October 26, 2016

Economist: Moody’s downgrade is a warning to NM

The state’s budget situation and the fix to solve a budget deficit mean that it will cost more to borrow money.

That’s the news from Moody’s Investor Service. The bond-rating agency dropped New Mexico from the top rating of AAA to the next level of AA1, still a very high bond rating.

According to Jeff Mitchell, the director of the Bureau of Business and Economic Research at the University of New Mexico, the downgrade itself will not be very impactful or have any significant effect on the state.

“It’s not, however, a good sign,” Mitchell said. “What they’re saying, in effect, is when they tell you what they’re concerned with, what they’re looking at is address these things or you will have another downgrade.”

And key among the findings that Moody’s used to justify the downgrades are the state’s lackluster general fund reserves.

In the past, the state sought to maintain 10 percent reserves. According to Moody’s, the reserves at the end of the current fiscal year will be at just 1 percent.

Rating agencies prefer reserves of 5 percent or more.

“We’ve been above and beyond, but now we’re looking at sub-one [percent],” Mitchell said.

The move means that future bonds, such as those used to pay infrastructure through capital outlay projects, will be slightly more expensive.

“If they fall, they affect the rate you’re likely to pay on bonds the next time you issue,” Mitchell explained. “It doesn’t affect the state on bonds that have already been issued.”

The downgrade comes after the state Legislature held a special session to address the budget deficit. Gov. Susana Martinez signed bills that included moving reserves into the general fund to fill the deficit. She also signed a bill that would cut most state agencies by 5.5 percent, though some like the Children, Youth and Families Department and the Department of Public Safety escaped any cuts.

But it was the use of the one-time funds—the reserves—that ultimately led to the downgrade. And there just isn’t much left, if any, to cover future budget gaps.

“The question really comes down to the willingness of anyone up there to look at revenues, because there’s not a whole lot left to cut,” Mitchell said.