Category Archives: Finance (government)

A Performance Rating for Virginia Local Governments

Click for more legible image.

Goochland County offers the most bang for the buck of the localities in the Richmond metropolitan region, according to a local government rating system devised by the Virginia Tea Party Patriots Federation.

The rating system compares fiscal indicators such as property tax rates and collections, per capita indebtedness, school spending per capita, and unfunded pension liabilities, as well as outcome metrics such as the clearance rate of crimes, fire department ratings, and Standards of Learning pass rates.

Mark E. Daugherty, former chairman of the Virginia Tea Party Patriots Federation and organizer of the rating system, presented the numbers for the Richmond region — plus the City of Norfolk for purposes of comparison to Richmond and Spotsylvania County for comparison to Richmond-area counties — to the Tuesday Morning Group, a monthly gathering of conservative and libertarian activists. The 20 counties and cities analyzed so far represent 23% of Virginia’s population. The group also has completed research on several Shenandoah County jurisdictions, and is now working on an analysis of Northern Virginia jurisdictions.

The purpose of collecting the statistics, says Daugherty, is to arm citizens and elected officials with data to stimulate questions and new ideas on how local governments and schools can improve performance. (Read more about the initiative here.)

Bacon’s bottom line: The Tea Party data represents a starting point for evaluating local government, not a finish line. Inevitably, the selection of one data set over another entails a value judgment and affects the ratings. Including other data sets would add more texture and context. But it’s a darn good start.

My sense from a brief conversation is that Daugherty acknowledges the difficulties that local governments and school systems are grappling with, especially urbanized cities with a large percentage of lower-income residents. Clearly, a down-in-the-dumps city such as Petersburg has much greater challenges than an affluent exurban county such as Goochland. Still, by highlighting Goochland, the rating system does suggest — not prove, just suggest — that Goochland is doing something right. Perhaps counties with comparable demographics and economic assets should take a look. After all, the purpose of the exercise is to stimulate questions and deeper analysis.

It would be easy for some to take issue with the methodology or criticize the source — ew, it’s the Tea Party! — but Daugherty and his colleagues have expended considerable effort without any overt agenda to identify and publish local government input and performance numbers, which is more than you can say for anyone else.

The Forgotten Literary Fund

One of the many debates expected in the 2019 General Assembly of Virginia, which is coming at us like a freight train, will focus on school construction funding and the need for a dedicated source of revenue to repair or replace old or dilapidated local facilities.

Proponents have latched onto additional sales tax revenue that would flow from expanding the tax to more out-of-state retailers who sell into Virginia via the internet.  Earlier this year the U.S. Supreme Court overturned precedents and set some ground rules that Virginia could easily adopt for 2019, forcing more retailers around the country to collect and remit Virginia sales tax.

During months of public discussion of this issue, one key element has been ignored.  Virginia already has a dedicated funding source for school construction, one that produces $260 million a year.   Historically those funds have leveraged very low-cost bonds for new schools across the Commonwealth and built much of the existing stock of school facilities.

This is the State Literary Fund, enshrined in the Constitution of Virginia and the source of amusement to insiders, who joke when they pay a traffic fine that they are “making a contribution to the Literary Fund.”

According to the Treasurer of Virginia the Literary Fund collected $264 million during the last fiscal year, most of it from unclaimed property ($165 million), unclaimed lottery prizes ($14 million) and court fines, fees and forfeitures ($52 million.)  It also received more than $23 million back from local school divisions as principal and interest on earlier revolving loans.

Wouldn’t $264 million per year leveraged through low-interest government financing support a healthy construction and repair program?  It would indeed, but only two projects have been funded with this money in a decade, both earlier this year.  They were the first since 2008.  A report to the most recent meeting of the State Board of Education listed 19 deferred applications seeking $83 million, the most recent from 2013.

Instead of building schools the money is used to pay for school equipment ($72 million, also through bonds) and for deposit into the Virginia Retirement System for teacher retirement ($181 million.) Using Literary Funds to pay for VRS means that much less money needs to be found from state or local taxes, which can then be spent on something else.  School divisions no longer view the Literary Fund as a construction funding source.

