Bond 'swap' to shore up N.M. budget reserves

SANTA FE, N.M. -- It's an odd way to come up with cash.

But the complex bond transaction that helped resolve an impasse over New Mexico's budget crisis will free up $81 million in one-time money this year to help boost state reserves and avoid employee furloughs, officials say.

And while no one seems particularly enthusiastic about the deal, it was essentially all that the governor and lawmakers could agree on.

It means New Mexicans will borrow about $81 million this year to help finance public school construction -- rather than paying with short-term "sponge notes" that are essentially cash.

It also comes at a cost: The governor and state lawmakers gave up their ability to plow $81 million this year into their own capital projects -- such as improvements to senior centers, state prisons, water infrastructure and the computer system that makes campaign finance information available to the public.

At least some of those projects, presumably, will have to be paid for at some point, skeptics say, and forgoing them for now means the money won't flow into the state's construction industry this year.

The bond "swap," in any case, was one of the few budget measures that managed to win approval this year from both Republican Gov. Susana Martinez and the Legislature, where Democrats hold majorities in both chambers, as the state faced incredible financial pressure.

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The rating agencies that watch state finances have not yet weighed in on the budget package.

But Richard Anklam, president of the nonpartisan New Mexico Tax Research Institute, said the transaction is neither ideal nor unprecedented.

"I'm not a purist," he told the Journal, "and I'd rather do what they did if the alternative is rash and poorly thought-through spending cuts or tax increases. That said, we've kicked the can a couple of years in a row and the cupboards are really bare. Our reserves are almost non-existent, which is a bit scary despite the apparent budget optimism."

The state essentially took money that would go toward brick-and-mortar projects, he said, and used it instead to bolster general-fund reserves, where it could eventually be spent on employee salaries and other operating expenses.

John Hicks, executive director of the National Association of State Budget Officers, based in Washington, D.C., said there's "nothing inherently bad or wrong" with the transaction.

New Mexico clearly had a practice of using cash -- or "pay as you go" financing -- for some capital projects, but in tough times, the state decided to borrow the money instead by issuing bonds. And that's OK, Hicks said, as long as the debt is used to finance long-term assets, such as school buildings, as state officials say it will.

"It's just a simple matter of, 'We wanted to finance it with cash, but we can't now,'" Hicks said after reviewing the New Mexico legislation.

Giving up 'pork'
The transaction triggered intense debate in the New Mexico Senate, where skeptics described the transaction as poor fiscal policy. Some called it a roundabout way of borrowing to prop up this year's operating budget.

The Martinez administration, in turn, disputes that characterization. The measure was simply a way for lawmakers to give up their "pork projects" for a year to help the budget. The state was going to borrow the money anyway, in other words, but now it's doing it for public school buildings rather than "pork."

The debate comes as state finances are squeezed by a downturn in oil and gas prices -- a critical source of state revenue. There is broader weakness in the economy, too: New Mexico has had the worst unemployment rate in the nation for several months.

'One-time' money
The complexity has added to the intensity of the political debate.

Sen. John Arthur Smith, a Deming Democrat and chairman of the influential Senate Finance Committee, said he and his colleagues were willing to approve the proposal only as a compromise with the Republican governor, who pushed for the transaction.

Martinez vetoed a package of proposed tax and fee increases adopted by the Legislature.

But the proposal she did agree to, Smith said, is "one -time" money that won't help the state balance its budget in future years.

"It's like borrowing cash on your credit card," he said in an interview. "... It's bond money being used for operational purposes."

Furthermore, he said, the capital projects that legislators and the governor agreed to give up -- road projects and the like -- will cost more by the time the state gets around to doing them.

Stephanie Schardin Clarke, deputy cabinet secretary for the state Department of Finance and Administration, said the swap transaction was a sensible option to help the state rebuild its reserves and protect its credit rating, all without adding to New Mexico's overall debt level.

"Allowing cash on hand to shore up the state's reserves was the most fiscally responsible option available to the state," Clarke said in a written statement. "The swap increases the state's reserves by about 1.5 percent without adding a cent to the state's long-term planned debt. This step was essential to protect the state's bond rating and insulate critical government services from future budget cuts."

She said she doesn't think the swap "is the start of a trend." Lawmakers, in any case, need to take steps to ensure that the capital projects funded in future years are effective uses of state money.

"It is critical that legislators adopt capital outlay reform to ensure scarce capital outlay funding is targeted to projects that improve health and safety and promote economic development," Clarke said.

Bond rating awaits
Outside rating agencies haven't rendered an opinion yet.

David Hitchcock, a credit analyst and senior director at S&P Global Ratings, said his agency will examine New Mexico's latest budget to determine whether there's "structural balance" -- in other words, that there's ongoing revenue to cover ongoing spending. The state's debt levels, reserves and the accuracy of revenue projections are among the other factors that will be scrutinized before S&P issues a new bond rating, he said.

"Our main concern is sustainability," he said in an interview, speaking generally about S&P's approach.

The state endured a downgrade in its credit rating last year, with a negative outlook, though S&P still rated New Mexico about average for a state.

Tribune Content Agency
Budgets New Mexico
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