Giesen Perspective

Editor's note: This is the second installment of the five part series. To view the first installment please click on the following link: March 19, 2007

The Virginia Transportation Reform Act of 2007 - HB 3202

A Collaborative Analysis—Installment # 2

Bonds for Highway Construction

DATE: Wednesday, March 21, 2007

A STATEWIDE BONDING PACKAGE FOR TRANSPORTATION

HB 3202 as now drafted authorizes the Commonwealth Transportation Board (CTB) to issue up to $2.5 billion (yes, billion with a “b”) in bonded indebtedness.

These would be 9(d) bonds authorized by Article X, Section 9, paragraph (d) of the Constitution of Virginia. As way of background, this section of the Constitution reads:

(d) Obligations to which this section not applicable.

The restrictions of this section shall not apply to any obligation incurred by the Commonwealth or any institution, agency, or authority thereof if the full faith and credit of the Commonwealth is not pledged or committed to the payment of such obligation.

Different Types of State Bonds

There are three other types of debt allowed by our state’s Constitution. These are all spelled out in Article X, Section 9 (State debt) of the Constitution adopted in 1971. Debts to meet emergencies and redeem previous debt obligations are covered in paragraph (a) of this section. Then there are those debts approved in referendum by the voters -- called 9 (b) bonds. This type of debt has the full faith and credit of the Commonwealth behind it and receives the highest rating (AAA) from the bonded agencies. Debt that the state issues for revenue-producing capital projects, such as university dorms and dining halls, are covered under paragraph (d) of Section 9.

It should be noted that all bills authorizing debt for 9 (c) revenue-producing capital projects require, “…the affirmative vote of two-thirds of the members elected to each house of the General Assembly…” This restriction on 9 (d) bonds does not exist.

Since the “full faith and credit of the Commonwealth” is not technically behind the 9 (c) and 9 (d) bonds, bonding agencies have in the past typically rated these types of bonds at as “AA” bonds rather than the higher “AAA” ratings given 9 (b) bonds. Interest rates are normally slightly higher for AA bonds than they are for AAA bonds. In actuality, there is the presumption that the Commonwealth will not let any bonds issued by an agency of the state default. Thus, bonds issued by most every agency of the state, including the CTB, receive a “good” interest rate when they are issued.

The Virginia Transportation Capital Projects Revenue Bonds

Now, this gets a bit complicated, but stick with me. The transportation legislation establishes a new Commonwealth Transportation Capital Projects Fund (CTCPF). This fund is set up to be a part of the Transportation Trust Fund (TTF). The section of the bill dealing with this fund puts into Code instruction that certain amounts of annual collections of recordation taxes shall be deposited into this fund. The General Assembly may also appropriate other funds “from time to time” to go into this fund. All interests earned by these funds will remain in the fund and not revert to the General Fund (GF). The revenues from the fund will be used for the debt service requirements on any bonds issued by the state as, “revenue bonds of the Commonwealth to be known and designated as ‘Commonwealth of Virginia Transportation Capital Projects Revenue Bond’…” This is the wording in subsection 4f of Section 33.1-269 of the Code.

This section of the Code (§ 33.1-269) contains the authorization for the CTB to issue other “revenue bonds.” The difference in this new subsection (4f) is that it lacks language contained in other provisions of the existing Code (specifically, section 3 and subsections 4a through 4e). Existing language there states that the repayment of the debt incurred by the issuance of these “revenue bonds” shall be, “…secured, subject to their appropriation by the General Assembly…” The new Section 4f states specifically that the bonds authorized for these “capital projects” are, “… secured by the revenues deposited into the CTCPF; or to the extent required, from other funds legally available from the TTF or to the extent required, from any other legally available funds.” The requirement for the approval by the General Assembly is not spelled out.

