By ANDREA LANNOM
CHARLESTON, W.Va. — Moody’s Investors Services has downgraded West Virginia’s general obligation debt rating, affecting about $393.6 million in outstanding debt.
The reason for the downgrade from Aa1 to Aa2, according to the rating agency, is because of a “multi-year trend of growing structural imbalance between annual expenditures and available resources.”
“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,” the summary rating rationale said.
“Additionally, 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.”
Gov. Jim Justice and Department of Revenue Secretary Dave Hardy hosted a press conference Tuesday to discuss the downgrade. Hardy said a year ago, Standard & Poor and Fitch Ratings downgraded West Virginia. Moody’s put West Virginia on a negative watch before deciding today to act on that watch.
However, Hardy said in a conference call with Genevieve Nolan, lead analyst for Moody’s Investors Services, Nolan expressed optimism about Justice’s proposed budget.
“(Noland) said your governor is not afraid to get his hands dirty, referring to Justice’s commitment to close the structural hole.
He said Nolan praised Justice’s proposed budget and a commitment by West Virginia to meet its obligations in a responsible way.
Justice’s proposal, dubbed Save Our State, includes $26.6 million in cuts and $450.15 million in revenue enhancements or taxes to resolve the projected $500 million deficit for the next fiscal year.
In the press conference, Justice said he was disappointed in the downgrade, saying it made him sick.
“Well guys, all I can say is this just makes me sick,” Justice said of the downgrade. “That’s all there is to it.”
“We’ve been here for years and won’t react,” Justice later said. “All we want to do is kick the can down the road and not react. That won’t do. Now, we are where we are. It’s disappointing as can be.”
Justice echoed his concerns that things are going to get worse.
“This is not going to get better,” Justice said. “It’s just going to get worse if we don’t act, if we don’t do something. It’s going to hurt communities. Borrowing just got more expensive.”
He mentioned a proposal that has recently come up to refinance or reschedule pension payments. In a previous interview, Delegate Eric Nelson, R-Kanawha, said one of the many things on the table to deal with the budget gap is to refinance pension plans, which he said could save the state up to $90 million a year.
The state has a 40-year payment plan with 18 years remaining on the payout. Nelson said if the state were to extend it another 12 years, it could save $70 million to $90 million a year.
However, Justice said Tuesday that in his view, this would be a bad idea.
“One of the big things Moody’s said is that if we do that, we are even more unstable,” Justice said. “If we don’t make our current liabilities and current annual payments, we are more unstable.”
Moody’s said the outlook for the state is stable, saying “the economy is stabilizing and liquidity remains healthy, allowing the state financial flexibility to weather a slower rebound.”
“Additionally, we expect the state to continue with its prudent management practices, managing through what will likely be a longer term but more moderate revenue decline,” Moody’s said.
The agency also listed factors that could lead to an upgrade listing: longterm growth and diversification of the economy, improvement in the state’s energy sector, codification of the conservative management practices that have enabled the state to maintain positive fund balances and strong reserve levels.
Justice said this is what he advocated in his budget proposal.
Moody’s listed additional factors that could lead to a downgrade including a prolonged downturn of the coal and natural gas industries, a shift away from sound governance practices and a trend of well-managed financial operations increases in the state’s unfunded pension liabilities and a significant increase in state’s net tax supported debt burden.
“Now look, it’s time to do something,” Justice said. “I’ve told you a bunch of times, I didn’t create this mess. The voters honored me to straighten it up. We have got to do something and I’ve put together a proposal of how we can be on a pathway to prosperity and climb out of this mess. If we don’t, there will be more and more days like today.”
After going through what the downgrade meant for the state, Justice said he would be happy to answer questions any other day except for today, saying he wasn’t happy with the announcement and saying, “I can’t say anything more about it than it makes me sick” before leaving the room.
After Justice’s press conference, Senate President Mitch Carmichael, R-Jackson, released a statement on the downgrade.
“Years of fiscal mismanagement have led us to this point,” Carmichael said in the statement. “The bond downgrade underscores the urgency and the need for fundamental reform and a new direction in West Virginia. 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, R-Kanawha, also released a statement.
“This bond downgrade reinforces the need for fundamental changes to how we operate our state government,” Armstead said. “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. 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.”
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