Patrick McSweeney

Down the Wrong Road

The GOP transportation plan would employ 
"subject-to-appropriation" bonds similar to the "pledge" bonds that voters rejected in 1990. Very bad idea.

A year after the defeat of the “pledge bond” ballot measures, the Virginia Supreme Court in Dykes v. Northern Virginia Transportation District Commission ruled that Fairfax County could accomplish essentially the same result by resorting to “subject-to- appropriation bonds.” The County argued that these bonds are not debt at all because it had made no commitment to bondholders to pay them, but merely to consider appropriating sufficient funds each year to cover principal and interest payments. A majority of the Justices accepted the County’s argument.

One of the dissenting Justices in that case insisted that the Court should not validate such a scheme, noting that the voters had overwhelmingly rejected the “pledge bond” ballot measures just a year earlier.  He called the County’s scheme “a shocking, patent attempt to circumvent and nullify the requirement of voter approval” in the Virginia Constitution.

Since the Dykes decision, the Commonwealth has issued hundreds of millions of dollars of “subject-to- appropriation bonds” in support of projects such as the improvement of hundreds of miles of U.S. Route 58 from Norfolk to Lee County. Now Republican leaders in the General Assembly want to authorize the issuance of another $2 billion of “subject-to-appropriation bonds” as the centerpiece of their transportation and growth proposal. It is an astonishingly awful notion that should be rejected as emphatically as the voters rejected the proposed “pledge bond” constitutional amendments in 1990.

Decades ago, New York State issued a milder version of these “subject-to-appropriation bonds” known as “moral obligation bonds,” only to discover that they contributed to the bankruptcy of New York City in 1975. As a result of that experience, New York State outlawed the use of this type of bond in 1976, as have other states, but not Virginia.

Virginia has issued “moral obligation bonds” of this sort for more than 50 years. Unlike “subject-to- appropriation bonds,” these bonds at least have a source of repayment other than tax revenues, such as user charges. “Subject-to-appropriation bonds” typically have only one source of repayment — discretionary appropriations of tax revenues. For that reason, they are far more objectionable than “moral obligation bonds.”

If debt financing is a good way to jump start Virginia’s transportation construction program, the General Assembly should put that proposition to the voters for their approval as the Virginia Constitution requires when tax-supported debt is incurred. Legislators shouldn’t resort to the “subject-to-appropriation” scheme, which will cost taxpayers tens of millions of extra interest expense, bypass the voters and offend the Commonwealth’s tradition of honor and fiscal integrity.

The pending legislation proposed by Republican leaders explicitly treats the “subject-to-appropriation” debt instruments, which the Commonwealth will sell to the public in the form of bonds or notes, as negotiable instruments. By statutory definition, these bonds or notes are legal obligations of the issuer. A negotiable instrument is an unconditional promise to pay the amount shown on the face of the document, but the essence of the “subject-to-appropriation bond” is the condition that General Assembly has absolutely no legally enforceable obligation to appropriate funds to repay bond buyers.

Virginia should immediately put an end to this method of raising funds. It is nothing short of dishonest. 

Imagine what would happen to a private company if it resorted to this “subject-to-appropriation” scheme. It would be prosecuted for fraud. When government does it, it is merely clever.

-- February 05, 2007