BRADENTON, Fla. – Tapping reserves too often landed Virginia a negative rating outlook that could foreshadow a loss of the state’s coveted gilt-edge ratings.
S&P Global Ratings said a budget imbalance stemming from soft revenue growth and spending down the state’s savings led it to revise the outlook to negative from stable on Virginia’s AAA general obligation rating. The outlook change also applies to the state’s appropriation-backed and moral obligation debt.
“Should we see a continuation of weaker economic growth, softer revenue performance, reliance on one-time budget solutions, and no clear path to stronger reserve levels, we could lower the rating,” said S&P analyst Carol H. Spain.
Despite a period of economic growth and recovery from the federal government’s initial implementation of sequestration, Spain said state officials chose to “significantly” draw from budget stabilization revenues over the biennium budget years between 2014 and 2018, rather than implement sufficient structural changes.
Should currently drawdowns occur as planned, Virginia’s revenue stabilization reserves would be at 1.39% of general fund expenditures at the end of fiscal 2018, which S&P said is low relative to similarly rated peer states.
S&P also said it believes there is a risk that future federal spending cuts could have an outsized effect on the state’s economy.
“We understand that the commonwealth plans to establish a second reserve fund called the revenue cash reserve to further support operations in the event of future revenue shortfalls, and that currently revenues are trending ahead of most recent forecasts,” Spain said.
Virginia’s Finance Secretary Ric Brown said he’s disappointed the state received a negative outlook, but he didn’t take issue with the reasons cited by S&P.
“We think we’ve got a mechanism in place to deal with their concerns,” Brown said Friday. “We’ve got to have some time to see the strategy through.”
Brown was referring to the planned creation of the new cash reserve in fiscal 2018, which will be seeded with $35 million from a new tax amnesty program.
The Legislature decided to develop the new reserve because of constitutional restrictions on the use of the revenue stabilization fund.
“It is not called a rainy day fund for a reason,” Brown said.
The stabilization fund can only be tapped when the budget is enacted, and the withdrawal amount is tied to a formula that tracks the growth and decline of state revenues, he said. The fund cannot be used to bolster the budget if revenues fall short mid-year or an emergency requires additional state funding.
At the end of fiscal 2018, the budget stabilization fund balance is projected to total $281.7 million.
Brown said the new cash reserve will give the state more flexibility.
In addition to the initial $35 million from the tax amnesty program, the cash reserve will also benefit from any revenue surplus that becomes available at the end of fiscal 2017.
The current general fund budget was projected to see 2.9% growth in revenues, but the state has experienced 4.6% growth for the year-to-date, according to Brown.
If revenue growth continues on its current trajectory, the new cash reserve fund will receive $315 million from the surplus, he said.
The governor and the Legislature are in the process of finalizing the spending plan for fiscal 2018. The total budget is currently proposed at $52.7 billion, while the general fund budget is $20.1 billion.
S&P's outlook change came in conjunction with assigning its AA-plus rating to the upcoming sale of $18.2 million of bonds by the Virginia Public School Authority.
Moody's Investors Service, which rates the state’s GOs Aaa with a stable outlook, has assigned its Aa1 rating to the VPSA deal.
Fitch Ratings assigns its AAA rating with a stable outlook to the GOs, but has not issued a rating for the upcoming VPSA offering.