Moody’s gives New Mexico a positive GO outlook, downgrades other bonds

Moody’s Ratings revised its outlook on New Mexico’s Aa2 rating to positive from stable, while downgrading ratings on certain state transportation and severance tax bonds in the wake of a methodology update review. 

The positive outlook, which affects $521 million of outstanding general obligation bonds, reflects Moody’s view that “the state’s strong financial position, reflected in recent growth of operating reserves and permanent funds, will drive an improvement in its credit rating despite underlying risks of economic concentration,” the rating agency said Friday.

Wayne Propst, cabinet secretary for the New Mexico Department of Finance and Administration, said Moody’s recognized the state’s strong fiscal governance, including the maintenance of operating reserves above 30%, stabilization of long-term pension liabilities, as well as a lower dependence on additional borrowing by financing projects through the general fund, “all while investing billions in the state’s permanent fund balances for future needs.

“This has significantly reduced volatility in the state’s revenue from oil and gas and stabilized the medium-term revenue forecast,” he said in a statement, adding the state anticipates an upgrade to Aa1 in the next 12 to 18 months. 

New Mexico’s latest consensus revenue forecast released in August estimated fiscal 2024 general fund ending balances at $3 billion or 31.7% of recurring appropriations and projected $3.5 billion or 34.8% ending balances for fiscal 2025. 

“The state’s historic revenues have grown at a record pace propped up by booming oil and gas, durable consumer spending, inflation, strong demand for employment, and robust wage growth,” the forecast said, adding while the pace slowed in fiscal 2024, it was double the average growth rate of the previous two decades.

Last year, the state took action to cap the amount of certain volatile fossil fuel-related revenue flowing into the general fund, transferring the excess to the Severance Tax Permanent Fund starting in fiscal 2025. 

A review spurred by an update to Moody’s rating methodology specifically pertaining to special tax bonds led to downgrades to Aa2 from Aa1 for $166 million of New Mexico’s senior lien transportation tax revenue bonds, Aa3 from Aa2 for $916 million of senior lien severance tax bonds, and A1 from Aa3 for $8.9 million of subordinate lien severance tax bonds.

Propst said the downgrades are expected to be temporary, noting that an upgrade in the state’s rating would return the severance tax bond rating to Aa2.

“Given that the state intends to continue financing public projects with (the) general fund instead of borrowing for the foreseeable future, the adjustment should have no impact on New Mexico,” he added.

An August quarterly report showed nearly $6 billion in unspent cash and bond funding across about 5,600 projects. That amount is “quite high,” state capital outlay analyst Cally Carswell told the New Mexico Legislative Finance Committee in August.

“The most basic reason is 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,” she said.

Criteria changes at Fitch Ratings led to the downgrade of Santa Fe’s general obligation and gross receipts tax bonds to AA from AA-plus last week, following Albuquerque’s downgrade to AA from AA-plus in August. The outlooks on the cities’ lower ratings are stable.