Category Archives: Finance

Threading the Needle on Long-Term Debt


Graph credit: Virginia Debt Capacity Advisory Committee

by James A. Bacon

Virginia has more than tripled its tax-supported debt over the last decade, according to the December 2015 report of the Debt Capacity Advisory Committee, but the state still has enough capacity to support the issuance of another $603 million per year in added debt in Fiscal years 2016 and 2017 without undermining its AAA bond rating.

Long-term debt is necessary to pay for long-lived assets such as public buildings, university facilities and transportation projects, but higher debt payments, a fixed expense, make it difficult to respond to economic downturns and address other budgetary needs. It has been Virginia’s policy to limit debt payments to 5% of blended revenues.

While other states have been somewhat constrained in their borrowing in recent years, Virginia has continued to add to its debt. Net Tax-Supported Debt (NTSD) as a percentage of personal income increased to 2.8% — higher than the national median and 19th highest among the states.


Graph credit: Virginia Debt Capacity Advisory Committee

Against this backdrop, Governor Terry McAuliffe has proposed issuing $2.43 billion in bonds for higher-ed R&D initiatives, Virginia ports, corrections, state parks and the environment. Assuming the bond issuances are staggered over four years, they would soak up the state’s projected added bond capacity over that period.

Complicating matters, McAuliffe has an appetite for even more spending that requires long-term financing. The administration’s signature transportation initiative is a $2 billion upgrade to Interstate 66, a key transportation artery in Northern Virginia. The project as currently envisioned is dependent upon highly unpopular tolls and toll-backed debt to finance the project. Unless offset by the maturation of old transportation debt, issuing bonds for the project could accentuate the crowding out of other priorities. As the committee report states:

Currently, debt service on debt paid by the TTF (Transportation Trust Fund) exceeds 5% of TTF revenues. Accordingly, to the extent the 5% measure is exceeded, capacity derived from the general fund is being utilized. This does not mean that general fund dollars are supplementing debt service payments on TTF debt; rather, it means that capacity derived from the general fund is being used to keep overall capacity for all tax-supported debt under the 5% target.

The General Assembly money committees have more than budgets to discuss this year.

Slaying the Debt Dragon – or Feeding the Beast?

slaying_debt_dragonby James A. Bacon

There aren’t many things that almost everyone across the ideological spectrum agrees about, but one of them is that indebtedness from student loans is out of control. Here in Virginia, about one million students owe roughly $30 billion, according to the Richmond Times-Dispatch — or about $30,000 each on average.

The loan burdens can be difficult enough for students who graduate with degrees, but the debt can be devastating for those who don’t complete their degree requirements and don’t achieve the earning power they expected. Commenting on the Richmondsunlight website, Ruth Hall asks:

What about a person who becomes disabled before completing their education? Where is the concern for them regarding paying back student loans when their only source of income is social security disability? My daughter has a rare disease (as defined by the NIH) that struck her in her early 30’s. She is unable to work, but her social security disability check is garnished to pay her outstanding student loans. Already living in poverty with an income of $1000 a month, losing $150 a month to student loans affects her ability to provide for herself. Student loans never go away and she will never be able to finish college or return to earning a living due to this rare disease.

But not all debtors inspire the same degree of sympathy. The Times-Dispatch quotes one student griping about the $250,000 cost of his education, including the interest on the $190,000 he borrowed to attend the University of Virginia and the University of Richmond Law School. Is his complaint really with the debt and interest — or with the outrageous cost of higher education? The young man worries that he might have to sacrifice his career in public interest law. Perhaps he should have considered the consequences such a massive debt before embarked upon that particular goal!

Another student said she didn’t realize she owed $32,000 for a nine-month medical assistant diploma from Corinthian College, which she says turned out to be worthless, until it showed up on her credit report. She said she had been told grants and scholarships would cover her costs. “I still to this date have never received a bill” or documentation, she said. Either she was defrauded, in which case she should collect damages in a civil suit, or she was negligent in understanding the obligations she was incurring, in which case it’s hard to muster much sympathy.

