As the West Virginia budget impasse heads into its sixth week, the Tomblin administration is advising legislative leadership to prepare for a worsening economic outlook.
Without giving precise numbers, Revenue Secretary Bob Kiss said Friday he told leadership to anticipate a "worst-case scenario" for April revenue collection as personal income tax collection - of the two biggest state revenue sources - are falling well below projections.
"One of the things that looks particularly bad is the nonresident withholding taxes," Kiss said Friday.
He said two factors are driving that: A downturn on royalties on mineral interests owned by out-of-state residents and a drop in payroll withholding for nonresident oil and gas workers, as low natural gas prices are putting a damper on the Marcellus Shale boom.
Kiss said the drop in income tax collection is a ripple effect of the ongoing downturn in the energy sector, a downturn that he said was a key factor in Standard and Poor's downgrade in the state's bond rating from AA to AA-.
The report, issued Thursday, cited "Structural changes to the state's economy due to weakness in the energy sector, specifically coal, which in our view is a long-term challenge rather than a cyclical setback."
Standard and Poor's concluded that warm winter weather and a 45 percent drop in mineral exports driven by "global reduction in demand for mineral and ore products" had dragged down the economy and reduced state tax collections.
However, Kiss noted that the ratings firm continues to give West Virginia a stable outlook, based on the state's "strong Rainy Day fund balances," and its "demonstrated ability" to tackle large-scale financial challenges in the past.
The report notes, though, that stability will depend on West Virginia's leaders coming up with a plan to resolve current and 2016-17 budget year shortfalls, stating, "Should the state be unable to reach consensus on sufficient budget adjustment measures to demonstrate long-term structural balance, the ratings could also be pressured."
"The governor has said since January this budget is not sustainable without additional significant revenue," Kiss said, adding, "That statement has become more true."
Gov. Earl Ray Tomblin said in a statement Friday that he was disappointed, but not surprised, by the downgrade in the bond ratings, saying other states heavily dependent on the energy sector have already been downgraded.
"This is not a typical downturn. This one is different, and even the most optimistic among us realize it is unlikely that coal will ever reach the production levels of the past," Tomblin said.
Tomblin said the downgrade is evidence that West Virginia needs to continue to diversify its economy, and the Legislature needs to pass a "responsible, structurally sound budget."
"Continuing to make deep cuts to critical programs and services is not sustainable, and it has the potential to cause additional downgrades in the future," he said.
"If we don't take proactive steps to develop a stable path forward that does not rely on one-time monies and even deeper cuts to cover long-term and recurring needs, the economic and budget challenges facing our state will only get worse," Tomblin added. "We have worked too hard and come too far to allow that to happen."
The Legislature adjourned on March 15 without passing a 2016-17 state budget, unable to reconcile vast differences between the Senate plan - which relied on nearly $140 million in tax increases that were rejected by the House - and a House proposal that closed the budget deficit using one-time money and raiding Rainy Day reserve funds.
Legislative leadership has had discussions with the Tomblin administration since then but have been unable to reach consensus on how to close funding shortfalls in the current and 2016-17 budget, particularly with some House Republicans opposed to any tax increases to balance the budget.
Kiss said talks are continuing and the governor is willing to consider all reasonable proposals, including additional spending cuts and use of Rainy Day funds, but he said it will be impossible to close the deficits without new sources of revenue.
"These numbers can't be solved without significant additional revenue," Kiss said.
Reach Phil Kabler at philk@wvgazettemail.com, 304-348-1220, or follow @PhilKabler on Twitter.