"Pay As You Go" and Bond Issues in Virginia

When Virginia's voters approve a bond, they are approving a decision to borrow money from investors. Most state bonds are dedicated to purchasing parkland or constructing a capital improvement such as a college dorm, a new road, a library expansion, or other facility.

Virginia does not sell its state bonds directly to individuals. Bond issues are "underwritten" by firms, usually large banks or brokerage firms on Wall Street. The underwriter commits to selling all the bonds at a particular interest rate. After selling the bonds, the state ends up with cash to pay for a project (minus the underwriter's fees), plus a long-term commitment to repay the debt over the next 20 years.

Bonds are loans with interest rates. The higher the interest rate, the more money the state must pay to the lenders, the people or organizations who buy the bonds. If the buyers see a higher-than-average risk that the state will not repay the loan, then the underwriter must set a higher-than-average interest rate to attract enough buyers for all of the bonds. Virginia maintains a AAA ("Triple A") rating with the two leading companies that evaluate the risk, Moody's Investor Services and Standard & Poor's, so the cost to borrow money is minimized.

A revenue bond will be repaid by money generated by the facility - tolls from a highway bridge, for example. A general obligation bond will be repaid by general tax revenues.

Often the advocates of a bond issue will proclaim that passage of the bond issue will not raise taxes. A typical statement was made by the Department of Conservation and Recreation in its outreach before voter approval of the 2002 Parks and Natural Areas Bond:1

The annual payback is so small a fraction of state revenues that no tax increase is necessary to make bond payments, which will take place over many years.

A new toll road financed by a bond will not raise taxes either, if the users of the road will pay enough tolls to repay the loan on schedule. Those driving on the road will have to pay the tolls, and the general taxpayer is not committed to paying off the bond even if the tolls do not generate sufficient revenue. However, Virginia tries hard to maintain its high credit rating and thus minimize the interest rate on its bonds. Those purchasing Virginia bonds may assume, one way or another, that all public bond issues (including the municipal issues and revenue bonds that are not guaranteed by the "full faith and credit of the Commonwealth of Virginia") will be repaid on schedule. If so, then conservative financial management by the state can provide benefits to other public organizations in Virginia.

The General Assembly and the Bureau of Public Works approved bonds for an excessive number of turnpike, canal, and railroad projects prior to the Civil War. Few were profitable before 1861, and by 1865 none were likely to generate adequate revenue to cover the interest and capital on the state bonds. Virginia emerged from the Civil War deep in debt, unable to pay the interest and simultaneously fund government operations. Choosing how and when to pay off the pre-war debt became a primary political issue.

The 1870 state constitution prohibited the state from going into debt for future transportation projects. Article X, Section 7 said:2

No debt shall be contracted by this state except to meet casual deficits in the revenue, to redeem a previous liability of the state, to suppress insurrection, repel invasion, or defend the state in time of war.

The elected officials had the option to "adjust" the pre-war debt. Through negotiations with bondholders or by fiat, the state could pay only a portion of the total debt and stretch out payments. Readjustment would allow the state to postpone debt repayment and some use revenue to meet current priorities instead.

"Readjusters" proposed allocating tax revenues to fund creation of a public school system and other state services. "Funders" made it a priority to repay all the debt, in order to maintain the state's reputation as a reliable borrower and obtain future loans and lower interest rates. The conflict between the two groups continued for nearly 20 years. The final payment of the prewar debt was made in 1937.3

The 1902 state constitution retained the 1870 prohibition of debt. However, as cars started to become widely available, public demands for a paved road network emerged. Voters approved a constitutional amendment in 1920 that authorized the state to sell bonds again for transportation projects. Virginia needed state funds to match Federal funding. Borrowing money would allow building a planned 3,800 miles highway system faster than waiting to collect a gas tax to provide the state's share.

The borrow vs. "pay as you go" choice led to a political battle in the General Assembly. Governor E. Lee Trinkle, the Virginia Good Roads Association, and the state's highway commissioner pressed for the sale of bonds. State Senator Harry F. Byrd was the primary advocate for a "pay as you go" approach instead of debt. Byrd blocked the General Assembly from approving a $12 million bond sale in 1922.

A special session of the legislature considered a $50 million bond issue in 1923. Byrd built a coalition of Shenandoah Valley and Southside officials who endorsed a $0.03 per gallon gasoline tax to finance the highway system, and got Gov. Trinkle to shift to that side of the issue. The special session approved both the gas tax and a voter referendum on the $50 million bond issue.

Byrd won the battle and voters defeated the bonds. Road improvements were funded by the gas tax as it was collected, and building the highway network took more years than predicted as predicted by the advocates for debt. Byrd used the debt and tax debate to establish his leadership of what became known as the "Byrd Organization." He was elected as Governor and then US Senator.4

The 1928 amendments to the state constitution retained the option authorized by voters in 1920 of going into debt to finance road construction. In 1953, Republican candidate for governor Ted Dalton proposed seling $100 million in bonds to fund new roads, pledging anticipated revenue from the gasoline tax to repay the debt. The Democratic candidate opposed the proposal, saying:5

We have been committed for a long time to the pay-as-you-go system. My opponent proposes we issue bonds with which to build additional roads. Until I can be economically convinced we should change systems, I'm going to stick to the pay-as-you-go plan.

