West Virginia revenue officials brief lawmakers on ratings agency calls

Department of Revenue Cabinet Secretary Dave Hardy, who participated in Monday’s meeting by phone from Charleston, told lawmakers that state officials participated in phone calls last week with Moody’s, Standard and Poor’s, and Fitch. The calls help these bond rating agencies when determining future ratings.

According to Hardy, all three rating agencies praised West Virginia for maintaining a strong rainy day fund, also called the revenue shortfall fund, which had more than $1.1 billion as of the end of October.

“We always get good feedback about our rainy day fund balance,” Hardy said. “This year, of course, it was nearly $1.2 billion, and that’s always viewed very favorably by the rating agencies, and that’s nothing new.”

The state’s Public Employee Retirement System is nearly fully funded at 98.8%, while the Teacher’s Retirement System is 78.4% funded, up from 67.1% when Justice first took office in 2017.

While there is some debate, the U.S. Government Accountability Office considers a state and local pension plan healthy if it is close to 80% funded.

“We have improved by 11.3% in the last seven years, and we continue to climb out of that hole, and that’s quite an accomplishment,” Hardy said.

The state was also able to turn around over a decade its other post-employment benefits (OPEB) liability. The state had an OPEB liability of $3 billion in 2018, dropping to $1.6 billion in 2019. Hardy said as of this year, the state’s OPEB liability has been erased and is in the positive by $158 million.

“That was such a good outcome that we actually went back and audited those numbers,” Hardy said. “We get those numbers from PEIA and the retirement board, and that obviously was very well received by the rating agencies.”

Hardy also said the old worker’s compensation debt remaining from when the state privatized its worker’s compensation program (Now Encova Insurance), which was more than $2.2 billion in 2006, has now been retired. The fund now has a balance of $7 million.

Some of the questions state officials received from the ratings agencies last week revolved around the state’s recent tax reform plans. The West Virginia Legislature passed House Bill 2526. The bill included a 21.25% across-the-board cut in personal income tax rates retroactive to the beginning of January.

Hardy said despite the personal income tax cut, total tax collections year-to-date for fiscal year 2024 beginning in July were $1.8 billion, which was 15.5% more than the $1.6 billion revenue estimate set for the first four months of the fiscal year, providing a year-to-date surplus of $242.2 million.

The ratings agencies were pleased that the state created a personal income tax reserve fund in case personal income tax collections don’t meet expectations following the tax cut. That fund has a balance of $460 million.

The agencies were also pleased that annual triggers included in the tax cut bill that allow for up to a 10% further reduction in personal income tax rates depending in a set formula that does not factor in the up-and-down revenues from the severance tax on coal, oil , and natural gas. Revenue officials said they won’t know if the trigger kicks in until August 2024, and the next personal income tax rate reduction wouldn’t begin until calendar year 2025.

According to the Governor’s Office, the state collected $55.7 million in severance tax dollars, or $52.7 million more than the $3 million estimate for October. However, the state returned more than $74 million in severance tax collections, leaving the state with a negative $37.5 million balance in the severance tax line item for October.