million.[20] When the state reduces its contribution, the federal government portion is automatically lowered proportionately.

The Affordable Care Act (ACA) allowed states to expand Medicaid coverage to more people, thus reducing the rate of uninsured. There is a perception among some that the Medicaid expansion caused New Mexico’s current budget problems. According to the University of New Mexico (UNM) Bureau of Business and Economic Research (BBER), this is not the case. Instead, Medicaid expansion through the ACA is actually generating revenues.

The Medicaid program, including its post-ACA expansion, currently covers more than its costs and is projected to continue covering its costs beyond 2020 when the state’s match rises to 10 percent. (The federal government will assume 90 percent of Medicaid expansion program costs from 2020 forward.) Medicaid is also generating General Fund revenue for a net gain through fiscal year 2021 of $316 million.[21]

Possible solutions to the state budget shortfall include cutting spending across the board for Medicaid services, requesting a supplemental appropriation for the 2017 budget, reducing reimbursement rates, rescinding physician rate increases and rates paid to hospitals, instituting a hospital and physician fee on the volume of services charged under Medicaid, and increasing reimbursement for services provided in rural areas.[22] It has been suggested that all of these options plus additional yet unknown solutions should be explored together in a comprehensive way for the long-term solvency of the Medicaid program in New Mexico.

Public-Private Partnerships

The previous sections looked at how we spend or rely on federal dollars. This section looks at different options to weave together different types of dollars (federal, state and private) into public projects. New Mexico faces a growing need to build and maintain critical infrastructure – everything from roads, transportation and water systems, broadband infrastructure, energy transmission, courthouses, healthcare facilities and schools – but with limited and shrinking government funding to do the job.

Many people point to public-private partnerships (P3s) as a possible strategy for providing New Mexico additional financing opportunities for infrastructure development, creating efficiencies, and sparking innovation that can also lead to cost savings.[23]

P3s are agreements between public agencies (federal, state and/or local) and private sector entities that allow delivery of a public service or facility for public use. Through this agreement, the skills and assets of each sector (public and private) are shared as are the risks and rewards in the delivery of the service or facility.[24]

Whether a bridge, a water system, a hospital or some other public need, P3s can be used to finance different elements of a project including: [25]

  • Design and build phases
  • Operate and maintain phases
  • Some combination of the above

P3 proponents argue that in addition to injecting financial resources, private sector involvement potentially reduces costs, project delivery time and public sector risk and may also improve project selection and project quality.[26] While P3s are designed to provide private capital for public projects, they also contribute the ingenuity and entrepreneurship of the private partners.[27]

On the other hand, opponents argue that P3 potential is limited, that private funding will substitute for public resources with no net gain to the public.[28] Additional concerns include loss of public control, private sector profits at the public’s expense, loss of future revenues, risk of private sector bankruptcy or default that falls back to the taxpayer, loss of accountability and transparency, environmental and labor-management concerns, use of out-of-state or foreign companies and specific contract terms.[29]

Thirty-three states (along with the District of Columbia and Puerto Rico) have enacted by statute P3 enabling legislation. New Mexico’s neighboring states of Arizona, Colorado, Texas and Utah have P3 enabling legislation designated primarily for transportation purposes.[30] New Mexico P3 enabling legislation has been introduced in recent years, but has not yet passed the state legislature.

Ultimately, changes in federal law encourage the creation of P3s at the state and local level.[31] Increasingly, federal grants require a larger portion of state and local matching funds and require that P3 agreements be part of grant proposals. Partly in response to this development, the Bipartisan Policy Center (BPC) last year developed model P3 legislation based on its review of best practices nationwide. The model legislation helps to address concerns about P3s and allows each state to tailor its legislation according to its needs and circumstances.

Key Components of the P3 Model Law[32]

  • Enable P3s for a wide range of public projects in addition to transportation projects. Examples include roads, bridges, storm water management, broadband, energy transmission, schools or courthouses.
  • Create a state office dedicated to providing P3 expertise, standardized procurement processes and assistance. The office would be a resource for all state, county and municipal agencies and departments unfamiliar with alternative methods of funding projects. This office would conduct ongoing public and stakeholder engagement as well as promote transparency and information sharing.
  • Standardize and promote best practices. Create a P3 Guidelines Task Force with members representing all tiers of government within the state as well as public consumer and private stakeholders. The task force would recommend the governing, guidelines for solicitation, evaluation, award and delivery of P3 projects. Task force meetings would be public meetings. The task force would make recommendations based on significant input from the public and interested stakeholders.
  • Protect the public interest. Public interest would include a process for education and input in the development of P3 projects. It would also require an evaluation of the life-cycle costs and benefits of a potential P3 project. Before an agreement is signed, recommends the BPC, there must be compatibility between public interests and private funders, as well as evidence that costs and benefits of the P3 have been assessed and disclosed.

P3 Case Studies

 

States with P3 Legislation for Transportation. Source: Bipartisan Policy Center 2015 

Though the state does not have P3 enabling legislation, some P3s have taken place in New Mexico. Below are examples from New Mexico and elsewhere.

Highway Construction – Santa Fe, NM

  • Contract for NM 44 Highway Construction Program, 1999[33]
  • Public sector partner: New Mexico State Highway and Transportation Department
  • Private sector partner: Mesa Development Corporation

The contract for the NM Corridor 44 construction used a P3 to create a new model for joint public-private design and accelerated construction, a new class of public finance investment, and introduced “long-term warranties” for these types of projects to the nation. This warranty guaranteed the public a road performance level that could not be achieved through traditional means. The state and New Mexico taxpayers realized a savings of $89 million though this P3.

