CHARLESTON — Gov. Patrick Morrisey praised an upgrade in West Virginia’s ratings outlook, but that same report included a warning about the state’s continuing loss of population, reliance on fossil fuel taxes and one-time monies.

S&P Global Ratings, an international credit rating agency, released a report Tuesday and reaffirmed West Virginia’s long-term general obligation bond debt as AA- while revising the state’s outlook from “stable” to “positive.”

S&P also reaffirmed the state’s A+ long-term rating for appropriation debt and upgraded that outlook from stable to positive as well.

In a statement Tuesday afternoon, Morrisey credited S&P’s improved outlook for the state’s financial condition to changes put in place by the West Virginia Department of Revenue in how the state crafts its general revenue budget and good financial management since taking office in January.

“This positive rating action affirms my administration’s approach to our budget and West Virginia’s long-term financial health,” Morrisey said. “S&P’s report highlights my administration’s strong commitment to fiscal responsibility, living within our means, and advancing initiatives which drive government efficiency and accountability. I am proud to oversee the first positive rating action by S&P regarding West Virginia’s creditworthiness in more than a decade.”

Fiscal year-to-date tax collections for the first three months of the current fiscal year were more than $1.370 billion, or 4.7% above the $1.310 billion revenue estimate, taking the total general revenue surplus to nearly $61 million. The Legislature passed — and Morrisey signed — a $5.323 billion general revenue budget for fiscal year 2026, which began on July 1.

With the $61 million in surplus collections, the state is sitting on more than $200 million in unappropriated money in the general revenue fund, as well as $1.374 billion in the state’s two revenue shortfall reserve funds (called the Rainy Day Fund) and $460 million set aside in the personal income tax reserve fund.

The authors of the S&P report said these factors will help the state maintain financial stability as changes at the federal level could mean reduced funding for West Virginia.

“Our view of West Virginia’s positively trending credit quality reflects the state’s recent run of large budgetary surpluses, multiple ample reserve funds, and management actions to control costs,” according to the S&P report. “We expect the state to be able to address the changing federal policy landscape while maintaining structural balance and healthy reserves.”

One of those federal changes is to the Medicaid program. The One Big Beautiful Bill Act passed earlier this summer created a new rule for the Payment Error Rate Measurement (PERM) program, establishing a strict 3% error rate threshold.

Beginning in 2029, the federal Centers for Medicare and Medicaid Services (CMS) will no longer have the authority to waive financial penalties for states exceeding this rate. West Virginia’s PERM percentage was once as high as 15%, though the state’s last reported rate was 3.43%.

Officials with the Department of Human Services told state lawmakers earlier this month that the PERM provision presents a potential financial risk to the state if the rate is not lowered and maintained and could cost the state millions of dollars if not kept at 3% or less. S&P analysts said they were confident in the state’s ability to meet these federal challenges.

However, the S&P report was highly critical of West Virginia’s continued loss of population over the last 75 years. West Virginia’s population peaked in 1950 at more than 2 million according to the U.S. Census Bureau, dropping to 1.74 million 20 years later. While population rose to 1.95 million in 1981, the state has seen a steady drop in population to 1.77 million as of 2024.

S&P analysts pointed to the high number of West Virginians living in poverty and the high number of older West Virginians compared to shrinking numbers of younger residents as factors that could reduce the state’s economic outlook and future credit ratings.

“West Virginia’s demographic profile remains a negative consideration in our credit rating analysis for West Virginia due to consistent and ongoing population declines,” the analyst wrote. “Wealth and income indicators also compare unfavorably with the nation, with per capita personal income below 80% of the U.S. average. Combined with a high age-dependency ratio, we expect the state’s demographics will remain a challenge for economic development.”

Analysts also raised issues about overreliance on tax revenues from the coal, oil and natural gas industries, with potential regulatory issues making those revenues volatile.

“West Virginia’s dependence on the coal and gas-mining industries for both economic activity and tax revenue could have an impact on budgetary performance in the long term.,” the analysts wrote. “This is because the uncertainty over the evolving federal regulatory landscape may affect states that rely on these industries for economic growth and as major revenue sources. However, the state maintains robust financial reserves to mitigate some revenue volatility stemming from reliance on that sector.”

According to the S&P report, there is a one-in-three chance that analysts could raise the state’s credit ratings over the next two years as long as West Virginia maintains a responsible general revenue budget but warned against relying on one-time money to balance future budgets.

“We could revise our outlook to stable if the state is unable to maintain structural balance and relies significantly on one-time budgetary solutions should a shortfall unfold,” the analysts wrote. “We also could revise the outlook to stable should economic diversification wane or if demographic trends weaken further compared with those of the nation.

“We could raise the rating should West Virginia maintain sound financial practices and preserve reserves, particularly after changing the tax structure with lowering personal income taxes recently, while maintaining improving economic fundamentals,” the report concluded.