The Remarkable Revival of “Pay As You Go”

It was quite a sight: During the transportation debate in the House of Delegates yesterday, Democrats waved personal credit cards over their heads to mock Republican proposals to borrow $1.5 billion in order to pay for new road projects.

Kaine administration spokesman Kevin Hall dissed the legislative package, telling Hardy/Schapiro with the Richmond Times-Dispatch:

I’m not sure that a proposal to simply incur more debt is the way Virginia wants to plan, build and maintain its transportation network. … That’s like using your Visa card to pay your MasterCard bill.

Someone better tell the backers of the $4 billion (before cost overruns) Metro-to-Dulles heavy rail project! Now that Gov. Kaine opposes the use of debt for building Virginia’s transportation network, there is no way the project will ever be built! Oh, wait… You’re telling me that Gov. Kaine favors borrowing money for that transportation project? … I’m confused.

My point here is not to defend the Republican proposal — I haven’t examined the list of projects to be funded under the plan, and might well disagree with the priorities if I did. My point is to query the Democrats: Since when did the old Byrd Machine “pay as you go” philosophy become the guiding philosophy of the party?

A decade ago, as I recall, Democrats were bashing “pay as you go” as a relic of a past age and were touting the idea of borrowing to build roads. Of course, that was when Jim Gilmore was governor and the prospects of passing a tax hike were precisely zero. The only way to spend more money on roads, it was perceived, was to borrow it. I can’t help suspecting that the underlying principle is not an aversion to debt but a fixation on extracting the maximum amount of cash, whatever the source, to build more roads.

The putative aversion to debt comes, incidentally, from the very same people who raised taxes in 2004 in order to preserve Virginia’s AAA bond rating. The reason the bond rating is so important, we were assured, is that a downgrade would make it more expensive to… borrow money. But now that we’ve preserved the AAA, the Commonwealth has yet to approve any new general obligation bond issues.

I draw the reader’s attention to the chart above, which I extracted from a House Appropriations Committee PowerPoint presentation. The red line shows Virginia’s maximum debt capacity. The pink line shows projected debt levels under existing legislation. The gap is large and growing. Looking forward, Virginia has enormous unused debt capacity. The blue line shows what debt levels would be under the House plan that Democrats want to skewer — still loads of debt capacity.

One final point: Roads are exactly the kind of long-term asset that should be funded with long-term bonds. When an asset is to be used and enjoyed by future generations of taxpayers, those future generations should help pay for it.

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16 responses to “The Remarkable Revival of “Pay As You Go””

  1. Anonymous Avatar

    The red line is only going to stay that way if state revenues hold staedy in proportion to the debt payments.

    In other words, if revenue decreases then the gap b/w the red line and pink line will get smaller which, in effect, will reduce your debt capacity.

  2. Larry Gross Avatar
    Larry Gross

    It all depends on the SOURCE of the funds that are envisioned to pay back the debt.

    If you have a virtually ironclad quantifiable source (like a dedicated sales tax)- as opposed to a prospective unquantifiable source – like an annual surplus then that IS pay as you go.

    Try to get a personal loan based on the premise that you got a bonus this year and expect that bonus to continue in the out years!

    The folks who pass out Bond Ratings frown on payback “schemes” predicated on prospective payback sources of funds .

    I think the waters are being muddied – and the next phase will be the smoke and mirrors phase.

    First and foremost – you’re not going to build new facilities without specific “new” money.

    If you choose instead to divert money already committed to other purposes then you’ve essentially re-prioritized the expenditures of existing funds.

    The Bond markets know full well that next year revnues and budget priorities can re-jigger and strand the revenue source.

    This is the essence of the Senate Path. They are saying that without a dedicated permanent source – that whether you just build roads or go to the bond market to leverage more money – either way – unless the source is permanent that it’s not PayGo.

  3. Overusing your debt capacity is, or might someday be, dangerous, but in this case, Jim is 100% correct. Roads should be constructed with debt in order that future users can pay as they go. If you believe that new users are the cause of the requirement for more roads, then debt is one way to pass the burden to them.

    Insisting that roads be payed for up front isn’t pay as you go: it is pay in advance. Unless your real goal is to see they don’t get built, there is no reason to advocate such a plan, and it is fiscally irresponsible. It is also fiscally irresponsible if you don’t know where the money is coming from, as larry suggests.

    That only applies to construction. Maintenance needs to be paid for out of current funds, and maintenance alone virtually guarantees that you will need a dedicated source of funds to continue that work, byitself, even without any new construction. Those funds should rely on a user pays system and should not be diverted to other transport, unless a strong cse can be made that the diversion will improve the system as a whole.

