While so many questions remain, the biggest one is why has the Governor nor any member of the General Assembly sought to address the evolutionary impact of this shutdown by calling for a summit or leadership round table meeting to address the direct impacts on small business and local and state government alike?
Where is the true leadership being demonstrated to take Virginia out of this crisis financially? Other than suspending the implementation of the new budget, what has been advanced as anything remotely appearing as a bipartisan solution to come to the aid of Virginians?
Both the Commonwealth and local governments derive much of its operating revenues from consumer spending and the taxes that are derived from such activity. The Commonwealth requires "sales taxes" while many local governments require "food taxes" and other taxes joined with the Commonwealth to fund government services. As a result of lost revenue, small business operators will not make tax obligations nor continue to employ Virginians thus eliminating "payroll taxes". Transportation tolls (road taxes) have all but dried up as a result of the shutdown as well and with so few Virginians on the roads with "stay at home" orders the revenue generated from the "gas tax" has fallen substantially.
Why has their not been an economic team assemble to address how Virginia will come out of this shutdown now anticipated to be June or even July? Where are the plans to address the shortfalls experienced at the local level which desperately requires revenue to sustain itself. Revenue that Governor Northam is currently denying them with his executive orders.
The biggest question than no one in the Assembly is raising is what will be the impacts of the shutdown on the bonds issued by the Commonwealth and the ratings levels that these bonds had in late 2019 compared to what they will be at the end of this year. If those ratings decline and in all likelihood they will across the board in many states as well as local governments throughout Virginia, the capacity to borrow and the costs of borrowing will only increase thus costing the Commonwealth millions more than ever anticipated.
"Bonds are used in the Commonwealth of Virginia to finance the costs of long term capital improvements throughout the state. The Commonwealth does not use bonds to close budget gaps or fix cash flow problems. Virginia bonds are primarily used for new construction and improvements at our institutions of higher education, transportation and port facilities, schools and state park and correctional facilities. Investing in Virginia bonds supports these endeavors, and interest paid to bond holders is exempt from Virginia income taxation, and in most cases, federal income taxation.
The Commonwealth's general obligation bonds are currently rated AAA/Aaa/AAA by Fitch, Moody's and Standard and Poor's rating agencies respectively. Rating agencies focus on several key factors in assessing a state's credit quality: control of debt burden, economic vitality/diversity, fiscal performance, and administrative capabilities. Most of the Commonwealth’s appropriation supported bond programs, which require an annual appropriation for debt service, are rated one notch below the general obligation bonds at AA+/Aa1/AA+. This would include bonds issued by certain state authorities, such as the Virginia Public Building Authority and the Virginia College Building Authority" (Virginia Treasury, Virginia.gov)
The following is a typical rating scale for bonds issued by government entities:
| Aaa | Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk. |
| Aa | Obligations rated Aa are judged to be of high quality and are subject to very low credit risk. |
| A | Obligations rated A are judged to be upper-medium grade and are subject to low credit risk. |
| Baa | Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics. |
| Ba | Obligations rated Ba are judged to be speculative and are subject to substantial credit risk. |
| B | Obligations rated B are considered speculative and are subject to high credit risk. |
| Caa | Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk. |
| Ca | Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest. |
| C | Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest. |
This above scale happens to be for the reputable Moody's rating service.
Virginia Performs, originally developed by the Council on Virginia's Future (2004-2017), was a performance leadership and accountability system within the Virginia state government whose goal was to evaluate government financial performances and outcomes in order to inspire and support Virginians toward healthier lives and strong and resilient families. It basically evaluated the government independently.
Virginia Performs took the data and demonstrated how government was impacting the lives of Virginians and most especially the quality of life in Virginia. It focuses on all the aspects of government from education, work force, transportation to finance. If a role or function of government was performed than Virginia Performs examined the outcomes.
Today, where is the true oversight coming from regarding the actions that the Governor or the General Assembly are implementing?
Where is there an economic adviser summit being called for by Governor Northam or the Republican leadership in Richmond?
The Council of Virginia's Future existed from 2004-2017. It began with a vision to guide the future taking into account responsible economic growth, quality of life, good government and all well educated electorate seeking to shape the future of Virginia in a dedicated, positive manner and direction.
"Virginia Performs" performed an essential role in informing Virginians as to the financial health of the Commonwealth of Virginia and provided a website as part of the Virginia.Gov site to dissimilate information to Virginians regarding State finances.
Virginia Performs however was "sunset" on July 1, 2017. This was done while the Republicans in Virginia controlled the majority of seats in the Virginia General Assembly in Richmond. This begs the question now whether this was in fact in the best interest of the Commonwealth.
A state's bond rating influences how much taxpayer money the state can save by securing competitive loans; it also serves as a measure of a state's financial and administrative status. Virginia's AAA bond rating, the best rating possible, is a reflection of the confidence placed in the Commonwealth's fiscal health.
"Virginia's bond rating allows it to borrow money at the most competitive rates available. Having a good credit rating means Virginia can save millions of taxpayer dollars in interest payments when it finances debt, such as borrowing for construction costs. With less interest to pay, Virginia's resources can be used where needed, and the state can maintain its favorable tax rates for citizens and industries.
Bond ratings are also a measure of a state's financial reputation. Finance professionals conduct a rigorous examination of a state's fiscal management practices over a significant period of time and express their level of confidence in that state’s ability to safely meet its scheduled interest and principal repayments. A bond rating of AAA is highest (best), and D is lowest (worst). A high bond rating makes the state's bonds more attractive to investors.
Note: A bond is an investment instrument through which an investor loans money to a public or private entity in return for earning interest. Typically, the interest a bond issuer must pay the purchaser is higher when the risk that the issuer will not be able to repay the loan is greater. Three major rating firms conduct research and set a rating based on their assessment of the risk that the loan will not be repaid as scheduled. This rating then influences the amount of interest the bond issuer must pay the investor" (Virginia Performs 2017)
A variety of factors can influence a bond rating, including:
- The amount of debt a state holds in relation to the size and health of its overall economy.
- A state's long-term financial management practices, including whether it meets its interest and principal repayments on time and has a back-up plan to make sure it can meet its obligations.
- Changing economic conditions that result in lower state revenues.
- Inaccurate forecasting that fails to anticipate revenue shortfall.
Virginia's bond rating is the responsibility of its governmental leadership. The executive and legislative branches must cooperate to ensure that Virginia's practices are sound by:
- Planning strategically.
- Independently studying problem areas and recommending sound improvement strategies.
- Accurately forecasting expenditures and revenues.
- Borrowing prudently.
- Objectively monitoring fiscal processes and procedures.
No one is talking about the impact this shutdown will have long term on Virginia financials and in effect its bond ratings. This fact should scare every Virginian because as ratings on bonds fall it is historically significant that taxes rises on citizens both at the state and local levels.
J.Scott
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