RD588 - Debt Capacity Advisory Committee Special Report on State Tax-Supported Debt Issuance Procedures and Transportation Debt Capacity – October 21, 2021

Executive Summary:

Following the Commonwealth’s increased use of debt in the 1980’s, Governor Wilder issued Executive Order 38 (1991) which established the DCAC. Subsequent to the Executive Order, the DCAC was codified in Section 2.2-2712 of the Code of Virginia. The Committee was initially comprised of the Secretary of Finance, the State Treasurer, the Auditor of Public Accounts, the Director of Planning and Budget, the Director of the Joint Legislative Audit and Review Commission, and two citizen members appointed by the Governor. Legislation enacted in 2010 added three additional members to the Committee: the staff directors of the Senate Finance and House Appropriations Committees, and the State Comptroller. The Secretary of Finance serves as Chairman.

The Committee is vested with the power and duty to annually review the size and condition of the Commonwealth’s tax-supported debt and to submit to the Governor and the General Assembly, by January 1st of each year, an estimate of the maximum amount of new tax-supported debt that prudently may be authorized for the next biennium. The Committee’s recommendations must consider the projected debt service requirements over the current fiscal year and the following nine fiscal years. The Committee must also review annually the amount and condition of obligations for which the Commonwealth has a contingent or limited liability, and for which the Commonwealth is permitted to replenish reserve funds if deficiencies occur (i.e., Moral Obligation debt).

In 1991, after consideration of various alternatives to assess capacity, the Committee decided on a measure based on tax-supported debt service as a percent of revenues. This measure provides a direct comparison of the state’s obligations to the resources available to pay them. Measuring the portion of the State’s resources committed to debt-related fixed costs provides a measure of the State’s budgetary flexibility and its ability to respond to economic downturns.

The target level selected by the Committee in 1991 was five percent - that is, debt service on tax-supported debt obligations should not exceed 5% of blended revenues. This measure is intended to ensure that annual debt service payments do not consume so much of the state’s annual operating budget as to hinder the Commonwealth’s ability to provide core government services. This basic measure has been endorsed by the DCAC in each subsequent year. Blended Revenues are comprised of general fund revenues, certain recurring non-general fund transfers including ABC profits, state revenues in the Transportation Trust Fund (“TTF"), and Virginia Health Care Fund revenues. Following a 2010 study, Blended Revenues also include the relevant portion of sales tax and certain recurring non-general fund Appropriation Act transfers. DCAC uses a ten-year average capacity to arrive at its recommendation in order to smooth the effect of dramatic revenue fluctuations and to facilitate long-term capital planning.

It is important to note that maintaining debt service at less than 5% of revenues is merely a benchmark of affordability. Debt service requires annual appropriation, and to the extent debt is authorized and issued, debt service will limit the amounts available for other budgetary needs.