S&P Global Ratings has restored Virginia’s financial outlook to stable and reaffirmed the state’s coveted AAA bond rating, the day after Gov. Ralph Northam signed a new budget that the national rating agency credited for rebuilding revenue reserves and investing in core services such as public education.

“The outlook revision reflects the adoption of a structurally aligned 2018-2020 biennial budget, planned reserve fund deposits, and stronger projected revenues and economic indicators,” the agency said in its report on Friday.

S&P’s action ends a year of uncertainty for state officials and legislators who were alarmed by the agency’s decision more than a year ago to downgrade Virginia’s financial outlook to negative, raising concerns about a potential loss of the AAA rating that enables the state to pay lower interest on bonds to finance capital projects.

“It’s fantastic news!” said House Appropriations Chairman Chris Jones, R-Suffolk, who negotiated the two-year, $117 billion budget with Senate Finance Co-Chairman Emmett Hanger, R-Augusta, to end an impasse over expansion of Virginia’s Medicaid program.

“The most important responsibility I have as chairman is to protect our AAA bond rating,” Jones said. “S&P was very clear when we met with them last year about what needed to be done. The budget addressed those concerns, so it is extremely gratifying to see the results of those efforts acknowledged so quickly.”

Hanger called the upgraded outlook “extremely good news” and added, “I knew we were heading for solid footing, but it is great that they reacted that quickly.”

Northam issued a statement that said, “This demonstrates the fiscal health of the commonwealth and affirms the work we have done over the course of the session to ensure our critical AAA bond rating remains intact.”

House Speaker Kirk Cox, R-Colonial Heights, called the report” vindication that the hard work we put in to crafting the budget has paid off.”

S&P noted the risk to Virginia and other expansion states if the federal government cuts back Medicaid spending, but said the budget plan to accept federal funds under the Affordable Care Act and impose a tax on hospital revenues to pay the state’s share would offset the costs and “mitigate” potential pressure on the general fund for core services.

“We always wanted to do it in a fiscally responsible way,” Finance Secretary Aubrey Layne said Friday.

Layne had pushed publicly for Medicaid expansion because of the additional federal funding that would result in almost $371 million in state savings that could be used to bolster reserves and invest in core public services.

Senate Majority Leader Tommy Norment, R-James City, has maintained that Virginia could have bolstered reserves and satisfied rating agency concerns without expanding Medicaid, which he and the majority of Senate Republicans strongly opposed.

After Moody’s Investors Service affirmed Virginia’s AAA rating and stable financial outlook earlier this week, Norment called arguments that expansion was necessary to protect the state’s bond rating “absolute poppycock.”

S&P credited Virginia for using the new budget and anticipated windfalls in tax revenues to bolster its depleted financial reserves, which had fallen to the bottom of the 14 states that have a AAA bond rating from the agency.

The budget adds $90 million to the state’s new cash reserve, on top of the $156.4 million carried over from the last fiscal year. It projects more than $500 million in unanticipated revenues in this fiscal year, ending June 30, most of it a one-time windfall related to a surge in income tax payments related to the adoption of comprehensive federal tax reforms in December. Any additional revenues would be held in reserve.

Altogether, S&P expects the state to boost its revenue stabilization fund, known as the rainy day fund, by $193.2 million and its cash reserve by $412 million in the next biennium to bring the combined reserves to $976.3 million, close to the pre-recession peak of $1.2 billion in 2007.

The rating agency also predicted an improved economic outlook for Virginia with the end of federal budget sequestration as a threat to the defense-dependent state economy and the likelihood of higher military spending.

“Given boosts to defense spending in the recently enacted federal omnibus spending bill, we view it as likely that Virginia’s economy will benefit,” S&P said, while noting some risk to the state from federal trade policy and “the threat of retaliatory tariffs.”

The agency noted that Virginia’s revenues were growing at almost twice the annual forecast of 3.4 percent, but agreed with state officials and legislators that much of the increase could be one-time gains from “tax planning related to federal tax policy changes.”

S&P said that while the forecast in the next biennium does not consider higher tax revenues because of changes in tax policy, the budget does reflect an increase of about $60 million a year from higher income tax collections withheld from paychecks and other, sustainable sources of revenue.

The additional money, combined with state savings from accepting more than $2 billion in federal funds to expand Medicaid, helped pay for what the rating agency called “additional spending on several policy initiatives,” such as public education, raises for state employees and teachers, and infrastructure projects such as dredging Hampton Roads Channel and the Elizabeth River.

“This is a positive sign for Virginia’s economy and I look forward to continuing to work with the General Assembly to make the commonwealth work better for every family,” Northam said.

S&P also credited the state’s progress in funding pension obligations for state employees and teachers, primarily by fully funding the contribution rates certified by the Virginia Retirement System to pay ongoing costs and unfunded liabilities for the retirement plans it administers.

“This is an improvement and gets the state to full funding of the (actuarial contribution) one biennium budget ahead of schedule under its pension reform,” the report states.

The agency warns that it would consider lowering its rating if Virginia backtracks on its commitment to rebuilding reserves, maintaining a structural budget balance, or “experiences consistently weaker economic performance relative to the U.S.”

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