NEW ORLEANS – West Virginia's budget problems, stemming largely from sharply reduced demand for coal products, took a toll on the state's bond rating Thursday.
Standard & Poor's dropped the state's general obligation debt to AA-minus from AA, and lowered its appropriation and moral obligation ratings to A-plus and A-minus, respectively.
Ratings on the West Virginia Municipal Bond Program were also lowered to AA-minus from AA, because it is linked to the state by virtue of certain program mechanics.
The outlook is stable.
"The downward revision reflects our view of structural changes to the state's economy due to weakness in the energy sector, specifically coal, which in our view is a long-term challenge rather than a cyclical setback," said analyst Nora Wittstruck.
West Virginia has seen year-over-year economic deterioration as a result of the global reduction in demand for mineral and ore products, and faces ongoing challenges to diversify its employment base over the long term, S&P said.
As a coal-producing state, West Virginia has seen key economic indicators erode from rapidly declining coal and natural gas prices and statewide layoffs for key energy sector employers.
The economic weakness has negatively affected state revenue collections for fiscal years 2016 and 2017, leading to revenue shortfalls and challenges in reaching structural budget balance, Wittstruck said.
"Although officials face difficult decisions to realign revenues and expenditures through revenue enhancements, recurring budget cuts, or both, we believe the state's access to sizable rainy day funds provides credit strength at the AA-minus rating level," she said.
"However, the use of reserves and other one-time measures to close structural budgetary gaps could lead to greater fiscal pressures in future years," Wittstruck added.
The Legislature adjourned on March 15 without passing a budget for fiscal 2017 due to the inability to reach consensus on measures to achieve budget balance without substantial use of one-time revenues.
Structural budget balance was further complicated by a $92.4 million reductions in revenues expected for severance, sales, corporate, and personal income taxes.
In total, lawmakers faced a $271 million gap as they considered the 2017 budget. They rejected tax increases proposed by Gov. Earl Ray Tomblin.
Budget negotiators are still working to reach a compromise that can be taken to the full Legislature in a special session expected to be called later this month or in early May.
