Two weeks ago Fitch Ratings increased its rating of West Virginia's general obligation (GO) bonds from "AA" to "AA+."
This follows similar increases in the last two years from the other two major bond raters. Moody's Investor Service increased it's rating for West Virginia GO bonds in 2010, following Standard and Poor Rating Services 2009 increase. In addition, Moody's increased its rating of some of our revenue bonds to its highest rating, AAA, in 2009.
GO bonds pledge the "full faith and credit" of the state. There is no direct funding source for the debt service on such bonds. The legislature simply has an obligation to make sure the debt is paid on schedule.
A revenue bond by contrast has a dedicated funding source for the debt service. There are only two ways the debt service on such a bond would not be paid on schedule. The dedicated revenue source might prove insufficient and the legislature would refuse to make up the difference, or the legislature could change the law before the full debt was paid.
The bond that will soon be issued to pay for the better sewage treatment systems mandated by the Chesapeake Bay standards is an example of a revenue bond. Money from the Excess Lottery Fund is dedicated to service this bond.
Fitch gave several reasons for its upgrade of West Virginia's GO bonds. They include West Virginia's long-standing efforts to address financial challenges, its use of surpluses to build up reserves and reduce pension liabilities and the state's emergence from the recession in a strong financial position.
Indeed, our state finished Fiscal Year 2011 three weeks ago with a General Revenue Fund surplus of about 9 percent (over $320 million out of a General Fund budget of $3.74 billion). Since half of that surplus must by law be deposited in the state's rainy day fund, that fund will become even stronger. We already had the fourth or fifth strongest rainy day fund in the country.
Eighteen and a half years ago (January 1993) I was sworn in as a member of the House of Delegates and took my place on the Finance Committee. At that time West Virginia's finances were an absolute mess. Our bonds were little better than junk quality, and entrepreneurs doing business with the state went many months before being paid. Many medical providers and pharmacies refused to honor the public employees health care system (because payments were woefully late).
West Virginia's finances in 1993 looked like California's do now. Three people persuaded a majority of each house of the legislature that we had to make major changes to the way we were doing business.
One was Gov. Gaston Caperton. Another was Bob Kiss, who became chair of the House Finance Committee the same day in 1993 that I became a member. The third was Earl Ray Tomblin, who had shortly before become President of the Senate and had been chair of the Senate Finance Committee before that.
After finishing his second term, Gov. Caperton became president of the College Board, which produces the Scholastic Aptitude Test (SAT) among other things. He recently retired from that. Kiss served four years as House Finance chair and was Speaker of the House for 10 years after that. Tomblin is still President of the Senate and is also now acting governor.
Creation of the state's rainy day fund was the first in a series of structural reforms to our finances. This was followed by the privatization of our workers' compensation program, the creation of the excess video lottery fund and several other changes.
But the biggest change was a psychological one. Members of the legislature now have a much greater sense of financial responsibility than they did before 1993. Consider that the tremendous fiscal progress we have made in the last 18 and a half years has come without a single general tax increase.
Some user fees have been increased, inlcuding one big one. The gasoline tax is now 5 cents per gallon greater than it was in 1993, although in constant dollars its actually lower now. Unlike general sales taxes, the gasoline tax is not a percentage of the price but rather a fixed number of cents, so it is reduced in value as the economy inflates.
But both income and sales taxes have actually been reduced on both individuals and businesses. And our state is now considered one of the dozen best fiscally managed of the 50.
So why do we not have the highest bond rating, "AAA," for all of our bonds from all three rating services? The answer given by all three is that our economy is not diversified enough.
The coal industry, which provides us a great deal of the revenue with which we have been able to pay our bills on time, ironically causes us to not be considered economically diverse enough to get the ratings our fiscal performance deserves. I wonder, will the projected boom in the natural gas industry be perceived as greater "diversification" or will it be considered just more dependence on energy production?