New Mexico's Fiscal Resilience: Moody's Positive Outlook and Ratings Adjustments

In a significant move, Moody's Ratings has revised its outlook on New Mexico's Aa2 rating to positive from stable, recognizing the state's strong financial position and prudent fiscal governance. This development comes alongside the downgrading of ratings on certain state transportation and severance tax bonds, following a methodology update review by the rating agency.

Unlocking New Mexico's Fiscal Strength

Positive Outlook Reflects Robust Reserves and Permanent Funds

Moody's positive outlook on New Mexico's $521 million in outstanding general obligation bonds underscores the state's financial resilience. The rating agency cited the state's "strong financial position, reflected in recent growth of operating reserves and permanent funds," as the driving force behind the potential credit rating improvement. This growth in reserves and permanent funds has helped mitigate the inherent risks associated with the state's economic concentration, positioning New Mexico for a brighter fiscal future.

Prudent Fiscal Governance Earns Praise

Wayne Propst, the cabinet secretary for the New Mexico Department of Finance and Administration, highlighted the state's commitment to sound fiscal management. Moody's recognition of New Mexico's maintenance of operating reserves above 30%, stabilization of long-term pension liabilities, and reduced reliance on additional borrowing for financing projects through the general fund have all contributed to the positive outlook. Propst noted that these measures have "significantly reduced volatility in the state's revenue from oil and gas and stabilized the medium-term revenue forecast."

Anticipated Upgrade to Aa1 within 18 Months

The state's fiscal prudence has not gone unnoticed, as Propst expressed optimism about a potential upgrade to Aa1 within the next 12 to 18 months. This anticipated upgrade underscores the state's commitment to maintaining a strong financial position and its ability to navigate the challenges posed by its economic concentration.

Robust Revenue Forecasts and Diversification Efforts

New Mexico's latest consensus revenue forecast, released in August, paints a promising picture for the state's fiscal future. The forecast estimates fiscal 2024 general fund ending balances at $3 billion, or 31.7% of recurring appropriations, and projects $3.5 billion, or 34.8% ending balances for fiscal 2025. This growth in revenues has been fueled by a combination of factors, including booming oil and gas, durable consumer spending, inflation, strong demand for employment, and robust wage growth.To mitigate the volatility associated with its reliance on fossil fuel-related revenue, the state has taken proactive steps. Last year, New Mexico capped the amount of certain volatile fossil fuel-related revenue flowing into the general fund, diverting the excess to the Severance Tax Permanent Fund starting in fiscal 2025. This move aims to stabilize the state's revenue streams and ensure long-term fiscal sustainability.

Temporary Downgrades in Specialized Bonds

While the overall outlook for New Mexico's credit rating is positive, Moody's has downgraded ratings on certain state transportation and severance tax bonds. These downgrades, from Aa1 to Aa2 for senior lien transportation tax revenue bonds, Aa2 to Aa3 for senior lien severance tax bonds, and Aa3 to A1 for subordinate lien severance tax bonds, are a result of Moody's updated rating methodology specifically pertaining to special tax bonds.Propst, however, has reassured that these downgrades are expected to be temporary, noting that an upgrade in the state's overall rating would restore the severance tax bond rating to Aa2. He emphasized that the state's intention to continue financing public projects through the general fund, rather than relying on additional borrowing, will mitigate the impact of these temporary downgrades.

Unspent Funds and Project Backlog

An August quarterly report revealed a significant amount of unspent cash and bond funding across approximately 5,600 projects in New Mexico, totaling nearly $6 billion. This substantial backlog of unspent funds has raised concerns, with state capital outlay analyst Cally Carswell noting that "the amount we're appropriating to these projects and the number of projects we're appropriating keep growing at a faster rate than spending and project closures."The state's ability to effectively manage and deploy these substantial resources will be crucial in ensuring that the benefits of its fiscal strength are realized through tangible infrastructure improvements and economic development initiatives.

Ratings Adjustments in Neighboring Cities

The fiscal landscape in New Mexico extends beyond the state level, with Fitch Ratings also making adjustments to the credit ratings of neighboring cities. Santa Fe's general obligation and gross receipts tax bonds have been downgraded from AA-plus to AA, while Albuquerque's rating has been lowered from AA-plus to AA. However, the outlooks on these lower ratings are stable, indicating a more stable fiscal footing for these municipalities.These rating changes underscore the broader trends and challenges facing local governments in the region, and New Mexico's ability to navigate these dynamics will be crucial in maintaining its overall fiscal resilience.