The fund would be substantially larger, but in 1990 the General Assembly proposed, and the voters approved, an amendment to that provision allowing criminal forfeitures to divert from the Literary Fund and be spent on law enforcement instead.   As with payments to VRS, this is also a way to take pressure off tax funds.

So as the debate kicks up, key points to remember include:

Virginia does have a fund for this purpose already, but the General Assembly has chosen to spend it otherwise. It could revisit that choice.

It might be more logical to use any new sales tax revenue to pay for the General Fund function of funding teacher retirements, so the Literary Fund can return to paying for new or improved school buildings.

It might be worth discussing whether that pile of loot collected under the criminal forfeiture procedures should be returned to its original home with the Literary Fund and help pay for schools.

This overlaps with the debate over unpaid fines and fees, which are collected with the help of a very unpopular practice of suspending debtors’ driving licenses. Abandoning the effort to collect that revenue is walking away from major revenue for the Literary Fund.

Moody’s: Virginia Local Government Credit Quality Healthy despite High Debt Burdens

Moody’s bond ratings for 28 cities and 38 counties in Virginia. Source: Moody’s. (Click for larger image.)

Moody’s, the bond-rating firm, has disseminated a new report on the credit quality of Virginia local governments — answering many of the questions we have been posing on this blog.

The good news is that Moody’s rates Virginia’s business climate highly and says that local governments have “wide latitude” to protect their bond ratings by raising taxes and cutting expenses.

The bad news is that local-government flexibility to raise property tax rates might reassure bond holders but is not a prospect that taxpayers will relish. Which raises the question: How likely are local governments to raise property tax rates? Moody’s does not get into that, but it does observe that that Virginia local governments have high debt burdens, big pension obligations, and aging infrastructure to contend with.

For your reading pleasure, I have extracted verbatim the high-level conclusions from the Moody’s report:

  • High debt burdens can constrain local governments’ financial flexibility. In general, Virginia local governments have debt burdens that exceed national medians, largely due to debt issued for schools. High debt burdens lead to higher-than-average fixed costs, including debt service, the annual required contribution for pensions, and the “pay-as-you-go” portion of retiree health benefits. In turn, local governments’ flexibility to raise funds to address capital needs faces limits.
  • The federal government’s major role in Virginia’s economy is a strength but carries some risk of cutbacks. The state is home to the world’s largest naval base and the Pentagon as well as a number of non-military operations. In 2016, it ranked first in the US in military spending as a share of gross state product (11.8%). While the Hampton Roads and Northern Virginia economies benefit from the large federal government presence, both face exposure to federal budget reductions, though massive cuts are unlikely.
  • Continued private-sector investment will boost revenues and provide stability. A highly education workforce, weak union protections and significant population growth will continue to generate private-sector expansion. The expanding private sector will fuel tax base growth and provide a stabilizing factor in case of cuts in military and other federal government spending. Virginia has experienced a substantial bump in Eds and Meds with the higher education and healthcare industries consuming a greater share of employment.
  • Legal framework helps local governments maintain solid reserves. Cities and counties can raise property taxes, their largest revenue source, without state-imposed caps or voter approval. The ability to control the tax rate, along with flexibility to reduce personnel costs, has contributed to strong financial positions. However, operating funds include school operators, so reserves generally trail national medians.

I’ll provide details in future blog posts.

Virginia Ill Prepared to Weather a Recession

Thin ice

I’m not sure how Virginia’s Secretary of Finance, Aubrey Layne, sleeps at night. He is by nature a fiscal conservative, and he was in frequent touch with the rating agencies that threatened earlier this year to downgrade Virginia’s prized AAA bond rating. While elected officials may ignore the fiscal warning signs, it’s Layne’s job to pay attention to the warning signs. They’re coming fast and furious.

In recent days, I have drawn attention to analyses by Truth in Accounting and the Mercatus Center that have highlighted the precarious nature of the Commonwealth of Virginia’s finances. Now come new warnings from bond-rating firms S&P Global Ratings and Moody’s Analytics. As reported by Reuters:

While U.S. states’ financial health has strengthened in 2018 compared with last year, fewer than half have enough financial reserves to weather the first year of a moderate recession, according to an S&P Global Ratings report on Monday. …

Only 20 states have the reserves needed to operate for the first year of an economic downturn without having to slash budgets or raise taxes, S&P said.

