CHARLESTON, W.VA. — Moody’s, one of the big three bond rating agencies, is giving a thumbs up to voter approval of West Virginia’s $1.6 billion road bond issue.
The firm issued a short report this week concluding that West Virginia’s attention to its infrastructure is long overdue.
The report is called “West Virginia’s new bonding authority shifts road improvements into the fast lane.”
— Moody's US PubFin (@MoodysUSPubFin) October 26, 2017
Moody’s did acknowledge that the road bond will add to West Virginia’s debt burden, which it described as moderate.
“The approval will result in a near-term, gradual increase to the state’s moderate debt burden, but overall the vote is a credit positive,” Moody’s wrote.
Moody’s declaration of “credit positive” or “credit negative” does not connote a rating or outlook change. It is indicative of the impact of a distinct event or development as one of many credit factors affecting the issuer.
Moody’s, along with the other two big credit ratings agencies, downgraded West Virginia’s overall credit rating last year based on a soft economy and continued reliance on one-time funds for ongoing expenses.
In the report issued this week, though, Moody’s said additional spending on highways and bridges is a worthy investment.
“The accelerated construction is a key step towards addressing West Virginia’s significant backlog of transportation infrastructure repairs and improvements,” the company wrote. “The investments may also help spur economic development.”
Moody’s wrote that West Virginia has $1.8 billion of tax-supported debt outstanding. That’s 2.4 percent of the state’s gross domestic product and 2.6 percent of personal income.
“Both figures are slightly higher than the state sector medians of 2.2 percent and 2.5 percent respectively,” Moody’s wrote.
But the bond rating agency noted that West Virginia has designated a funding stream.
“New revenues will more than offset higher debt service after the new bonds are issued,” Moody’s wrote.
Legislators approved increased gasoline taxes, Division of Motor Vehicles fees and sales taxes on new vehicle purchases to bring in about $130 million more a year to be used to pay down the bond debt.
“Assuming full leveraging of the new authority, a 20-year amortization period and a 3 percent yield, the new revenues should be sufficient to cover the approximate, additional debt service of $108 million annually,” Moody’s wrote.
Moody’s applauded West Virginia’s plans to invest in its highways system.
“The plan to leverage these revenues and accelerate construction work is a key step towards addressing the significant backlog of statewide transportation infrastructure repairs and improvements,” the agency wrote.
“As a result of years of underfunding, West Virginia has the largest backlog of state road and bridge maintenance needs in the nation, with the estimated repair costs reaching 49 percent of general revenues in 2016.”
Whether West Virginia could afford additional bond indebtedness was a significant and complicated issue in the weeks leading up to the road bond vote earlier this month.
The West Virginia Center on Budget and Policy, an economic think tank with a lobbying arm, assessed the impacts of the road bond earlier this month.
The center expressed concern about the level of debt West Virginia would be taking on but, like Moody’s, acknowledged that the road work was long overdue.
“The enormous investment provided by the road bonds offers a great opportunity to boost jobs and economic growth in the short-term, but it is unclear what the long-term impact will have on the state’s economic and fiscal health,” wrote the center’s director, Ted Boettner.
“Additionally, it will be important for lawmakers to ensure that the additional debt does not lead to another credit downgrade or additional budget austerity that is already hurting our state’s economic position.”
The center noted that the $1.6 billion approved by voters is not the only spending on roads planned by West Virginia. The state intends to spend an estimated $500 million in Turnpike Bonds and $500 million in federal Garvee road bonds that were approved during the special legislative session earlier this year.
Last week, state officials announced they are ready to move forward on a sale of $260 million of Garvee bonds that leverage anticipated federal highways dollars. Gov. Jim Justice’s office sent out a release saying the state has locked in a rate of 2.145 percent.
The road bond measure that West Virginia residents approved earlier this month authorizes the state to issue general obligation bonds not exceeding $1.6 billion over a four-year period: $800 million in 2017, $400 million in 2018, $200 million in 2019, and $200 million in 2020.
The Justice administration, in touring the state in support of the bond issue, suggested a rate of 3.5 percent seemed possible. Officials compared that favorably to an anticipated inflation rate on construction costs of 4 percent or more.
Moody’s wrote last February that West Virginia’s state funding shows a structural imbalance and that the governor’s proposals to take on more debt were part of its thinking when it downgraded West Virginia’s bond rating.
Moody’s also concluded that a significant reduction in debt and pension liabilities could lead to an upgrade, whereas a significant increase in the West Virginia’s net tax supported debt burden could result in another downgrade.
In issuing its most recent assessment of West Virginia, Moody’s took specific aim at the road bond idea, “Pension liabilities remain above average and the state’s debt burden could increase under the Governor’s new infrastructure proposal.”
Moody’s provided that warning before the Legislature passed the funding mechanisms intended to pay down the bond debt — a distinction that the company made in this week’s positive assessment of the road bond.
A 2017 “Debt Capacity Report” issued by the state Treasurer’s Office concluded that West Virginia needs to be careful about taking on increased debt.
“Although West Virginia is below all of the recommended caps on the ratios examined in this report, that does not provide a license to issue debt,” the report concluded.
“Until West Virginia leaders come up with a comprehensive plan to fix the budget deficits and address declining revenues, debt should only be issued within the recommended ratios to move West Virginia forward and help address its financial issues.”
Again, that conclusion was reached before lawmakers approved tax and fee increases to pay down the road bond.
And that report notes that West Virginia has not had a general obligation bond issued in more than 15 years since issuing the final $110 million authorized by the Safe Roads Amendment of 1996.
“West Virginia has the capacity for the issuance of bonds if we can find the way to pay for them,” according to the debt report.