Gov. Bill Richardson is turning to an obscure financial vehicle — “sponge bonds” – to help fix New Mexico’s budget problems without a tax increase, the Associated Press is reporting today.

The governor proposes to issue $135 million in short-term severance tax notes, called sponge bonds, to partly offset a budget deficit of more than $400 million.

First, a definition of “sponge bonds” is in order. Barry Massey of the AP obliges:  The bonds are related to the money the state receives when companies extract oil and natural gas from state-owned land.

One of the ways government raises money is by selling bonds against revenues that are expected to come in. Which is, at its simplest level, what the governor is talking about with “sponge bonds,” even though they are short-term notes.

Massey explains that:

The state can issue short-term notes using severance tax revenues that aren’t needed for debt service (paying off debt). Otherwise, the extra money flows into one of the state’s permanent funds and can’t be spent.

State officials call them sponge bonds because they are “sponging up” cash. The short-term notes would be sold to the state treasurer’s office and carry a low interest rate.

Richardson’s suggested use of “sponge bonds” appears to set up a couple of battles, one philosophical, one more practical and potentially nasty, as the governor’s negotiators continue to meet with representatives of the Legislature to figure out the best mix of spending cuts and revenue-generating tools to address this year’s budgetary shortfall.

The philosophical battle is one that observers of government, particularly governments facing difficult financial times, are familiar with.  Should a government bond to raise cash to pay for the state’s day-to-day operating expenses?

The respective positions in that debate come through loud and clear in Massey’s story as he quotes lawmakers and top Richardson officials.

“It is ill-advised to borrow money to pay your utility bill at home, and the state shouldn’t be borrowing money to fund operational expenses,” said Sen. John Sapien, D-Corrales.

But Richardson’s top budget official defended the proposal, saying the short-term severance tax notes differ from long-term bonds sold by the state to investors.

“It’s not debt. It’s a one-day bond,” said Katherine Miller, secretary of the Department of Finance and Administration. “The bonds are purchased and paid off in one day, so it’s as good as cash.

The other battle is more immediate, and involves the high-stakes politics that occur during each legislative session.

Massey notes that in New Mexico the bonds traditionally have financed brick-and-mortar projects such as construction of schools, parks, office buildings and roads.

I’ve also spoken to lawmakers who defend the use of money to pay for brick-and-mortar projects — capital improvements — at a time like this because the projects create jobs, albeit temporary jobs, as the state is suffering through a recession.

But there’s another angle here, and that is the tangible aspect of brick-and-mortar projects. By using “sponge bonds” to pay for the state’s operating expenses the state is removing some cash that would pay for such projects. Yes, as Massey notes, lawmakers see Richardson’s proposal as a big change because it would spend bond money for all government operations, not just agency activities connected to capital improvements.

But some lawmakers see it as something else. And that is an election-year calling card.

Whatever one thinks of such spending, one can see, feel and touch office buildings, roads, parks, although I wouldn’t recommend going around doing that. Most of what state government does is abstract to the voting public, but a park where your kids play ball is not. The same goes for much-needed roads in a high-growth area. That’s not to say that these projects are undeserving. Many are. My point is that projects are things that can be pointed to.

And state lawmakers know that.

Many, but not all, use such projects at re-election time to say to their constituents, “Look at what I have done for you.” It’s why many state lawmakers wait on pins and needles every legislative session to see how many of their projects make it onto the omnibus capital bill.

Do voters respond to such blatant appeals to self-interest? I’ve heard differing views. But some lawmakers think they do. And that is one among many things to remember as one follows the high-wire act of the state’s budget negotiations.