  4. Larry Gross Avatar
    Larry Gross

    I believe that the premise and evidence that taxpayers will not pay for additional transportation improvements is wrong.

    It’s true that the 2004 referenda were voted down but it’s also true that local bond referenda for roads have been approved in several jurisdictions including those where the state referenda was voted down – including Fairfax and Prince William.

    The most obvious question is why.

    The answer is simple. Taxpayers want to see what exactly their money will be spent on.

    They will NOT pay increased taxes at the state level to be sent to Richmond and what they get back is an IOU.

    So – I would posit – that both the House and the Senate have failed to “get it”.

    They think it is about money and its really about trust and accountablility.

  5. Nice one, Larry. Well said.

  6. Anonymous Avatar

    Good points are made by each of you.

    I would maintain that we are all saying the same thing….new money is needed.

    IMO, “borrowing” money is also “new money”… are just obtaining it by different means.

  7. Larry Gross Avatar
    Larry Gross

    new money – yes.

    How it is to be paid back is an issue.

    My understanding is that bond money to be repaid from a dedicated revenue source is cheaper and you qualify for more of it.

    It also affects your overall bond rating which affects the ability to borrow in the future.

    It IS interesting that the convervative, financially-prudent House is apparently willing to go to the bond market for bonds that will not be repaid with a dedicated source and thus will cost more and possibly affect Virgnia’s AAA rating.

    From this perspective – the Senate Plan seems to be more financially responsible.

  8. Anonymous Avatar

    Larry –

    I would only add that to call “taxes” or even “new taxes” a dedicated revenue source is the beginning of your smoke & mirrors saga… revenues go up and down all of the time which is the basis for the Senate’s argument against the HOD position.

  9. Toomanytaxes Avatar

    What would the Senate’s plan buy the average person in Virginia? Which roads are going to be improved and by how much? How will these roads be selected? Since Phil Shucet said that the CTB is the place you go to get your project included in the six-year plan, how will the average Virginian know that the roads selected for funding are the best use of funds, instead of the best enhancement for someone’s land development plans?

    If the Senators were selling stocks and bonds, they’d all be put in jail for securities fraud. What are we going to get for the money? Indeed, the Virginia Senate stands as a good argument for a unicameral legislature. That’s scary!

  10. Anonymous Avatar

    TMT –

    None of your concerns are addressed by the HOD plan as far as I know. In addition, turning over secondary roads to localities and then not giveing them a mechanism to fund the new costs is a$$-backwards.

    The original Senate plan would have required appointing people to the CTB who have some knowledge of transportation issues (engineers, planners, etc.)….as it stands right now that’s not a requirement!

    Yes, it would have called for an increase in taxes, but what’s the difference b/w a tax increase and borrowing money (See post above)?

    Why make your kids and grandkids pay for roads that our generation borrowed to build and then didn’t fund?

  11. James Atticus Bowden Avatar
    James Atticus Bowden

    Anon 2:57. Hallelujah! Virginia is one economy. All boats rise and fall on the tide – as do taxes on the economy.

    My concern is the rationalization of the money. Tolls are better than sales tax for transportation.

    My hair (what is left) is on fire is about who controls it . Nix on unelected,unaccountable, omnipotent Regional Government.

  12. Toomanytaxes Avatar

    4:30 You raise some interesting points.

    However, the idea that there’s no money to pay for maintenance of secondary roads is not correct. Indeed, VDOT transfers funds to those local governments that maintain their own secondary (local) roads. I posted ten years’ of data from the General Assembly on my own blog (9/26).

    A requirement for the CTB to include engineers, planners, etc. adds absolutely nothing to fix the problem plaguing Virginia. The problem is that the CTB can be lobbied to fund road projects that are designed to enhance private parties’ investments in real estate and not provide the best return (in terms of safety or traffic flow) for the dollars invested. Engineers and planners can be lobbied. True reform would require funding to go to only those projects that produce the best return based on record evidence or to make the CTB elected positions. The Senate does nothing to address this serious problem.

    Indeed, most of the Senators are the same “individuals” who designed the 2002 referenda. Those plans were designed to put the bulk of the money raised by the tax increases in the hands of another board that could be lobbied. Guess what? The voters rejected those schemes. Why would anyone trust the Senate on this issue? A good test for a fair plan designed to improve transportation and not real estate investments would be for there to be opposition by the developers and contractors. If they felt that they could not manipulate a plan, it would probably be real transportation progress. But these groups like the Senate’s plan. That’s reason enough to oppose it.

    Again, no one supporting the Senate’s plan has identified which roads would be improved and by what measure. Why? Probably because they cannot answer those questions because the Senate’s plan is designed to continue the flawed CTB approval process. The Senate asks Virginians to turn over more money based on trust. Why would anyone trust the Senate? As a institution, it supports the flawed status quo.

