West Virginia’s Rainy Day emergency reserve funds will top $1 billion for the first time in state history next week, thanks primarily to strong investment earnings, Department of Revenue officials told the interim Joint Committee on Finance Monday.
“The Rainy Day fund for the first time in the history of West Virginia will have a balance of over $1 billion,” Revenue Secretary Dave Hardy told legislators.
As of Aug. 31, the balance of the two Rainy Day funds — Fund A and Fund B — was a combined $958.1 million. The state will repay a $68.5 million “opening” loan next week to push the balance to $1.026 billion.
Each year on July 1, at the start of the new state budget year, the government borrows money from Rainy Day A to pay current expenses during the gap before tax revenue for the new year starts rolling in.
On July 1, 2021, the state also transferred $15.4 million — half of the 2020-21 budget surplus — to Rainy Day A, as required by law.
However, as Deputy Revenue Secretary Mark Muchow explained, most of the growth that will push the Rainy Day funds over $1 billion comes from strong return on investments in the Rainy Day B fund.
“Most of Rainy Day B is investments, not principal,” he said.
Rainy Day B was created in 2006 — 13 years after the state set up Rainy Day A — using $234 million of tobacco settlement funds, a portion of the more than $1 billion settlement with major cigarette manufacturers negotiated by then-Attorney General Darrell McGraw.
Under the law creating Rainy Day B, the state Investment Management Board is allowed to make relatively aggressive investments with those funds. Those investments have increased the fund from the original $234 million to $562.69 million as of Aug. 31, Muchow said.
He noted that no additional principal has been added to Rainy Day B since it was established.
Under the law, the state cannot tap into Rainy Day B unless Rainy Day A is exhausted. While the government has tapped into Rainy Day A periodically to pay for natural disaster relief and to balance state budgets during economic downturns, that hasn’t happened since the 2016-17 budget year, Budget Office Director Michael Cook noted.
As of Aug. 31, Rainy Day A totaled $395.52 million, pending the repayment of the $68.5 million loan.
Bond rating agencies look positively on the state having strong Rainy Day funds, Hardy said, and strong bond ratings can mean lower interest rates on bonds and borrowing.
“I’m sure the groups that rate West Virginia’s credit rating will be very impressed,” he said.
Rating agencies, like Moody’s and Finch, want to see the state maintain Rainy Day funds equal to at least 16% to 18% of the general revenue budget, or currently about $780 million to $880 million, Hardy said.
The Rainy Day funds equal about 19% of general revenue.
“When we get our review from Moody’s and the other people, they always point out our Rainy Day funds, and our ability to support our retirement plans,” Hardy said.
Under existing law, 50% of any year-end budget surplus has to go into Rainy Day A, until that fund equals 13% of the general revenue budget. It’s currently just under 8%, Muchow said.
Also during the legislative interim meeting Monday:
- Cook said state finances continue to benefit from a higher federal Medicaid funding match, which was increased from 75% to 81.1% at the start of the coronavirus pandemic.
That frees up about $200 million a year that the state otherwise would spend for its share of costs for Medicaid, the state-managed health care program for the poor, disabled and elderly, he said.
- Muchow said state sales tax collection jumped 8.1% in 2020-21, helped by most adult West Virginians receiving a total of $2,000 in pandemic stimulus checks earlier this year.
“Start multiplying $2,000 by the number of people, and that’s going to drive up consumption in the short term,” he said.
- Income tax collection was up 7.2% from last year, with payroll withholding taxes up 10%.
“That tells me more people are working, and maybe being paid a little more,” Muchow said.
- Severance tax collection jumped from “an almost laughable” $4 million for the first two months of the 2020-21 budget year to $49.3 million for the first two months of the current budget year, Hardy said.
Muchow said that’s primarily because of a jump in natural gas prices from less than $1 per million BTU to more than $3.60. Also, when natural gas goes over $3, that makes steam coal more price competitive for power generation, which has resulted in an increase in state coal production. Coal prices also are running about $10 a ton higher than this time last year, Muchow said.
- Asked why the Justice administration did not release the traditional six-year budget forecast this year, Muchow said there’s so much uncertainty in the economy that long-term projections are difficult.
“There’s so many moving parts,” he said.