SANTA FE – With New Mexico facing a gaping budget shortfall and no agreement in sight about how to solve it, a national credit rating agency has announced it is considering downgrading the state’s top rating for general obligation bonds.
Moody’s Investor Service, in announcing its review earlier this week, expressed concern that recent state revenue estimates showed a “structural imbalance” in the state’s budget for the fiscal year that started in July.
The top budget official in Gov. Susana Martinez’s office said Tuesday that the review was expected and that there’s still time for budget-balancing measures that might prevent the state’s triple-A bond rating from being lowered, a move that could drive up future borrowing rates.
“Given how hard we’ve been hit by the oil and gas price crunch, I’m certainly not surprised that Moody’s is considering our budget situation,” Finance and Administration Secretary Duffy Rodriguez told the Journal.
Other energy-reliant states have also had their credit ratings scrutinized – Alaska’s credit rating has been downgraded twice this year – after big drops in oil and natural gas prices.
But the short-term prospect for a rebound in oil prices took a hit Tuesday when a leading industry group said the growth of global oil demand is slowing by more than previously thought, largely because of a more pronounced economic slowdown during the third quarter of the year, according to The Associated Press.
The forecast caused an immediate dip in oil prices, as U.S. crude fell $1.39, or 3 percent, to $44.90 a barrel in New York on Tuesday. New Mexico legislative and executive branch economists are counting on state oil prices to average $45 per barrel for the current budget year.
After depleting its cash reserves, New Mexico is facing an estimated budget shortfall of $458 million for the fiscal year that started in July, along with a $131 million deficit for the just-ended budget year.
In basic terms, state legislators and the governor “over-budgeted” by more than $1 billion in the just-completed and current budget years, as the drop in oil and gas prices caused the state’s tax collections to end up falling far short of what had been expected, according to recent estimates.
Majority Senate Democrats have urged Martinez in recent weeks to put forward a budget-balancing plan and voiced concern about why a special legislative session to deal with the budget crisis has yet to be scheduled.
Senate President Pro Tem Mary Kay Papen, D-Las Cruces, said Tuesday that the possibility of a potential credit rating downgrade means even more urgency to fix the state’s budget gap.
“If we could get this fixed in a hurry and get it done right, hopefully our bond rating won’t go down,” Papen said in an interview.
She also said forging a solution to the state’s budget crisis will require compromises to be made by legislators of both political parties and the governor, a two-term Republican.
Martinez has maintained a “no tax increase” stance since first taking office, while Senate Democrats have said they will oppose any cuts to public schools, which account for roughly 44 percent of the state’s $6.2 billion budget.
“I think everyone is going to be uncomfortable with some of it,” Papen said, referring to a potential budget-balancing package. “But we’ve just got to get it fixed.”
Meanwhile, Moody’s said its review will focus on steps taken – likely during a special session – to replenish the state’s cash reserves and restore greater stability to the state’s budget.
“The state has a long track record of taking timely action to address budget shortfalls and to maintain adequate reserves,” the credit rating agency said in its announcement.
Moody’s reaffirmed New Mexico’s credit rating for general obligation bonds in March, but the state’s worsening budget situation apparently prompted the decision to launch a new review. Any change in the state’s credit rating would not affect bonds that have already been issued.