Category Archives: Finance (government)

Court Backs Little Debbie In Tax Dispute

McKee Foods’ Little Debbie

Don’t underestimate Little Debbie – the spunky tyke took on the Augusta County tax collectors and won.  But the county still has her money.

The Virginia Supreme Court has sided with manufacturer McKee Foods Corporation, which makes the Little Debbie snack products, in a dispute over the tax assessment on its 828,000-square-foot factory in Augusta County. The July 18 opinion by Chief Justice Donald Lemons (here) reverses a lower court decision, rejects the county’s existing valuations and sends the dispute back to the local circuit court for another look.  Continue reading

Virginia Unemployment Fund Gains In Good Times

2018 labor force participation rates. Source: VEC. Click for larger view.

Laissez les bon temps roulez. Virginia’s strong employment climate is adding a financial spare tire to Virginia’s unemployment trust fund, now above 83 percent solvency by one actuarial measure and exceeding a federal recommended minimum balance on another measure.

The annual unemployment fund status update for a legislative oversight commission Wednesday lasted about 30 minutes, with the chairman, Del. Lee Ware, R-Powhatan, noting it was far shorter and less dramatic than some previous meetings in tight times, adding “it’s a good drama not to have.” The presentation is here.

The projected $1.45 billion fund balance for next December 31 will be another record, said Virginia Employment Commissioner Ellen Marie Hess. The figures used are not adjusted for inflation, however, and the state has been at higher solvency levels in previous periods of prosperity. The funds are just sitting there earning interest and awaiting the next recession, which history deems inevitable.  Continue reading

VRS Hybrid Plan Drawing Even Fewer Contributions

Virginia Retirement System overall investment returns, all funds. Source: JLARC

The percentage of state employees making voluntary contributions to their own retirement pot, contributions which are matched with free money, has continued its rapid decline over the past year.  As of March 2019, fewer than half of state employees who should be investing in their own retirement are doing so, according to a Virginia Retirement System update Monday.

A year earlier, according to the comparable report given the Joint Legislative Audit and Review Commission and reported on Bacon’s Rebellion, 58 percent were contributing something and drawing in matching funds.  A year before that it was 79 percent.  Just how much money the 52 percent adding nothing this past year failed to invest, and how many matching dollars were therefore not captured, is not in the report.  Continue reading

Layne Cautions Again about Excess Debt and Risk

The good news in Secretary of Finance Aubrey Layne’s presentation to the House Appropriations Committee this morning is that General Fund revenues, after a below-forecast start to the fiscal year, surged 27.4% in April. On a year-to-date basis, total revenues are 6.2% ahead of last year, beating the 5.9% forecast for Fiscal 2019.

The bad news is that U.S. economic prosperity is built on a mountain of consumer, corporate, and government debt. The national debt stands at $22 trillion, and the Congressional Budget Office says that debt as a percentage of GDP could increase from 78% this year to 96% by 2028. Plus, student debt exceeds $1.5 trillion, and credit card debt has surpassed $1 trillion, both record highs. And corporations are carrying a $9 trillion debt load, almost double the level of the Great Recession. At 46% of GDP, corporate debt is the highest on record.

Layne, a traditional fiscal conservative, is not predicting an imminent recession. Rather, he is saying that the U.S. economy and, by extension, the Virginia economy and state budget, are highly vulnerable to a downturn, should one occur. Continue reading

Your State Government in Action: Fire Programs Edition

An audit of three public safety agencies — the Virginia State Police, the Department of Emergency Management, and the Department of Fire Programs — has revealed numerous shortcomings in internal control systems, reports the Richmond Times-Dispatch.

“Today was not a good day for public safety [agencies],” acknowledged Secretary of Finance Aubrey Layne, who attended the auditor’s presentation for the findings on the Emergency Management Department. “Obviously, there are some issues the administration needs to deal with.” Writes the newspaper:

The problems included “rampant use of signature stamps” to approve reimbursements with no way to verify who used them; reimbursement of training class tuition without prior approval; reimbursement for use of personal vehicles by employees who have assigned state vehicles; mismanagement of procurement funds; and lack of control over credit cards, travel and capital assets.

The Department of Fire Programs, which was found deficient in 14 areas, was elevated into the high-risk pool for closer scrutiny.

“A Dozen Pockets of Extreme and Growing Risk”

Source: Dollarcollapse.com

The economy is chugging along at a 3% growth rate, unemployment is hitting record lows, productivity is surging. The economy looks like it’s in fantastic shape. A friend of mine and long-time Trump hater, normally disinclined to give the president credit for anything, marveled recently that the low-inflation, low-unemployment economy “is as good as it gets.” I hope like heck it stays that way.

But I am an inveterate worry wart. I’ve lived through booms before — the 1980s savings & loan bubble, the 1990s tech bubble, the 2000s real estate bubble. I’ve heard the promises that “it’s different this time.” And I’ve seen the busts that followed. It’s a universal rule that most “experts” did not foresee the meltdowns coming. The same thing may be happening again. Very few are paying attention to the build-up of highly leveraged corporate debt, both in the U.S. and abroad.

