|
|
|
|||||||||||||||||||||||||||||||||||||
Virginia is one of only eight states to have a ‘AAA’ bond rating from all three major rating agencies, and is the only state to have the highest short- and long-term credit ratings.
During the Allen Administration, total tax- supported debt declined from the total levels recorded for previous Administrations. The reversal of a trend toward increasing debt authorization will have a positive impact on current and future debt capacity.
While tax- supported debt authorization trends have been reversed, a number of major capital projects have been funded.
The increased debt authorization for public safety reflects the Commonwealth’s desire to resolve the local jail overcrowding crisis and to implement Governor Allen’s parole abolition and sentencing reform initiatives, while maintaining Virginia’s historical commitment to higher education.
A number of innovative financing arrangements have been used over the last four years through public- private partnerships.
Virginia’s net tax-supported debt per capita has consistently fallen below the 50-state median and is currently below the average for AAA states.
Net tax-supported debt as a percent of personal income is a measure of the state’s ability to pay principal & interest on its bonds. Because Virginia’s ratio is low, the Commonwealth is in a strong position to service its debt.
The most important parameter used by the Debt Capacity Advisory Committee is the five percent ceiling on the ratio of tax-supported debt service to revenue.
At December 1996, the debt ratio of the Commonwealth was projected to peak in 1999 at almost 4.5 percent.
Innovative debt financing programs implemented in recent years have generated millions of dollars in savings to the Commonwealth and its citizens.
The VPSA’s 1997 bond resolution proposed by Governor Allen will enable the VPSA to provide short-term financing for educational technology and other equipment which it could not provide at favorable rates previously.
The oversight provided by the DCAC in the issuance and management of Commonwealth debt is a strong positive factor in the Commonwealth’s superior credit ratings.
|
The Commonwealth’s long-term general obligation debt is currently rated AAA/Aaa/AAA by the three rating agencies — Standard & Poor’s, Moody’s Investors Service, and Fitch Investors Service, L.P. The Commonwealth is one of only eight states to bear such a distinction. The Commonwealth also carries the highest short-term rating from the three rating agencies, making it the only state with the highest long-term and short-term ratings from all three agencies. Maintaining the "triple AAA" ratings ensures that the Commonwealth issues debt at the lowest possible cost of borrowing. For example, if the Commonwealth sold $100 million in general obligation bonds on September 2, 1997, the AAA rated bonds would have been priced to yield 4.88 percent. Interest payments on the 20-year, level principal bonds would total $51.6 million. On the same date, similarly structured AA rated general obligation bonds would have been priced to yield 5.08 percent, incurring an interest cost of $53.7 million. Issuing at the lower rate afforded to the Commonwealth, due to its AAA ratings, results in savings of $2.1 million over the life of the bonds. This example illustrates the value of the AAA ratings for the Commonwealth’s general obligation bonds. The triple-AAA ratings also result in a lower cost of borrowing for non-general obligation bonds issued by State entities which are structured as appropriation-supported bonds or which carry the Commonwealth’s moral obligation pledge. Examples of such issuing entities include the Virginia Public Building Authority (VPBA), the Virginia Public School Authority (VPSA), the Virginia Resources Authority (VRA), and certain debt of the Virginia Housing Development Authority (VHDA). Although the structure of the underlying credit is important in assigning ratings to such obligations, ratings are generally one full category below the State’s general obligation rating. The AA ratings on the majority of the Commonwealth’s appropriation-supported debt and the AA+ ratings on the VPSA obligations reflect, in part, the historic ability and willingness of the General Assembly to make debt service appropriations and the strong financial position of the Commonwealth. Any downward movement in the Commonwealth’s general obligation bond rating will significantly increase the cost of these and other borrowing programs.
During the Allen Administration, total tax-supported debt authorization declined from the total levels recorded for earlier administrations. During the Baliles Administration, $1.54 billion in new tax-supported debt authorization represented an increase of $1.17 billion over the level of $370 million authorized during the Robb Administration. Additional authorizations during the Wilder Administration totaled $1.69 billion, a $145 million increase over the prior administration’s debt authorization.
