Recent developments in credit ratings have placed New Mexico in a spotlight, reflecting a blend of optimism and caution. Moody’s Investors Service has upgraded its outlook on New Mexico’s Aa2 credit rating from stable to positive, a shift that can be interpreted as a vote of confidence in the state’s fiscal management. This adjustment impacts a significant $521 million worth of outstanding general obligation bonds, suggesting that there is a measured expectation for long-term financial health in the state. However, this positive outlook doesn’t come without caveats, particularly concerning the state’s economic concentration risks.
This revised credit outlook indicates that Moody’s recognizes the state’s robust financial positioning, which includes substantial growth in operating reserves and permanent funds. Such attributes are crucial as they portray New Mexico’s commitment to proactive financial management and risk mitigation strategies. Nevertheless, while the boost in rating serves to elevate New Mexico’s appeal to investors and creditors, one must question whether the underlying risks tied to economic concentration—largely dependent on the volatile oil and gas sectors—can be adequately addressed in the long run.
Wayne Propst, the Cabinet Secretary for the New Mexico Department of Finance and Administration, articulated critical components that underscore the state’s strong fiscal governance. Propst points to the maintenance of operating reserves above the 30% threshold and a sustained effort to stabilize long-term pension liabilities as key achievements. Additionally, the state has strategically opted to finance projects through its general fund, thereby reducing the reliance on debt and future borrowing.
This prudent approach has not only bolstered the state’s financial standing but has also led to a significant reduction in revenue volatility from the oil and gas sectors. It reflects an impressive strategic vision aimed at improving New Mexico’s creditworthiness. Propst’s anticipation of a potential upgrade to Aa1 within the next 12 to 18 months ties directly to these disciplined financial strategies, reinforcing a commitment to a fiscally responsible approach in turbulent economic times.
The latest consensus revenue forecast for fiscal 2024 paints a promising, albeit cautious, picture of the state’s economic trajectory. With estimated general fund ending balances reaching $3 billion—equating to 31.7% of recurring appropriations—New Mexico is positioned relatively well. Furthermore, projections for fiscal 2025 anticipate even larger reserves at $3.5 billion or 34.8%. Yet, while these figures demonstrate resilience, they also hint at potential volatility, especially considering the historical dependence on the oil and gas sectors which, although showing record revenue growth, remain susceptible to market fluctuations.
The state’s proactive measures to cap volatile fossil fuel-related revenue entering the general fund—transferring excess to the Severance Tax Permanent Fund—illustrate a commitment to long-term sustainability. This move may help cushion the state against future economic shocks, ensuring that robust fiscal foundations can absorb market swings effectively.
Not all signs point toward sustained growth, however. Recent changes in methodology by Moody’s led to downgrades in specific transportation and severance tax bonds. Ratings for approximately $166 million of senior lien transportation tax revenue bonds were dropped from Aa1 to Aa2. Similarly, senior lien severance tax bonds saw downgrades from Aa2 to Aa3, while subordinate lien severance tax bonds fell to A1 from Aa3. These adjustments highlight the creeping caution within the credit environment, signaling that while the overall outlook is positive, specific areas of vulnerabilities cannot be ignored.
Propst suggests that the downgrades could be temporary and contingent upon improvements in broader economic conditions and rating assessments. Still, the existence of nearly $6 billion in unspent cash and bond funding across about 5,600 projects presents a paradox. State officials express concern that the high number of appropriated projects outpaces spending and project closures, creating a bottleneck in effective investment.
The challenges faced by New Mexico are also mirrored in its urban centers, where recent downgrades of Santa Fe and Albuquerque’s bond ratings reflect broader economic concerns. With Santa Fe’s general obligation and gross receipts tax bonds downgraded to AA from AA-plus and Albuquerque facing a similar fate, the stability of local funding mechanisms warrants scrutiny.
While the overall sentiment for New Mexico’s financial future glimmers with potential, it also serves as a reminder of the need for diligent fiscal strategies and adaptive management. Only time will determine whether the positive credit outlook fully materializes into long-term economic stability for the state and its municipalities. As New Mexico strives for balanced growth, the importance of prudent governance and strategic foresight cannot be overstated.