This Is What a Fiscal Meltdown Looks Like, IV: The State Intercepts Your Aid

Melt down

Melt down

by James A. Bacon

The City of Petersburg’s fiscal meltdown is reaching a new crisis stage as an Oct. 1 deadline nears to make a $1.4 million payment to the Virginia Resources Authority (VRA), a state funding source for local infrastructure financing.

In remarks to the Richmond Times-Dispatch following a House of Delegates Appropriations Committee hearing yesterday, Secretary of Finance Richard D. “Ric” Brown said that the state might have to “intercept” state aid to Petersburg in order to meet principal and interest payments on VRA bonds backed by the moral authority of the state.

The General Assembly had convened the session to discuss how to build a firewall between Petersburg and the rest of the state. The city faces a $12 million budget deficit this year as well as estimated backlog of $19 million in unpaid bills.

“I just hope we are not heading down this road where we are digging the state into a hole,” said Del. R. Steven Landes, R-Augusta, chairman of a task force formed to study the impact of fiscally stressed localities on the state.

“We’ve got to figure out what change we need to make from a state’s perspective; we need to protect ourselves,” said Committee Chairman Chris Jones, R-Suffolk, as reported by the Richmond Times-Dispatch. “VRA debt can be an issue that can affect our bottom line. We cannot allow [a default] to occur. It’s very distressing when you see what has occurred, and hopefully [the city] will continue to try — in a very straightforward way — to deal with the issues.”

So far, Petersburg officials have yet to ask for state bail-outs. Secretary of Finance Richard D. “Ric” Brown and his office have lent considerable “technical assistance” in disentangling the city’s finances. But other than shaking loose some funds to help the city’s school system, the McAuliffe administration has taken no concrete measure to ease the city’s burden — and it likely would meet considerable resistance if it tried to do so.

City Council has been enacting draconian cuts to the budget in a desperate effort to stem the red ink. Whether it can find $1.4 million to pay the VRA is an open question. The state has a lot at stake.

Created by the General Assembly in 1984, the VRA has funded more than $7 billion in investment in 1,000 projects across the Commonwealth. According to the VRA website, this is how the program works:

VRA sells bonds and then loans the proceeds to local governments to finance eligible infrastructure projects. The borrowers’ interest rates are based on the rates that VRA obtains in the public bond market. Based in part on the use of the Commonwealth’s moral obligation, VRA’s high credit ratings typically result in interest rate savings for localities. This translates to reduced rates, taxes and user fees for borrowers’ constituents.

Come Oct. 1, if Petersburg fails to make its $1.4 million payment to VRA, absent state intervention, the authority will be unable to make the interest and principal on the bonds sold to investors on Petersburg’s behalf. Those bonds are backed by the “moral authority” of the state, which does not legally obligate the state to made good, as it would if the bonds were backed by the full faith and credit of the state. But a failure to back Petersburg’s payment would damage the state’s moral authority, thus undermining the entire premise of the VRA, harming other localities who might wish to borrow from it, and perhaps even calling into question the creditworthiness of other categories of bonds backed by the state’s moral authority.

Allowing a default on the VRA bonds is, in a word, unthinkable. But bailing out Petersburg would create a moral hazard. If the state bails out Petersburg once, then why not twice? If the state bails out Petersburg, then why not some other hard-pressed locality? Fiscal discipline could unravel.

Brown clearly understands the state’s quandary. Speaking to reporter Markus Schmidt after the hearing, the finance director said he might have to “take certain steps to intercept aid” from the state to Petersburg to make sure the payments are made. He acknowledged the hardship such an action would create: “In many cases for the city, that would make matters a lot worse for them.”

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12 responses to “This Is What a Fiscal Meltdown Looks Like, IV: The State Intercepts Your Aid

  1. “But other than shaking loose some funds to help the city’s school system, the McAuliffe administration has taken no concrete measure to ease the city’s burden — and it likely would meet considerable resistance if it tried to do so.”

