State’s bond rating lowered over pensions

A lagging economy and New Mexico’s “extremely large pension liabilities” helped lead a national credit rating agency this week to downgrade the state’s bond rating by a notch.

Bond ratings, which reflect confidence in a state’s ability to pay its debts, can affect borrowing costs for road building and other projects.

In dropping New Mexico’s general obligation bonds to Aa2, its third-highest rating, Moody’s Investors Service cited New Mexico’s obligations to the Public Employees Retirement System and the Educational Employees Retirement System, which face total shortfalls of about $12.5 billion.

Along with its pension obligations, New Mexico faces a large Medicaid caseload, an economy lagging the rest of the nation, below-average wealth levels and financial reporting practices “weaker than typical for a U.S. state,” according to Moody’s. New Mexico also has a “revenue structure more concentrated and volatile than most similarly rated states,” meaning New Mexico relies heavily on oil and gas revenues.

The chairman of the New Mexico Senate Finance Committee, Sen. John Arthur Smith, D-Deming, said the Legislature has attempted to address the unfunded pension liabilities for a number of years with little success. He said part of the problem is control of the Educational Retirement Board and the Public Employees Retirement Association by the same groups that benefit from its decisions

— public employee and teachers unions. “The bottom line is they don’t want to pay any more money and they think the state needs to pay more money, and it’s a pretty high percentage on both sides,” Smith said Tuesday.

A statement from Gov. Susana Martinez’s office sidestepped the lowered rating and focused instead on Moody’s improved rating outlook, from negative to stable, “thanks to the governor’s hard work to create a true rainy day fund.

“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,” wrote Martinez spokesman Ben Cloutier by email Tuesday.

In raising New Mexico’s rating outlook, the potential for its bond rating to change in the next six months to a year, Moody’s cited sustained growth and diversification of the state economy and progress in reducing its pension liabilities.

The latest bond rating also took into account a number of strengths, according to Moody’s, including “the state’s history of taking timely action to maintain the budgetary balance,” and a building-up of financial reserves that were depleted during an era of falling oil and gas revenues. Plus, Moody’s analysts wrote, the state created a rainy day fund to “capture future growth” in revenues related to oil and gas production.

Smith said the Legislature previously prohibited return-towork practices by some public employees that allowed retirees to return to work after one year, thereby collecting a paycheck along with their retirement benefits.

That and other changes made some dent in the widening gap in pension obligations, but not enough. Plus, a demand for public safety employees — law enforcement and firefighters, for example — threatens to undercut that change, he said.

While the state shows growth in several economic indicators, Smith said he fears what might happen in light of recent events, including a looming trade war with China and U.S. hostility toward normally friendly trade partners in Mexico, Canada and Europe.

“But oil is doing extremely well and we’ve made quite a bit of money,” he said.

Through March, the state this fiscal year has collected $4.6 billion in gross receipts taxes and revenue from oil and gas production, a figure that is up by $582.1 million over the same period the previous fiscal year, according to the Legislative Finance Committee.

The Moody’s rating downgrade affects about $260 million in general obligation bonds, according to the service. The state’s capacity to issue general obligation bonds is equal to 1 percent of statewide assessed property value from the prior year less the outstanding bond debt.