Renovated and Improved Parks Space – Grants, NM

  • Parks maintenance, 2001[34]
  • Public sector partner: Grants municipal government
  • Private sector partner: Operations Management International, Inc. (OMI)

Through this collaboration, Grants was able to remodel an abandoned fire station for a new parks office, replace 375 sprinkler heads in local parks, install new wind screens at softball fields, repair and repaint concession stands and improve the appearance and safety of the youth football field. OMI is providing a higher degree of service at the same cost the city was paying previously.

New Medical School in New Mexico – Las Cruces, NM

  • Burrell College of Osteopathic Medicine at New Mexico State University, 2016[35]
  • Public sector partner: New Mexico State University (NMSU)
  • Private sector partner: The Burrell Group, LLC

Scheduled to open in June 2016, Burrell College of Osteopathic Medicine (BCOM) is a private, free-standing medical college that is not a part of NMSU, but is closely affiliated with NMSU.[36] BCOM’s 80,000-square-foot newly constructed building is located on the NMSU campus.

The goal of BCOM is to increase the number of doctors for rural and underserved New Mexico communities. However, barriers like the limited number of physician residency slots in New Mexico or nationally present practical challenges that must be overcome.

New Mass Transit Rail System – Denver, CO

  • Regional Transportation District (RTD) FasTracks Commuter Rail Lines, 2010[37]
  • Public sector partner: Regional Transportation District
  • Private sector partners: Kiewit Infrastructure, Regional Rail Partners, Plenary Roads Denver and others[38]

Once complete, the project will bring 47 miles of new rail to the RTD system, more than doubling its existing light rail holdings. The initiative is projected to create more than 10,000 construction jobs during the peak construction period and bring tourists and other money into the regional economy.

Project funding for FasTracks is derived from a combination of funding sources, including a voter-approved sales tax increase, municipal revenues, federal funding and P3 investment.

New School, Housing and Community Space – Washington, DC

  • James F. Oyster Bilingual Elementary School, 1993[39]
  • Public sector partners: DC Public Schools, DC Municipal Government
  • Private sector partner: LCOR Incorporated

Through the P3, a new, state-of-the-art 48,000-square-foot building and an adjacent 211-unit apartment building were constructed at no cost to taxpayers. Community areas, exterior playgrounds and parking areas included in the P3 also contribute to the current, more efficient use of the site.

The partnership between DC Public Schools, the DC government and LCOR, Inc., a national real estate development company, allowed for alternative financing sources to complete the project, exceeding community expectations in the process.

Options and Intersections

This chapter offers several ideas for further discussion. To what degree should our state strive to become less reliant on federal government dollars? Or should we aim to continue to grow this segment of our funding base? (Or is it a bit of both?) How might we best leverage existing federal funds to spur and sustain a diverse, vibrant economy? What can we do to accelerate and support the creation of entrepreneurial private sector and nonprofit entity spin-offs from work done at our national labs and facilities? Should New Mexico pass P3 legislation? If so, what how might a New Mexico model addresses key infrastructure needs, while considering proponents’ and opponents’ views and concerns?

These questions are also influenced by other sections in this report. As noted above, industry diversification goes hand-in-hand with discussions about New Mexico’s reliance on federal dollars. (Ch. 4) And a large portion of federal contractors are also small business owners. The tech transfer opportunities associated with research at the labs and other federal facilities are great, but they rely on a healthy entrepreneurial culture and the systems infrastructure to support it. (Ch. 3) Consideration of P3s is especially important to rural and tribal areas where infrastructure needs are significant. (Ch. 5) And the changing role of federal dollars in the healthcare industry links directly to the concerns of New Mexico’s low-income population. (Ch. 1)


Chapter Endnotes

Short reference sources below; complete citations in the bibliography.

[1] (Reynis, Grassberger and Norton 2005)
[2] (The Pew Charitable Trusts 2016, p. 6)
[3] (Kiernan 2015)
[4] (Kiernan 2015), (IRS 2015)
[5] (Morales 2010)
[6] (New Mexico Jobs Council 2014, p. 1 )
[7] (Henry J. Kaiser Family Foundation 2015)
[8] (The Pew Charitable Trusts 2016, p. 6)
[9] (Knighten, 2016)
[10] (Dekker, 2016)
[11] (Knighten, 2016)
[12] (Reynis, Grassberger and Norton, 2005)
[13] (NM Department of Workforce Solutions 2015, p. 6)
[14] (Harris 2015, p. 14)
[15] (NM Health Care Workforce Committee 2015)
[16] (NM Department of Workforce Solutions 2015)
[17] (Heinriks 2016)
[18] (Krasnow 2016), (DeMarco 2016)
[19] (Krasnow 2016)
[20] (DeMarco 2016)
[21] (Reynis 2016)
[22] (Krasnow 2016)
[23] (National Conference of State Legislatures 2016)
[24] (Meyer 2012)
[25] (National Conference of State Legislatures 2016)
[26] (Mallett 2014)
[27] (Sandy Apgar 2012)
[28] (Mallett 2014)
[29] (National Conference of State Legislatures 2016)
[30] (Association for the Improvement of American Infrastructure 2015)
[31] (Mallett 2014)
[32] (Bipartisan Policy Center 2015)
[33] (National Council for Public-Private Partnerships 2016)
[34] (National Council for Public-Private Partnerships 2001)
[35] (Domrzalski 2014)
[36] (Burrell College of Osteopathic Medicine n.d.)
[37] (Meyer 2012)
[38] (Whaley 2014)
[39] (Meyer 2012)

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