DALLAS — Moody's Investors Service on Friday lowered its general obligation bond rating on Santa Fe, N.M., to Aa3 from Aa2, citing the state capital's underfunded pensions.
The downgrade affects $17.1 million of outstanding debt.
The ratings on Santa Fe's GO, gross receipts tax, and water system debt were placed on review for downgrade in April due to the city's large adjusted net pension liability relative to its rating category.
"Increases in employer contributions could further stress the city, which already has high fixed costs as a percentage of the annual budget," wrote analyst John Grayson Nichols, lead author of the report with analyst Thomas Aaron. "The Aa3 also reflects the city's modest debt burden."
Moody's Aa3 senior and A1 subordinate gross receipts tax ratings have been confirmed, affecting $55.7 million in outstanding debt. The city's water utility system revenue bonds have also been confirmed at Aa2, affecting $38.8 million of outstanding debt. The outlook on the city's entire debt portfolio was revised to stable.
Santa Fe was among 29 issuers placed on Moody's watch list in April for possible downgrades due to the ratings agency's new methodology for analyzing public pension liabilities.
The Moody's action reflected the agency's view that "pension obligations are a significant source of credit pressure for governments and warrant a more conservative view of the potential size of the obligations."
Standard & Poor's rated the city's gross tax-receipt bonds AA with a stable outlook in advance of a $14 million refunding deal in June. Fitch Ratings issued its AA-plus rating with a stable outlook.
"The continuance of solid reserves remains integral to maintaining the city's high-grade credit quality given the heavy reliance on economically sensitive GRT revenue," wrote Fitch analyst Jose Acosta. "A return to structural imbalance and reduced reserves could lead to negative rating action."
With a population of about 69,000, Santa Fe has an economy anchored by government, retail businesses, and tourism. Market value per capita of $160,000 reflects Santa Fe's high wealth levels, according to S&P.
The city's defined-benefit pension plan and other post-employment benefits are provided through the state-administered Public Employees Retirement Association. PERA's fiscal 2012 funded position is below average at 65% based on a 7.75% return assumption, according to Fitch.
"Although the city has fully funded its annual required contributions, the funded position has declined due to ongoing recessionary losses," Acosta noted.
New pension reforms, signed into law in April, are expected to improve the plan's funded position, and will not increase the city's pension costs. Pension benefits are negotiated annually with its three unions, which represent 71% of city staff.
