DALLAS – New Mexico’s return to a structurally balanced budget led S&P Global Ratings to boost the outlook on the state's AA rating to stable from negative Wednesday.
The state had a negative outlook since 2014 and took an S&P downgrade to AA from AA-plus in November 2016.
As an energy dependent state, New Mexico has seen revenues rise with prices on oil and gas produced in the Permian Basin.
“While we expect revenue and reserves to continue to fluctuate based on economic activity, we believe New Mexico will be able to build and retain strong reserves during current prosperous times to help cushion against the next downturn,” said analyst David Hitchcock.
State officials project general fund reserves rising to 34% of recurring appropriations at fiscal year-end 2019, up from 18% at fiscal year-end 2018, and 8% at fiscal year-end 2017.
“In contrast, after a 2017 special legislative budget session, the state legislative finance committee projected that fiscal 2018 would end with only a 0.4% general fund reserve, despite the use of significant one-time budget measures during the most recent oil and gas downturn,” Hitchcock wrote.
New Mexico’s general fund reserve target is generally about 10% of recurring expenditures. However, a severe downturn in oil and gas activity after oil prices collapsed in 2014 left state financial reserves well short of original budgeted amounts, even with midyear budget cuts and significant use of one-time fund transfers, S&P wrote.
Reserves fell from 11.6% of recurring budgetary operating appropriations at fiscal year-end 2015 to 2.4% at fiscal year-end 2016.
The state's revised 2018 budget target after a 2017 special legislative budget session was for only a 2.7% reserve at fiscal year-end 2017 and a 0.4% reserve at fiscal year-end 2018, according to state legislative finance committee projections.
“Since then, New Mexico has revised its consensus revenue forecast to project substantially higher severance tax and mineral royalty revenue, as much as $914.3 million extra in fiscal 2019 alone, or about 13% of currently projected 2019 revenue,” Hitchcock said.
Moody’s Investors Service downgraded New Mexico’s general obligation bond rating to Aa2 from Aa1 on June 18, revising the outlook to stable from negative. Ratings on the state’s senior-lien transportation bonds remained at Aa1.
Analyst Kenneth Kurtz cited the state’s large pension liabilities and its heavy Medicaid caseload, a reflection of its lower-income population.
New Mexico is the 36th-largest state by population, at 2.1 million. Its state gross domestic product of $97.1 billion, is the 37th-largest. The state's wealth levels are below average, with per capita personal income equal to 77.4% of the US level and a poverty rate among the highest for US states.
