An Answer for Jon Baliles: It’s the Constitution

by Dick Hall-Sizemore

Shame on Jon Baliles for not knowing why cities and counties are treated differently in the Code of Virginia regarding the issuance of general obligation debt. The answer is simple;  the state constitution requires the different treatment.

Article VII, section 10, of the state constitution deals with the issuing of debt by local governments. After setting out the process for issuing local bonds or debt, the constitution stipulates that the issuance of general obligation debt by counties is contingent upon the “submission to the qualified voters of the county… for approval or rejection by a majority vote of the qualified voters voting in an election on the question of contracting such debt. Such approval shall be a prerequisite to contracting such debt.” Thus, the statutory distinction is rooted in the constitution; that distinction cannot be changed by the General Assembly passing legislation.  Furthermore, the statutory provision that, through a referendum, a county can choose to be treated as a city for the purposes of issuing bonds, is also a reflection of the language in the constitution.

Baliles implies that there is no limitation on the issuance of debt by municipalities. That is not accurate. Cities and towns may not incur total general obligation bond indebtedness that exceeds ten percent of the assessed value of the real estate in the city or town subject to taxation. There is no such cap on counties. In summary, cities and towns are subject to an assessment cap on the amount of general obligation debt they can issue whereas counties are subject to the approval of voters on whether they can issue general obligation debt.

Of course, to say that the distinction is rooted in the constitution begs the question of why the constitution makes the distinction. For the answer to that question, we can turn to A.E.Dick Howard, the widely accepted authority on the Virginia Constitution.

Beginning on page 858 (Vol. II) of his Commentaries on the Constitution of Virginia, Howard points out that the local debt provisions of the current (1972) constitution are a continuation of similar provisions in the prior state consitution.

Prior to the late 1800’s, there were no restrictions on the issuance of bonds by localities. Nationwide, that had led to some extravagances. “Local communities competed to see which could give the railroads the most money.” (Sound familiar?) “By 1902 local debt was eight times larger than state debt.”

The General Assembly moved in 1875 to rein in local debt, enacting a statute that forbade cities and counties from creating indebtedness in excess of 17 percent of the assessed value of real estate and 15 percent of personal property. The convention that drafted the 1902 Constitution approved with little debate a provision that limited city or town bonded indebtedness to an amount not exceeding 18 percent of the assessed value of the real estate in the jurisdiction.

County debt was obviously not a concern of those writing the 1902 Constitution, probably because counties were largely rural, delivered few services, and seldom needed to issue bonds. If a county did desire to issue bonds, it would go to the General Assembly for a special act giving it authority to do so. Such legislation was traditionally passed at the “mere request” of the county’s delegate.

It was during the Byrd amendments of 1928 that the issuance of county general obligation debt was made subject to approval in a referendum. This would have been in keeping with Harry Byrd’s famous abhorrence of debt and his “pay-as-you-go” philosophy.

Howard acknowledges “that the use of a debt ceiling for municipal borrowing and a requirement of local referendums for counties is unusual.” He suggests that the different treatment of local government borrowing authority “may turn on the historical periods when the respective limits were first adopted.” That answer is not very satisfactory.  Surely, Byrd and his advisers did not wear blinders that only allowed them to consider county debt. In proposing constitutional amendments that would require counties to have a referendum before issuing general obligation debt, why did they not include an amendment subjecting municipalities to the same requirement? Getting an answer to that question would require considerable digging into the records of the Byrd gubernatorial administration.

The last piece of this history is the story of the current constitutional provision. Howard goes on to relate that the Commission on Constitutional Revision, of which he served as staff director, decided to keep assessed property values as the basis for measuring debt limitations on counties and cities. In a major break from the past, however, it proposed that counties be treated the same as cities and towns regarding bond issuance, subject to a cap based on assessed property values and no longer contingent on approval in a referendum.

