Recently, Moody’s Ratings has made significant changes to New Mexico’s credit ratings that deserve scrutiny and analysis. The agency revised the outlook on the state’s Aa2 rating to “positive” from “stable,” an important move that impacts roughly $521 million of outstanding general obligation bonds. This shift in outlook isn’t merely a result of a numerical reassessment but is reflective of a broader context—a recognition of New Mexico’s financial resilience. Notably, the improvements are grounded in the state’s enhanced operating reserves and permanent fund growth, alongside acknowledgment of risks related to economic concentration. This move stands as a testament to the state’s robust management practices, but it also challenges stakeholders to consider how sustainable these positive trends will be in the face of evolving economic dynamics.
Wayne Propst, the cabinet secretary for New Mexico’s Department of Finance and Administration, emphasized the substantial factors contributing to this upbeat rating. The state’s governance has worked effectively to ensure operating reserves consistently exceed 30%. This safeguard, coupled with proactive measures to stabilize pension liabilities and minimize reliance on borrowing, showcases New Mexico’s commitment to fiscal responsibility. Propst’s assertion that the state might achieve an upgrade to Aa1 within the next 12 to 18 months signals cautious optimism. However, stakeholders must consider that while hope is warranted, a credit rating is not solely an affirmation of past achievements but a forecast of future performance.
Examining New Mexico’s revenue forecasts provides further insight into the state’s financial state. The latest consensus revenue forecast predicts general fund ending balances to be around $3 billion for fiscal 2024, representing 31.7% of recurring appropriations, with projections increasing to about $3.5 billion—or 34.8%—in fiscal 2025. Such numbers indicate an enviable position, shaped significantly by the booming oil and gas industry, consistent consumer spending, and favorable labor market conditions. However, the forecast also notes a notable deceleration in revenue growth for fiscal 2024, which, while still robust compared to prior decades, requires a careful examination of the underlying economic forces.
Long-term Sustainability and Strategy
One bold move by the state includes the recent decision to cap volatile fossil fuel revenues flowing into the general fund, redirecting excess funds to the Severance Tax Permanent Fund starting in fiscal 2025. This change emphasizes a strategic shift towards ensuring long-term sustainability that mitigates the risks of economic dependency on fossil fuels—an imperative given that such revenue streams can be unpredictable. While this decision may enhance fiscal stability in the long run, it is crucial for stakeholders to adapt to these changes actively and to evaluate the ongoing economic implications of reduced immediate revenues from this sector.
However, amidst the positive outlook, challenges remain rooted in a methodology update by Moody’s. This led to downgrades in specific state transportation and severance tax bonds. Notably, the ratings for transportation tax revenue bonds dropped from Aa1 to Aa2, while severance tax bonds saw a decline from Aa2 to Aa3. Propst assures that these downgrades are expected to be temporary; they are tied to the motion of choosing general fund financing over borrowing for public projects in the foreseeable future. Very importantly, the groundwork laid with almost $6 billion in unspent cash across thousands of projects indicates a pressing need for strategic prioritization in partnerships with state officials and stakeholders alike.
Broader Implications
As cities within the state also experience rating adjustments—such as Santa Fe and Albuquerque—it’s clear that the ripple effects of financial decisions affect both municipalities and the overarching state governance. The shift in ratings reflects broader economic realities that demand scrutiny of how effectively states and cities can balance ambitious projects with the fiscal discipline necessary to sustain growth.
New Mexico stands at a crossroads, armed with a positive outlook but facing multifaceted challenges. The state’s financial trajectory is promising but contingent upon continued vigilance in fiscal governance, adaptability to economic shifts, and effective management strategies to leverage its resources for sustainable growth. Stakeholders must remain engaged in not only celebrating achievements but also fortifying New Mexico against the uncertainties that always accompany economic fluctuations.