Regardless of the circumstances of individual loans, it’s clear that thousands of Virginians have a problem. The question is, what do we do about it?

Sen. Janet Howell, D-Reston, and Del. Marcus Simon, D-Falls Church, are lead patrons of SB 52 and HB 400 respectively, identical bills that would create a Virginia Student Loan Refinancing Authority. The Authority would be tasked with creating a program in which Virginia students with educational loan debt “may receive a loan from the Authority to refinance all or part of his qualified education loans.”

Where would the money come from to refinance the student loans? The Authority would issue bonds. However, the Commonwealth of Virginia would take on no financial risk. The bills explicitly state: “No bond of the Authority shall constitute a debt or pledge of the full faith and credit of the Commonwealth or any political subdivision of the Commonwealth and each bond shall be payable solely from the revenues and other property pledge for such payment.”

Bacon’s bottom line: Howell and Simon deserve credit for devising an innovative approach to the problem of student indebtedness. I have major reservations, but I think their idea deserves deserves thorough airing and debate. The devil, of course, is in the details.

Investor appetite for the Authority’s bonds will determine how much money the Authority will have to work with and how many students it can help. I would like to know how prospective bond underwriters would evaluate the quality of the debt, what interest rates they would demand, and what flexibility the Authority actually would have to offer students better loan terms. I presume that the bonds would be classified as tax-free municipal debt, which would be cheaper than private-market financing. On the other hand, participating students , presumably those with the greatest need, pose a higher-than-normal risk of default, which could push interest rates higher.

Currently, the federal government assumes the risk for student loans gone bad. A Virginia student loan authority would assume that risk for the debt that it restructures. The transfer of risk needs to be examined very carefully. Even if the state’s full faith and credit weren’t on the line, bond defaults by the Authority would be a debacle for the state.

Otherwise, my main reservation is that creation of a Virginia Student Loan Refinancing Authority is only a palliative. This proposal would not address the underlying causes of the problem — out-of-control costs at Virginia colleges and universities, and indiscriminate lending by the federal government regardless of a student’s likelihood of repaying their debt. That’s what got us into this predicament, and anything that dulls our laser-sharp focus on those realities only delays addressing them.

$1 Billion in Bonds for R&D Initiatives

Virginia Tech robotics competition team

Virginia Tech robotics competition team

by James A. Bacon

Governor Terry McAuliffe has unveiled a $2.43 billion bond package, about $1 billion of which will go to Virginia colleges and universities for technology initiatives.

“The bond package represents the largest research-oriented capital investment in the Commonwealth’s history as well as the largest state investment,” states the press release issued by the governor’s office. “The chief focus of this bond package will be strengthening research and workforce development in high-demand fields at Virginia’s four-year institutions of higher learning and community colleges.”

Stated McAuliffe in making the announcement at the Virginia Commonwealth University (VCU) Medical Center yesterday: “If we are going to build a new Virginia economy, we must make smart investments in research, higher education, veterans, public safety, tourism and environmental stewardship that will yield returns for decades to come.”

The proposed bond issue will allocate $100 million over two years in “competitive grants for research activities,” and $40 million over two years “in cash incentives for research and matching funds to secure federal grant funding.” Funds will be used to renovate research labs, purchase equipment and attract top talent to higher education institutions. The state will leverage the funds through public-private initiatives and by focusing on centers of excellence.

“The goal of the research component of this initiative is to put Virginia on the map as the best place in the nation for entrepreneurs to start their businesses and design the next generation of revolutionary products,” states the announcement.

Another $850 million will go to new buildings, labs, classroooms and renovations at VCU, VirginiaTech, Old Dominion University, the University of Virginia, Longwood University and several community colleges.

