Shame on Jon Baliles for not knowing why cities and counties are treated differently in the Code of Virginia regarding the issuance of general obligation debt. The answer is simple; the state constitution requires the different treatment.
Article VII, section 10, of the state constitution deals with the issuing of debt by local governments. After setting out the process for issuing local bonds or debt, the constitution stipulates that the issuance of general obligation debt by counties is contingent upon the “submission to the qualified voters of the county… for approval or rejection by a majority vote of the qualified voters voting in an election on the question of contracting such debt. Such approval shall be a prerequisite to contracting such debt.” Thus, the statutory distinction is rooted in the constitution; that distinction cannot be changed by the General Assembly passing legislation. Furthermore, the statutory provision that, through a referendum, a county can choose to be treated as a city for the purposes of issuing bonds, is also a reflection of the language in the constitution.
Baliles implies that there is no limitation on the issuance of debt by municipalities. That is not accurate. Cities and towns may not incur total general obligation bond indebtedness that exceeds ten percent of the assessed value of the real estate in the city or town subject to taxation. There is no such cap on counties. In summary, cities and towns are subject to an assessment cap on the amount of general obligation debt they can issue whereas counties are subject to the approval of voters on whether they can issue general obligation debt.
Of course, to say that the distinction is rooted in the constitution begs the question of why the constitution makes the distinction. For the answer to that question, we can turn to A.E.Dick Howard, the widely accepted authority on the Virginia Constitution.
Beginning on page 858 (Vol. II) of his Commentaries on the Constitution of Virginia, Howard points out that the local debt provisions of the current (1972) constitution are a continuation of similar provisions in the prior state consitution.
Prior to the late 1800’s, there were no restrictions on the issuance of bonds by localities. Nationwide, that had led to some extravagances. “Local communities competed to see which could give the railroads the most money.” (Sound familiar?) “By 1902 local debt was eight times larger than state debt.”
The General Assembly moved in 1875 to rein in local debt, enacting a statute that forbade cities and counties from creating indebtedness in excess of 17 percent of the assessed value of real estate and 15 percent of personal property. The convention that drafted the 1902 Constitution approved with little debate a provision that limited city or town bonded indebtedness to an amount not exceeding 18 percent of the assessed value of the real estate in the jurisdiction.
County debt was obviously not a concern of those writing the 1902 Constitution, probably because counties were largely rural, delivered few services, and seldom needed to issue bonds. If a county did desire to issue bonds, it would go to the General Assembly for a special act giving it authority to do so. Such legislation was traditionally passed at the “mere request” of the county’s delegate.
It was during the Byrd amendments of 1928 that the issuance of county general obligation debt was made subject to approval in a referendum. This would have been in keeping with Harry Byrd’s famous abhorrence of debt and his “pay-as-you-go” philosophy.
Howard acknowledges “that the use of a debt ceiling for municipal borrowing and a requirement of local referendums for counties is unusual.” He suggests that the different treatment of local government borrowing authority “may turn on the historical periods when the respective limits were first adopted.” That answer is not very satisfactory. Surely, Byrd and his advisers did not wear blinders that only allowed them to consider county debt. In proposing constitutional amendments that would require counties to have a referendum before issuing general obligation debt, why did they not include an amendment subjecting municipalities to the same requirement? Getting an answer to that question would require considerable digging into the records of the Byrd gubernatorial administration.
The last piece of this history is the story of the current constitutional provision. Howard goes on to relate that the Commission on Constitutional Revision, of which he served as staff director, decided to keep assessed property values as the basis for measuring debt limitations on counties and cities. In a major break from the past, however, it proposed that counties be treated the same as cities and towns regarding bond issuance, subject to a cap based on assessed property values and no longer contingent on approval in a referendum.
Before being submitted to the voters for approval, the recommendations of the Commission for the new constitution were submitted to the General Assembly for amendment and approval. The General Assembly approved the recommendation that municipalities be subject to a cap of 18 percent of assessed value. (That amount was lowered to 10 percent in an amendment approved in 1980.) However, the legislators rejected the proposal that county issuance of general obligation debt no longer be contingent upon approval in a referendum.
Howard cites several factors behind the opposition to the change in how counties were treated. First, many rural legislators were still strong supporters of “pay-as-you-go” and wanted to retain the referendum as a check on local government borrowing money. On the other hand, several counties believed that the 18 percent cap would be too restrictive. Finally, many counties were leery of the provision of the Commission’s proposal under which any debt incurred by towns within a county would count against the county’s debt limit. They did not want to be restricted by something they had no control over.
And that is how we got we where we are now. Baliles is correct that it is illogical that the city of Richmond is subject to different conditions than are the neighboring urban counties of Chesterfield and Henrico. He would make the city be required to have a referendum before issuing general obligation debt. Conversely, I daresay that the Chesterfield and Henrico governments are envious of the city’s position. Putting together a general obligation bond package for a referendum is a major undertaking. They would much rather issue bonds upon a majority vote of the board of supervisors.
[Note–The issuance cap and referendum requirement apply only to general obligation (“full faith and credit”) bonds. There are exemptions set out in the constitution. The primary exemptions are bonds for which the revenue produced by the financed projects will be used to pay the debt service (revenue bonds) and certain bonds issued for school purposes.]