Patrick McSweeney



 

As Good As Gold?

 

 

North Carolina lost its AAA bond rating. If Virginia isn't careful, it could suffer the same fate.


 

In 1996, former State Senator Hunter B. Andrews warned that Virginia needed to reduce its debt.  Unless the commonwealth did so, he said at the time, its AAA bond rating could be in jeopardy. Virginia is one of only a handful of states with this highest rating.

Public finance experts carefully monitor debt and other financial indicators in every state. Rating agencies are likely to downgrade a state’s rating when its debt exceeds their benchmarks.

A case in point is North Carolina’s credit downgrading in August by Moody’s Investor Service, one of the nation’s leading bond rating agencies. For more than 40 years, North Carolina had enjoyed the highest rating from all of the rating agencies, but it responded to the downturn in the economy and resulting budget shortfalls with too many one-time gimmicks and too few long-term fixes.

North Carolina’s loss of the highest bond rating will mean that it will pay higher interest rates in the future. The precise amount won’t be known for years.

It is also unclear what effect a state’s downgrading has on its localities. Thirty years ago, for example, the adverse impact of a default on bonds issued to finance the West Virginia turnpike project included higher interest payments on local school bonds.

To many, including Andrews and North Carolina’s Speaker of the House, Jim Black, a state’s bond rating is about more than money. It is also about a state’s fiscal integrity, the values of its people and the state’s good name — all of which matter in retaining and attracting business and industry.

A downgrading negatively affects those who already hold state bonds by devaluing their investment. To many Virginians, that would be a breach of faith on the part of the commonwealth.

Debt doesn’t create additional revenue and must be repaid with state funds that come from higher taxes or user charges, new revenues from economic growth, or reductions in state programs. The debt option is often abused by politicians because it produces an immediate sum of money (and, therefore, political benefit) that will be repaid in the future when taxpayers are likely to blame someone for that burden other than the politicians who authorized the debt.  This technique of separating the benefit from the burden is as old as representative government.

The Constitution of Virginia includes provisions designed to reduce the opportunities for politicians to abuse their ability to incur debt. It limits the term of any debt, requires level payments of principal and interest over the term, restricts the total amount of general obligation debt, and mandates voter ratification of debt that pledges the commonwealth’s credit. Even the most restrictive constitutional provisions, however, can’t guarantee a AAA bond rating. That depends on the self-discipline of elected officials.

Virginians need to be particularly concerned at the moment. There is a huge budget shortfall to be closed. The ratio of state debt to total state income has risen from 2.9 percent to almost 4.5 percent. There appears to be no support for a statewide tax increase.

Two statewide bond referenda to fund higher education and state parks are on the November 5 ballot. If approved, the General Assembly must find revenues to pay debt service on these bonds. Since state revenue growth can’t be expected soon, will debt service come from higher taxes or additional program cuts?

-- October 14, 2002

 

 

 

 

 

 

 

Contact Information

McSweeney & Crump

11 South Twelfth Street
Richmond, Virginia 23219
(804) 783-6802

pmcsweeney@

   mcbump.com