Another Credit Agency Drops West Virginia's Bond Rating

Another shoe has dropped on the West Virginia economy, as another of the "big three" credit rating agencies downgraded the state's bond rating Wednesday.

By Phil Kabler

Another shoe has dropped on the West Virginia economy, as another of the "big three" credit rating agencies downgraded the state's bond rating Wednesday.

Fitch Rating said the downgrade, from AA-plus to AA, "reflects the state's economic and fiscal challenges that have reduced its financial flexibility, and are expected by Fitch to continue over the next several years."

Fitch cited a steep decline in demand for coal in the past two years, driven by "significant domestic and international momentum to reduce coal utilization," as the key factor in the downgrade.

While the report notes growth in natural gas and oil production, it also notes that a substantial drop in natural gas prices and lack of transmission capacity has hampered the ability of that sector to help offset losses in coal production.

Other negatives cited by Fitch are the state's "comparatively weak" demographic profile and ongoing population loss.

"Managing the state's budget is expected to be particularly challenging due to a stagnant revenue trend that Fitch expects will keep spending growth above the state's expected revenues," the report states.

An AA bond rating is still considered a high-grade investment, showing that the bond issuer has a "very strong capacity" to meet its financial commitments.

However, the lower ratings mean that state agencies such as the School Building Authority, Economic Development Authority or Water Development Authority likely must offer higher interest rates to attract buyers on future bond issues, effectively reducing the amount of funds available for the bonded projects.

Despite its downgrade, Fitch cited some positives in the state economy, including low state government debt, a "sizable" Rainy Day reserve fund and "steady growth in the services professions as well as transportation, trade, and warehousing," particularly in the Eastern Panhandle.

Gov. Earl Ray Tomblin said Wednesday the downgrade is another signal that the state must address systemic budget issues.

"As this notice underscores, rating agencies pay sharp attention to our state's responsiveness in the face of an economic downturn, particularly one of the magnitude we are experiencing with the decline of the coal industry," Tomblin said. "We must work to continually diversify our economy through projects like the Hobet mine site redevelopment, while also maintaining a balanced, smart budget without irresponsible cuts to critical programs."

"While Fitch's downgrade is certainly disappointing, it shouldn't be a surprise," said state Senate President Bill Cole, R-Mercer, a candidate for governor.

"It's clearly spelled out for us," Cole continued. "We have to right-size our government and get our state's spending under control, and quickly. West Virginia's families simply cannot afford to keep fronting the cost of a government that grows in the face of a declining population."

The state's general revenue budget has declined 0.3 percent since 2008, according to Department of Revenue figures.

"The Fitch downgrade highlights the need for us to push forward with bold policies that attract the needed investments that will strengthen our economy," House Speaker Tim Armstead, R-Kanawha, said of the report.

He said the downgrade also emphasizes the need to "streamline government spending, and reform our tax code, to broaden our tax base."

In April, in the midst of a legislative budget impasse, Standard and Poor's downgraded the state's bond rating from AA to AA-minus, also citing a global reduction in demand for coal and low natural gas prices.

(c)2016 The Charleston Gazette (Charleston, W.Va.)

Caroline Cournoyer is GOVERNING's senior web editor.
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