Bacon’s bottom line: The top priority of any bond package is to fit within the financial parameters — debt service accounting for no more than 5% of total revenue — required to maintain Virginia’s AAA credit rating. I presume that McAuliffe scaled the size of the $2.4 billion proposal to the bond-issuing capacity that will be freed up by retirement of old debt and the anticipated growth of state revenue projected over the next two years.

As for funding priorities, McAuliffe’s instincts are right — we need to invest in the industries of the future, not prop up the industries of the past. The assumption underlying his initiative is that pumping money into university buildings, labs and research programs will help build the industries of the future. Such a conclusion seems intuitively obvious but bears examination. As we move in for a closer look, questions arise:

(1) To what degree is R&D lab space and equipment a constraint on recruiting research scientists (and the grant money they bring with them) to Virginia universities? Is McAuliffe proposing the R&D equivalent of shell buildings used to entice manufacturers? Build it and they will come?

One could make the argument that the hard part in building an R&D program is recruiting star scientists, not building buildings and labs for them. Say Virginia Tech, UVa or VCU could land a research scientist who would bring $10 million in federal or industry research dollars with him. Surely it would be a relatively modest a challenge to find him (or her) lab space and equipment in short order. Might there be other ways to recruit star research scientists — to pay them more, for instance, as Texas has used a bond issue to do.

(2) To what extent will higher R&D spending at Virginia universities result in the local commercialization of technology, creation of opportunities for local entrepreneurs and local job creation? Tech, UVa and VCU all can point to anecdotal success stories, and each can point to research parks that have filled up with tenants. But add it all up, and what does it amount to? Do Blacksburg, Charlottesville and Richmond have the support resources — tech-savvy management, early-stage capital — required to leverage R&D into spin-off jobs in the local economy?

Northern Virginia has Virginia’s most advanced technology sector, the deepest technology management bench to recruit from, and the most advanced venture capital sector. If spinning off entrepreneurial opportunities is a key part of the mission, wouldn’t it make sense to build the R&D capacity of Northern Virginia’s largest institution of higher ed, George Mason University? GMU doesn’t even get broken out in the list of universities receiving funding support. What the heck is going on? Continue reading

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.


McAuliffe Adminstration Gives P3s a Second Chance

Transportation Secretary Aubrey Layne. Photo credit: Daily News.

Transportation Secretary Aubrey Layne. Photo credit: Daily News.

by James A. Bacon

The McAuliffe administration has spent much of its first two years unwinding the legacy of botched and controversial public private partnerships inked by the McDonnell administration: radically truncating the plan to to build a U.S. connector between Petersburg and Suffolk, and revising significantly the tolling for Norfolk’s Midtown-Downtown tunnel project. Now, after the enactment of significant legislative reforms, the McAuliffe transportation team is turning to the P3 tool to help fund and/or operate its ambitious plans for Interstate 66 in Northern Virginia.

Transportation Secretary Aubrey Layne is confident that he can avoid the pitfalls of the previous administration, and that a public-private partnership can make a major contribution to improving mobility along a transportation artery that Governor Terry McAuliffe variously described Thursday as a “parking lot” and “the most congested road in America” at the 2015 Governor’s Transportation Conference in Virginia Beach.

“We’ll be a big supporter of P3s,” elaborated Layne in his own remarks to the conference. “We need to share risk with the private sector. [Virginia] will very much continue to be a leader.”

The I-66 initiative essentially consists of two separate plans: one for inside the Beltway and one for outside the Beltway. The outside-the-Beltway plan entails widening the Interstate, installing HOT lane tolls and ramping up commitment to mass transit. The Virginia Department of Transportation (VDOT) has generated 13 responses from private-sector players on how to structure the P3.

Where Sean Connaughton, Layne’s predecessor as transportation secretary, regarded P3s as a way to leverage finite public dollars with private investment, thus maximizing total dollars invested, Layne emphasizes the role of P3s in allocating risk. That feedback has been invaluable in surfacing cost and risk issues that VDOT had not considered. “Transparency is the way you have price discovery and risk discovery,” he said.