Meanwhile, from Moody’s Analytics:

A Moody’s Analytics report, also released on Monday, said the number of states with sufficient reserves to withstand a recession increased to 23 from 16 last year.

However, that leaves 27 states lacking sufficient reserves. And who might they be? According to Moody’s (my emphasis):

Those states, in order of least-prepared, are Louisiana, Oklahoma, North Dakota, New Jersey, Montana, Kentucky, Virginia, Missouri, Arizona, Illinois, Pennsylvania, Wisconsin, Kansas, New Hampshire, Mississippi, Michigan and Arkansas.

More than nine years since the end of the 2007-2009 recession, and Virginia is one of the states least prepared to weather an economic downturn?

Virginia has a rare chance to put its fiscal house in order. We’re benefiting from a trifecta of (1) a temporary acceleration in economic growth and tax revenue, (2) a windfall from the federal tax cut, and (3) a windfall from the ability to start collecting a tax on Internet sales. Some people say, whoopee, let’s spend the windfalls! Others, including my esteemed colleague Steve Haner, say, let’s give it back to the taxpayers. I have yet to hear anyone (other than myself) say, let’s use the windfalls to pay down liabilities, build up reserves, and generally strengthen Virginia’s financial condition.

This is easy money. If we spend it or give it back, I can guaran-damn-tee you that a time will come when we’ll wish we’d set it aside for when we really needed it. Cutting spending and/or raising taxes at that time will be very painful.

Virginia Unfunded Liabilities: $5.4 Billion

Source: Truth in Accounting

Here is more confirmation, as if any were needed, that the Commonwealth of Virginia is running hidden deficits in the form of unfunded pension and retiree healthcare liabilities… Truth in Accounting, a nonprofit devoted to transparency of government finances, gives Virginia a grade of “C” for its financial practices.

By the standards of the 50 states (and District of Columbia), that’s not a bad score. Virginia’s unfunded liability averaging $1,900 per taxpayer is less onerous that that of all but 11 states. So, if you’re inclined toward Pollyanna-ish views on government finance and debt, we’re not doing so badly.

But here’s what Truth in Accounting has to say in its Virginia profile: “Virginia’s financial condition is not only disconcerting but also misleading as government officials have failed to disclose significant amounts of retirement debt on the commonwealth’s balance sheet. Residents and taxpayers have been presented with an unreliable and inaccurate accounting of their government’s finances.”

Highlights:

  • Virginia has $35.8 billion in assets to pay $41.2 billion worth of bills.
  • The $5.4 billion shortfall averages $1,900 per taxpayer.
  • Despite reporting all of its pension debt, the commonwealth continues to hide $936.9 million of its retiree health care debt.
  • Virginia’s reported net position is inflated by $1.5 billion, largely because the commonwealth defers recognizing losses incurred when the net pension liability increases.

The best funded states are Alaska ($56,000 surplus per taxpayer), North Dakota, Wyoming, Utah, and South Dakota, all of which have set aside more than enough money to pay their pensions and retiree healthcare liabilities. The top “sinkhole” states are New Jersey ($61,400 debt per taxpayer), Connecticut, Illinois, Kentucky, and Massachusetts.

Remember, the Truth in Accounting methodology does not take into account hidden deficits in the form of maintenance backlogs on roads, bridges, mass transit, school buildings, water and sewer plants, etc., much less the potential liability associated with rising sea levels. Nor does it cover the liabilities associated with local governments or a welter of independent and quasi-independent authorities. The fiscal health of the Commonwealth and its localities is far more precarious than even Truth in Accounting portrays it.

The national debt now exceeds $21 trillion, and I read recently that the federal government has unfunded liabilities of roughly $100 trillion over 30 years. Yet Democrats are campaigning on expanding entitlements (Medicare for all, free college for all, etc.) while President Trump is promising another round of middle-class tax cuts. Both political parties are in total denial. The federal budget is unsustainable, and when the national government can no longer maintain its promises and breaks its social contract, and the country slides into chaos, state governments will be the main line of defense against anarchy.