Before being submitted to the voters for approval, the recommendations of the Commission for the new constitution were submitted to the General Assembly for amendment and approval. The General Assembly approved the recommendation that municipalities be subject to a cap of 18 percent of assessed value. (That amount was lowered to 10 percent in an amendment approved in 1980.) However, the legislators rejected the proposal that county issuance of general obligation debt no longer be contingent upon approval in a referendum.

Howard cites several factors behind the opposition to the change in how counties were treated. First, many rural legislators were still strong supporters of “pay-as-you-go” and wanted to retain the referendum as a check on local government borrowing money. On the other hand, several counties believed that the 18 percent cap would be too restrictive. Finally, many counties were leery of the provision of the Commission’s proposal under which any debt incurred by towns within a county would count against the county’s debt limit. They did not want to be restricted by something they had no control over.

And that is how we got we where we are now.  Baliles is correct that it is illogical that the city of Richmond is subject to different conditions than are the neighboring urban counties of Chesterfield and Henrico. He would make the city be required to have a referendum before issuing general obligation debt. Conversely, I daresay that the Chesterfield and Henrico governments are envious of the city’s position. Putting together a general obligation bond package for a referendum is a major undertaking. They would much rather issue bonds upon a majority vote of the board of supervisors.

[Note–The issuance cap and referendum requirement apply only to general obligation (“full faith and credit”) bonds. There are exemptions set out in the constitution. The primary exemptions are bonds for which the revenue produced by the financed projects will be used to pay the debt service (revenue bonds) and certain bonds issued for school purposes.]

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11 responses to “An Answer for Jon Baliles: It’s the Constitution”

  1. LesGabriel Avatar

    Thanks for the history lesson.

  2. Marty Chapman Avatar
    Marty Chapman

    I always learn something by reading Dick's posts.

  3. Carter Melton Avatar
    Carter Melton

    Great piece….thank you.

  4. LarrytheG Avatar

    Thank you Dick, again. What we can be assured of is that Dick does delve into important and useful things that all citizens ought to know, but certainly our elected and politicians! And we can pretty much count on him NOT turning it into some culture war mess nor use pejoratives to describe other folks.

    Thank you.

    We also have some very blue counties in Va that have AAA bond ratings.. pretty solid "conservative" values. And we have referenda
    but citizens cannot initiate it – which they should in my view.

  5. Nancy Naive Avatar
    Nancy Naive

    1928 and early 1929 saw an extreme tightening of general indebtedness, and on trading on margin. There was a double witching in the market when in early Sept29 stock prices turned down in the face of margin tightening. POOF

    Obviously there were people who saw it coming, or caused it. One or the other.

  6. James Wyatt Whitehead Avatar
    James Wyatt Whitehead

    Arthur Ellsworth Howard. A Virginia treasure. Alright so what Jon got one wrong. I still like his blog. I enjoyed reading this one about the DIME bridge not the nickel bridge.×5-it-was-the-dime-bridge-before-it-cost-a-nickel.html

  7. LarrytheG Avatar

    To a certain extent, what a AAA rating means is that a county is willing to tax it's citizens to the extent necessary to pay it's debts
    AND the county/citizen's actually have the "ability to pay" – which is central to the concept behind the Composite Index for school funding. Not sure exactly how it is determined that they don't have the "ability to pay", might be an interesting blog post.

    Does not necessarily mean the debt itself is a good thing either, but one presumes citizens have a view about it at elections.

    There have been some notable financial issues in some counties and cities in Virginia. I seem to recall a municipal golf course in Buena Vista.

    I also wonder if the bond agencies, for a given, county, city, have some proxy they use that assesses "ability to pay"? In other words, no matter what a given county leadership might say or even citizens via referenda – if paying back the bond requires a significant increase in tax rates – that actually increases stress on property owners that results in tax bill defaults, forced sales, reduced assessments, etc… Especially true of some landowners who are literally land-rich and cash poor.

    Can't get blood out of stone type thing …

    So "ability to pay" for a bond agency might include a look at demographics with regard to income and wealth but not sure
    at all if it is a similar calculation used in the composite index.

