CHARLESTON, W.Va. — Governor Jim Justice called a press conference today to announce that the debt ratings agency Moody’s has downgraded West Virginia’s rating to AA2, outlook stable, for its general obligation bonds.
It’s a sign that Moody’s, one of the big three ratings agencies, considers West Virginia’s finances less healthy than it used to.
In practical terms, it also means that West Virginia’s interest rates will rise, making borrowing more expensive for projects such as new schools, water projects or highways construction.
And, more broadly, the announcement goes into the swirl of differing opinions about how state leaders should approach the half-billion dollar budget gap for the coming fiscal year.
Moody’s is the third of the three ratings agencies to downgrade West Virginia, joining Fitch and Standard & Poor’s. In 2015, Moody’s downgraded West Virginia’s economic outlook but not its bond rating.
In discussing the Moody’s rating adjustment, Justice was joined Tuesday afternoon by Revenue Secretary Dave Hardy.
The Governor will be holding a press conference regarding Moody’s rating action. It will start in a few minutes. https://t.co/7Q54Pxn23c
— Governor Jim Justice (@WVGovernor) February 21, 2017
“This just makes me sick. That’s just all there is to it,” Justice said as his first remarks during the press conference.
Justice said the Moody’s downgrade is a sign that the legislative branch should embrace his budget, which includes $450 million of “revenue enhancements,” mostly new or increased taxes.
He also said it’s evidence that the state needs to set aside additional money to promote development, pointing to his $105 million Save our State fund.
“Now we are where we are. It’s disappointing as it can be to get downgraded,” he said.
“It’s just going to get worse. It’s not going to get better if we don’t act. It’s going to hurt our communities. Our borrowing just got more expensive, no question.”
Senate President Mitch Carmichael issued a response saying almost the opposite: that tax increases won’t solve the problem but that a restructuring of the state’s tax structure could.
“Years of fiscal mismanagement have led us to this point. The bond downgrade underscores the urgency and the need for fundamental reform and a new direction in West Virginia,” Carmichael stated.
“The old policies of simply raising taxes and spending more will only lead to further structural deficiencies and continued downgrades. This news makes it abundantly clear the time for new policies cannot wait, and we will not turn this ship around with continued taxation and unchecked spending.”
House Speaker Tim Armstead also sent out a statement interpreting the Moody’s downgrade to reject Justice’s tax proposals:
“This bond downgrade reinforces the need for fundamental changes to how we operate our state government. The failed tax-and-spend policies of the past will not solve this problem. We need bold leadership to right-size our state government and restructure our tax code in a way that promotes growth,” stated Armstead, R-Kanawha.
The proposal to increase spending by another $318 million and pay for it with the largest tax increase in the history of our state will not solve our budgetary challenge. In the coming weeks, we will work to construct a budget that will restore confidence in our future economic outlook.”
Moody’s wrote that West Virginia’s state funding shows a structural imbalance and that the governor’s proposals to take on more debt are part of its thinking.
“The downgrade of the general obligation and related lease ratings reflects the recent multi-year trend of growing structural imbalance between annual expenditures and available resources, which is generally inconsistent with a Aa1 rating.
“While the state has used a mixture of revenue enhancements, expenditure reductions and reserves to close budget gaps, revenues continue to lag budgeted estimates and the structural imbalance is likely to continue at least through 2018.
“Additionally,” Moody’s wrote, “while the economy has begun to stabilize some, the demographic profile remains weak. Pension liabilities remain above average and the state’s debt burden could increase under the Governor’s new infrastructure proposal.”
Moody’s provided some tidbits about how its future ratings could either improve or get worse.
Factors that could lead to an upgrade:
- Long-term growth and diversification of the state economy
- Improvement in the state’s energy sector that results in the stabilization of employment trends and severance tax revenues
- Codification of the conservative management practices that have enabled the state to maintain positive fund balances and strong reserve levels including the use of surplus funds to bolster weakness in retirement system funding
- Significant reduction in debt and pension liabilities
Factors that could lead to a downgrade:
- A prolonged downturn for the coal and natural gas sectors, including any significant mine closures or a continued trend of layoffs
- A shift away from the state’s sound governance practices and trend of well-managed financial operations Increases in the state’s unfunded pension liabilities resulting from failure to pay full annual required contribution
- Significant increase in state’s Net Tax Supported Debt burden
House Finance Chairman Eric Nelson questioned whether, considering West Virginia’s situation, the ratings agencies would embrace Governor Justice’s SOS proposal and its largely-undefined expenditures to promote infrastructure and development.
“I would have to think they would, just like the Legislature, question a line item with very little detail,” Nelson, R-Kanawha, said in a telephone interview. “Ratings agencies want to have a known, and when you put a $105 million new expenditure out there, it’s very difficult.
“That’s not to say that I couldn’t support additional expenditures promoting our state, but without the details I’m not sure that’s an area I can get a hundred percent behind.”
The press conference originally was to start at 4 p.m. although it wound up being a half-hour late.