Reason for restraint

Thanks to a coal boom in recent years, a surge in gambling and profitable performances by corporations and franchises in West Virginia, state government is in the black. But the state still faces large unfunded liabilities in its retirement and health insurance programs for teachers and other government workers. Other short-term needs include highways, school buildings, water and sewer systems, Medicaid and a whole laundry list of programs. Gov. Joe Manchin wants lawmakers to continue to use tax surpluses wisely as experts predict a state and national slowdown in the economy.

One sentence in the 706-page budget proposed by Gov. Joe Manchin speaks volumes about West Virginia’s finances.

It’s only one fact in the lengthy document (also available on-line at: www.wvbudget.gov) that spells out a taxing and spending plan for fiscal 2008, which begins July 1.

Set against what the governor and his revenue and budget experts call the “entire picture” of short- and long-term challenges facing the state, the statement might be considered only a transitory oddity, like the “green flash” visible when a tropical sun drops into the sea at day’s end.

It also goes to the debate over whether the state can afford hefty pay hikes for teachers, school service personnel and other state government employees.

Here it is: “The state effectively received five years of normal revenue growth in a span of just two years.”

The sentence appears in the “Budget Summary” on Page 58, part of a section on the governor’s “Six Year Financial Plan” or forecast. Manchin started the six-year forecast last year to give lawmakers a better picture of the state and national economies.

“Growth” as in “normal revenue growth rate” is the important concept.

The trends that led to this development from July 1, 2004, to June 30 of last year are likely to fade before the end of the decade, the administration believes.

Not quickly, like the onset of a tropical night, but gradually, the surge in state tax revenues from the coal boom will slow down. So too, will the increases from video gambling at the state’s four racetracks and at 1,600 neighborhood “mini-casinos,” and, more prosaically, from corporate and business franchise profits.

The pace will be set by the national and global economies and if the state is to weather that drop in growth, it must practice restraint, Manchin believes.

The Iraq War, tax cuts by the Bush administration and the decision by lawmakers and Gov. Bob Wise to regulate and tax local bar and club video gambling machines in late 2001 are behind the surge in state revenues.

In the sober assessment of the executive budget document, again on Page 58:

“In both FY 2005 and FY 2006, the West Virginia economy and tax collections grew sharply, in large part due to energy prices reflected in the severance tax and higher corporate profits as reflected in the corporate income/business franchise tax collections.

“General Revenue Fund collections grew by roughly $700 million or more than 23 percent between FY 2004 and FY 2006. Combined Lottery and Excess Lottery (video gambling) revenues grew by more than $81 million or nearly 17 percent during the same two-year period.”

The surpluses went to pay down unfunded liabilities in state retirement programs for teachers and State Troopers.

Manchin encouraged legislators to put $294 million to bring the Trooper Retirement System Plan A to within 90 percent of actuarial soundness.

Manchin and lawmakers then put $672.9 million into the Teachers’ Retirement System.

Manchin put down his marker last week in the teacher pay-hike issue in an interview with the Charleston Daily Mail.

He’s proposing to put $59 million more than required by an annual payment program into the retirement fund this year. Altogether, his administration has provided $877 million for teachers in two years, including filling in gaps in incremental pay.

The state has a 40-year plan to pay off its unfunded liability in the teacher retirement program by 2034, Manchin said. The actuarial unfunded liability in the teacher retirement system was $4.742 billion as of last June 30.

Because of interest, the annual payments are growing by 3.2 percent. In 2034, that annual payment is projected to balloon to $714 million, something Manchin and lawmakers are trying to cut by paying down as much of the principal as possible.

The monies they have appropriated in the last two years are expected to cut the state’s interest payments by $1 billion.

Besides his 2 1/2 percent pay hike, Manchin wants to ensure that all full-time teachers make at least $30,000 a year.

In the last two years, Manchin and lawmakers have also put another $133.7 million into the state’s Revenue Shortfall Reserve Fund, also known as the Rainy Day Fund.

