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?
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October 14, 2002
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