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Moody’s downgrades NM’s bond rating

Copyright © 2018 Albuquerque Journal

SANTA FE – Concerns over New Mexico’s pension liabilities and deeply rooted spending challenges prompted a national credit rating agency to downgrade the state’s bond rating on Monday – a blow to the state’s fiscal reputation and its second downgrade in two years.

Moody’s Investor Service noted in its announcement that the state’s cash reserves have been built back up after being depleted during a recent budget crunch but that the growing pension liabilities, a high Medicaid enrollment rate and other budget-related issues prompted the downgrade from an AA1 to an AA2 rating.

Although the credit rating agency set the state’s outlook as “stable,” the rating downgrade could lead to higher borrowing rates for infrastructure projects. It also represented Moody’s first rating change for a state this year.

Sen. John Arthur Smith

“It’s not a surprise – disappointed, but not a surprise,” Sen. John Arthur Smith, a Deming Democrat and chairman of the influential Senate Finance Committee, said of the rating downgrade.

After having its top bond rating downgraded in October 2016, New Mexico appeared to have dodged an additional downgrade last year, which Gov. Susana Martinez’s office said at the time validated the governor’s anti-tax increase stance.

But New Mexico’s two large retirement systems’ unfunded liabilities have increased in recent years, as 2013 solvency fixes aimed at shoring up the Public Employees Retirement Association and the Educational Retirement Board have not been as effective as intended.

As a result, the state could be facing big questions about how it plans to pay future retirement benefits for thousands of state workers and teachers.

In a statement, a Martinez spokesman appeared to blame lawmakers and pension fund officials for the downgrade. He also said the state’s rating outlook was shifted from “negative” to “stable” after the downgrade.

“The governor has also ensured New Mexico has maintained a budget that lives within its means and is currently overseeing an unprecedented reserve level,” Martinez spokesman Ben Cloutier said. “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.”

Some lawmakers, including Smith, have suggested the solution might involve requiring government agencies and employees to contribute more financially to the pension funds to help put them in a stronger fiscal position. But it’s no small challenge to tackle, given that the funds are billions of dollars away from being actuarially sound.

Demographic changes in the workforce, the early retirement allowed for public safety officers and other factors have contributed to the challenge of addressing the state’s pension funds, Smith said.

Combined, the state’s two large retirement systems had unfunded liabilities of roughly $12.5 billion as of June 2017, with the pension fund covering nearly 60,000 active teachers, professors and other school workers having the larger liability of the two.

Unfunded liabilities represent the difference between current assets on hand and future retirement benefits owed, and both pension funds’ liabilities have increased in recent years.

Meanwhile, New Mexico also faces other systemic economic problems, despite a recent revenue uptick driven primarily by an oil drilling boom in southeastern New Mexico that has led to the state collecting $582.1 million more in revenue through March – or 14.5 percent – than it had during the same time period in the most recent budget year.

Some of those challenges were cited by Moody’s analyst, along with the pension funding issue.

“That pressure is compounded by spending challenges associated with a large Medicaid caseload, a revenue structure more concentrated and volatile than most similarly-rated states, an economy that has lagged the nation’s, below-average wealth levels, and financial reporting practices which, while improving, are weaker than typical for a U.S. state,” Moody’s analyst Kenneth Kurtz wrote.

New Mexico has one of the nation’s highest unemployment rates, although it has dropped in recent months, and more than 40 percent of the state’s population is enrolled in Medicaid. The state’s unemployment rate was 5.1 percent in May.

Lawmakers did take action in 2017 aimed at shoring up the state’s budget – including setting aside more money in cash reserves and creating a rainy-day fund to help keep state government operations running in future cash-lean years – that were signed into law by Martinez.

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