Thus, since the section dealing with the CTCPF puts into Code the actual amounts from the annual collections of the state recordation taxes which will be deposited into this sub-fund of the TTF, and if the General Assembly wanted to change its mind on floating these “capital project revenue bonds”, the Assembly would have to amend this section of the Code. A simple action in the Appropriations Act would not suffice; as it does on the other “revenue bonds” authorized § 33.1-269.

The $2.5 billion in bonds, visualized to be issued under HB 3202, would be issued over an eight to nine year period beginning in FY09. The maximum that could be issued each year would be $300 million and the bonds shall be limited to 20-year issuances. Assuming the last bonds are issued in FY18, the final payments on the bonds would be in 2038!

The legislation spells out how the proceeds of the bonds will be distributed. The bulk (80%), “…shall be used for paying the costs incurred or to be incurred for construction or funding or priority transportation projects on the primary or Interstate systems of highways, excluding maintenance projects, as determined by the Commonwealth Transportation Board (CTB).” [Underlining added] Of the 20% balance, 15.7% will go for transit capital projects and 4.3% for rail projects through the Rail Enhancement Fund. Construction Districts are to receive their “proportion allocation of the total proceeds…within a 10 percent margin.”

Many elected members of boards of supervisors of rural counties are concerned that none of the proceeds of these bonds will go to the secondary system or to maintenance projects. (Yet there were a whole lot of “rural delegates and senators” that voted for the bill!) One supervisor observed, “The more primary and Interstate highways we build, the more maintenance dollars we will need in the future. This will cause the gap between the funds for construction and maintenance to continue to widen. There’s not enough money to improve our secondary roads as it is. This will just increase the road problems we have.”

Some supervisors whose counties are in smaller construction districts worry about the “10% margin.” They are concerned that large primary or interstate projects in other districts might “take up all of the proceeds and leave us sucking air (a substitute for a more descriptive country phrase).”

So there are some valid questions about the wording of this portion of the bill. The Governor has been hearing these questions asked at his “listening meetings” around the state. How will he address them? Tune in on March 26.

Repaying the Bonds—The Dedicated Funds—Recordation Taxes

HB 3202 places a section 58.1-815.01 into the Code. This new section spells out the annual amounts from the recordation taxes which will be deposited into the CTCPF. Remember, at present, the bulk of the recordation tax receipts goes into the GF. There is, of course, the diversion of some of this revenue into the U.S. Route 58 Corridor Development fund. This is approximately $40 million a year but goes up or down depending on the actions of the sitting General Assembly. Over the years it has ranged from $15.3 million to $47.3.

If HB 3202 goes into law as written, the Department of Taxation will deposit into the CTCPF the amounts specified in the Code, i.e. $148 million in FY09; $172 million from FY10 through FY16; and $185 million in each fiscal year thereafter until the bonds are paid off (estimated by us to be around 2036). This is in addition to the commitment to appropriate money from this source for the expenditure on the Route 58 corridor.

Should recordation tax collections, and its subsequent impact on the General Fund, be used to meet the transportation needs of the state? The proponents of HB 3202, of course, argue YES! They content the interest rates on the bonds will be low because of the good standing of the state, thus the debt service is reasonable. In fact, it is better to borrow the money and pay it back in this fashion because construction costs are rising so fast. There are even indications that the inflation rate for construction materials is going up faster than the interest rates the state will pay on the bonds. So it is better to build now with borrowed money rather than waiting when your costs will be much higher. They tell you the money you save will be greater than the debt service costs. And after all, the annual amount being diverted from the GF is less than 1% of the total GF revenue.

The concerns expressed by those who worry about this use of GF money for transportation counter with the observation that it always costs more when you do highway construction with borrowed money. Unlike houses and buildings, highways deteriorate at a much faster rate. Maintenance costs for roads, streets and highways are considerably higher than for other capital projects and the initial need for maintenance comes in the first five years. It will take 20 years to repay every bond issuance. Many argue it is this very fact which has gotten the state’s transportation program into its present trouble.

