DALLAS – New Mexico lost its triple-A general obligation bond rating from Moody's Investors Service Wednesday and may fall further after analysts retained a negative outlook.
In its report on the downgrade to Aa1 from Aaa, Moody's cited the state's depletion of its general fund reserves following "a very large and unanticipated shortfall" in tax revenue 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 analyst Kenneth Kurtz wrote.
"With the reduction in reserves, the state's overall liquidity has also declined, but remains adequate," he wrote.
S&P Global Ratings rates the New Mexico AA-plus. S&P downgraded New Mexico's severance tax bonds to AA-minus from AA in May. The state's $122.5 million of subordinate bonds dropped to A-plus from AA-minus. S&P returned the outlook to stable.
Hard hit by the decline in oil and gas prices since mid-2014, New Mexico suffered an 8% decline in pledged severance tax revenue in fiscal year 2015 and a 38% decline for the 2016 fiscal year that ended June 30.
Most of New Mexico's bonds are supported by severance tax revenue while $327 million of general obligation bonds are backed by all revenues, including ad valorem taxes.
"The state's GO bonds represent only a small portion of its net tax-supported debt and benefit from particularly strong security provisions," Kurtz wrote.
"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," Kurtz wrote.
New Mexico's treasurer is required to keep property tax proceeds separate from all other funds to support GO bonds. The payment of general obligation bonds from other than ad valorem taxes collected for that purpose requires an appropriation by the legislature.
If at any point there is insufficient amount of money from ad valorem taxes to make a required payment of principal of or interest on state general obligation bonds, the governor may call a special session of the legislature in order to secure an appropriation of money sufficient to make the required payment, Kurtz wrote.
In conjunction with the GO downgrade, Moody's also lowered $53 million of lease-appropriations bonds and $2.1 billion of New Mexico School District Enhancement Program debt to Aa2 from Aa1. The outlook on those ratings also remained negative.
Moody's affirmed the Aa1 rating with a stable outlook on the New Mexico Finance Authority's senior-lien State Transportation Revenue Bonds and the Aa2 rating and stable outlook on its subordinate lien State Transportation Revenue Bonds.
New Mexico is the 36th-largest state by population, at 2.1 million. Its state gross domestic product, $92.2 billion, is the 37th-largest. The state's wealth levels are below average, with per capita personal income equal to 78.9% of the US level and a poverty rate among the highest for U.S. states, analysts said.
In May, Moody's dropped its rating on the senior-lien severance tax bonds to Aa2 from Aa1 and retained a negative outlook.