Double-Standard Bonds

by Jon Baliles

One of the eternal mysteries of the Commonwealth of Virginia’s governing structure is the separate treatment of counties and cities. We are the only state in the country that has the screwy system of independent cities that are not part of a county government or structure. But that’s not where the screwiness stops.

For some reason, the state treats bond referendums for cities differently than those for counties. A county can issue bonds for major projects (usually for schools, roads, fire stations, libraries, etc.), but it has to be put to a voter referendum for approval. The state doesn’t want localities to spend what they don’t have, and then come to the state for a bailout.

Cities, however, can authorize major bond issuances with just the approval of the governing body (i.e., City Council). State code section § 15.2-2636 states: “The governing body may authorize and issue bonds in accordance with the applicable provisions of this chapter, without submission of the question of the issuance of the bonds to the voters for approval.”

So what? It is important to remember that this different “standard” allows cities to make bond referendums much more susceptible to politics (and shenanigans) because you only need a majority of votes of the governing body. That’s a much easier bar to clear than having to convince voters.

I bring this up only to point out the difference in referendums and what localities use them for. What we saw this week in our region were two huge referendums pass overwhelmingly: Henrico ($511 million); and Chesterfield ($540 million).

They weren’t promising an NCAA Tournament appearance every few years or new restaurants or office towers that pay debt service instead of going the general fund. No, they were asking for voter approval to build and renovate schools, expand libraries, improve public safety, etc. You know, the boring (but essential) stuff.

The same state code sets a different bar for counties. If you skip down just a couple of lines in state code to section § 15.2-2638, it states: “…no county has the power to contract any debt or to issue its bonds unless a majority of the voters of the county voting on the question at an election held in accordance with §§ 15.2-2610 and 15.2-2611 approve contracting the debt, borrowing the money and issuing the bonds.” (There are a few exceptions for both sections, but not many.)

In Henrico’s case, they had all kinds of public information sessions beforehand to find out what residents needed; then they compiled a list and cost amounts and sent out mailers, hosted information sessions, took out ads, and produced a sharp video detailing the projects that would be funded in every corner of the county.

“It’s exciting, regardless of where you live. East, west, central. The bond referendum is going to touch your part of town,” Henrico County Supervisor Tyrone Nelson told Elizabeth Holmes at CBS6.

Of the $511 million, there were four areas to be funded: $37 million for parks and recreation improvements; $50 million for flood prevention efforts; $83 million for public safety facility improvements and upgrades to firehouses; and $340 million to school improvement projects. All four passed with at least 84% approval and the public safety referendum passed with almost 90% approval.

Supervisor Dan Schmitt said: “You can’t get 90% of Americans, you can’t get 90% of folks in Henrico to agree on what flavor of ice cream to eat every day, but we got them to agree in the future of our county, by telling them our story and showing past historical successes of what this county can do, when the resident’s trust is placed in county leadership.”

And these projects are not vague concepts that take years to argue about how large a school to build (like the battle over George Wythe High School), but a list that you can see here and that residents can see in their neighborhoods.

The Henrico Citizen reported, “The landslide of support for the referendum was even stronger than that shown by voters in 2016, when they approved the last such referendum, a five-question proposal whose “yes” votes ranged between 76% and 86%.”

Chesterfield voters also approved $540 million in bond-financed projects with 76% of voter approval. They also had four targets for the bond funding — $375 million for schools; $45 million for parks; $38 million for libraries, and $81 million for public safety. Their detailed list of projects can be seen here.

Like Henrico, Chesterfield officials held meetings over the last five years identifying needs and listening to residents. They also held public meetings, Facebook Live events, and podcasts to educate people on the referendum. Since 2010, Chesterfield has become home to 50,000 more residents and 2,000 school-age children and is receiving 6,000 more Fire and EMS calls than five years ago.

The refreshing thing about referendums like this is that they are done with deliberation, consultation, planning, and approval of the residents. Neither county is raising taxes to fund these projects but managing their debt with watchful and timely financing (especially with current interest rates) and creating a decade-long timeline to complete the projects. Further, they do not include either county siphoning off future revenues for thirty years to back or pay bond-issued debt the way Navy Hill would have, for example.

It may not be a coincidence that this portion of state code was written in 1950 when Virginia was under the iron grip of the Byrd Machine and voting was limited to the elite. There have been a half-dozen amendments to it over the decades, and I have no idea of the history behind it nor if there is a practical reason for the different standard, but I plan on doing more research. It is a fascinating (and vexing) dichotomy.

As written, it allows more risky standards for bond financing for cities than counties. It keeps the door open for cities to use bond financing for just about any project that is approved with a simple majority vote by the governing body. That can happen before the people even know what is going on or if the plan is reasonable — or needed.

And I am not just talking about Richmond — Bristol got into massive financial trouble issuing bonds for a development called “The Falls” and Buena Vista nearly went bankrupt by issuing bonds to build a golf course to drive economic development. Why go to all that trouble of planning projects and legitimate financing and making your case to the public when you can just wing it by sweet-talking and back-slapping a simple majority of politicians?