“When combined with the recently created Revenue Shortfall Reserve Fund-Part B, the current total Rainy Day Funds’ balance of more than $477 million represents over 13 percent of the current State General Revenue Budget (about $3.56 billion),” the budget states.

The general revenue fund is the revenue estimate minus any lottery transfers. For FY 2008, which starts July 1, the administration is predicting it will collect $3.79 billion.

Last June 30, the state finished FY 2006 with a $142 million surplus, 4 percent more than anticipated in collections. The Excess Lottery Fund generated $72 million more than estimated.

The administration is predicting another — but smaller — surplus by June 30.

It’s also predicting smaller surpluses by June 30, 2008, and June 30, 2009.

Falling energy prices are one reason. Deputy Revenue Secretary Mark Muchow told the Charleston Daily Mail last week that energy prices are retreating. Two years ago, coal was selling in the futures market at $60 per ton, but today it’s below $40.

The state’s collection of severance taxes on coal and natural gas production will dip as that trend continues.

In the last fiscal year, the state collected $314.7 million in severance taxes. The current budget estimate calls for $314 million in collections, followed by a gradual decline to $309 million by June 30, 2008, $296 million in FY 09 and $286 million in FY 10.

Another risk is posed by increases in foreign and domestic production.

Meanwhile, Pennsylvania has approved plans for about 61,000 video gambling machines in about a dozen locations. At least one of the giant casinos has opened.

Lottery Director John Musgrave said when casinos in western Pennsylvania come on-line, the impact on the state’s three racetracks in the Northern and Eastern panhandles will be “severe.”

The tracks have become “destination” tourist spots, with most of their customers coming from within a 100-mile radius.

The new Pennsylvania operations, including one in Pittsburgh, will eat into that customer base, Musgrave said.

“And 80 to 85 percent of the customers coming to the racetracks comes from out of state,” he said. Before Pennsylvania joined the national Powerball lottery, “we had lines of customers waiting to buy lottery tickets around Morgantown and Wheeling when the jackpots grew really large.”

“When Pennsylvania joined the Powerball, we had close to a $10 million to $12 million drop in sales,” said Musgrave.

If Ohio and Maryland join Pennsylvania in approving video gambling machines, the lottery is estimating a loss of $100 million in net revenues, he said.

When he became head of the lottery in 1997, its sales were about $200 million annually, Musgrave recalled.

“Now, a decade later, we’re up to $1.6 billion. With only a population of about 1.8 million, we have to draw in people from outside the state,” he said.

Finally, the rate of growth in corporate and business taxes is also expected to decline.

“Slight reductions in the corporate net income tax rate and the business franchise tax rate coupled with a slowdown in corporate profits will result in lower revenue in FY 2008 and FY 2009 with estimated declines of 4 percent and 10 percent, respectively,” the budget states.

“Collection trends for these taxes largely depend on the overall health of the U.S. economy, corporate profits, interest rates, inflation rates, the degree of preference for equity financing over debt financing, the degree of business earnings reinvestment, and changes in federal tax policy.

“Compared to the prior year, corporate profits were expected to increase by roughly 16 percent in 2006, marking the fourth consecutive year of double-digit growth. However, during the revenue forecast period, only minimal growth is projected with an estimated increase of 1 percent in 2007 and 3 percent in 2008 followed by slight declines in the 2009 and 2010 (budget years).”

Meanwhile, the state has a number of short- and long-term financial problems.

The budget addresses plans for roads, water and sewer systems, regional jails, juvenile detention centers, school buildings, health care, Medicaid, public employees’ insurance, children’s health insurance, and workers’ compensation, among other needs.

E-mail Bill Byrd at bbyrd@timeswv.com.

Economy shows mix of risks, positive signs

By Bill Byrd

Times West Virginian

FAIRMONT — The two-volume state budget has two “bonus” features in the form of an economic forecast of the state and national economies and an intriguing “profile” of the state in demographic and historical terms.

