Bond Issues in Virginia
When Virginia's voters approve a bond, they are approving a decision to borrow money, usually to construct a capital improvement such as a college dorm, a new road, a library expansion, or other facility . Bond issues are "underwritten" by firms, usually large banks or brokerage firms on Wall Street. The underwriter commits to selling the bonds at a particular interest rate. After selling the bonds, the state ends up with a lot of cash (minus the underwriter's fee) to pay for a project, plus a long-term (often 20-year) commitment to repay the debt.
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 high interest rate to attract enough buyers to sell all of the bonds. (Bonds are not sold directly by the state to individuals.) 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.
Rather than sell bonds, Virginia could raise taxes and stockpile money in
advance, then "pay as you go" for construction of new facilities. That was the
practice of the Byrd Organization,
until in the late 1960's the demand for providing additional public services
in the short run (such as building a community college system) finally overcame
resistance to long-term debt.
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 Overview, Bullets for the 2002 Parks and Natural Areas Bond:
- "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.
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