New Mexico’s recent rating assessment by Moody’s has become a focal point of discussion, particularly following the agency’s revision of its outlook on the state’s Aa2 rating from stable to positive. This shift, while seemingly an affirmation of New Mexico’s economic resilience, is also wrapped in noteworthy caveats that deserve a deeper analysis. The state’s economic landscape, underpinned by notable growth due to the oil and gas sectors, illustrates both potential and challenges.
The positive outlook from Moody’s pertains to approximately $521 million of the state’s outstanding general obligation bonds. This upgrade reflects an encouraging view that New Mexico’s robust financial management and the growth of its operating reserves and permanent funds will likely yield enhancements in its credit rating. The state’s financial discipline, characterized by maintaining operating reserves above 30% and reducing long-term pension liabilities, has certainly caught the attention of rating agencies. Wayne Propst, New Mexico’s Finance and Administration Department Secretary, emphasized these achievements, asserting that reducing the reliance on borrowing for capital projects while still investing in future needs is a formidable balancing act that the state has managed effectively.
However, it is essential to recognize that these accomplishments do not erase the underlying vulnerabilities. The term “economic concentration” mentioned by Moody’s reveals an important risk factor, as New Mexico remains heavily reliant on a single industry: oil and gas. Such dependency can expose the state to market volatility and price fluctuations, which can be detrimental when economic conditions shift abruptly.
A critical element influencing this outlook is the state’s revenue forecast. Recent projections reveal fiscal 2024 ending balances at a robust $3 billion, representing 31.7% of recurring appropriations. The anticipated growth in fiscal 2025 further illustrates this trend, with projected balances climbing to $3.5 billion. Given the current trajectory, one might be inclined to expect that the state is on solid ground. However, these projected figures stem largely from a favorable economic environment driven by high oil prices and significant consumer spending.
As noted in the revenue forecast, while growth remains impressive, it is crucial to note that the pace has decelerated compared to previous records. The shifts in the economic landscape can significantly impact these figures. For instance, last year’s decision to cap fluctuating fossil fuel revenues and channel excess funds into the Severance Tax Permanent Fund crystallizes the forward-thinking approach, yet it raises questions about the sustainability of this growth model.
Amidst the positive developments, Moody’s also downgraded ratings on select state transportation and severance tax bonds due to an updated ratings methodology. This duality presents a dichotomy, where an improving outlook on general obligations contrasts with a deteriorating assessment of certain bonds. The downgrades, which include the reduction of senior lien transportation tax revenue bonds from Aa1 to Aa2 and others, reflect vulnerabilities that could dampen investor confidence.
Nevertheless, Propst pointed out that these downgrades are anticipated to be temporary, hinged on the expectation of an upgrade in the overall state rating. The state administration’s decision to utilize general fund financing for public projects instead of increasing debt suggests a strategic maneuver to stabilize its economic footing. However, there remains a significant concern, as indicated by the sheer volume of unspent cash and bond financing allocated to around 5,600 projects, highlighting a dissonance between appropriation and actual spending.
New Mexico’s financial outlook presents a complex tapestry. While improvements in its credit rating outlook by Moody’s signal better days, corresponding bond downgrades serve as a reminder of the fragile underpinnings of this recovery. Building on the state’s fundamental strengths while mitigating excessive reliance on volatile sectors will be key in navigating future challenges.
The state must ensure that its optimistic financial posturing is matched with a diversified economic strategy, investment in infrastructure, and vigilant management of its capital resources. If New Mexico can strike this balance, it can solidify its standing in a diverse economic environment, potentially emerging stronger and more resilient when faced with unexpected financial headwinds.