A top financial rating firm downgraded the status of New Mexico’s general obligation bonds, citing large pension obligations and Medicaid costs.
A rating downgrade means it will be more expensive for the state to borrow money. General obligation bonds, or GO bonds, are used to finance capital improvement projects, like building state buildings.
Moody’s Investors Service announced the downgrade from Aa1 to Aa2 Tuesday. Aa2 is the third-highest rating at Moody’s, below AAA and Aa1, but is still considered an investment grade rating. The service previously downgraded the rating in 2016.
Moody’s said the change “is primarily attributable to the state’s 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).”
Earlier this year, a PERA official said the state was unlikely to catch up with financial obligations with regard to pensions, putting the odds at just 11 percent.
The rating service also notes that New Mexico has a high Medicaid caseload, a volatile source of income from oil-and-gas severance taxes and weak, though improved, financial reporting practices.
New Mexico continues to have an unemployment rate higher than the national average and among the highest rates of poverty in the nation, both contributors to more residents using Medicaid for health insurance.
New Mexico also opted to take advantage of expanded Medicaid as part of the Affordable Care Act. The federal government covers most of the costs of the expanded Medicaid, but the state’s cut increases slightly each year.
The service said the rating is relatively high because the state restored general fund reserves after they were expended to deal with the latest budget problems from low oil and gas prices and the establishment of a new “rainy day fund” to capture oil-and-gas revenue during boom periods and use it during busts to avoid budgetary problems.
The service said to improve the rating again, the state must have sustained economic growth and diversify the economy, as well as make “significant progress” in reducing pension liabilities.
“It’s encouraging to see that our rating outlook improved from negative to stable thanks to the Governor’s hard work to create a true rainy day fund,” Gov. Susana Martinez spokesman Benjamin Cloutier said in a statement Tuesday. “The Governor has also ensured New Mexico has maintained a budget that lives within its means and is currently overseeing an unprecedented reserve level. But until the Legislature and Educational Retirement Board address true pension reform, we will continue to face the same extremely high levels of liability with our pension funds.”
Update: Added quote from Benjamin Cloutier.
