The bond rating agencies remained mum prior to the road bond election because they did not want to be seen as influencing the outcome. But now that the election is over and West Virginia has overwhelmingy passed the road bond (Yes 73 percent, No 27 percent), we are getting some feedback.
Moody’s, one of three big credit rating agencies—the others are Standard & Poor’s and Fitch Group—has released an analysis of the road bond. “West Virginia’s new bonding authority shifts road improvement into the fast lane,” reads the headline in the report.
Moody’s points out that the state has an existing tax-supported debt of $1.8 billion, which represents approximately 2.4 percent of the state’s gross domestic product. The state is now going to take on another $1.6 billion in debt for the road bonds. Moody’s sees that as manageable. “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.”
The Legislature’s approval and Governor Justice’s support of higher taxes before the bond vote appears to have been integral to Moody’s review. “New revenues will more than offset higher debt service expenditures after the new bonds are issued,” Moody’s said.
As an example, Moody’s said if the state finances the bonds over 20 years with a three percent yield, the annual debt service would be $108 million. The new taxes and fees are expected to generate $130 million, so there will be enough to pay the debt with a considerable cushion.
Moody’s reinforced what we already know about our roads–that we have a “significant backlog of statewide transportation infrastructure repairs and improvements”— and that it would take half of all general revenues for one year to catch up. Improved roads and bridges are critical to our economy.
“Economic growth and diversification are key to offsetting a potential decline in health and energy sectors, ensuring the long-term financial health of the state,” Moody’s said. “As the state looks to attract private investment and new jobs, safe, reliable transportation modes are essential.”
The Moody’s report did not directly address the question of how the additional debt would impact the state’s credit rating; it now stands at Aa2 stable, which is the third highest. A number of factors contribute to the bond rating and the debt is just one of them. Given the positive report by Moody’s it’s evident that if the state does get downgraded at some point, the road bond won’t be the cause.
Moody’s said state and local governments are cutting back on capital expenditures because of tight budgets, and deferred infrastructure maintenance will eventually “prove expensive and credit negative” for those entities. It’s encouraging to know that West Virginia has finally taken a meaningful step toward correcting its crumbling roads and has put the taxes and fees in place to pay for that work.