    Where are the developer impact fees in the Senate’s plan? Most others states impose reasonable, cost-based impact fees for transportation. Those fees send proper economic signals to the market. But they are missing from the Senate’s plan. The Senate continues to see taxpayer subsidies for one segment of the economy. That’s wrong.

    If borrowing to fund roads is wrong, why is borrowing to fund the extension of Metrorail right? Virginia needs to toss most of its state senators regardless of their political party.

  13. Anonymous Avatar

    TMT –

    Your arguments are justified, i.e., building the roads that generate the most bang-for-the-buck, removing the lobbying aspect from the CTB, identifying the most needed roads, and adding impact fees. I would support all or even a few of these in order to stop doing “business as usual”.

    What ticks me off is the fact that there doesn’t seem any willingness to compromise on ANYTHING b/w the HOD & Senate. The premise of our system of govn’t is based on compromise – the more you have you have the better things work. IMO, we are on a reverse course – less compromise seems to be the attitude from both the HOD & Senate.

    If the HOD (or Senate for that matter if they thought it would budge the HOD) was serious they could counter with a plan similar to the Senate’s that INCLUDES all of the things you mention.

    I would add that any time a new road is built someone is going to benefit. I don’t think there’s any way around that. And, I don’t think you can have a “plan” and expect people to not lobby for or against it.

    Lobbyists, in whatever form they choose to participate are a byproduct of a transparent form of government. To have a plan and then not allow anyone to have a say in what happens is eerily similar to the Politburo.

    Finally, borrowing funds is not wrong. Borrowing funds and not proving a way to pay back the funds is wrong.

  14. I think I’m with Anon on the road benefit issue. No matter what you do, it will benefit some and impact others. The point is to see to it that those that benefit compensate those who are impacted. If they can do that and stil come out ahead, then at least you have the foundation for completing a deal.

    If you cannot, then you are stealing.

    In addition, we need to have a uniform (or at least a rational) plan for determining how to allocat the benefits of development related to public services. As it stands now, transit services seem to get fredit for added development potential, boat roads have that benfit subtracted.

    If we are going to charge those who benefit from public services that enhance their land value, then we should compensate those who are damaged by public service requirements.

    Which is it? Or shall we be fair and require both?

  15. Larry Gross Avatar
    Larry Gross

    Are we talking about roads for transportation or roads for land development? ;-0

    Is the issue that it’s not fair that newroads will benefit only some lucky landowners and not all of them?

    If THAT is considered an important issue then I’m starting to understand why those concerned with that aspect of road building are .. essentially opposed to reform and especially reform that focuses the process on objective, needs-based criteria and away from slush funds and political manipulation of projects that almost nothing to do with priorities such as congestion relief.

    The minute we admit that roads are really for land development is the moment we all know exactly why the transportation process in Virginia is broken.

  16. Toomanytaxes Avatar

    4:30 Compromise is fine, but the fault in this instance lies with the Senate. Kaine and House leaders have each indicated some willingness to compromise. But where’s Senator Chichester? Obstructing change as per usual.

    Access to government decision-makers is important, but that does not mean unlimited access by lobbyists to all aspects of decision-making. State and federal agencies are open to public and special interest input, but also provide for rules conditioning access. For example, agencies often require a party to file a written summary of its meeting with decision-makers, which becomes a part of the record. Agencies generally make decision based on the public record and interested parties on all sides of issues can go to court to challenge decisions as being contrary to the record. Government sets rules for purchasing goods and services. Etc. We could easily require that each and every contact with VDOT or the CTB about funding a particular project be reduced to writing and posted on the Internet. Such a requirement would enable the public to weigh in on alternatives. This would not result in a Poliburo, but rather, more open government.

    Shouldn’t transportation decision-making be held to some type of standard? If, for example, VDOT plans to widen a particular road or build an interchange at Location X, shouldn’t the alternatives considered be set forth — not just for the project, but also for projects not funded? Obviously, there can be situations where VDOT/CTB would fund a project or select an alternative that does not best fit the public interest criteria (safety and improved travel), but those would need to be explained and could be tested in court. In most instances, I strongly suspect that VDOT/CTB would be sustained, but just subjecting VDOT/CTB to some procedural requirements would likely provide sufficient discipline to drive better funding decisions. We likely see more intersection improvements than plans to build outer beltways near speculative land purchases. We’d likely see a better return on taxpayer investment. We might see more trust in government.

    But so long as John Chichester sits in the Senate, we will never see any reform. Senator Chichester is the enemy of reform. He simply wants to preserve the status quo and feed it with more tax dollars.

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