Source: Department of Treasury New debt authorization during the Allen Administration fell to $1.1 billion, a decline of $585 million from the amount authorized during the Wilder Administration. Table 1 displays debt authorizations for the last four Administrations. Debt authorizations for the four years of the Allen Administration are detailed in Table 2. The reduction in authorized tax-supported debt was a result of a cooperative effort by the Governor and the General Assembly. Prior to the commencement of the 1997 General Assembly Session, Governor Allen requested a moratorium on the approval of authorization of any new tax-supported debt during the 1997 Session of the General Assembly. With the support of the chairmen of the House Appropriations and Senate Finance Committees, the General Assembly agreed with the Governor’s request, and no new tax-supported debt authorizations were passed in the 1997 Session. In fact, unused debt authorizations or authorizations for projects which had been removed from the capital plan were rescinded during the 1997 Session, resulting in a negative authorization of $54.5 million for 1997.
Source: Department of Treasury In addition to reversing the debt authorization trend, the Commonwealth dissolved one of its debt-issuing authorities. The Virginia Education Loan Authority (VELA) was created in 1972 to provide financing for the higher education loan needs of Virginia residents. VELA’s loan portfolio was sold and the proceeds from the sale were used to defease the authority’s outstanding debt. Although the dissolution of VELA did not have an impact on the tax-supported debt of the Commonwealth, total debt outstanding was reduced. In addition, after payment of expenses and provision for reserves, $61.3 million was transferred to the general fund of the Commonwealth between May and October of 1996. While there has been a reduction in tax-supported debt authorizations, a number of major capital projects have been funded for public safety, higher education, and transportation. As shown in Figure 1, of the nearly $3.6 billion of tax-supported debt authorized from 1982 through 1993, $495 million, or 13.8 percent, was allocated for public safety needs in the Commonwealth. From 1994 through 1997, public safety increased from 13.8 percent to 21.9 percent of debt authorizations to address one of Governor Allen’s key initiatives, parole abolition and sentencing reform, and to resolve the local jail overcrowding crisis. As shown in Figure 2, however, the areas of transportation and higher education still comprised roughly two-thirds of all debt authorizations, maintaining its historical relationship. This mix reflects Governor Allen’s initiatives for maintenance of transportation and higher education authorizations, improvements in the public safety area, and a reduction in general government authorizations.
Source: Department of Treasury
Source: Department of Treasury
A number of higher education projects have also been under-taken or completed since 1994. Examples of these projects include, among others, the College of Integrated Science and Technology at James Madison University, the Engineering School Clean Room at Virginia Commonwealth University, and Teletechnet at Old Dominion University. While continuing to foster the construction and improvement of the Commonwealth’s highway and road infrastructure under capital programs initiated by prior governors, Governor Allen has also overseen the issuance of approximately $132 million in debt for the Northern Virginia Transportation District Program, $114 million for the Route 58 Corridor Development Program, and $33 million for the Oak Grove Connector in the City of Chesapeake. The Commonwealth has also issued self-supporting general obligation debt for the Coleman Bridge project and for the widening of the Dulles Toll Road. Debt ratios are often used to assess a governmental unit’s debt burden and debt trends. Moody’s Investors Service annually publishes selected indicators of municipal performance (Moody’s Medians) for the 50 states and identifies the 50-state median for each ratio. The three ratios relevant to the analysis of a state’s debt burden are net tax-supported debt per capita; net tax-supported debt as a percentage of personal income; and net tax-supported debt service as a percentage of revenues. Moody’s defines net tax-supported debt as all debt serviced by tax revenues of the state, whether or not the state itself was the issuer, less any debt that is self-supporting, debt that is serviced by another unit of government, sinking funds, and short-term operating debt. Net tax-supported debt per capita is calculated by dividing debt by the total population. As displayed in Figure 3, per capita debt in Virginia began to escalate in 1994 as the Commonwealth began to issue the debt authorized in the late 1980s and early 1990s.
Source: Moody's Medians During this time, the debt per capita for Virginia surpassed the mean of the AAA states, but declined below the 50-state average in 1997. Virginia’s per capita debt has continually fallen below the 50-state median. The ratio of net tax-supported debt to personal income is derived by dividing debt by personal income as reported by the U. S. Department of Commerce. The same increasing ratio found in the debt per capita chart is shown in the trend of net tax-supported debt as a percentage of personal income (Figure 4). Unlike the debt per capita graph, the Commonwealth’s debt to personal income ratio never exceeds that of the AAA states’ mean ratio. Net tax-supported debt service as a percentage of revenues relays the most useful information in determining whether the debt burden for a state is excessive. This ratio, which is calculated by dividing debt service on net tax-supported debt by revenues, represents the burden placed on the budget as a result of debt issuance. The bar chart in Figure 5 shows that the 50-state median has been relatively unchanged since 1994, while the ratios for Virginia and the AAA states have decreased.
