Meanwhile, Virginia’s Debt Service Has Doubled

Source: "State Spending: 2015 Update"

Source: “State Spending: 2015 Update”

Debt service on bond issues, mainly for higher education and transportation, has been a major driver of state spending over the past 10 years. The repayment of interest and debt has increased in absolute numbers and as a percentage of total blended revenues — from $385 million (or 2.57% of revenues) in FY 2005 to $836 million (or 4.51% of revenue) in FY 2015.

Spending on debt service remains below the 5% cap recommended by the Debt Capacity Advisory Committee in order to protect Virginia’s AAA bond rating, according to the recently published “State Spending: 2015 Update.” But it still represents a long-term obligation that cannot be pared during economic downturns, thus limiting to some degree the state’s ability to respond to recessions.

Fortunately, Virginia’s debt bears no comparison to the federal ponzi scheme. The interest charges on state bonds are fixed. Payments will not increase unless state authorities choose to issue new debt. Uncle Sam is in a very different situation. Much of the $18+ trillion in federal debt consists of short-term notes (two years or less) that benefit from extremely low interest rates. However, should interest rates rise, a substantial portion of the federal debt will be rolled over at higher interest rates in short order. So even if the feds didn’t run annual deficits of $400+ billion a year for now until forever, the debt burden would increase.

Bond indebtedness does not account for other long-term obligations, such as real estate leases and, most worrisome, unfunded pension obligations. Virginia has made progress in bringing its pension obligations under control, although budget pressures could tempt the General Assembly to short-change budget contributions in the event of another recession.


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16 responses to “Meanwhile, Virginia’s Debt Service Has Doubled

  1. To attempt to get a grip on “public private partnership” transportation projects and the effect on Virginia taxpayers a year+ ago, I looked a tad into the P3 bonds being sold. And discovered that, according to T. Rowe Price, among its “best” bond performers were Virginia transportation bonds. In the narrative, T. Rowe Price mentioned three Virginia P3 amongst those best performers BUT two of those projects weren’t yet completed and one wasn’t even begun.

    Since the bonds were sold with the concept that tolls would pay them off, how were uncompleted toll road projects amongst anyone’s
    “best” bond performers???

    That is one of the many unasked questions that P3 toll roads survive on.

    Mainstream media generally just parrot P3 press releases and have forgotten that their job is supposed to be to act as the “Fourth Estate” of government.

    As an individual, I don’t have the financial background to understand these kinds of questions and since no one is paying me to educate myself and — even if I do — I have few possibilities of publishing whatever knowledge I eventually gain, there is no benefit for discovering answers to these kinds of questions. It’s all “pain and no gain.”

    Consequently, I’m only “betting” here but I’ll bet that much of the doubling of bond indebtedness that Mr. Bacon mentions in this piece has gone to financial boondoggles like 460 Mobility Partners, Elizabeth River Crossings, and Capital Beltway Express.

    International and even local data is as clear as it can be. P3 toll roads, even before tolls are included, cost taxpayers MORE money than if the state built the projects. The so-called efficiency behind which bonds have been sold and loans provided to P3s is the efficiency of scamming taxpayers who no longer have watchdogs over our interests.

    To this point, Virginia taxpayers have lost upwards of $400 million due to the kinds of P3 transportation debacles delivered by the past administration. How long, I wonder, will we be paying off the bonds? And how much will they cost us when it’s all said and done?

    As I’ve written before, I hope the new sec trans, Aubrey Layne, has stopped digging deeper the Virginia P3 disaster hole but he can’t reverse the horrible — at best — decision making of the prior administration.

    • Glad to see the P3 issue is still on your mind, as it should be. Despite Secretary Layne’s skepticism, is it true the rebuild of the Shirley Highway Express Lanes inside the Beltway is still going ahead as a P3 project? To your knowledge has anyone taken a recent look at what that contract will cost over its lifetime, relative to what it would have cost VDOT?

    • I don’t have access to the bond rating commentary you reference. However, I’ll take a guess. First, I doubt the interest on the bonds is paid by the tolls. The interest is paid by the issuer (presumably using the tolls once they have stabilized). If there were a slow month or even year for toll collection the issuer would not be able to pay partial interest nor would the issuer pay more interest in a good month or year. The issuer is responsible for paying the interest regardless of the toll collection level. Of course, if the toll collections remain too low for too long the issuer will declare the entity involved in any particular P3 to be insolvent. The estimation of the odds of that happening is usually done by a bond rating agency.

