New Mexico bond projects hit record amid rising tide of revenues
After several lean years, New Mexico enters the 2020 fiscal year July 1 with a record budget for capital outlay projects backed by bountiful revenue from oil and gas.
Lawmakers at this year’s session provided $993 million for 1,600 bond-funded projects around the state.
The New Mexico Finance Authority issues traditional muni bonds for local projects approved by lawmakers under the capital outlay plan. Public projects in amounts in excess of $1 million per project require specific authorization by the Legislature.
As the end of the 2019 fiscal year approaches on June 30, NMFA this week is pricing about $64 million of taxable and tax-exempt bonds for projects across the state.
The bonds are coming in three tax-exempt and taxable series. About $45.2 million Senior Lien Public Project Revolving Fund Revenue and Refunding Bonds, Series 2019B, are doubly tax-exempt in New Mexico. Another $18.7 million of Subordinate Lien Public Project Revolving Fund Revenue Bonds are split between taxable and tax-exempt. The taxable $11.7 million Subordinate Lien Public Project Revolving Fund Revenue Bonds are designated Series 2019C-2.
The 2019B bonds will provide three loans and refund outstanding senior lien Series 2009A and Series 2009D-1 bonds. The Series 2019C-1 and Series 2019C-2 bonds will reimburse 24 loans in total.
JPMorgan is book runner on the Series B bonds, while RBC Capital Markets leads the Series C deal. PFM Financial Advisors is municipal advisor.
Moody’s Investors Service rates the senior-lien bonds Aa1 and the subordinate lien Aa2 with a stable outlook.
New Mexico's general obligation rating of Aa2 from Moody’s “incorporates strong revenue growth and an increase in reserves driven largely by a rebound in the state's important oil and gas sector and the expectation that the state will maintain adequate reserves in the future,” wrote analyst Kenneth Kurtz.
“The state's establishment of a Rainy Day Fund to capture future growth in oil- and gas-related revenues should enhance budget discipline in periods of increasing revenue,” he wrote. “At the same time, the state is challenged by its extremely large pension liabilities, including both its direct obligation to the Public Employees' Retirement System (PERA) and its indirect obligation to the Educational Employees' Retirement System (EERS).”
S&P rates both the senior and subordinate bonds AAA with a stable outlook.
“New Mexico's finances have shown great volatility, in our opinion, because of swings in oil and gas prices and production,” analyst Scott Garrigan wrote. “At the most recent low point, the state forecast a fiscal year-end 2018 general fund reserve of only 0.4% of recurring appropriations after midyear special legislative adjustments, only to see an actual fiscal year-end 2018 balance of 19.5%, as prices and production began to rise again.
“New Mexico's enacted fiscal 2020 budget forecasts what we would view as strong general fund reserves equal to 21% of recurring appropriations at fiscal year-end 2019, and 20.1% at fiscal year-end 2020, despite recurring appropriations increasing 11% in fiscal 2020, particularly for education and roads,” Garrigan added.
In this year’s legislative session, lawmakers raised the state’s top income tax bracket, but the new rate does not go into effect until Jan. 1, 2021, after fiscal year-end 2020.
State legislation in 1992 created the finance authority and the Public Project Revolving Fund for bond projects. As of March 31, the Finance Authority had 1,619 PPRF loans totaling roughly $3.6 billion.
The 2020-21 budget is the first under the new Democratic Gov. Michelle Lujan Grisham.
General fund spending increases by $700 million to $7 billion. Lawmakers allocated more than $1.3 billion for infrastructure. The funding provided in three bills was pitched a stimulus package.
The budget also gives school staff 6% raises and other state employees pay hikes of 4%. Minimum teacher pay would rise by as much as 12%. A 15% raise goes to statewide officeholders, starting with those who take office in 2020, under separate legislation.
A major educational reform would raise spending for at-risk students by more than $100 million, lengthen the school year or teacher training by 10 days statewide and offer most elementary schools the chance to extend the school year.
New Mexico’s economy has made a comeback with higher oil and gas prices and rising production tax revenue from the Permian Basin.
In 2018, Moody’s Investors Service downgraded New Mexico’s general obligation rating to Aa2 from Aa1 citing pension and Medicaid pressures. The state’s senior-lien transportation revenue bonds remained at Aa1 because of greater levels of security backing the debt.
New Mexico’s “extremely large pension liabilities” include the Public Employees' Retirement System and an indirect obligation to the Educational Employees' Retirement System.
New Mexico is the 36th-largest state by population, at 2.1 million. Its state gross domestic product, $97.1 billion, is the 37th-largest. It is the sixth-largest producer of crude oil in the nation.
The state’s wealth levels are below average, according to Moody’s, with per capita personal income equal to 77.4% of the U.S. level and a poverty rate among the highest for U.S. states.
The Moody’s downgrade in 2018 was the second since 2016. The state lost its Moody’s triple-A rating on Oct. 25, 2016 when the agency lowered the GO rating to Aa1, citing “depletion of general fund reserves following a very large and unanticipated shortfall in tax revenues for fiscal 2016 and 2017.”
The following month, S&P lowered its rating on NMFA’s senior-lien transportation revenue bonds to AA-plus from AAA. The outlook is stable.
The state’s economic activity and state revenues vary considerably based on the prices of oil and gas, the levels of production, and the amount of new drilling, according to Moody’s. The oil market has experienced a steady rebound this year, five years after a steep reduction in energy-related employment and state revenues.
Grisham’s predecessor, Gov. Susana Martinez, touted the state’s economic revival in a 2018 report.
“New Mexico’s tax revenues are rising rapidly, the state’s economy is expanding and diversifying, and we have made important progress in protecting the long-term stability of our state budget,” Martinez wrote. “That’s a far cry from the nearly half-billion-dollar budget deficit I inherited when I took office in 2011.”
State tax revenues rose by $560 million or more than 16% through the first eight months of the last fiscal year, she said.
“As a result, we have replenished our reserves – holding over 10% of our $6.3 billion state budget as savings – and have a strong credit rating,” she said. “A year ahead of expectations, we will also divert in excess of $20 million in oil and gas revenues to our new stabilization fund that was created in 2017 to help New Mexico guard against future downturns in the energy markets or the national economy.”
Calling the economic outlook “positive,” Martinez said the state’s unemployment rate has fallen 2.5% since 2011, with 9,000 jobs added in the past 12 months.
“When I took office, our state faced a $450 million budget deficit. New Mexico was then hit hard by federal budget cuts, leading to a loss of federal government jobs and private sector employment tied to federal spending. Washington politicians even shut down the federal government at one point,” she noted.
“And, just a few years ago, New Mexico was one of a handful of states to feel the full brunt of the steepest oil and gas crash in history, which dried up state revenues and eliminated over 10,000 energy-sector jobs,” she added. “This steady drumbeat of economic adversity, much of it out of our control, has nonetheless been our responsibility to handle.”