One set of risks revolves around building a major project on budget and on time. Another major risk is “demand risk” — the likelihood that traffic and revenue forecasts will materialize as projected. There also are risks associated with operations and maintenance. Layne is open to assigning those risks to a private-sector contractor. He has been far more skeptical, however, of relying upon private-sector capital. Private-sector demands for higher financial returns on investment can add hundreds of millions of dollars to the price of a project.

Layne’s approach is to establish public policy first — what does the Commonwealth want to accomplish along I-66, and how? The administration has made it clear that the I-66 corridor will be multi-modal, including transit, and that the state will not agree to covenants that would restrict for decades construction on other roads that might divert traffic, as the previous administration did in the Downtown-Midtown tunnel project. Those parameters are non-negotiable, except perhaps at the margins. Once those guidelines have been established, he said, the private-sector input can be extremely valuable.

In other remarks, Deputy Secretary of Transportation Nick Donohue told the conference that Virginia and California lead the country with their P3 laws, and that delegations from other states frequently visit the Old Dominion to see what has been done here. Stymied by transparency laws from talking to private corporations “off line,” he explained, other states cannot enact laws like Virginia’s. And that curtails the ability to put together deals like Virginia’s.

An open and transparent process is critical to Virginia’s P3 law, said Donohue, but so is the ability to engage in confidential negotiations. He believes that Virginia has done a good job, based upon its extensive experience with P3s, in threading the needle between transparency and confidentiality. “Steps we have taken in the last couple of years have addressed a lot of problems” with Virginia’s law, he said.

The decision-making process for the I-66 corridor will put the administration’s faith in P3s to the test. The issue of inside-the-Beltway tolls has exploded into a political furor. More controversy is bound to follow as the administration moves from the concept stage to specific proposals.

How Not to Run a City

Will somebody please help this city?

Will somebody please help this city?

The bad news just keeps getting worse for the City of Richmond: An audit released yesterday of 98,000 transactions valued at $2 billion found significant delays to vendors, insufficient and inconsistent documentation and unrecorded wire transfers, the Richmond Times-Dispatch reports. That report was presented alongside a second report, an assessment of Richmond’s fiscal sustainability that found that the city collects and spends 1 1/2 times the revenue per capita of benchmark localities.

“I look at it and say, ‘My gosh, we have a lot of inefficiencies here,’” said Ramon Brinkman, a member of the audit committee. “What could you save by reducing some of the expenses and give a little money back to the taxpayer?”

Richmond is an awesome city. It has wonderful people, great neighborhoods, historical architecture, vibrant businesses, a rich history, a multitude of museums, theaters, art galleries and cultural institutions, and one of the most beautiful rivers in the country. But it has a wasteful and inefficient city government that taxes too much and delivers too little in the way of municipal services.

Part of the city’s financial woes can be attributed to a flawed implementation of an $18  million RAPIDS financial system in 2013, which, according to the city’s deputy chief administrative officer, still suffers from “severe system limitations.” Another problem is the extensive staff turnover, insufficient training and heavy reliance upon inexperienced temps in the accounts receivable office. Those maladies, it would seem, are a reflection of poor management. Of course, there has been high turnover in senior staff positions as well, prompted no doubt by the frustrations encountered with the dismal organizational culture. Thus, the serpent swallows its tail in a never-ending loop of dysfunction.

Richmond has so much potential, but it will never live up to that potential until the city administration gets its act together. What will it take to make that happen? A mayor who makes organizational reform the unremitting focus of his or her attention over all other priorities.


Alpha Natural Resources: Running Wrong

Alpha miners in Southwest Virginia (Photo by Scott Elmquist)

Alpha miners in Southwest Virginia
(Photo by Scott Elmquist)

 By Peter Galuszka

Four years ago, coal titan Alpha Natural Resources, one of Virginia’s biggest political donors, was riding high.