      I am guessing that T Rowe Price has four facts at hand:

      1. The price they paid for the bond.
      2. The effective interest rate on the bond.
      3. The credit rating on the bond.
      4. The effective interest they are earning on bonds with the same credit rating.

      Their statement of “best bond performer” is just a reflection of mathematical reality. Those bonds are earning the highest interest in their risk class (i.e. bond rating).

      If I’m right, the real question is whether the credit rating of those bonds is reflective of the real financial risks facing Virginia P3 debt. That would be a better question for the rating agency rather than T Rowe Price.

      One final point – again, if I am right – the high interest rate received on the P3 bonds actually reflects the market’s perception that these bonds are risky relative to their credit rating and thus deserving of a high risk premium.

      Anyway, just guesswork on my part. If you reference the T Rowe Price report I’ll take a more detailed look (time permitting).

  2. As you are reading this post, remember the other post Jim just put up today about the overall growth in government spending. Part of the calculation as the state considers building roads with bonds vs. cash, and considers roads owned by VDOT vs. roads built with private partners – is the purely political calculation on what the published budget ultimately looks like. To the extent the Elected Folks are being pressured to keep the annual bottom line within a certain limit, bonds and PPP’s start looking more attractive. I don’t envy anyone who tries to think in a 20-40 year time window in an environment with elections every other year……

    What do you want, Jim — cash or debt? I actually think Virginia needs both and has a pretty good balance. I’m not sure you haven’t somewhat confused debt tied to general taxes and debt tied to specific revenues.

  3. re: ” I’m not sure you haven’t somewhat confused debt tied to general taxes and debt tied to specific revenues.”


    For instance, I presume that the transportation bonds are being paid back with transportation revenues….not general revenues.

    I suspect that what the State is doing is trying to front-end projects that otherwise it could not pay for -up front and would have to wait to accumulate the funds.

    and the problem with that is that each year you wait – the project gains costs and if you wait 5-10 years – the price can double – and that’s what, in essence, got about 30% of the projects in the original 6 yr plan – killed… there was not enough money to build all that were on the list so they cut projects – they knew they’d never fund.

    Next – HB2 – which basically is a prioritization process that will not let projects get put into the 6yr plan unless there is assured funding so everyone competes to see which projects get funded.

    it’s a flawed process – will always be – but the core of it is to prevent projects from sneaking onto the 6yr plan as placeholders for downstream funding.

    in terms of “learning” … my view is that one should not hold an opinion about something unless they really understand the issues and facts and that especially goes for govt and spending.

    it’s way too easy to skim … and yes.. I think it’s incumbent on us to do the homework to understand – if we are going to hold opinions and vote based on what we think we know.

    • Here, then, Larry is the question (one of many about these things I don’t fathom): If your presumption that transportation bonds are being paid back with transportation revenues is at all correct (and it sounds like the most reasonable approach and the public is certainly told that is how bonds are to be paid) HOW can a bond manager say its “best performers” are toll projects which are not yet complete and, therefore, not yet generating any income? If there is no revenue, who is paying bond buyers? If there is a trickle of toll income from other actually-completed P3 transport projects, how can that trickle be “best performer” over all the other state bond projects?

      These kinds of questions should be asked about P3s but aren’t being asked.

      • Salz – I don’t pretend to know how bonds can be evaluated before a project is finished but wouldn’t you have this essential problem for any projects that anticipates revenues in the future?

        Like water and sewer utilities will go get bonds to expand their facilities before they actually expand them.

        I presume that someone presents a prospectus and folks who normally evaluate them – do so again and make a call.

        and we know they can be wrong… also..

        I’m not sure how the public gets informed to the degree they understand it without themselves having a background in that field but toll roads in general have a track record because they know the existing traffic counts and they can calculate the “shrinkage” due to tolls.

        but VDOT is not trying to get money from these toll projects as much as they want to use tolls to manage congestion to
        discourage SOV cars especially at rush hour and to encourage HOV and time-shifting to outside of rush hour.

        In other words – they’re trying to make these facilities LAST and not have to build more capacity by using Eminent Domain to buy developed property.

        I would posit that if one view their behavior in this light – it explains a lot and it also predicts what VDOT will likely do in the future.

        I call it the ” we finally get it – you cannot build your way out of congestion” moment.

      • See my prior comment. As for how the bond interest is being paid – I assume it is being paid from the proceeds of the bond issuance. Now, before you call the FBI to report a Ponzi scheme – this is fairly normal. Any time you finance something that requires construction the interest payments come from cash collected prior to revenue being recorded. This could be from the equity investors or the debt investors. The real question is whether the bond rating reflects the true risk of the bond.

