West Virginia making fiscal progress
West Virginia ended its fiscal year June 30 with a surplus of about $100 million in the General Revenue Fund. Half of that was, by law, deposited in the Revenue Shortfall Reserve Fund (the “rainy day” fund).
The rainy day fund first was established in 1993. It was championed by Delegate Bob Kiss, who had just become chairman of the House of Delegates’ Finance Committee. I had just become a member of that committee after being elected in 1992. I’ve been a member of Finance ever since.
We put about $30 million into the rainy day fund in 1993. Today it has more than $600 million in it, making it the fifth soundest rainy day fund of all 50 states, base on a percentage of general revenue.
Alaska has a rainy day fund of $10 billion, which is more than twice the size of its General Fund. Alaska could go for more than two years without collecting any revenue and still be solvent.
Texas is second, with a rainy day fund worth 23 percent of General Revenue, followed by Wyoming at 22 percent. North Dakota has a rainy day fund worth 20 percent of its General Fund, placing it fourth. West Virginia’s rainy day fund is worth just more than 16 percent of our state’s General Revenue Fund.
These figures come from the National Association of State Budget Officers. They include activity through July 1, 2010, the end of the fiscal year for every state.
West Virginia was one of the first states to establish a rainy day fund, but most other states followed within a few years. The funds were adopted as a result of advice from Wall Street Bond rating agencies after a series of bond market abuse scandals in the 1980s (including one in West Virginia).
The rainy day fund is money set aside for physical and fiscal emergencies. Money may not be taken from it for any purpose except those, and there must be an act of the Legislature any time money is removed from the fund.
One of the positive results of the creation and nurturing of the rainy day fund is the increase in the value of bonds issued by West Virginia for various purposes, primarily to improve infrastructure. Our revenue bonds have seen a threefold increase in value since the creation of the Revenue Shortfall Reserve fund. The soundness of the rainy day fund is not the only determinant of a bond rating, but it is an important one.
When the rainy day fund was created in 1993, our revenue bonds were rated “Double A Minus” by the various Wall Street Rating agencies (Standard and Poor, Moody’s etc.). Within two years of the creation of the fund, our bonds were upgraded to “Double A,” and were upgraded again to “Double A Plus” two years after that.
Just a few months ago, Standard and Poor upgraded West Virginia’s revenue bonds to “Triple A Minus,” making our state one of the top third of all the states in terms of revenue bond ratings. Virginia is the only state that enjoys the highest rating of “Triple A Plus,” and only a half-dozen states are in the next category down, “Triple A.”
A “revenue” bond is a bond that has a dedicated revenue source. A “general obligation” bond is a bond that obligates the “full faith and credit” of the government in question (in this case, the state of West Virginia).
General obligation bonds only may be authorized by a constitutional amendment, which requires a two-thirds vote of each house of the Legislature and approval by the people of the state at a referendum. Since there is no dedicated revenue stream for debt service on such a bond, a general obligation bond is merely a promise by the people to “pay up.”
Revenue bonds are considered sounder and safer than general obligation bonds, which is one reason we don’t float general obligation bonds much any more. I don’t think we’ve issued a general obligation bond since I got to the Legislature in 1992.
The higher the bond rating the more valuable the bonds, thus the lower the interest rate the state must pay for debt service to a bond of a particular amount. The bottom line is we get a “bigger bang for the buck” the higher our bond rating.