The Old (Debtor’s) Dominion

Staunton is a hilly town.  This morning, I ran up West Johnston Street which stretches for a mile  from the downtown up a steep slope.  Straight up. 

In Virginia, we are creating another mountain which is hard to climb.  It’s called state-supported debt.

Debt?  In the Old Dominion?

As every school child knows, Virginia has traditionally operated  on the “pay as you go” model instituted by Governor Harry Byrd in the 1920′s.  Governor Byrd insisted on using cash, and not debt, to build the state’s highway system.  This approach led Virginia to become the first U.S. state to be rated “AAA” by the Wall Street rating agencies in 1934.

That positive legacy has stayed with us for the past 76 years.  Today, Virginia is still one of only 7 states to be “AAA” rated, which allows us access to the cheapest credit when we do borrow.  One of the reasons for this highest rating is our voluntary 5% “debt to equity” ratio on our borrowing.  In other words, Virginia will not issue debt if the total outstanding is more than 5% of general fund revenues.

That’s an important standard.  Yet we do borrow. 

Historically, that borrowing went for capital projects at our state universities.  While that is still a factor, increasingly universities pay for non-academic buildings (dorms, student unions, stadiums) out of “9d” bonds which are paid back from non-general revenue, e.g. student fees.

Today state borrowing increasingly subsidizes highway projects.  Not just new construction but existing maintenance.  In other words, we’re borrowing money to repave our roads, while using student fees to build our college campuses.

No, it doesn’t make sense.

Today Virginia has about $9B in aggregated outstanding tax-supported debt.  (That’s still a modest number and less than Maryland which has 60% of our population).  Annual service on that debt is approx. $594M, which is a large portion of our General Fund budget.

What is more worrisome is that an additional 52% of our dedicated Transportation Trust Fund dollars (from gas tax  and car titling tax) are being used to pay down debt, not as cash for existing maintenance or new projects.  That is a radical change from our system, even ten years ago.

The reason is that the Assembly in 2000 and 2007 passed ambitious transportation programs, without new revenues or constitutional mechanisms to raise the funds.  (FWIW, I was not in either legislature).  So the bonds are issued and paid back with existing funds. 

Now Virginia is sitting on the authority to issue another $3B in transportation bonds,without any new taxes or revenues to pay them back.  Some lawmakers are talking about raising our debt ceiling to let those bonds be issued in 2011.

More debt without any accountability?  Somebody get me the Tea Party on the phone.

In the meantime, the projects are started.  The bonds are issued.  And they’re paid back with borrowed dollars for which our kids will pay the interest.

And the mountain slowly grows.

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