Mountain State Spotlight Explains: Should West Virginians care about the state’s bond rating?

Back in 2017, Gov. Jim Justice stood before state senators and  delegates and told them West Virginia had “a $500 million hole in the bucket” and warned that this hole in the state budget would grow to $700 million the next year.

During his first State of the State address , Justice came out from behind the lectern and wrote his tax and budget calculations on a whiteboard, like a folksy accounting professor.

During that speech, Justice said lawmakers needed to dip into the state’s Rainy Day Fund, but warned if they  kept doing that, it would hurt West Virginia’s bond rating.  “The people who create the rates for our bonds are going to torpedo us,” the governor said.

Almost seven years later, in December 2023, the Secretary of Revenue, Dave Hardy, stood before the Joint Finance Committee  clicking through PowerPoint slides as he gave an update on the state’s finances.

This time, Hardy had some good news — the state’s bond ratings were now stable and doing well. Hardy credited “the work of a lot of good people,” going back decades.

But no one bothered asking Hardy this:

Why should average West Virginians care about their state’s bond rating?

What is a bond rating?

A state’s bond rating is the state’s credit score, according to Liz Farmer, a policy expert with the Pew Charitable Trusts.

Think of it like that 2024 Ford F-150 Raptor sitting on the lot boasting a nearly $90,000 sticker price. Do you have that kind of cash to pay and drive it off the lot?

Probably not. So you take out a loan and make payments.

The state has to do the same thing for its roads, bridges, schools, state parks, sewer plants, water plants and more. While the state has deeper pockets than you, it can’t just pay outright for everything all at once.

So the state borrows money in the form of a bond. The world of bonds can get complicated real fast and that’s why people like Josh Goodman at the Pew Charitable Trust work to make sense of them.

The idea behind a bond is to take a major project that is meant to benefit a community for a long time and spread the cost out over many years or even decades, he said.

“If it’s something that’s supposed to be for future generations, their tax dollars can pay for it,” he said.

But like the loan on that F-150, whenever the state borrows money it has to pay interest. That’s where the bond rating comes in. It determines what interest the state’s going to pay on what it borrowed. Just like how a better credit rating means lower payments on the pickup.

Credit rating agencies like Moody’s , Standard and Poor’s and Fitch will look at how well the state balances its books, how its economy is doing and how much debt it already has. It’s like showing a loan officer your pay stubs and bank statements when trying to get a mortgage.

West Virginia’s scores are pretty much like getting a B on a math test. For instance, Fitch pegs the state at an “AA stable outlook,” which is a few notches down from perfect but still considered “high grade.”   What’s holding the state back is a slow economy, population decline and relying too heavily on taxes on industries like gas and coal, which can go up and down a lot.

How does West Virginia borrow money?

Just like you might be paying on a couple of credit cards, a mortgage and a car loan, the state has multiple ways to pay on its debts. Which  type of borrowing just depends on what the money is used for.

There are two main types of bonds: general obligation and revenue. Again, this can get real complicated, so all you need to know is general obligations are paid for through your tax dollars.

West Virginia has only borrowed money to be paid with tax dollars 16 times in its 161 years. Almost all those bonds went to two things: roads and bonuses to veterans of various wars. In order to borrow money that way, two-thirds of each chamber in the Legislature has to approve, then it goes to state voters.

Justice’s “Roads to Prosperity” is bond funded, approved in 2019 by voters. It’s the biggest of this type of debt the state is currently paying on.

Revenue bonds, on the other hand, are the typical way the state borrows money. Instead of the state itself borrowing the cash, individual agencies, such as the School Building Authority, the Economic Development Authority or the state’s universities take out the money.

Just like the state gets a credit score, those agencies get their own score. They pay for these types of bonds with lottery money, fees, special taxes or special agreements with private industry.

Altogether, revenue bonds add up to around $11 billion in outstanding debt.

But there’s a type of revenue bond that falls in the middle. Those are the lottery bonds, considered “moral obligations.” In the event the lottery money used to pay that debt dried up, the state has said it is willing to step in.

All told, the debt taxpayers are on the hook for about $2.6 billion.

Should you care?

How often do you drive on a road?

Farmer said while it’s hard to make a direct line from the state’s credit to people’s everyday lives, she notes the better the credit rating, “the more bang for the buck” taxpayers get with their money when it comes to vital infrastructure.

“People really care about that,” Farmer said. “And if it becomes more expensive for a state to do so, then the state has to start making choices about how much it can put where, and ultimately go to the taxpayers and ask them for more money and to raise taxes.”

Farmer noted it’s next to impossible for a state to default on its debt payments. It can raise taxes, cut spending or do both. Even bonds that aren’t backed with tax dollars, like certain road bonds backed by gas taxes, could result in the government raising those taxes to pay for them.

A bond rating upgrade or downgrade might not be felt immediately in the wallet, but can be over time. Even if the state isn’t taking out more money in taxes to pay on a road, if the road isn’t repaired every so often, the potholes could cause havoc on a driver’s wallet through the mechanic bill.

Credit ratings are also an indicator of how well the state’s finances are doing, Goodman said. Since the ratings are assigned to each state nationwide, they can be a good measure of comparison.

In that December meeting with lawmakers, Hardy said besides putting together a state budget for the governor, annual calls with rating agencies are “the most important thing the Department of Revenue does. Bar none.”

But quality of life and state finances don’t always equal the same thing, Goodman said. So it’s hard to say for sure if a strong bond rating translates into things West Virginians need, like fewer overdoses, less poverty, better schools or fewer kids in foster care.

“I haven’t gone into credit ratings, and try to draw a correlation between how a state is doing economically or based on public health measures, or life expectancy,” Goodman said. “But I think, just looking at it quickly, I think it doesn’t necessarily reflect that.”

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