S&P Global Ratings said it has revised its outlook on Virginia's general obligation, appropriation-backed, and moral obligation debt to negative from stable.
At the same time, it assigned its AA-plus rating to the Virginia Public School Authority's (VPSA) series 2017A school financing bonds issued for Virginia.
S&P also affirmed its AAA rating on the state's GO debt outstanding, its AA-plus rating on its appropriation-backed debt, and the AA rating on its moral obligation debt.
"The negative outlook reflects the commonwealth's recent pattern of structural imbalance despite a period of economic growth," said S&P credit analyst Carol Spain, "and although the commonwealth has recovered from the initial implementation of sequestration, state revenue growth has remained soft, suggesting a broader and longer lasting change in the economy, and we believe there is a risk that future federal spending cuts could have an outsized effect on the Virginia economy."
During the 2014-2016 biennium, and again in the 2016-2018 biennium, Virginia lawmakers have chosen to significantly draw down revenue stabilization reserves rather than implement sufficient structural changes to stabilize the budget.
Should budgeted drawdowns occur, the commonwealth's revenue stabilization reserves would be at just 1.39% of general fund expenditures to end fiscal 2018, which is low relative to similarly rated peers.
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, S&P said.
"However, 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 Spain.