    Why is there no resistance from every other school division in the state? Perhaps they see a “golden goose” with that action and they are lining up at the mansion gate. Perhaps I should contact the Lynchburg City Manager, tell her to put us in a financial bind (or even more so) so we too can get more state funding. This is no way to run the ship.

  2. Well again – to point out that 99% of Virginia localities ARE – well run financially and are not “doomed to fail” because that’s what government does…

    Petersburg is, instead, an anomaly… an exception to most govt in Va.

    Finally – I think important question with Peterburg are these?

    1. – did they waste taxpayer money on boondoggles… instead of paying their bills…

    or

    2. – did they pay their bills as far as their revenues collected were able to … but they fell behind because their tax base eroded

    or

    3. – their tax rates were just not sufficient to pay their bills?

    because – you don’t have to shut down schools or fire stations – you can raise taxes to pay for them….right?

    so ..what actually happened 1, 2 or 3 or some combination?

    I’m all in favor of the State intercepting revenues collected that go to the state and supposed to go back… sequester that money to pay for debt owed the state – for sure… and perhaps even vendors…

    then let Petersburg figure out what services they will cease or raise taxes to pay for…

    and if citizens vote them out for higher taxes – then citizens have made a choice – cut services…instead…

    but this is a choice for citizens with regard to who they will elect –

    cut services or raise taxes – make that choice.

    • Let’s see … government funds itself by taking money from citizens by threat of incarceration. Not even 1% should fail. How about Petersburg raises its taxes until it has enough money to pay its bills? The voters can throw the bums out in the next election – after the bills are paid.

  3. This posting raises some decent questions, but I agree with Larry that there are ways to help Petersburg resolve its issues. Also, there is a false argument about the “moral” issue of a state bailout.

    The vast majority of localities in the state don’t need such help. And, no one seemed to raise all that much fuss when the feds used TARP to bail out Citibank and the rest. Did we hear anyone saying, “We can’t do this, it is immoral.” Of course, they were big deal corporations not struggling cities.

    • As a matter of fact, Peter, there was a huge outcry against the use of TARP funds for private entities, including by many Republican types in Congress on both sides of the Hill.

      The answer here is simple: Chap IX. An orderly restructuring. Or receivership and/or its equivalent under Virginia law. I will defer to others on this latter possibility.

    • A lot of people raised objections to the TARP bail-outs, but we were told to shut up because the economy was in a crisis.

      • TARP was a particularly good scam. The government “bails out” banks and auto companies taking stock in return. Then, the government holds interest rates to essentially zero forcing investments into the stock market. After that, the government either gets repaid or sells the stock – at the peak of a government inspired bull market. Pretty neat trick.

        Liberals love to cry about the bank bailout. On aggregate, the banks repaid at a considerable profit to the government. I supported banks getting TARP funds out of necessity. A collapsed banking system really could have caused a depression. The so-called auto bailout should have been called the union bailout. It should never have happened. Ford didn’t need to be bailed out because it was a well run company. Americans who wanted an Amerucan made car could buy a Ford. And guess which bail out caused the government to lose money? You got it – the auto bailout.

  4. I would like to add that the Cities of Alexandria, Richmond and Lynchburg have gotten bailed out for their stupidity when they decided to save the ratepayers money by installing a single sewer system to handle both the storm and sanitary waste. And we have received tens of millions of state aid that Del. Landis has argued should not be borne by the rest of the state taxpayers to correct our stupidity. I agree.

  5. CrazyJD,
    Yep there was actually some objection to TARP. But I never will forget my interview with former House Majority Leader Eric Cantor.

    EC: “We’ve got to get the government out of capital markets!.”

    PG: But you voted for TARP, right?”

    EC: (20 seconds pause). “But that was an emergency.”

  6. I note, just in passing, that your “EC” no longer exists. Perhaps that’s because, fundamentally, he was just a collections lawyer who schmoozed reasonably well. Thinking perhaps we needed someone a little heavier weight, my wife and I were among those who very early on actively promoted and supported Dave Brat, who is at least trained in economics.

  7. Who’s going to Bail America Out when all its bills come due, and the well’s dry?

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