SOUTH CHARLESTON - West Virginia was facing a budget deficit of $389 million, but Gov. Earl Ray Tomblin and his staff have crafted a plan to present a balanced budget when the legislative session opens next week.
Tomblin was one of several featured panelists at the Associated Press Legislative Lookahead in South Charleston Thursday, where he spoke about the budget and several other key issues facing the state.
West Virginia's fiscal landscape has been relatively strong in recent years, but a drop in federal funding for Medicaid is causing angst among lawmakers as they scramble to fill the pending budget gap.
Tomblin previously had asked about a quarter of the state's agencies to cut spending by 7.5 percent for fiscal year 2014, netting lawmakers an additional $75 million to aid in covering the shortfall. Members of the budget panel, which included Deputy Revenue Secretary Mark Muchow, House Minority Leader Tim Armstead, Budget Director Mike McKown, House Finance Chair Harry Keith White and Senate Minority Leader Mike Hall, indicated that still wasn't enough. Another $314 million had to be cut in order for the budget to balance, they told panel moderator Heather Goodwin Henline, the publisher and general manager of The Inter-Mountain in Elkins.
The governor said he will further outline his roadmap for bridging the budget gap as part of his State of the State speech, which he will deliver Wednesday.
A large portion of the budget deficit comes from the reduction in federal funding of Medicaid. For every 1 percent drop in federal funding, the state must make up an additional $30 million, officials said. This puts the Mountain State's budget even further into the red as the effects of the recent recession still loom.
"Medicaid is a budget problem in 50 states," Muchow said. "It's not a West Virginia problem, it's a national problem. If you look at the amount spent on Social Security, Medicare, Medicaid and social support programs the taxes that come in do not support those programs."
"It has been known since I was a teenager that Social Security, Medicare, Medicaid is not sustainable," Muchow added. "It hasn't been completely sold to the American people that something has to happen. Those programs need restructured, but society is not quite ready for that. At the end of the day, there is a price."
While considerable, the projected budget cuts haven't touched the majority of the state's agencies, as public education as well as corrections are among the departments excluded.
McKown said he expects revenue will level off, though, as the state continues to fund many of its current programs and money from the state's lottery stagnates.
"Over the past three or four years, we have appropriated more money to Medicaid," he said. "For years, we banked that extra money and those trust funds grew modestly. By fiscal year 2014, those balances will be exhausted."
"We had a $389 million deficit projected for fiscal year 2014," McKown said. "That was the starting point. The budget Gov. Tomblin will submit Wednesday is balanced. (With the cuts,) we've taken $75 million out of that base."
Additional money will be made up from other state surpluses. This includes $82 million from state lottery excess and a $7 million cushion from the general fund.
Muchow said, economically, the Mountain State's outlook still hinges on the mining industry. Overall coal distribution is down 27 percent in the state, while coal severance taxes are down 17 percent.
Natural gas production is up in the state, but companies are unable to sell their product, Muchow noted.
"At the end of 2011 and in 2012, the coal industry began losing steam," Muchow said. "They began scaling back operations, and it has had an impact on employment rates. While natural gas production is up, severance taxes from that are down. Oil is the only thing in the state that is going up. The outlook is for the state to continue to struggle."
Hall indicated that despite the bleak outlook, the state has many wins in the fiscal column. Corporate net franchise taxes are down, and the food tax will disappear in July. In general, the state has continued to cut taxes, which Hall said is a big accomplishment for a little state like West Virginia.
In addition, the Mountain State's bond rating is AA-plus - a stronger ranking than that of the federal government. Several members of the panel attributed that positive rating to the security blanket created by the state's rainy day fund. The fund currently is at a reserve of about $914 million. With that cushion, it helps not only with the rating, but also for the state to secure lower interest rates when seeking bonds or other forms of financing.
Hall, though, warned against dipping into the fund. Ultimately, that could impact the state's bond rating, which would have a trickle-down effect making it more costly for the state to borrow money in times of true need, Hall said. This is a position Chairman White echoed.
"West Virginia was one of the few states who didn't borrow money during the recession," White said. "Our unemployment fund is still relatively strong, and we were the only state in the nation to pass an OPEB (Other Post-Employment Benefits) bill. Most states we talk to say they are just plain ignoring that."
While many of the panelists touted the state's practicality when dealing with large budget concerns, they also acknowledged the reality of rough seas ahead. Part of the reason for future uncertainty is because of the state's economic dependence on coal and natural gas.
Again, while the panelists said fiscal year 2014 will be the most bleak out of the next six years, the next five years will be dependent on the performance of coal and natural gas.
Officials expect the natural gas industry eventually will have a significant impact as the coal industry wanes. The volatility of the natural gas industry continues to play a role not just within the Mountain State, but also many parts of the U.S.
"If the (natural gas) prices bounce back up, we will see a significant increase in revenue 10 years from now," Muchow said. "Natural gas is the hope for the state's economy down the road. It is a matter of time that the coal industry will be a smaller part of the economy. Coal is still the big elephant in the room, but (natural) gas will become more a part of the equation down the road. It's a promising industry for not only West Virginia, but for the nation as a whole."
In the past eight years, natural gas production has increased by more than 108 percent. For every 10 percent decline in coal production, it takes a 60 percent increase in natural gas production to equal the same financial gain.
Aside from budget woes, several other issues will be addressed by the 81st Legislature. Those issues include education and prison overcrowding, both of which were topics featured as part of the Lookahead event.
Armstead said another key issue facing the Mountain State is job creation. More than 59,000 West Virginians are out of work and many more are taking a second job just to make ends meet.
"I think we have to be very serious about that," Armstead said. "There are things we can do to make us more job friendly. Overall, we need to make sure small businesses can grow. If we do this, we will increase our tax base."
Tomblin's State of the State address will kick off the 60-day regular legislative session. During the address, he traditionally introduces a more in-depth look at his proposed budget. The budget then must be voted on by legislators before being approved for the next fiscal year.
For fiscal year 2013, Gov. Tomblin used his line-item veto power to trim $13.5 million from the final budget, citing economic uncertainty. He indicated Thursday that he is willing to use such veto power again if he deems it necessary and appropriate.