DALLAS – A special session of the New Mexico Legislature that cut nearly $371 million of spending to keep pace with falling revenues created a negative credit factor for public education, according to Moody's Investors Service.
"New Mexico's willingness to target educational funding to close budgetary gaps is credit negative for all institutions of learning, but particularly school districts, which tend to operate within narrow margins," analyst Heather Correia wrote in Moody's weekly credit outlook.
Moody's downgraded New Mexico's general obligation rating to Aa1 from Aaa on Oct. 26 and retained a negative outlook.
The downgrade came after the special session passed a solvency package that created $370.8 million in savings for the current fiscal year. The combination of spending cuts and fund transfers fell short of erasing the $458 million deficit.
Senate Bill 9 targeted mid-year funding cuts of 5%, or $39.2 million, for higher education and 1.5%, or $37.8 million, for public schools. Martinez signed that legislation Oct. 24.
"For the current fiscal year, we expect public schools to manage the mid-year cut with reserves or budget reductions," Correia said. "School districts rely on state aid, which generally comprises more than 90% of their general fund budgets and cannot levy taxes for operations, limiting their revenue-raising ability."
Martinez also signed Senate Bill 2, which authorizes the transfer of $220 million in tobacco settlement money to the general fund. The bill earmarks $131 million to close the 2016 budget deficit.
SB 9 cut the budgets of nearly all state agencies by 5%, leaving an extra $171 million in the general fund. The Department of Public Safety and the Children Youth and Families Department did not see funding cuts.
Senate Bill 8 transfers nearly $90 million from inactive brick-and-mortar projects to the general fund while authorizing severance tax bonds to finance the work.
Senate Bill 6 eliminates certain tax loopholes, adding $10.2 million to the budget in the current fiscal year and $27.4 million in 2018.
"The state has a history of making mid-year cuts, specifically targeting public schools with reductions during the recession," Correia said. "Although reductions during the recession were offset with federal dollars, there is no corresponding offset in fiscal 2017, which ends June 30, 2017."
New Mexico's reserves are expected to equal only 1% of recurring revenues at the end of fiscal 2017, even after the special session.
Hard hit by the decline in oil and gas prices since mid-2014, New Mexico suffered an 8% decline in pledged severance tax revenue in fiscal year 2015 and a 38% decline for the 2016 fiscal year that ended June 30.
S&P Global Ratings rates the New Mexico AA-plus. S&P downgraded New Mexico's severance tax bonds to AA-minus from AA in May. The state's $122.5 million of subordinate bonds dropped to A-plus from AA-minus. S&P returned the outlook to stable.
