By MICHELLE DILLON
Times West Virginian
FAIRMONT, W.Va. — West Virginia’s debt rating has been lowered.
West Virginia Gov. Jim Justice and West Virginia Department of Revenue Secretary Dave Hardy announced during a Tuesday afternoon press conference that Moody’s Investors Service lowered the state’s general obligation debt rating.
West Virginia’s rating has been downgraded from an Aa1 to an Aa2, Hardy said during the press conference.
“All I can say is, this just makes me sick,” Justice said of the downgrade.
Justice said during the press conference that Standard & Poor’s and Fitch Ratings downgraded West Virginia last year. During that time Moody’s put the state on a negative watch.
In April 2016, Standard & Poor’s downgraded the state’s bond rating from AA to AA-minus. In September 2016, Fitch Rating downgraded the state’s bond rating from AA-plus to AA, according to a Charleston Gazette-Mail article.
Ratings issued by Moody are the company’s “current opinions of the relative future credit risk of entities, credit commitments or debt or debt-like securities,” Moody’s said in explaining West Virginia’s rating downgrade.
According to Moody’s rating action, Moody’s downgrade of West Virginia’s general obligation debt rating affects approximately $339.6 million in outstanding debt.
Moody has 21 different ratings with Aaa as the highest and C as the lowest, Moody’s spokesman David Jacobson said. Jacobson likened the debt rating to a person’s credit score.
“You and I have a personal credit score if we want to buy a car or something like that,” he said. “If your credit is better than my credit, I probably have to pay more interest for my car loan than you do.”
West Virginia’s old rating of Aa1 is the second-highest rating. The new rating of Aa 2, is the third-highest rating, Jacobson said. The median rating for states is an Aa1. There are about 14 Aaa states. Almost all the rest of states are at Aa1 or Aa2. There are 3 or 4 states at Aa3, and there are two more states rated lower than that, he said.
“You’ve gone from the second-highest rating to the third highest rating,” Jacobsen said. “So it’s still a high-quality rating, subject to a very low credit risk. West Virginia is just now one notch lower than the median rating.”
Generally the way it works is, when a state comes to the bond market to issue debt, the lower the rating, the more in interest the state will pay, he said. The amount of interest that West Virginia will now be charged because of the rating change is up to the market, Jacobson said.
In its rating action, Moody says the state’s rating downgrade reflects “the recent multi-year trend of growing structural imbalance between annual expenditures and available resources, which is generally inconsistent with an Aa1 rating.”
Moody’s discussed some of the positive and negative things happening in the state in the rating action.
West Virginia has had a mixture of revenue enhancements, expenditure reductions and reserves that it has used to close budget gaps. Revenues continue to lag behind budgeted estimates, and the structural imbalance is likely to continue through at least 2018.
The state’s economy has begun to stabilize, but the demographic profile remains weak. The state also has above-average pension liabilities, Moody’s said.
“The state’s debt burden could increase under the governor’s new infrastructure proposal,” Moody’s said in the rating action.
According to Moody’s, the outlook for West Virginia is stable. The economy is stabilizing and liquidity remains healthy, allowing the state financial flexibility in weathering a slower rebound, Moody’s said in the rating action.
Moody’s expects West Virginia to continue with its prudent management practices, working through what will likely be a longer term but more moderate revenue decline, the rating action said.
In the rating action, Moody’s lists factors that could lead to an upgrade in the state’s debt rating.
Factors that could lead to an upgrade are long-term growth and diversification of the state economy; improvement in the state’s energy sector that would result in the stabilization of employment and severance tax revenues; codification of the conservative management practices the state has used; and a significant reduction in debt and pension liabilities.
In the rating action, Moody’s also lists factors that could lead to a downgrade.
Those are a prolonged downturn for coal and natural gas, including significant mine closures or a continued trend of layoffs; a shift away from the state’s sound governance practices and well-managed financial operations; an increase in the state’s unfunded pension liabilities resulting from failure to pay the full annual required contribution; and a significant increase in the state’s net tax supported debt burden.
State’s debt ratings do not change very often, Jacobson said. In 2010, the state’s rating was upgraded from an Aa2 to an Aa1, Jacobson said.
“It’s going to get worse if we don’t act,” Justice said during the press conference. “I didn’t create this mess, but I will fix it. There is no chance we can cut our way out of this. I’ve put together a plan that will put West Virginia on a path to prosperity. We need to pass the Save Our State budget to create jobs and fix our state’s finances.”
Justice said during the press conference that communities will be hurt by the debt rating being lowered, which will make borrowing more expensive for the state.
Justice also said that he is disappointed about the downgrade.
“Now look, I’ll answer your questions on any day about anything, but not today,” Justice said at the end of the press conference.
“I’ve given you as much information as I’m going to give you today, and I’m not happy about this. And I absolutely can’t say any more than it just makes me sick.”
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