        • that’s true for ANY bond – right?

          like I said. When our local water/sewer utility needs to expand their system – they go to the bond market – get the money, put the infrastructure in the ground – then start collecting hook-up fees to re-pay the loans.

          and yes – there is risk if the rate of new hookups is slower than projected.

          but past performance on repay also goes into the rating.

          for tolls roads, generally speaking, I’m sure there is a range between the top and bottom revenues but again – if the principles are entities who have track records with other toll projects – that bolsters their credibility on new issuances.

          most infrastructure whether public or private – schools or roads or new commercial – or all financed by loans.

          I presume that public and private could save up in advance and truly pay as it goes but that seems pretty rare.

          With VDOT – there is no saving up… it’s basically a question of leveraging their revenues to pay interest on loans rather than directly buy infrastructure.

          so they build of debt – just as any homeowner would – to get the infrastructure up front now – and pay back the loan. Involving the private sector via P3 basically gets them more infrastructure – quicker and tolls are the additional revenues.

          Note also that VDOT (and other states) no longer look at individual projects as having to “pay for themselves with tolls”.

          VDOT is considering roads that have tolls but those tolls are insufficient to pay in total for the road so they are putting state money towards it also… basically so they can get the road now.

          other states, like Maryland and NC have created state-level toll road authorities where some toll roads are cash cows and other toll roads are essentially subsidized.

          it’s not your Dads road building world any more.

  4. Layne told Jack Trammell and I that I-66 “inside the beltway” was entirely a state project, costing if memory serves, about $285 million (no lanes would be built). Outside the beltway MIGHT be a P3 IF, he said, the privates could match the $2.1-$3 billion cost that the state believed it can build and operate the two-toll and three-free lane highway. He put the probable cost difference at $1 billion, or $4 billion total if it’s a P3. But, like I’m not a financier, I’m also not an engineer, and I don’t have any idea how to check VDOT cost calculations. Again, that was for the outside beltway I-66 toll project which Layne projects today again, if no private “help,” at $2.1 to $3 billion and $4 billion if a P3. The difference includes some $200 million in tolls that the state would NOT get if I-66 outside beltway is a P3.

    Layne does not have a scenario, to my knowledge, which doesn’t tolling inside the beltway. Most likely if inside the beltway doesn’t become a toll road, the highway patrol will begin to ticket drivers who are illegally driving on it today without a carpool. Though most don’t know this, on inside the beltway I-66 during rush hours, it is illegal NOT to have three people in the car. That’s TODAY. Making it a toll road allows drivers to continue to go single occupancy, but they have to pay for the right to do so, but drive free if they have riders.

    One issue with toll roads which few think about is that there has to be additional flyovers, underpasses, etc at most intersections because the toll lanes, on say, the Beltway, have to connect with the non-toll lanes on I-66 while the I-66 free lanes must connect with the 495 toll lanes. And vice versa. What was a eight ramp intersection becomes at least a 16 ramp intersction and probably 24 ramp (if I do the math right…which is always debatable). By making “inside the beltway” lanes ALL tolled during certain hours, much cost disappears because flyovers, or tunnels or… don’t need to be built. In addition to being cheaper, it is also less noisy. The higher the flyovers needed, the less sound can be mitigated — but even ground level sound walls actually help very little.

    Alnog I-66, both inside and outside the beltway, there are very smart people opposed to VDOT’s present ideas. While it’s easy to dismiss these folks as NIMBYs, the reality is that most of them purchased homes for the betterment of society as they were encouraged to pay more and therefore drive less for years. Now, from their opinion, under the present state plan they are being punished with more noise, more pollution, more drivers on their secondary roads — and of course more cost in using any toll highways– to benefit people further west who actually bought the cheaper houses.

    Transportation is a “wicked problem.” And I don’t claim that anyone has the best answer (though I promote “pull” “transportation demand management” and think tolls, a “push” method, are reasonable). What appalls me is that former Sec Connaughton just threw away Virginia’s transportation millions (perhaps billions, as yet uncalculated) because he was so inept (or something more sinister) that he didn’t oversee the P3 contracts. Jim Bacon, who believes greatly in free enterprise, pretty much says that the federal TIFIA and Virginia’s Public Private Transportation Act are/were faulty; that one has to expect the privates will always work to get whatever they can because it’s the nature of “let the buyer beware” economics.

