Moody's Investors Service said it has downgraded the state of New Mexico's general obligation bonds to Aa1 from Aaa, affecting $327 million of outstanding debt.

In conjunction with this action, Moody's also downgraded to Aa2 from Aa1 the state's Lease Appropriation Bonds (Fort Bayard Project) Series 2008, issued through Grant County, affecting $53 million of outstanding debt; and downgraded to Aa2 from Aa1 the ratings of the New Mexico School District Enhancement Program (post March 30, 2007) and the New Mexico School District Enhancement Program (pre March 30, 2007), affecting approximately $2.1 billion in enhanced school district debt.

These ratings had been placed under review for possible downgrade on September 12. The outlook on these ratings is now negative.

At the same time, Moody's affirmed the Aa1 rating with a stable outlook on the New Mexico Finance Authority's state transportation revenue bonds (senior lien) and the Aa2 rating and stable outlook on its state transportation revenue bonds (subordinate lien).

This action reflects the strong legal separation between the pledged transportation revenues and the state's general fund, including a constitutional provision that prevents the legislature from reducing or diverting the pledged revenues as long as the bonds are outstanding, according to the rating agency.

The downgrade of the state's general obligation rating is driven by the depletion of general fund reserves following a very large and unanticipated shortfall in tax revenues for fiscal 2016 and 2017. Reserves are expected to equal only 1% of recurring revenues at the end of fiscal 2017, even after significant budget balancing actions taken by the legislature in a recent special session, Moody's said. With the reduction in reserves, the state's overall liquidity has also declined, but remains adequate.

At the same time the rating incorporates a number of strengths, including the state's history of taking timely action to maintain budgetary balance and the expectation that it will act to rebuild reserves in the near future, Moody's said. Debt levels are moderate and have been declining.

The state's GO bonds represent only a small portion of its net tax-supported debt and benefit from particularly strong security provisions. Pension liabilities, while notable, are comparable to the medians for U.S. states, according to the rating agency. Balanced against these strengths are below-average wealth levels and financial reporting practices which, while improving, are weaker than typical for a U.S. state.

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