DALLAS – S&P Global Ratings on Thursday downgraded New Mexico's general obligation bond rating to AA from AA-plus and retained a negative outlook.
The move comes two weeks after Moody's Investors Service lowered the state's triple-A rating to Aa1 and also maintained a negative outlook.
"The downgrade follows what we believe will be a sustained decline in general fund balances due to weak revenue trends because of declines in the oil and gas industry and slow federal employment growth," said S&P Global Ratings credit analyst David Hitchcock.
In a special session of the Legislature in September, lawmakers closed a large mid-year budget deficit, leaving the state with a projected general fund balance of just 1% of recurring appropriations at the end of the fiscal year June 30.
"While Gov. Susana Martinez has indicated an intention to pursue measures to raise reserves to 5% of recurring appropriations by the end of fiscal 2017, we believe reserves will continue to trend significantly lower
than the 10% level targeted in earlier years," Hitchcock said. "At the same time, future budget balancing efforts in fiscal years 2017 and 2018 will be constrained by already realized reduction in revenue."
Fiscal year 2016 ended with an unbudgeted drawdown in general fund budgetary balances to 2.4% of recurring appropriations, from 11.6% the year before, Hitchcock noted.
"Despite the drawdown in balances, a majority of the corrective budget actions in the recent special session consisted of ongoing appropriation reductions," Hitchcock said. "However, we have assigned a negative outlook reflecting a one-in-three chance that we could take further downward rating action over our two-year outlook horizon if continued revenue decline resulted in significant nonrecurring budget balancing measures."
As one of the states hardest hit by the downturn in oil prices, New Mexico has struggled to match spending to revenues.
Despite moderate debt and rapid amortization, New Mexico's low per capita income, concentration of employment in the federal government and energy sectors darken the outlook, according to S&P.
"Also of note is a financial audit opinion disclaimer relating to inconsistent recognition of interagency transactions," Hitchcock added.
"New Mexico comprehensive annual financial reports have typically been released a year or more after fiscal year-end, which we view as delayed," he said.
"Although our rating anticipates that New Mexico will adjust its budget to maintain structural balance, as it has done historically, the negative outlook reflects the possibility the rating could be further pressured if continued slow economic growth, declining energy prices, and cost pressures significantly reduced revenue during our two-year outlook horizon."