    Why wasn’t Connaughton “beware” should be a BIG question, I submit, and to me it makes no difference whether or not Jim Bacon’s philosophy is or isn’t on the money. (And, of couse, I might misunderstand mr. Bacon’s philosophy anyway). Since Jim Rich, a CTB member, several times pointed out the fiscal irrationality of Connaughton’s plans and got fired for his efforts, I don’t think Connaughton can claim that he didn’t have any inkling of financial problems.

    By the way, jim Rich, Sean Connaughton, and Aubrey Layne are all members of the same political party. Please don’t anyone try to make this political.

  5. VDOT’s I-66 Outside the Beltway Project Will Be a P3


  6. Question: Will Salz become the Michael Burry of Virginia transportation circles, i.e., the guy who actually reads the bonds in their entirety?

  7. In 15 years, auto traffic in northern Virginia will at total gridlock save only for the citizens able to pay without pain exorbitant costs for everyone else.

    Public transport will be jammed and very expensive as well, that is if citizens can find a way to get to it from home and off it to work, both of which will for many people will be a very time consuming at awkward unreliable task.

    There will be little or no convenience left in travel and around around northern Virginia, whether it be local (shopping, day care, etc), Regional (commute between No. Va to DC or Md), or interstate. Daily regional traffic by auto from 5am to 8 pm will highly unreliable at best. Quality of life, convenience and options for work, play, and chores, will be severely restricted and expensive, save only for the very affluent.

    The blue collar worker – tradesmen, clerks, service workers – and the white collar worker (save for the very senior bosses and owners), their quality of life will plummet. The Affluent creating this mess will on the other hand be untouched by it. Indeed they will benefit from it, greatly, in many cases, for many reasons.

    New road building will compound these problems.

  8. Finally! The free market guided by the invisible hand is converting NoVa into a Smart Growth Mecca where you WILL live, work, shop and play – LOCALLY and not SPRAWL!

    and yes.. .as with everything else – only the rich are immune!


    here’s the deal.

    VDOT has decided that needed transportation infrastructure WILL, in fact, be paid for, by the rich via hefty tolls.

    what’ not to like about having the rich pay and let the hoi polloi go free on mass transit?

    it sounds like perfect symmetry…


  9. re: ” Fortunately, Virginia’s debt bears no comparison to the federal ponzi scheme. The interest charges on state bonds are fixed. Payments will not increase unless state authorities choose to issue new debt. Uncle Sam is in a very different situation.”

    well – you should read this:

    ” States throw money at military bases to keep them open”

    ” States with large military bases are filling what is traditionally the federal government’s role by picking up the tab for construction and repairs, saying they can’t afford not to.

    The number of states willing to spend taxpayer money to fix infrastructure in military facilities, and the scale of the projects, has increased steadily in the past five years. State officials argue the Pentagon keeps asking for base closings and they want to protect their bases and the revenue they bring in.”

    Look at the IRONY here. DOD wants to SAVE MONEY, prioritize it to what is most needed and in the process likely keep the deficit from growing, perhaps even reduce it – and what are the States and elected politicians who decry the Federal debt – doing?

    why hells bells. .. they’re actually spending MORE TAX DOLLARs to essentially continue the Federal deficit spending!

    Virginia is no stranger to this.

    ” In Virginia, military installations are in good shape, but the state and local communities have spent more than $140 million to prevent development close to them by purchasing land, said John C. Harvey Jr., Virginia’s secretary of veterans and defense affairs.”

    Virginia is actually spending tax money to PREVENT private development so they can continue to keep a Federal deficit-funded base – open.

    Finally – talking about Va DEBT – ” The legislature also passed a bond authorization in case infrastructure improvements are needed, he added.”

    Okay – so let me get this straight – Virginia and it’s so-called fiscally conservative in Richmond have authorized borrowing money with taxpayer dollars to pay for infrastructure for a deficit-funded Federal base.


    You know the problem with Conservatives and their narrative about deficits…. well.. it’s talk. When it actually comes time to walk-the-walk – who among the FAUX fiscal conservatives including those who write about debt and deficits … actually come out forthrightly and advocate for NOT using State tax dollars and restricting private development to keep deficit-funded military bases open in Va?

    so how many folks in Va who claim to be fiscal conservatives – advocate for not taking Federal money because it’s deficit-funded?

    Virginia sucks big time at the Federal Teat – and at the same time decries “entitlement” spending like MedicAid. So we argue against spending Va taxes on it’s own citizens health care and instead not only take Federal deficit money but actually add more Virginia taxpayer money to the pot to keep and maintain Federal deficit money.

    so when can we actually have a real discussion about Virginia’s role in the Federal “ponzi” scheme? Is Va not part and parcel of that ponzi scheme?

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