Recent news from Moody’s Ratings indicates a significant shift in New Mexico’s financial standing. The credit rating agency has revised its outlook on the state’s Aa2 rating to positive from stable, directly impacting $521 million of outstanding general obligation bonds. This revision underscores Moody’s perception of New Mexico’s robust financial situation, characterized by surging operating reserves and stable permanent funds. However, it also highlights the precarious balance between growth and the inherent risks posed by economic concentration in certain sectors, particularly oil and gas.
Moody’s commentary reflects a broader assessment of fiscal health, stating that the state’s financial governance and the management of reserves have played a crucial role in reassuring investors and credit holders. The recent modifications in the credit outlook from stable to positive are indicators of the state’s commitment to maintaining sound fiscal practices. According to Wayne Propst, the cabinet secretary for the New Mexico Department of Finance and Administration, the state has not only stabilized long-term pension liabilities but has also opted for financing projects through the general fund instead of accruing additional debt. This proactive management strategy contributes directly to a more favorable economic landscape, bolstering investor confidence.
The latest consensus revenue forecast offers a promising picture of New Mexico’s financial outlook. For fiscal 2024, the forecast indicates an impressive $3 billion general fund ending balance, making up about 31.7% of recurring appropriations. Projections for fiscal 2025 suggest even stronger figures, with anticipated ending balances of $3.5 billion, or 34.8%. This growth can be attributed to an array of favorable economic conditions, including booming oil and gas revenues, resilient consumer spending, and strong wage growth.
Even though the pace of this growth is expected to decelerate in fiscal 2024 compared to previous records, New Mexico’s economic performance remains double the average growth rate of the past two decades. This resilience suggests that while challenges loom—particularly those associated with over-reliance on the fossil fuel industry—the state is actively working to diversify its revenue streams. Initiatives to cap volatile fossil fuel-related revenues flowing into the general fund and channel them into the Severance Tax Permanent Fund highlight the state’s progressive approach to financial management.
Despite the positive outlook, recent developments underscore underlying challenges. As part of an update to Moody’s rating methodology affecting special tax bonds, New Mexico experienced downgrades in certain transportation and severance tax bonds. Specifically, this affected $166 million in senior lien transportation tax revenue bonds, among others, which now carry an Aa2 to Aa1 downgrade. Propst has indicated that these downgrades should be considered temporary and that an anticipated upgrade to the state’s overall rating could restore severance tax bonds to their previous Aa2 status.
Moreover, an August quarterly report revealed an alarming $6 billion in unspent cash and bond funding across approximately 5,600 projects. Such a backlog raises questions about the efficiency and management of state funds. Cally Carswell, a state capital outlay analyst, noted that the growth in appropriated projects far exceeds actual spending and project completions. This discrepancy could lead to inefficiencies and potential financial strain if not addressed adequately.
The recent trends and outlook indicate that New Mexico finds itself at a crossroads. There exists a solid foundation for growth built on prudent fiscal management, but significant challenges remain. The dependence on natural resource revenues places the state in a vulnerable position should market fluctuations occur. As New Mexico optimistically anticipates an upgrade to Aa1 within the next 12 to 18 months, it is imperative for state leaders to remain vigilant.
Investment in diversified economic opportunities must become a priority to mitigate reliance on fossil fuels and ensure sustainable growth. By balancing proactive governance with innovative economic strategies, New Mexico can harness its financial strength while working to alleviate the inherent risks of economic concentration. This dynamic environment offers a narrative of cautious optimism, underscoring the importance of strategic planning and fiscal responsibility for a more stable economic future.