BRADENTON, Fla. – Saying he is sickened by West Virginia's third rating downgrade in less than a year, Gov. Jim Justice blamed state officials for "poorly" managing the state's finances.
Justice, a Democrat who took office Jan. 16, was reacting to Tuesday's Moody's Investors Service downgrade of the state's $393.6 million of general obligation bonds to Aa2 from Aa1. The rating agency cited the state's multiyear structural budget imbalance.
Moody's also downgraded West Virginia's lease appropriation debt to Aa3 from Aa2, and its moral obligation bonds to A1 from Aa3. The state's outlook was revised to stable from negative at the new, lower rating.
West Virginia's growing budget imbalance, fueled by sharp declines in demand for coal products that support the state's economy and unemployment, led S&P Global Ratings to downgrade the state's GOs to AA-minus from AA in April 2016.
Similar concerns prompted Fitch Ratings in September to lower its GO ratings to AA from AA-plus.
"How many times do we have to be downgraded…until somebody wakes up and addresses the problem?" Justice said, adding that for years the state has known about the burgeoning budget imbalance but failed to react and address it.
Justice said the inability of state officials to reach consensus on how to rectify budget problems will unquestionably hurt communities.
"Our borrowing just got more expensive, no question," he said.
According to Moody's, while the state's economy has begun to "stabilize some," its demographic profile remains weak and pension liabilities are above average.
The state's debt burden could also increase under the governor's proposal to issue nearly $3 billion of bonds for highway projects, Moody's said.
"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," said Moody's analyst Genevieve Nolan.
West Virginia has a track record of fiscal conservatism and a financial cushion with $632.3 million in the rainy day fund, Nolan said.
However, she said, the state's credit challenges include an economy with an above-average concentration in the coal industry, below-average income, and persistent budget problems aggravated by "significant" unfunded pension liabilities.
In the current operating budget, revenues were $116 million, or 4.9%, below estimates at the end of January, leading the state to anticipate a year-end shortfall of $213 million, according to the governor's executive budget.
Justice said he has already taken action to close $90 million of the gap.
He has recommended lawmakers approve using $123 million of rainy day funds to close the remainder of the current shortfall.
In fiscal 2018, Justice has recommended a total budget of $33.5 billion, of which 42% is composed of federal funds, 35% consists of revenues that flow into the general fund, 10.3% is from the state road fund, 9.5% represents appropriated special revenue, with lottery funds making up the balance at 3.3%.
The $4.5 billion general fund projects a $497 million budget gap.
To close the shortfall, Justice has recommended "revenue enhancements" totaling $450 million, base budget expenditure reductions of $26 million, and $21 million of other adjustments by limiting the growth in some expenses.
Justice has received pushback from the GOP-led General Assembly for his revenue-generating proposals to close the 2018 gap, which includes increasing the state's 6% sales tax rate by 0.5%, eliminating some sales tax exemptions, and adding a 0.2% tax on commercial gross revenues.
The governor has also proposed raising the state's gas tax, nearly doubling vehicle registration fees, adding a $1 surcharge to the toll on its only turnpike, and raising the legislative cap on the issuance of grant anticipation revenue vehicle bonds to $500 million from $200 million, all to support Justice's infrastructure bond finance plan.
Senate President Mitch Carmichael, R-Jackson, and House Speaker Tim Armstead, R-Kanawha, said in separate statements that the downgrades by Moody's supported their positions that Justice's budget plan is flawed.
"The old policies of simply raising taxes and spending more will only lead to further structural deficiencies and continued downgrades," Carmichael said.
The downgrades by Moody's reinforce the need for fundamental changes to "right-size our state government and restructure our tax code in a way that promotes growth," according to Armstead.
"In the coming weeks, we will work to construct a budget that will restore confidence in our future economic outlook," he said.
Justice said Tuesday that further budget cuts of state services, on top of those imposed in recent years, will lead to "a total meltdown and we're not going to be able to get out of it."
He also questioned a proposal suggested by House Finance Chairman Eric Nelson, R-Kanawha, to refinance the state's pension liabilities – now on a 17-year payout trajectory – into a 30-year payment plan.
Restructuring the liabilities would save the state $20 million on its annual required contribution, and help lawmakers deal with the anticipated fiscal 2018 budget shortfall, Nelson has said.
However, Moody's said that while the state's pension burden remains elevated in comparison to its peers – at $9 billion as of fiscal 2015 - the state's 8.5% pension contribution in 2015 was above its "tread water" payment of 5.7% needed to keep pace with interest on its net pension liability plus the employer service cost.
"The state's focus on making its annually required pension contributions, which the governor is proposing to continue in fiscal 2018, is a credit positive," Nolan said. "A move away from the current practice of fully funding the annual required contribution could result in negative rating pressure for the state."
Justice, a billionaire coal and agriculture businessman holding his first political office, said during a press conference Tuesday that he "didn't create this mess."
"The voters honored me to come in and try to straighten it up," he said, referring to the state's budget problems. "We've got do to something."