It was spending $7.1 billion to buy Massey Energy, a renegade coal firm based in Richmond that had compiled an extraordinary record for safety and environmental violations and fines. Its management practices culminated in a huge mine blast on April 5, 2010 that killed 29 miners in West Virginia, according to three investigations.

Bristol-based Alpha, founded in 2002, had coveted Massey’s rich troves of metallurgical and steam coal as the industry was undergoing a boom phase. It would get about 1,400 Massey workers to add to its workforce of 6,600 but would have to retrain them in safety procedures through Alpha’s “Running Right” program.

Now, four years later, Alpha is in a fight for its life. Its stock – trading at a paltry 55 cents per share — has been delisted by the New York Stock Exchange. After months of layoffs, the firm is preparing for a bankruptcy filing. It is negotiating with its loan holders and senior bondholders to help restructure its debt.

Alpha is the victim of a severe downturn in the coal industry as cheap natural gas from hydraulic fracturing drilling has flooded the market and become a favorite of electric utilities. Alpha had banked on Masset’s huge reserves of met coal to sustain it, but global economic strife, especially in China, has dramatically cut demand for steel. Some claim there is a “War on Coal” in the form of tough new regulations, although others claim the real reason is that coal can’t face competition from other fuel sources.

Alpha’s big fall has big implications for Virginia in several arenas:

(1) Alpha is one of the largest political donors in the state, favoring Republicans. In recent years, it has spent $2,256,617 on GOP politicians and PACS, notably on such influential politicians and Jerry Kilgore and Tommy Norment, according to the Virginia Public Access Project. It also has spent $626,558 on Democrats.

In 2014-2015, it was the ninth largest donor in the state. Dominion was ahead among corporations, but Alpha beat out such top drawer bankrollers as Altria, Comcast and Verizon. The question now is whether a bankruptcy trustee will allow Alpha to continue its funding efforts.

(2) How will Alpha handle its pension and other benefits for its workers? If it goes bankrupt, it will be in the same company as Patriot Coal which is in bankruptcy for the second time in the past several years. Patriot was spun off by Peabody, the nation’s largest coal producer, which wanted to get out of the troubled Central Appalachian market to concentrate on more profitable coalfields in Wyoming’s Powder River Basin and the Midwest.

Critics say that Patriot was a shell firm set up by Peabody so it could skip out of paying health, pension and other benefits to the retired workers it used to employ. The United Mine Workers of America has criticized a Patriot plan to pay its top five executives $6.4 million as it reorganizes its finances.

(3) Coal firms that have large surface mines, as Alpha does, may not be able to meet the financial requirements to clean up the pits as required by law. Alpha has used mountaintop removal practices in the Appalachians in which hundreds of feet of mountains are ripped apart by explosives and huge drag lines to get at coal. They also have mines in Wyoming that also involve removing millions of tons of overburden.

Like many coal firms, Alpha has used “self-bonding” practices to guarantee mine reclamation. In this, the companies use their finances as insurance that they will clean up. If not, they must post cash. Wyoming has given Alpha until Aug. 24 to prove it has $411 million for reclamation.

(4) The health problems of coalfield residents continue unabated. According to a Newsweek report, Kentucky has more cancer rates than any other state. Tobacco smoking as a lot to do with it, but so does exposure to carcinogenic compounds that are released into the environment by mountaintop removal. This also affects people living in Virginia and West Virginia. In 2014, Alpha was fined $27.5 million by federal regulators for illegal discharges of toxic materials into hundreds of streams. It also must pay $200 million to clean up the streams.

The trials of coal companies mean bad news for Virginia and its sister states whose residents living near shut-down mines will still be at risk from them. As more go bust or bankrupt, the bill for their destructive practices will have to borne by someone else.

After digging out the Appalachians for about 150 years, the coal firms have never left coalfield residents well off. Despite its coal riches, Kentucky ranks 45th in the country for wealth. King Coal could have helped alleviate that earlier, but is in a much more difficult position to do much now. Everyday folks with be the ones paying for their legacy.