I don’t know if the “junk bond” sector will precipitate the next recession. Perhaps the next downturn will originate overseas and spread to the U.S., and a meltdown in junk bonds will merely act as an accelerant to a broader collapse. Whatever the case, the $1 trillion market now represents a significant risk. State and local governments in Virginia need to acknowledge this and other risks lurking in the economy as they go about making spending and taxing decisions. Only a fool would assume that the decade-long expansion, one of the longest in U.S. history, will last forever. Continue reading

Mass Transit and Unfunded Pension Liabilities

It has long been known that the Washington Metropolitan Area Transit Authority, which operates the Washington region’s commuter rail and bus systems, has unfunded retirement-benefit costs approaching $3 billion (on top of its multibillion-dollar unfunded maintenance backlog). While the Commonwealth of Virginia is not legally obligated to made good Virginia’s share WMATA’s shortfalls, as a practical matter it may have to eventually or risk — again — Metro collapsing into fiscal insolvency.

What I have not reported in past posts is the magnitude of that liability in relation to the size of the enterprise. A new Moody’s Investors Service report has the answer: Adjusted net pension liabilities plus adjusted net “other” retirement benefits (primarily health care) amount to 305% of WMATA revenues. For the uninitiated, that’s a lot. It’s the highest ratio of the nation’s ten largest mass transit agencies.

Another cause for concern. According to Moody’s, “WMATA has greater than a 10% one-year probability of experiencing pension investment losses that amount to 25% or more of its revenues, a threshold known as our “pension asset shock indicator.” Continue reading

Danville’s Bad $912,000 Loan — Isolated Case or Tip of the Iceberg?

Danville City Council will decide next week whether to forgive $912,000 owed the city by its land purchasing arm, the Industrial Development Authority. The money represents the unpaid portion of a $1.6 million loan issued in 2015 to entice Telvista, a call center operator which closed its facility in 2018 and ceased making lease payments.

The city needs to clear the books on the Airside Industrial Park property to make way for a new investment by Norfolk-based PRA Group, which has promised to invest $15 million and bring 500 jobs. “The property can’t close until this is done,” said City Manager Ken Larking, as reported by the Danville Register & Bee.

City Council is likely to forgive the loan. The PRA operation — ironically, a debt collection center — will employ more people and pay better at $38,400 per year on average than the old Telvista operation. Continue reading

Proffers: They’re Baaaaack!

Gentlemen may prefer blondes but localities prefer proffers.  A proffer is an arrangement between a locality and a land developer whereby the developer offers something of value in order to get a rezoning request approved.  Why do developers want land rezoned?  For residential development they want to build more homes on the land than the land’s current zoning allows.  Why would localities object to these rezoning requests?  Theoretically, the locality’s strategic and financial plans are based on providing services at an overall population density dictated by the current zoning.  Adding more density increases the locality’s costs for services like public schools.  Localities are understandably worried about the unfunded mandates that up-zoning can cause.  How do proffers help?  Items of value (money, land, astroturf, etc) are given to the locality by the developer in order to fully or partly cover the additional costs to the locality of development at higher density than was planned.  These proffers reduce the developer’s profit margin on the project at hand so they are not popular with the development community. Continue reading

Why Does King William Need a $11 Million Cash Reserve?

King William County cash reserves — how much is too much?

by Bob Shannon

We often listen to Pols cite the “gouging” we poor rubes are being subjected to. Members of Congress & our state legislative bodies –even local Pols get in on the game — tell us that big banks, big insurance companies, big brokerage firms, big pharmaceutical companies, big this or that are gouging us … and, by golly, the Pols are going to do something about it. Absent our Pols’ intervention, we would be bowled over by institutions cheating us at every turn.  

What they don’t talk about is the gouging they do themselves. No better example of this is what we have happening right here in King William County. A theft of epic proportions is taking place right in front of us.

Local governments need a reserve fund for a  time when the economy contracts and the local government needs funds to continue operating. This fund is supposed to be for the purpose of paying the ongoing routine costs of local government.  Continue reading

Pushing the Limits of Virginia’s Debt Capacity

Source: Debt Capacity Advisory Committee

by Richard W. Hall-Sizemore

The Commonwealth has been on a borrowing/building spree for the past few years and, as a result, its options for dealing with capital needs in the future may be constrained.

Since 1991, Virginia has voluntarily limited itself to the amount of tax-supported debt it would incur for capital projects.  This “debt capacity” is measured in terms of the percentage of general fund revenues that need to be provided for debt service on outstanding capital bonds.  The consensus between the legislature and the administration has been that projected debt service on tax-supported bonds should not exceed an average of five percent of general fund revenue over the ensuing ten years. Continue reading

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.