Virginia’s AAA Bond Rating Controversy: A Look Back

In poking around the General Assembly’s electronic archives, I stumbled across the findings of the Debt Capacity Advisory Committee in a report filed just before Christmas in 2005. Based on then-Gov. Mark R. Warner’s budget forecast, the Committee concluded that the General Assembly could prudently issue $886 million in new debt in 2006 and a like amount in 2007.

That got me to thinking… What did the Advisory Committee write two years earlier, in December 2003, when Gov. Warner, Sen Finance Chair John Chichester and others were beating the drums for a tax increase on the grounds that Virginia’s coveted “AAA” bond rating was in jeopardy?

Thanks to the wonders of the Internet, we can call up that very document, which the General Assembly considerately archives on its website. The Advisory Committee reiterated its endorsement of the “5%” rule, which holds that the debt service on state debt should never exceed five percent of anticipated revenues. Then it quoted the Fitch credit rating agency as follows:

Virginia’s AAA rating reflects its … careful attention to both the level and security of its debt obligations… The Commonwealth’s superior credit standing has reflected its conservative approach both to debt and to financial operations.” (Fitch Ratings, New Issue report, June 3, 2003)

After reviewing the state’s outstanding debt, the Advisory Committee said that based upon the state’s debt capacity model and the Governor’s official revenue forecast, the General Assembly could prudently issue up to $661.91 million in tax-supported debt, to be matched by a like amount in 2004.

A little refresher regarding the political climate at the time: Tax advocates were citing a move by a different credit rating agency, Moody’s, to put Virginia’s AAA bond rating on “credit watch.” Fitch and Standard & Poor’s never put Virginia on credit watch but, citing a threat to the AAA, Warner, Chichester and others argued that Virginia needed to raise more than $1 billion in taxes in the next biennial budget. Without the additional revenues, they warned, the margin of safety was perilously thin.

Yet the Warner administration’s own Advisory Committee, chaired by Secretary of Finance John Bennett, calculated that finances were sufficiently robust to borrow an additional $662 million without jeopardizing the AAA rating!! Further, the report noted how critical debt ratios had improved in 2003 over the previous year. Tax supported debt as a percentage of personal income had dipped in Virginia from 1.8 percent to 1.7 percent. Net tax-supported debt per capita had declined $566 to $546. Meanwhile, interest rates had declined by 22 basis points, creating opportunities, presumably, to refinance some debt at lower interest rates.

Why re-hash all this ancient history? Because the advocates of the 2004 tax increase have never admitted, despite gushing revenue surpluses, that they made a mistake. And now, unrepentant, Sen. Chichester and Gov. Timothy M. Kaine want to raise our taxes again, this time for transportation. Virginia doesn’t need to raise taxes now, and it didn’t need to raise taxes then. And the message must be hammered home until the voters understand it.

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14 responses to “Virginia’s AAA Bond Rating Controversy: A Look Back”

  1. Lucy Jones Avatar
    Lucy Jones

    Thank you for finding the hammers for us!

    First, the privatizing numbers, now the numbers on the taxes,

    You’re on a roll!!! Maybe we should vote for you!

  2. James Atticus Bowden Avatar
    James Atticus Bowden

    The truth is out there somewhere and you are bringing it home with the bacon.

  3. Not Guy Incognito Avatar
    Not Guy Incognito

    Ok, I’ll bite.

    Have YOU noticed the tax increases? I haven’t, and I’m a firmly middle class married man with a dog and a cat. Pretty much your average consumer.

    I do, however, have a much improved feeling about the state of the commonwealth. And that’s worth my $162 a year. Perception does mean something, and 70% of working Virginians are on my side.

    Anyway, previously the state budget was more patchwork and really a marvel of obfuscation. More than raising taxes, the 2004 increase made the budget process more honest and more realistic, even if the numbers were off.

    And Warner did a hell of a job selling it (you know, shutting down the DMV’s and all).

  4. Will Vehrs Avatar
    Will Vehrs

    Interesting that you mention the DMV shutdown. That was the early, “clumsy” version of Warner, using an oversized hammer. What insanity it was to shut down a vital function that citizens were required to use and had to pay to use, instead of shutting down optional things, like state parks.

    The DMVs opened back up pretty quick and a smoother Warner emerged, using a precision sander this time. He created an apparently integrated governing philosophy and took advantage of the power of budget numbers to resist contemporaneously the kind of contrary analysis that Jim is providing. A tax increase “need” was created and it seemed a natural outgrowth of this exciting new governing philosophy.

    It might be more difficult for Governor Kaine to repeat this, but I wouldn’t bet against him.

  5. nova_middle_man Avatar

    So Connolly (Fairfax County Board Chairman) is correct in stating the state can borrow up to 10% debt.

    I agree with you guys in principal but across Virginia and especially in NoVA people are very willing to pay higher taxes for education and transportation

  6. Lucy Jones Avatar
    Lucy Jones

    I saw the DMV shutdowns as a “Shock” campaign right along with the big speech about how every citizen was going to “feel the pain”. The parks just wouldn’t have brought the drama he needed to get the tax hike through. All that publicity provided a political stop sign to any naysayer that may have stood up and said, “hey, where’s the crisis?” or “really, just how big is the crisis?”