Maybe one of the reasons we have so many challenges that never seem to get solved is that we keep thinking that next pull of the casino handle is going to deliver the jackpot when all it does is perpetuate the very conditions we need to improve. Some “leaders” prefer to keep issues alive for political and fundraising reasons rather than solve and resolve the problems that will help people improve their lives and the health of the City. A double-standard in the state code for bond financing doesn’t help.

Jon Baliles is a former Richmond city councilman. This column has been republished with permission from RVA 5X5.

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17 responses to “Double-Standard Bonds”

  1. LarrytheG Avatar

    Correct me if I’m wrong but the counties can still sell bonds without a referenda but it’s not the kind that get the lowest interest rate.

    And even if they get denied or approved, they are not required to do what the results of the referenda said.

    Finally, none of these bonds are included in the current tax rate and if not mistaken, they don’t have to disclose the effect on the tax rate.

    Am I wrong?

    1. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      Counties can issue revenue bonds without a referendum. The debt service on these bonds is paid with revenue produced by the projects financed. Think water and sewer projects. They can also borrow money for school projects from the Literary Fund without a referendum. Otherwise, any project for which the debt service will be paid out of the general fund must be approved in a referendum. This includes parks and recreation, libraries, public safety (e.g. firehouses), courthouses, etc.

      If a bond issue is approved, the county is not required to issue the bonds. The referendum is an authorization, not a requirement. If they are approved, the bonds must be issued for the purposes stated in the referendum question. However, that question can be pretty broad.

      You are correct–the future debt service on the proposed bonds are not included in the current tax rate. As far as I know, counties are not required to project the effect on the tax rate of the bonds, but, politically, county officials should be able to provide some estimates.

      1. LarrytheG Avatar

        Thanks. So, in effect, if a project does not generate revenue (like water/sewer), then there is no way to repay the bond – unless it is voter approved and paid out of general revenues.

        Our county has started to disclose the “cost” of the project on the tax rate.

        But they also say that other savings in the budget and/or increases in revenue might help cover it.

        So you know this stuff apparently.

        So cities and towns are exempt from this?

        1. Dick Hall-Sizemore Avatar
          Dick Hall-Sizemore

          Cities and towns do not have to have a referendum to issue general obligation bonds.

  2. f/k/a_tmtfairfax Avatar

    Dick – where do “moral obligation bonds” fit in? I recall a number of real estate developers pushing Fairfax County not to issue revenue bonds but rather, to issue “moral obligation bonds” to shift risk to taxpayers instead of the developers and their customers.

    1. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      I’m quickly getting out of my depth here. As I understand it, a “moral obligation” bond is a revenue bond which the issuing authority promises to stand behind if the revenues are not sufficient to pay the debt service. However, that promise is not equivalent to the “full faith and credit” provisions of general obligation bonds, which are legally binding In the revenue bond case, the promise to stand behind the bonds is not legally binding, but a “moral obligation”.

      1. LarrytheG Avatar

        DIck and TMT might find the following interesting. Spotsylvania county is actually helping to finance a private sector venture – with tax dollars:

        ” In the agreement, the county and state would join with Kalahari on a “gap” loan covering about 25% of the cost to build the water park.

        The county’s estimated cost for its contribution would amount to $74.8 million. The county and state portions of the gap loan would be paid through tax revenue raised at the water park.”

  3. What is a “need”? Can you define it? I can’t.

    1. LarrytheG Avatar

      It’s defined by voters?

  4. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    The reason for the double standard in the Code is simple. The Code provisions are based on the provisions in the state constitution. I am disappointed that Mr. Balilies seems unaware of that fact.

    If he wants to know why the disparity exists in the state constitution, I suggest he start his research with A.E. Dick Howard’s commentary on the 1970 state constitution revision.

  5. False. Counties, at least Fairfax County, can bypass bond referenda by having the Economic Development Agency float bonds as “revenue bonds.” This is how Fairfax County financed. for example, the controversial Gatehouse school administration building. The debt service for EDA “revenue bonds” is paid by a transfer of General Fund revenues to the EDA.

    1. LarrytheG Avatar

      Looks like they ALSO have referendums…. for parks and schools so not really a “dodge” for all projects.

    2. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      The state has long done this. It finances the construction of state buildings and higher education capital projects with revenue bonds issued by the Virginia Public Building

      Authority and the Virginia College Building Authority, two legally independent entities. The “revenues” used to pay the debt service are general fund appropriations provided by the General Assembly. The state resorted to this shell game many years ago to avoid Harry Byrd’s aversion to general fund debt. The Virginia Supreme Court upheld it

      1. Thanks for the history. Money laundering.

  6. Nancy Naive Avatar
    Nancy Naive

    Speaking of money… if you were really going to invest in crypto currency, would you really use an exchange run by a guy named Bankman Fried?

    “Now boarding ValueJet Flight 5050.”

  7. vicnicholls Avatar

    Considering that would help get rid of the corruption in Chesapeake, I’d agree.

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