Senator John Chichester, during the 2006 debate on issuing bonds for highway construction, stated it rather forcefully when he said, “Building highways now and paying for them twenty years later doesn’t make much sense, does it? You will be paying almost twice as much per mile of road over that time. We should raise the money and pay for the roads with current dollars.” His arguments worked with the Senate Finance Committee in 2006 but not in 2007! There are many in the business community and in the “legislator observers” group that still agree with the retiring chairman of the SFC.

Then let’s look at the supporters’ argument that this is only a 1% or less diversion of so-called GF tax dollars going into transportation. To really focus on this and put in perspective, one needs to have some concept of the total budget picture of the state.

A Brief Explanation of the Budget of Virginia

Virginia operates under a biennial budget system. The Governor introduces a two-year budget bill in December of odd years to cover the states expenditures for the next two fiscal years. For instance in December of 2005 outgoing Governor Warner presented to the General Assembly the budget he had devised for the period from July 1, 2006 though June 30, 2008. The Assembly then passes its version, the Governor acts upon it, the Assembly reconvenes to consider the Governor’s changes, and when the Governor finally signs it, the Appropriations Act for 06-08 is complete. In the odd years, the previously adopted Appropriations Act is “tweaked—amended” somewhat for the balance of the biennium.

During this procedure the media almost always refers to the grand total of the budget, declaring the GA is considering a $74 Billion Budget (for 06-08 the expenditures in the budget are actually $73,847,010,896, give or take a few million!). One has to understand there are two different revenue and expenditure portions of the budget. There is the GF portion—general taxes (income, sales, insurance premiums, ABC profits, inheritance, etc.) going for general purposes (education, public safety, the court system, the expenses of the legislature, corrections, human services, etc.) and there is the Non-GF portion—revenue which is designated for specific purposes and spent accordingly.

These non-general funds include transportation taxes and fees—motor fuel taxes, driver license fees, motor vehicle license fees, toll revenues, federal grants and contracts, and motor vehicle sales and use taxes; the tuitions and special fees paid by parents and students to our colleges and universities; the revenue raised by higher education in auxiliary enterprises; federal grants for specific purposes;

hunting, fishing, and boating fees collected by the Department of Game and Inland Fisheries; fees paid to our state parks; fines paid to our courts; and so forth and so on. The list is long but you get the idea.

So first you must realize we are dealing with a biennial budget and “$74 billion” is spent over two years. Our total annual expenditures budgeted for this biennium are about $37.5 billion the first year (FY07) and $36.3 billion the second year (FY08).

However, these numbers include both GF and NGF expenditures. Now break this down into the GF portion of the budget and you get estimated expenditures of $18.0 billion in FY 07 and 17.6 billion in FY08. So our discussion at this point is really about an $18.0 billion dollar annual budget.

Looking closely at the general fund expenditures, one finds that there are five major budget drivers for this portion of the budget. Funds which are used for public education and primarily go back to the localities account for 33.1% of the GF budget (down from about 40% before the advent of Medicaid!). Higher education funding takes 10.1% (down from 18.8% in 1981). Medicaid, to which the state started contributing for the first time in the late sixties as required by federal law, now takes 14.2% of the total GF budget (up from 7.0% in 1981). The fully-state-funded corrections system takes 5.3% of the budgeted GF (down from a high of 7.7% of the budget in 1987). Finally, the fifth major driver and the most recent expenditure of general fund dollars, is the Car Tax refunds sent to localities to offset up to 70% of the car taxes the localities use to collect before the No Car Tax legislation of the late 1990s. This “refund” has gone from a zero per cent of the budget to consuming 4.9% of all GF expenditures. This would be much higher if the legislature hadn’t capped this program in 2004 when the drain on the GF reached 7.2%.

HB 3202 Only takes 1% of the GF—Are You Sure?