The debt ratios discussed in the previous section have consistently been favorable for the Commonwealth. The Debt Capacity Advisory Committee (DCAC), created in 1991 by Executive Order and codified in 1994, takes a proactive position with regard to Virginia’s debt authorizations and issuances to help maintain the Commonwealth’s AAA ratings. In addition to analyzing historical debt trends, the Committee looks at future debt authorizations and issuances and their impact on the Commonwealth’s debt capacity. The debt service to revenues ratio is the primary parameter used by the DCAC in its evaluation of the Commonwealth’s debt structure. (Moody’s and the Committee use slightly different categorizations for net tax-supported debt and revenues, resulting in minor variations in their respective ratios.) The DCAC has developed an authorization and issuance model, which is used as the Commonwealth’s debt management planning tool. The Committee regularly reevaluates the parameters of the DCAC model to reflect changes in the Commonwealth’s financial outlook or in the debt-issuing environment. The most important parameter used by he Committee is the five percent ceiling on the ratio of tax-supported debt service to revenues. The bar graph in Figure 6 shows the projected debt service to revenues ratio, assuming that all authorized debt as of December 1996 is issued and that no new tax-supported debt is authorized. This graph is consistent with the 1997 moratorium on new debt authorizations. At that time, without any new debt authorizations, the ratio was predicted to climb to nearly 4.5 percent in 1999 and 2000.
Source: Moody's Medians Although it is expected that the next report of the DCAC will confirm an increase in debt capacity, the Committee has historically recommended a degree of restraint for future debt authorization and issuance in order to preserve the Commonwealth’s stellar credit ratings. The Governor and the General Assembly continue to advocate the importance of the DCAC by evaluating its recommendations and relying on the DCAC model for guidance in capital planning.
Source: Moody's Medians The debt service to revenues ratio, along with the five percent ceiling, were introduced in An Assessment of Debt Management in Virginia, a report issued by the Secretary of Finance in December 1990. During the course of preparing this study, debt management reports of other states were reviewed and the states were surveyed for their debt management practices. Based on industry recommendations and the results of the survey, the DCAC viewed five percent as a moderate ratio and chose to use it in its calculations. The Committee has approved the five percent ratio each year since 1991. New Programs and Program Enhancements A number of new programs and enhancements to existing programs have recently been implemented. According to a February 1997 Standard & Poor’s article, "[m]any of the changes are improvements that will help the Commonwealth, local governments, and participating institutions as they continue to meet the capital needs of a growing economic base." A copy of the article is included as Appendix A. The next section describes some of these new initiatives. Tax-Exempt Commercial Paper Program A tax-exempt commercial paper program for general obligation and appropriation-based credits was proposed and implemented during the Allen Administration. Tax-exempt commercial paper is a short-term variable-rate borrowing instrument. A $50 million general obligation pilot program was begun in October 1995. In 1996, the general obligation program expanded to $75 million, and a $25 million program for the Virginia Public Building Authority (VPBA) commenced. The VPBA program expanded to $50 million in fiscal year 1997. It is anticipated that the commercial paper program will further expand to include issuance for the Virginia College Building Authority (VCBA) and possibly the Commonwealth Transportation Board.
Source: Department of Treasury The commercial paper programs allow the Commonwealth to finance the start-up costs of capital projects with funds obtained at lower interest rates. The programs also provide the Commonwealth flexibility in funding projects between long-term bond issues. By using commercial paper proceeds for project start-up costs, bonds for these projects can then be amortized over fewer years. Savings are also realized on the overall rate of interest paid. Finally, using commercial paper allows for better management of the expenditure of proceeds to assist in meeting spending targets in order to reduce arbitrage rebate liability to the federal government. During the first two years of the program, interest earnings alone on tax-exempt commercial paper proceeds netted approximately $900,000 to the Commonwealth.
The new master indenture recently adopted by the Virginia Public Building Authority changes the security structure of VPBA debt. Lease agreements will now be replaced with contractual agreements, making the debt a straight appropriation credit. This new structure eliminates the need for costly and time-consuming title searches and related legal work involved in setting up and administering the lease agreements while maintaining the VPBA’s strong "AA" credit ratings. In the first ten years of the VPBA’s existence, approximately $1 million was spent on title insurance which will no longer be required under the new structure.