Hint: Do not even think about moving to New Jersey or Illinois. Alaska is looking pretty good right now. Grizzly bears don’t riot or throw Molotov cocktails.

Chesterfield’s $50 Million Fiscal Landmine

Virginia and its local governments are constitutionally obligated to balance their budgets ever year. But as I have repeatedly pointed out, there are many ways to duck that obligation. One is to rack up unfunded pension liabilities. Another is to under-fund maintenance.

Today we discover that even a highly reputed county with a AAA bond rating can engage in fiscal sleight-of-hand. From today’s Richmond Times-Dispatch: “Chesterfield County needs $50 million for school maintenance problems that could keep kids out of schools if they are not addressed soon.”

The county issued $300 million in bonds after a voter-approved referendum in 2013 to replace and renovate county schools. Apparently, there’s only $13 million left for fixing facilities — far short of what’s needed.

Dan Champion, a program manager for the firm EMG, said there are schools across the county with serious electrical, air conditioning and roofing problems. If not adequately addressed over the next two decades, the cost of the repairs could rise to nearly $1 billion, he said.

The Times-Dispatch article delves into the riff between the county administration and the school system. There’s a lot of finger-pointing going on. Regardless of who is to blame, it is clear that Chesterfield schools have run $50 million in maintenance deficits over the years. And now the county is on notice that, absent corrective action, the maintenance deficit could reach $1 billion over 20 years.

How many other Virginia school districts have engaged in deficit maintenance spending? How many other agencies and localities have piled up unfunded liabilities for deteriorating roads, highways, bridges, mass transit systems, water and sewer plants and pipelines, libraries, administration buildings, courthouses, jails, prisons, municipal gas systems, IT systems, automotive fleets, and the rest of the state’s vast infrastructure?

Administrators and elected officials have no interest in knowing the truth that might make them look bad. So, nobody tracks this information until it becomes an explosive issue. What’s that noise we hear in Chesterfield? Kaboom!

Oops, Where Did that $3-4 Million Deficit Come From?

The idea behind the Commonwealth Center for Advanced Manufacturing (CCAM) is fantastic: Create a facility where Virginia manufacturers and universities can collaborate on advanced-manufacturing research projects that all participants can share. Research staff for the Prince George County-based facility are expert in everything from “vertical diffusion furnaces” and “robot arm-based automation cells” to “thermal spray coating” and “corrosion crack healing,” and they conduct about $7 million a year in research.

Just one problem: The program is operating at an annual deficit of between $3 million and $4 million a year. Debts include $2 million in unpaid rent to the University of Virginia Foundation and a tapped-out bank credit line, according to the Richmond Times-Dispatch.

Said Secretary of Finance Aubrey Layne: “They’ve got to put together a business plan that makes some sense.”

The Center has procured state and federal funding commitments to build a $12.6 million Advanced Manufacturing Apprentice Academy next door. But state officials, reports the T-D, say they won’t release $9 million in bond money planned for construction of the academy without an answer to the center’s financial questions. Said Layne: “That is not going to happen until this issue is solved.”

Bacon’s bottom line: As I have ranted and raved and inveighed and fulminated, Virginians have no idea how many fiscal land mines are out there. Yes, the Commonwealth has a AAA bond rating (although we have skirted on the edge of a downgrade), but no one has tallied up the long-term commitments, unfunded long-term liabilities, maintenance backlogs, and fiscal tricks of all the local governments and independent authorities set up to serve the interests of the Commonwealth.

After the Petersburg fiscal meltdown, the General Assembly began monitoring the health of local governments, looking for early warning sides of impending financial apocalypse — a big step forward. But no one is tracking dozens of non-governmental entities. Only a couple of months ago, for instance, was the public made aware of a $3.5 billion unfunded pension liability at the Washington Metro mass transit system serving Northern Virginia. Now we learn that CCAM is running a big budget deficit and racking up long-term debt.

The federal government has accumulated a $21 trillion national debt, and soon will be adding to it at a rate of $1 trillion a year — during an economic boom. The Medicare trust fund is projected to run out in 2026. The Social Security trust fund is expected to run out in 2034. Uncle Sam will never collect a big chunk of the $1.3 trillion in student loan debt outstanding, and taxpayers will have to pick up the tab. Meanwhile, states like Illinois and New Jersey are one sharp recession away from fiscal collapse.