    I wonder if Mr. Kaine is not pulling the same levers already. The transportation issues have become VERY important and are therefore a very emotional issue. When people are desperate for an answer and the only given answer comes in the form of “we must tax” many will go right along. Many (myself included) are just not educated in these matters and we have to rely on our leaders to make good choices. BUT as Mr. Bacon and others have pointed out, there are some seemingly reasonable alternatives to the increased taxes. The alternatives should be weighed heavily before a tax increase is even considered. It looks to me like Mr. Warner’s original shock campaign could have used a little more scrutiny as well.

    And yes, I notice every additional tax dollar. A little $10 here, $10 there, makes a lot of difference. The new taxes that are being proposed come down to an average increase of about $80 a month for each family in Virginia. Tack that on to the $10 and all of the sudden, I have nothing left to save for retirement. Nothing left for the increase in prescriptions. Nothing left for the increase in gas. Every tax dollar counts!

  7. Anonymous Avatar

    Let’s increase taxes only on those who voted for Warner and Kaine. They will happily support their tax-and-spend heroes. Meanwhile, our savings will surely help the rest of us get over our losses at the polls. It’s a win-win situation!

  8. Jim Bacon Avatar

    NoVa Middle Man, You people in NoVaLand need to know how the funding formulas work. Say you live in Fairfax County. If you raise $1 through property taxes to spend on local schools, the entire $1 stays in Fairfax County. If you raise $1 through a state tax — sales, income, whatever they use to find schools — that money gets distributed according to the SOQs funding formula which was designed with the explicit goal of redistributing money from affluent school districts to poor school districts. About 20 cents on the dollar returns to Fairfax County.

    So, if you advocate higher state taxes for “schools” you’re acting in a most compassionate manner, and the people of Wise County and Mecklenburg County will thank you (or, they would if they understood the funding formulas), but you’re shooting yourself in the foot.

    Want more money for local schools? Support local taxes. Don’t funnel the money through the state.

  9. nova_middle_man Avatar

    Schools was in reference to the Kaine plan for all-day kindergarden which will propably be next after Transportation.

    With transportation its the exact same problem evey dollar “we” send from NoVA down to Richmond is a negative investment

    I totally agree with you guys its the Conventional Wisdom that needs to change up here. Government works best at the local level.

    Its frustrating in 2001ish the transportation referendums were voted down by NoVA and Hampton Roads. But, In 2003 the education tax went through and now the 2006 transporation tax will propably go through. The 2001 plan made alot more sense for all of Virginia.

  10. Rtwng Extrmst Avatar
    Rtwng Extrmst

    Not guy,

    I’m glad you “have a much improved feeling about the state of the commonwealth” because your taxes have increased, even though you claim to not have noticed it.

    I also notice these increases. Meanwhile I feel worse about the state of the commonwealth because our transportation fund dollars are robbed to pay for pet projects and while as it was mentioned that in 2003 our taxes were increased for “education” I see no improvement at all there. In fact, I continue to see the same “one size fits all” beauraucracy that eats money and provides no real improvement. Please, spare us the “we should be happy to spend more money for government” whining.

  11. kingfish Avatar

    One reason I am a Virginia Democrat is that I understand there is no free lunch. Whatever newspaper you read, from whatever region of the state, there is coverage of transportation crises. Here in Hampton Roads, for safety and security reasons alike, we need another crossing. I read that the pavement on I-81 is giving out in the Valley. NoVA traffic jams are legendary. We can adress these problems like responsible people and pay for our generations needs with our generations money, or we can behave like Congressional Republicans.

  12. Rtwng Extrmst Avatar
    Rtwng Extrmst


    I actually don’t differ from you that much. Here’s my version of your statement:

    One reason I am a Virginia conservative is that I understand there is no free lunch. Whatever newspaper you read, from whatever region of the state, there is coverage of transportation crises. Here in Hampton Roads, for safety and security reasons alike, we need another crossing. I read that the pavement on I-81 is giving out in the Valley. NoVA traffic jams are legendary. We can address these problems like responsible people and pay for our generation’s needs with responsible amnounts of our generation’s money, by cutting inefficient and unnecessary programs, not robbing the transportation trust fund, funding transportation projects that actually make a difference (read: no Metro to Dulles), increasing use of toll roads and public/private partnerships, all without raising taxes; or we can behave like Congressional Democrats and whine that government needs more tax dollars.

  13. kingfish Avatar

    Extremist- Well done! We can disagree about which Federal bunch of goofs is worse and I am sure you and I would not agree on which programs we could cut ( I would not be eliminating funding for student loans as is our dear President) but I like your style!

  14. Ray Hyde Avatar

    The state should borrow every dollar it can get its hands on and spend it on capital goods and equipment.

    I believe that fuel prices, home prices, and federal deficits will push us into a round of inflation we haven’t seen since after the Reagan years.

    Our children will thank us for the roads and schools, and they will be paying of the debt with dollars that are 20% cheaper.

    Some people go nutso at the idea of wasting funds paying the debt service. But for long term projects that will be used up a lttle ata time, by many for years, it is foolish and probably impossible to raise the money up front.

    If you try that, you are prohibited from commercial investments anyway, so there is no way to save, and anyway, you will get hammered by people like Bacon for raising taxes unneccesarily. Either you are robbing the populace through excess taxes wich cause a surplus, or you are a bad planner for not getting ahead of the problem.

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