As he has done in recent years for legislators, Dr. George W. Hammond, of West Virginia University’s College of Business and Economics, compiled a 27-page summary for the “Economic Forecast” section of the budget.

Hammond agrees with administration experts like State Budget Director Mike McKown and Deputy Revenue Secretary Mark Muchow that the state’s economy will grow slowly in the next five years.

“Further, the state outlook for 2007 faces important risks as the national economy decelerates in response to recent increases in interest rates and energy prices,” Hammond writes.

Still, there are some good signs, particularly in the last three years.

The state added 26,600 jobs from the second quarter of 2003 to the second quarter of last year.

Income and population also made gains, and the state’s unemployment rate hovered near the national average.

The job growth was most evident in natural resource (extraction) and mining. Strong energy demand resulted in the addition of 5,200 net new jobs from mid-2003 to mid-2006.

Coal production and employment are slated to fall “as increased production in the northern coal fields (with increased investment in pollution abatement equipment translating into increased demand for higher sulfur coals) is offset by increasingly difficult mining conditions in the state’s southern coal fields.”

Education and health care added 6,200 jobs, with most coming in health care. Trade, transportation and utilities added 4,800, with most coming in wholesale and retail trade (up almost 4,000).

Leisure and hospitality employment also increased significantly, adding 4,100 jobs. Amusements and recreation, including gambling and hospitality and food service jobs, contributed to the growth.

The state has added 9,414 residents since 2000, but the state is the only one where deaths outpace births. The forecast calls for adding about 9,000 residents in the next five years.

“This translates into a growth rate of just 0.1 percent per year, which is well below the expected national rate of 0.9 percent per year,” Hammond writes.

If there is a national recession, “state growth will hit the brakes as well,” he said.

“We’re not an economic island,” he said last week in a telephone interview.

The forecast is drawn from research done by Hammond and his staff at the WVU Bureau of Business and Economic Research. Reports by the bureau are available on-line at: www.bber.wvu.edu.

In the 20-page “State Profile,” readers are offered a brief history of the state and a number of facts about its public education system, its libraries, health care, transportation network, law enforcement and fire services.

The state has 95,524 students enrolled in its colleges and universities. They awarded 16,781 certificates and degrees last year, compared to the enrollment figure of 84,992 and graduation total of 13,617 in 1997.

There were 152,969 elementary students and 126,819 secondary students last year in public schools (2005-06). That compares to 161,519 elementary students and 145,989 high school students in 1995-96.

In 2002, the state had 221 doctors per 100,000 residents for a national ranking of 31st. The 2002 data was the latest available. In 1990, that figure was 172 doctors, good for a ranking of 36th.

Also in 2002, the state ranked fourth worst in the nation for traffic fatalities per 100 million vehicle miles with a 2.2 rate. The national average was 1.5 fatalities.

It did much better in the rate of violent crimes per 100,000 population. In 2003, the state ranked 42nd, with a rate of 258. The national average was 475.

The state has 449 fire departments, with 419 of those being volunteer fire departments. There are 12 career (fully paid) departments and another 18 are a combination of paid firefighters and volunteers. There are about 11,147 firefighters, with only 870 paid.

Precipitation across the state averages 40 to 60 inches per year. Snowfall averages 20 to 25 inches per year in most of the state, except for the Potomac Highlands, which gets much more.

The state ranks last in the percentage of residents with a bachelor’s degree. The state percentage was 15.3 percent in 2003 while the national average was 27.2 percent.

The State Budget Office compiles the profile, drawing its information from the U.S. Census Bureau and state government agencies.

The budget office also produces the annual executive budget document, something which it works on year round.

For the last 11 years in a row, McKown said the document has won the “Distinguished Budget Presentation Award” from the Government Finance Officers Association of the United States and Canada.

The executive budget is available on-line at: www.wvbudget.gov.

E-mail Bill Byrd at bbyrd@timeswv.com.

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