As Boomergeddon looms, Virginia traipses merrily along, most recently creating a new Medicaid-expansion entitlement, with no clear idea of its overall fiscal condition. Our lawmakers look no more than two years ahead — the time horizon dictated by the biennial state budget. Although they are attuned to the necessity of maintaining a AAA state bond rating, the credit-worthiness of state bonds is just one piece of the whole. The credit-worthiness of Virginia’s counties, cities and towns is another piece. The credit-worthiness of our state universities is yet another. The credit-worthiness of a plethora of independent authorities is still another. No one, to my knowledge, has analyzed all the pieces as a whole and stress-tested the system. Until we do, we’re flying blind. It is foolhardy to pretend otherwise.

Virginia Ranks 13th Best in Fiscal Condition

Ranking of Fiscal Condition, FY 2016. Source: Mercatus Center.

The Commonwealth of Virginia’s fiscal condition ranked 13th among the 50 states in FY 2016, according to data in the Mercatus Center’s “Ranking the States by Fiscal Condition” report released today.

The Mercatus methodology incorporates 13 financial indicators falling in five buckets: cash solvency, budget solvency, long-run solvency, service-level solvency, and trust fund solvency.

Here are the key statistics Mercatus considered:

There is a significant time lag in the reporting and analysis of the data — this is FY 2016 data, and Virginia is now in FY 2019. So, the ranking reflects the state’s fiscal performance during the McAuliffe administration, not the Northam administration.

Hurricanes, Risk, and Fiscal Collapse

Graphic source: Wall Street Journal

John Rubino, publisher of Dollarcollapse.com, and I think a lot alike when it comes to the inevitable fiscal collapse of the United States. The country (indeed the globe) is riding high today on a giant credit bubble right now, but sooner or later the bubble will pop and the economy will crash. If you buy into my Boomergeddon theory — that the U.S. will experience massive social upheaval when federal and state governments are unable to maintain their commitments to core services and the social safety net — you might want to check his website for your daily frisson of fear.

I, like John, have been writing about the dangers lurking in states’ unfunded pension liabilities and the exploding student loan liabilities that are undermining our institutions of higher education. I’d urge John to give more coverage to the issue of hidden deficit spending in the form of growing infrastructure-maintenance backlogs. (Read the Strong Towns blog for a primer on state/local governments’ growth Ponzi schemes.) Meanwhile, in a recent post, John drives home a point to which I have given insufficient attention: the future cost of hurricanes.

Unlike unfunded pensions, student loan defaults and maintenance backlogs, upon which we can put reasonable figures, there is no way for Virginia to budget for hurricanes. The incidence of hurricane hits is relatively infrequent and highly random and the damages are so variable from storm to storm, that budgetary forecasts are a total crap shoot. But I think we can safely say three things about Virginia:

  1. Sooner or later, another large hurricane will hit Virginia;
  2. Subsidence and sea-level rise, which will occur even in the absence of global-warming scare scenarios, will magnify the impact of major storms;
  3. Continued development along the shorelines of the Atlantic Ocean and Chesapeake Bay will lead to more storm-related damage.

John is concerned about the prospect of a monster storm hitting a big city like Miami or New York and giving us “a trillion-dollar summer” that bankrupts major insurance companies, roils insurance markets, depletes federal flood insurance reserves and forces the U.S. government into another massive bail-out “just as federal deficits are exploding, public sector pensions are imploding, and student loans are defaulting en masse.”

I, too, worry that the federal government is headed for disaster. But as I observe the proceedings in Washington, D.C., I have written off the federal government. Our political culture in Washington is so dysfunctional, so toxic, so addicted to short-term political gain, that the federal government is beyond salvation. I don’t waste a lot of intellectual bandwidth wondering what might save Washington. Nothing can. But I would like to ensure that the Commonwealth of Virginia survives the wreckage. Some government entity will have to carry on when the federal government melts down, and state government is the only alternative.

