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West Virginia 'outlook negative,' according to rating agency

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West Virginia 'outlook negative,' according to rating agency
By Brad McElhinny, WV MetroNews

CHARLESTON, W.Va. — The sagging coal industry and slumping natural gas profitability have led to a downgrade in West Virginia’s credit rating by Fitch, one of the big three credit rating agencies.

West Virginia has dropped to ‘AA’ from ‘AA+’

Or, as Fitch puts it, “outlook negative.”

Downgraded credit ratings mean West Virginia will have to pay greater interest rates when it borrows to pay for infrastructure projects such as water lines or school construction. The higher interest rates have a negative impact on a state’s budget and economic growth.

It’s also a sign of how the credit rating agency thinks the state is doing.

In this case, not well.

“Fitch believes long-term headwinds are significant, as coal production remains a key input to the state’s economy and there is significant domestic and international momentum to reduce coal utilization,” according to Fitch’s assessment released Tuesday.

“Fitch expects that financial stress will persist until such time as the decline in coal production bottoms out and is replaced by an expansion of the state’s other natural resources or another positive development.”

Fitch also concluded that the natural gas industry, despite its recent success, has hit a wall because of declining prices.

“Development of the state’s crude oil and natural gas reserves in the Marcellus and Utica Shales, which began in 2010, has increased substantially over this time period, but the substantial drop in crude oil and natural gas prices as well as a lack of transmission capacity have also hampered the state’s economy and financial performance,” Fitch stated.

Gov. Earl Ray Tomblin responded to the downgrade by saying West Virginia must strive to diversify its economy.

“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 stated.

“We must work continually to diversify our economy through projects like the Hobet mine site redevelopment, while also maintaining a balanced, smart budget without irresponsible cuts to critical programs.”

Fitch downgraded:
•West Virginia’s Issuer Default Rating, the overall credit rating, to ‘AA’ from ‘AA+’
•$396 million outstanding general obligation bonds to ‘AA’ from ‘AA+’
•$441.6 million outstanding lease revenue bonds issued by the Economic Development Authority and the School Building Authority to ‘AA-‘ from ‘AA’
•$133 million outstanding West Virginia Water Development Authority revenue bonds to ‘A+’ from ‘AA-‘

Fitch said there is good news to report about West Virginia’s economy, but not enough.

“Bright spots in the state’s economy have been the steady growth in the service professions as well as transportation, trade and warehousing, with a particular focus on the areas located in the states Eastern Panhandle that are near to Washington, D.C., and its surrounding suburbs.

“Yet, the state’s demographic profile remains comparatively weak and the state has steadily lost population to other states and regions.”

Fitch gave West Virginia credit for fiscal responsibility, including judicious use of its Rainy Day Fund.

“The state has responded to the economic downturn and related serial revenue losses through a multi-prong approach: reducing expenditures, increasing and reallocating revenues and through consecutive applications of reserves from its RDF.”

But Fitch concluded that continued economic struggles, plus the unpredictability of a new governor and administration next year, could make keeping a strong reserve in the Rainy Day Fund difficult.

Tomblin urged the state to continue striving for fiscal responsibility.

“Fiscal responsibility and solvency have been cornerstones during my time in public service and especially as governor, despite some recent challenges,” Tomblin stated. “We have worked hard to fulfill our financial obligations and pay off our long-term liabilities but at the same time we must — as I have continually emphasized — address systemic issues within our state budget to reflect new economic realities.”

The other two major credit ratings agencies are Moody’s and Standard & Poor’s. Moody’s downgraded its rating of West Virginia last October. Standard & Poor’s downgraded its West Virginia rating in April.