The new master indenture for the VPBA allows the Commonwealth to issue debt for its share of regional and local jail construction costs and to reimburse localities up-front upon completion of jail construction. Under the prior system, the Commonwealth reimbursed localities or regional jail authorities over time through reimbursement agreements. The Commonwealth’s payments under such agreements coincided with debt service payments on obligations issued by localities or regional jail authorities to finance the jail facilities. The localities financed the Commonwealth’s share of the jail costs with their obligations which, in most cases, carried lower underlying credit ratings than VPBA debt. Now, by financing reimbursements through the VPBA, overall reimbursement costs at the state level will be reduced. Localities will also receive their payments from the Commonwealth up-front. This way, neither party is burdened with incorporating the Commonwealth’s over-time reimbursement payments into its long-term financing plan.
The Virginia College Building Authority’s (VCBA) Pooled Bond Program was proposed by Governor Allen and was passed by the 1996 General Assembly. Proceeds from the VCBA bond sales will be used to purchase obligations issued by the participating public higher education institutions. Each institution’s obligation is secured by a pledge of its general revenue, and this credit in enhanced by an "appropriation intercept" mechanism, which diverts institution appropriations to the payment of debt service in the unlikely event of default.
In addition, since VCBA Pooled Bonds are rated "AA," most schools will receive more favorable interest rates than if they had issued bonds on their own credit. For most institutions, the VCBA Pooled Bond program will result in interest savings of approximately 20 basis points (0.2%), which equates to $20,000 in interest savings for every $1 million financed over 20 years.
In November 1996, Governor Allen proposed a new school construction financing program for the Virginia Public School Authority (VPSA) to make it easier for localities to finance various school projects. This new program replaces the moral obligation pledge backing the debt service reserve account of the Authority and strengthens the Commonwealth’s commitment to the program by providing a sum sufficient appropriation, first from available monies in the Literary Fund, and second from the Commonwealth’s general fund. Removing the moral obligation pledge will eliminate the need to issue a greater amount of debt to fund the debt service reserve account, thereby allowing more capacity for capital projects. The new resolution will also enable the VPSA to provide short-term financing for educational technology and other equipment which it could not provide at favorable rates under its prior pooled financing resolution. The strength of this new resolution was recognized when the rating agencies were asked to assign ratings to the first issue in October 1997. All three rating agencies provided AA+ ratings (or the equivalent) to the new resolution, as compared to the AA ratings assigned to prior resolutions for the pooled bond program. These high credit ratings will translate into lower borrowing costs for Virginia localities as they finance their school construction and equipment needs.
In an effort to eliminate unfunded mandates on localities, the Allen Administration introduced legislation to dissolve the State Council on Local Debt (SCLD). The SCLD, originally created in the 1950s, was primarily responsible for approving advance refundings of outstanding debt issued by local governments. Since the Council’s inception, localities have become more sophisticated borrowers, and independent financial advisors are assisting local officials in their borrowing decisions. Seeking Council approval added additional costs to localities’ refunding transactions and sometimes delayed transactions. This initiative was approved by the 1996 General Assembly.
The 21st Century Program was proposed by the General Assembly during the 1996 Session and signed into law by Governor Allen. The $163 million Program provides bond financing, supported by a general fund appropriation, for various projects at public institutions of higher education. This unique program has provided another debt-financing method to meet the needs of higher education.
The DCAC’s role was expanded during the 1997 Session of the General Assembly to include review and oversight of moral obligation debt and other contingent or limited liabilities in addition to tax-supported debt. Outstanding debt of the Virginia Resources Authority and a portion of the outstanding debt of the Virginia Housing Development Authority and the Virginia Public School Authority are backed by a moral obligation pledge of the Commonwealth.
|
his report provides a brief synopsis of the state of the
Commonwealth’s debt. The report focuses on the Commonwealth’s
debt today and how policies implemented since 1994 have influenced
the Commonwealth’s authorized and outstanding debt levels. 
risons and jails have been constructed through capital lease arrangements
and through the Commonwealth’s Local and Regional Jail Reimbursement
Program. The facilities constructed include a prison in the town of
Big Stone Gap, a private prison in Brunswick County, and eight local
or regional jails in various localities in the Commonwealth.
n addition, during the 1997 Session, legislation was adopted which
increased access to certain additional tax revenues for the Virginia
Baseball Stadium Authority and the Hampton Roads Sports Facility Authority.
The legislation requires the State Treasurer, acting in concert with
the DCAC, to review the terms and structure of obligations issued
to finance the facilities to determine whether such obligations would
be considered tax-supported debt or would impact the Commonwealth’s
credit ratings. If so determined, the obligations would require General
Assembly approval.
