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Global Credit Research - 25 Oct 2016
New York, October 25, 2016 -- Summary Rating Rationale
Moody's Investors Service has downgraded the State of New Mexico's general obligation bonds to Aa1 from Aaa, affecting $327 million of outstanding debt. In conjunction with this action, we have also downgraded to Aa2 from Aa1 the state's Lease Appropriation Bonds (Fort Bayard Project) Series 2008, issued through Grant County, affecting $53 million of outstanding debt; and downgraded to Aa2 from Aa1 the ratings of the New Mexico School District Enhancement Program (post March 30, 2007) and the New Mexico School District Enhancement Program (pre March 30, 2007), affecting approximately $2.1 billion in enhanced school district debt. These ratings had been placed under review for possible downgrade on September 12. The outlook on these ratings is now negative.
At the same time, Moody's has affirmed the Aa1 rating with a stable outlook on the New Mexico Finance Authority's State Transportation Revenue Bonds (Senior Lien) and the Aa2 rating and stable outlook on its State Transportation Revenue Bonds (Subordinate Lien). This action reflects the strong legal separation between the pledged transportation revenues and the state's general fund, including a constitutional provision that prevents the legislature from reducing or diverting the pledged revenues as long as the bonds are outstanding.
The downgrade of the state's general obligation rating is driven by the depletion of general fund reserves following a very large and unanticipated shortfall in tax revenues for fiscal 2016 and 2017. Reserves are expected to equal only 1% of recurring revenues at the end of fiscal 2017, even after significant budget balancing actions taken by the legislature in a recent special session. With the reduction in reserves, the state's overall liquidity has also declined, but remains adequate. At the same time the rating incorporates a number of strengths, including the state's history of taking timely action to maintain budgetary balance and the expectation that it will act to rebuild reserves in the near future. Debt levels are moderate and have been declining. The state's GO bonds represent only a small portion of its net tax-supported debt and benefit from particularly strong security provisions. Pension liabilities, while notable, are comparable to the medians for US states. Balanced against these strengths are below-average wealth levels and financial reporting practices which, while improving, are weaker than typical for a US state.
The outlook on the state's general obligation bonds and related ratings is negative reflecting the risk that further revenue declines could pose new budget challenges for the state and impair its ability to rebuild reserves.
Factors that Could Lead to an Upgrade
Return to robust revenue growth and rapid restoration of reserves to historical levels
Factors that Could Lead to a Downgrade
Further declines in revenues
Failure to rebuild reserves
Deterioration in unemployment rates or other economic indicators
Delays in making planned improvements in financial reporting practices
New Mexico's general obligation bonds are secured by the full faith and credit of the state and specifically secured by and paid from a statewide property tax levy without limit as to rate. The treasurer is required to keep the property tax proceeds separate from all other funds. The payment of general obligation bonds from other than ad valorem taxes collected for that purpose requires an appropriation by the legislature. If at any point there is not a sufficient amount of money from ad valorem taxes to make a required payment of principal of or interest on state general obligation bonds, the governor may call a special session of the legislature in order to secure an appropriation of money sufficient to make the required payment.
Use of Proceeds
New Mexico is the 36th-largest state by population, at 2.1 million. Its state gross domestic product, $92.2 billion, is the 37th-largest. The state's wealth levels are below average, with per capita personal income equal to 78.9% of the US level and a poverty rate among the highest for US states.
The principal methodology used in this rating was US States Rating Methodology published in April 2013. An additional methodology used in the enhanced rating was State Aid Intercept Programs and Financings Pre and Post Default published in July 2013. An additional methodology used in the lease rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. An additional methodology used in the State Transportation Revenue Bonds was US Public Finance Special Tax Methodology published in January 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
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