Dalton was defeated, and he considered the road bond proposal to have been a major factor. In Stanley's inaugural address, he proposed raising the gas tax another penny per gallon to $0.07 cents per gallon. The 1954 General Assembly rejected the tax increase for road construction, but did approve building the 37-mile Richmond-Petersburg Turnpike as a toll road.6

The number of cars on the road expanded throughout the 1950's. Public demand for providing additional public services, including construction of roads, continued to increase but "pay as you go" remained the practice of the Byrd Organization until the late 1960's. Mills Godwin, a strong ally of Byrd, opposed selling bonds to speed up road construction in his 1961 primary campaign for the Democratic nomination for Lieutenant Governor. He later recollected in an oral history interview:7

...most of the people that were allied with the Byrd faction were opposed to that type of highway financing. I would say that our position was one of somewhat total opposition to that concept of bond financing for highway construction and improvements. It was an issue that was clearly drawn. People could understand it and the majority of people in Virginia were opposed to it at that time.

Godwin won the race for Governor in 1965. He responded to public pressure and got the General Assembly to approve Virginia's first statewide sales tax to raise funding to increase state services. He doubled the state's funding for public schools and created the Virginia Community College System. Recognizing that more resources were needed, he obtained the legislature's approval in 1968 to sell $81 million in bonds for expansion of higher education and mental health facilities. Voters approved the bonds in the general election by a 2-1 ratio.8

Voters continue to support bonds for purchasing parks, expanding roads, etc. The state legislature puts bond issues up for referendum only when it can assure voters that Virginia's AAA bond rating will not be affected by authorizing more debt. Today it is a standard practice for the local governments, including school districts, to obtain voter approval for bond issues according to the Virginia Public Finance Act of 1991. Voters typically approve bond issues committing local governments to 20-year obligations to repay debt, in order to finane acquisition of land for new parks, construction of new roads, and other local projects.9

In 2021, Virginia Beach officials scheduled a voter referendum on a bond issue for flood control projects. The city proposed to issue $567 million in general obligation bonds to fund construction of 21 major projects over the next 10 years. The "pay as you go" approach might generate $567 million in tax revenue over 15-20 years, but anticipated benefits of the flood control projects would be delayed until funds could be accumulated for building the projects using a piecemeal approach.

In order to generate the tax revenue needed to pay back the investors who purchased the bonds, city officials made clear that property taxes for all parcels within the boundaries of the city would be raised. Asking voters to support a tax increase always involves politcal risk. Voters had the choice of rejecting the proposal and voting "no" on the referendum, and potentially voting against political candidates who had supported a tax increase. Voting "no" would avoid a tax increase in the short-term, but increase the risk of the city being damaged by flooding until the "pay as you go" funding could be accumulated.10

Budget of Virginia

Byrd Organization



1. "Virginia Park and Natural Areas Bond Overview," Virginia Park and Natural Areas Bond Overview, 2002, https://www.dhr.virginia.gov/pdf_files/HistoricResourcesArticle08-10-02.pdf (last checked June 14, 2021)
2. Constitition of Virginia, 1870, http://vagovernmentmatters.org/files/download/424/fullsize (last checked June 16, 2021)
3. Brent Tarter, "Debt Controversy, The Virginia," Encyclopedia Virginia, Virginia Humanities, December 14, 2020, https://encyclopediavirginia.org/entries/debt-controversy-the-virginia/ (last checked June 14, 2021)
4. "Senator Harry Flood Byrd of Virginia - The Pay-As-You-Go Man," Federal Highway Administration, https://www.fhwa.dot.gov/infrastructure/byrd.cfm; Ronald Heinemann, "Highway Bond Referendum, 1923," Encyclopedia Virginia, Virginia Humanities, December 7, 2020, https://encyclopediavirginia.org/entries/highway-bond-referendum-1923/; "Constitutional Changes in the 1920 Election," The Southwestern Political Science Quarterly, Volume 1, Number 4 (March 1921), p.414, https://www.jstor.org/stable/42879029 (last checked June 17, 2021)
5. Warren Wayne Riggan, "A political biography of Thomas Bahnson Stanley," University of Richmond Master's Theses, Paper 1073 (1965), p.17, https://scholarship.richmond.edu/cgi/viewcontent.cgi?article=2088&context=masters-theses (last checked June 17, 2021)
6. Warren Wayne Riggan, "A political biography of Thomas Bahnson Stanley," University of Richmond Master's Theses, Paper 1073 (1965), p.20, pp.23-27, https://scholarship.richmond.edu/cgi/viewcontent.cgi?article=2088&context=masters-theses (last checked June 17, 2021)
7. "Oral History Interview with Mills E. Godwin," Old Dominion University, April 1, 1981, https://dc.lib.odu.edu/digital/collection/oralhistory/id/130 (last checked July 21, 2021)
8. James Sweeney, "Godwin, Mills E. (1914–1999)," Encyclopedia Virginia, Virginia Humanities, February 12, 2021, https://encyclopediavirginia.org/entries/godwin-mills-e-1914-1999/; 1968 Ballot Issues, Historical Elections Database, Virginia Department of Elections, https://historical.elections.virginia.gov/ballot_questions/search/year_from:1968/year_to:1968/type:is_referendum (last checked July 21, 2021)
9. "Public Finance Act," Code of Virginia, Title 15.2. Counties, Cities and Towns - Subtitle II. Powers of Local Government - Chapter 26, https://law.lis.virginia.gov/vacode/title15.2/chapter26/ (last checked July 21, 2021)

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