As noted the proponents claim the impact of HB 3202 on the GF budget will hardly be felt since it takes less than 1% of this revenue when compared to the annual GF budgets. It is true that the designated amount of recordation taxes being sent to the CTCPF from FY10 to FY16 are only $172 million and the total GF revenues already top $17.2 billion. Revenues are not forecasted to go down. Thus, with a reasonable economy (is our economy ever reasonable?) this comparison should hold true.

Oh, but hold on—look at the total GF dollars being transferred to NGF-transportation purposes by HB 3202. In addition to the recordation taxes for the debt service of the bonds, there is also the forecasted 50% of the nonrecurring GF surplus ($64 million) and the dedicated 1/3 of the insurance premiums ($150.8 million in FY10). Each of these has been going into the GF unless specific action by the legislators directed it elsewhere. These three amounts add up to a possible redirection of $386.8 million from the GF pot of revenue by FY10. Even if the GF revenues were to grow to over $19 billion annually, the transfers would equal over 2% of the GF total.

Those who have concern over this use of GF dollars point out that while this doesn’t sound large as a % of the GF revenue stream, that amount of money is more than the ’08 GF combined budgets of the Dept. for Aging ($19.1 million); the Dept. of Agriculture and Consumer Services ($28.5 million); The Dept. of Conservation and Recreation ($47.5); The Dept. of Environmental Quality ($47.7 million—not including the surplus transfers to the Water Quality Improvement Fund); the total legislative branch—including JLARC, Capitol Police, JCHC, etc.—($59.7 million); the Attorney General and the Dept. of Law ($21.5 million); and the total allocation for all of the departments under the Secretary of Commerce and Trade ($115.4 million). After funding all of these agencies with the GF included in HB 3202 for transportation there would still be $47 million plus to spend on “non-state agencies!”

How about another comparison? The entire state financed judicial system only has a GF appropriation for FY08 of $359.8 million! It would appear one could make a good argument that using GF for transportation could have an impact on other agencies funded by GF revenues. The counter argument made by advocates of HB 3202 is, “Well, wouldn’t you say that transportation is a core service of the state and should be adequately funded? If that is true, then using GF dollars to improve this core infrastructure is in the best interest of the citizens of the Commonwealth!”

And so the debate goes on. Can the Governor reconcile it? He has a tough job. As one supervisor said to the media, “I certainly hope this Governor has the wisdom of Solomon!”

Can the Recordation Tax Take the Drain?

There have been a number of groups looking with wistful eyes toward the rapidly increasing revenues being collected in recent years from the recordation taxes. However, there is data in the making that would dictate caution in being too optimistic about this revenue source. It is true these taxes have jumped from a 10 year average of $66.5 million from FY86 and FY95 to an average of $186.1 from FY96 to FY 05. Then in ‘06 the collections (with the rate increase from the 2004 tax bill in effect) topped out at $622.6 million. But the forecast for FY 07 is down to $499.4 million. Collections are running about in line with the estimate predicting a drop in receipts of 20%. To most real estate people with whom we have talked, the official estimates now on the board for the Governor’s six-year forecasts ($537.0 and $563.9 millions for FY09 and FY10) are too optimistic. If the real estate market doesn’t recover there could be a drastic result for the transference of funds into the TTF.

The Governor has some tough decisions.

THE NEXT INSTALLMENT

We’ll talk about the Regional Plans.

Arthur R. Giesen, Jr., fondly known as Pete, served in the Virginia House of Delegates for over 30 years. He represented the citizens of the Central Shenandoah Valley surviving four different district realignments. During his career he represented Augusta, Bath, Highland and part of Rockingham County and the Cities of Staunton and Waynesboro.

Following his career as an elected official, Pete assisted Lt. Governor John H. Hager as his Chief of Staff.

Pete now keeps an eye on Virginia government and assists many clients with his unique perspective on the workings of the Virginia General Assembly and its relationship with the other branches of state government.

THE GIESEN PERSPECTIVE