But I worry about Virginia, too. As I blogged recently, we have no idea what governments and quasi-state agencies — from the Washington Metro to local economic development authorities — have piled up in long-term debt, unfunded pension liabilities, and maintenance backlogs, much less how vulnerable they are to the next economic downturn. Now, add the risk of damage from hurricanes to roads, bridges, railroads, water and sewer facilities, coal ash ponds, the electric grid, pipelines, and other infrastructure. How prepared are our state agencies and utilities to cope with a major disaster? What would the impact be on taxpayers and rate payers, what have we set aside in reserves?

In a word: How fiscally resilient is Virginia in the face of natural disaster? Puerto Rico showed how a hurricane can push a corrupt and mismanaged polity over the edge. Surely we’d hold up much better. But that assumes Uncle Sam can continue handing out billions of dollars in disaster relief and that insurance markets are functioning. No one knows. We live in ignorance at our peril.

Has NoVa Finally Woken Up?

VA-10.  State Senator Jennifer Wexton (D) hopes to unseat Congresswoman Barbara Comstock (R) in Virginia’s 10th Congressional District.  A typically gerrymandered Virginia district, the 10th stretches from inside the Capital Beltway to well west of Winchester.  As a resident of the 10th I watch the elections in that district closely.  This one is shaping up to be a doozy.  Far left Jennifer Wexton is running on an anti-Trump platform while trying to avoid taking a position on any issue relevant to the constituents she hopes to represent.  Meanwhile, Barbara Comstock is running as an embarrassed Republican who tries to avoid gazing east at the current occupant of the Oval Office.  Think Nelson Rockafeller in drag.  All in all I think Barbara Comstock has done a better job of explaining herself and focusing on issues that are relevant to her district.  One issue in particular stands out for me – the allegation that Wexton has sold out Northern Virginia during her time in the General Assembly.

Don’t get Wexton’ed.  Recent negative ads run by the National Republican Congressional Committee (presumably) on behalf of Barbara Comstock hit a point that hasn’t been hit before.  The ads call out Jennifer Wexton for her role in the General Assembly’s massive rip off of Northern Virginia.  The 30 second ads are punchy and direct.  One ad has a graphic that shows money raining out of NoVa into Richmond.  It cites high tolls and NoVa – only taxes.  Needless to say, Jennifer Wexton is the highlighted villain.  Another ad shows traffic jams and tolls in NoVa then cuts to a single car effortlessly driving down an otherwise empty road claiming, “The rest of the state rides for free.”  As far as I’m concerned, the ads are completely on target and finally call out the gutless NoVa politicians we have elected for selling out their constituents.

I wish I could drive I295.  For many people from Northern Virginia there certainly seems to be a vast sucking sound coming from the General Assembly in Richmond.  There also seems to be a two class system when it comes to a lot of things including transportation.  Take Richmond for example … the city, not the state government.  The OMB defines the greater Richmond area as comprising thirteen counties, including the principal cities of Richmond, Petersburg, Hopewell, and Colonial Heights. As of 2016, it had a population of 1,263,617.  Somehow, this qualifies the area for a 4 lane “beltway” called I295.  Meanwhile, the greater Washington area has a population of 6.1m as of 2016.  It also has a 4 lane beltway in NoVa.  An area with 4.7 times the population of Richmond somehow ends up with the same sized highway encircling it as Richmond gets?  And Jennifer Wexton thinks that’s all fine and dandy?  Comstock’s right – let’s not get Wexton’ed.

Thanks, Barbara.  Jennifer Wexton is hardly alone in selling out her constituents.  All 140 seats in the Virginia General Assembly are up for election in 2019 including every state politician claiming to represent Northern Virginia.  It’s high time that all of NoVa’s politicians are taken to task for selling out their constituents.  Hopefully these ads and others like them will continue to haunt the comfy re-election dreams of our political class in Northern Virginia.  If our politicians want to argue about their role in grifting NoVa the approach is easy … clearly and quantitatively document the amount of money taken by state and local government in NoVa and compare it to the amount of money spent by state and local government in NoVa.  Then … defend the difference.  I happen to know that a number of General Assembly members from NoVa read this blog (at least occasionally).  Any of you who read this – are you up for the challenge of demonstrating the fairness of your actions vis-a-vis inflows and outflows of money from NoVa?  I won’t hold my breath.

— Don Rippert