    Bonds can include what is known as "enterprise bonds" which in my county have been for water & sewer – AND they got themselves in fiscal hot water by subsidizing their operating expenses with new hookups… The county is on the hook for
    "full faith and credit" which means they'll guarantee them with taxpayer funds if the enterprise fund runs into financial issues. Needless to say, that very much gets the attention of the BOS.

    One thing more and more urbanized counties are doing bond referenda for is transportation as VDOT clearly does not have enough resources for some needs and the SmartScale program favors projects that have some local funding added to the proposal.

  8. DJRippert Avatar

    It seems to me that this difference in the management of debt between towns/cities and counties is a holdover from more orderly days.

    Once upon a time, a city was meant to be the densely populated part of an area. Due to the dense population, city governments had to provide more services to their citizens. Hence, different needs for borrowing, taxes, etc between cities and counties arose.

    As the population grew, the areas directly adjacent to cities grew first and most. Eventually, these areas (in counties) became so densely populated they were more like cities. So, the cities annexed those areas. Through this process, the centuries old process of urbanization was managed / governed.

    However, Virginia being Virginia – our state couldn't quite figure out how this is all supposed to work.

    The first blunder was not putting cities inside counties – like the other 49 states do. This made annexation a zero sum game for counties.

    The second blunder was "temporarily" halting all annexations. In 1979, the Virginia General Assembly temporarily blocked the right of cities to annex territory from counties. The temporary ban has never been lifted, and in 2016 it was extended again to 2024. That's a 45 year long (and counting) temporary ban. Only in Virginia.

    The final blunder comes from not accepting that Virginia's governance structure is designed to retard the growth of cities. The net result of blunders one and two is Fairfax County being much more densely populated than 24 of Virginia's "cities" while Arlington (a county) has the second highest population density of all jurisdictions in Virginia (after Alexandria).

    Virginia is now a hodge-podge of jurisdictions where the very concepts of "town", "city", and "county" have no relevance. Arlington County has over three times the population density of the City of Fredericksburg.

    So, why should Arlington require a referendum while Fredericksburg does not?

    Play stupid games, win stupid prizes.

    1. LarrytheG Avatar

      I agree it ought to be updated to the current realities but I can cite counties in Va that are far less experienced in finances and while both the adjacent counties to Fredericksburg , Stafford and Spotsy, both have AAA bond ratings.. that's not the case outside the urbanized places in Va where the counties that surround the town/city don't do city services in general and would not if the county voters opposed it. The places that have city services need to have a way to connect with citizens that live there that want city services instead of county voters saying "no". Counties in Va other than Arlington and Henrico pretty much suck at roads as amply demonstrated.

      1. Paul Sweet Avatar
        Paul Sweet

        Cities, like towns, can tax their citizens more to support these added services. It would be better if cities became part of the county and could annex growing areas.

        The annexation ban was reasonable because cities were gobbling up the more developed parts of counties that contributed most to county finances. I remember how Charlottesville kept piling on so many more requirements for somebody trying to develop a mall inside city limits that the developer just bought a piece of property in the county a couple miles outside city limits and built the mall there. Charlottesville then turned around and tried to annex the new mall!

        1. LarrytheG Avatar

          Same thing happened in Fredericksburg and would again if the moratorium went away. So now the county has a lot of commercial but has had a different (rural-driven) view about libraries, parks, bike/ped facilities, etc… At one point , some elected wanted out of libraries, regional jails, etc… because of the "cost". Fredericksburg has crosswalks and bike/ped trails and such. Spotsy has not been friendly toward such even though they have
          approved subdivisions out of the wazoo.. they oppose sidewalks in them as well as two entrances or connecting roads , etc. They use the revenues from commercial to reduce taxes. The city uses them to improve the facilities for citizens in the city. I know there is a middle ground but so many rural counties in Va are more like Spotsylvania than towns and cities inside those counties.

          DJ picked Arlington for a county. Arlington and Henrico are two counties in Va that are not run like most counties in Va and a "good" thing in my view, i.e. Arlington and Henrico are better run counties… run more like cities.

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