I am following up on an earlier post discussing the capital budget recommendations of the Governor and the Commonwealth’s debt capacity. Jim Bacon’s recent post discussing Secretary of Finance Aubrey Layne’s worries about increasing debt also dealt with this general issue.
Guided by Secretary Layne, the Governor’s introduced budget was relatively conservative in its capital provisions and the authorization of $568.4 million in additional tax-supported debt. As predicted in the earlier post, the General Assembly came under a lot of pressure to add to the package and responded accordingly. The final budget bill, signed by the Governor in early May, authorized the issuance of an additional $1.1 billion in state-supported debt.
The major projects added by the legislature were the replacement of Central State Hospital ($315 million), a top priority of the Governor; “renewal” of Alderman Library at UVa ($132.5 million); and demolition and replacement of Daniel Gym at Virginia State University ($82.9 million). Also included in the introduced and final total packages was $248 million, primarily for Virginia Tech, which was tied to the Amazon deal. Including the authorizations provided by the 2018 General Assembly, the 2018-2020 Appropriation Act authorized the issuance of an additional $2.1 billion in tax-supported debt.
As discussed in the earlier post, the Commonwealth abides by a voluntary limit on the amount of its general fund revenues that will be committed to debt service. That limit is an average of no more than 5 percent of projected general fund revenues over a ten-year period. The Debt Capacity Advisory Committee (DCAC) projected last December that up to $1.34 billion in additional debt could be authorized in this biennium with the state remaining within its debt capacity limits. With the General Assembly authorizing an additional $1.1 billion, it appears that the legislature stayed within the limit.
There are some hidden costs for which additional debt will need to be authorized in the future, but which were not included in the debt capacity calculations this year. The first such future cost is related to the General Assembly’s penchant for under-funding the capital pools. Some clarification is needed here. The majority of the tax-related debt projects are consolidated into one Central Agency “pool” project. There is an appropriation and bond authorization for the total pool, but the estimated costs for the individual projects are not broken out in the Appropriation Act. The spreading of the total funding among the various individual agency projects is done administratively later by the Department of Planning and Budget, after consultation with the money committee staffs and staff from the Department of General Services.
For the 2019 pool, the General Assembly authorized $694.3 million in a combination of new funding and funding left over from previously completed projects. However, the estimated costs of all the projects in that pool are higher. Estimates for all the authorized projects are not publicly available and the estimated costs for the others are preliminary, based on the agencies’ budget requests in 2018 and 2019. Nevertheless, even with that preliminary data, it is estimated that the funding authorized in the pool is at least $65.3 million less than will be needed. Underfunding the pools is not new for the General Assembly. The Department of General Services estimated that, as of March 31 of this year, the 2016 pool will need, at some point, an additional $105 million, due to initial underfunding and cost increases.
Another hidden cost that must be addressed later is that for any furnishings and equipment that are not an integral part of a building. The legislature has a policy of not including this equipment funding in the initial authorization of pool projects, but providing it later when the project is nearing completion. For the sake of comparison, the Appropriation Act just signed into law authorizes $106 million in bonds for equipment of projects approved in previous years.
The administration and G.A. will have more room in debt capacity next year. The calculations used by the DCAC in December to project the debt capacity limits did not include the effects of conforming the state’s tax laws to the major changes in the federal income tax code. Because the G.A. did adopt conforming legislation, the state’s general fund revenues will be higher than the projections used in the debt capacity calculations. Of course, the G.A. stipulated that the additional revenue should be deposited into a separate fund and used for tax reform. It will be interesting to see how all this plays out next fall and winter.
Will the DCAC include this additional revenue in its debt capacity limits? It seems that it should, given that the additional revenue will come from income taxes, the primary source of the general fund. Will the administration increase its capital outlay budget request to take advantage of this resultant increase in debt capacity or will it exercise the restraint urged this spring by Secretary Layne? Will the G.A. take advantage of this increase in debt capacity to authorize more new projects, although it has said that the additional general fund revenue from the federal tax changes should go back to the taxpayers? These are just some of the questions that the fall legislative elections will influence.