Commonwealth's Debt Programs Overview
This briefing covers the Commonwealth's debt programs, including debt management, constitutional framework, types of debt, and capital financing options. It highlights the roles of various entities such as the Virginia Public School Authority and the Treasury Debt Management Division in managing debt capacity and relationships with rating agencies.
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Review of Commonwealths Debt Programs A Briefing for the Commission on School Construction and Modernization Manju S. Ganeriwala State Treasurer James D. Mahone Public Finance Manager September 29, 2021
Overview Commonwealth Debt Debt Management Overview Constitutional Framework and Types of Debt Debt Capacity Advisory Committee Virginia Public School Authority Who We Are Capital Financing Options VPSA Pooled Bond Program Literary Fund Background Recommendation Letter 2
Department of Treasury Overview State Treasurer Executive Assistant Deputy State Treasurer Information Security Officer Administrative Services Internal Review Human Resources Cash Management & Investments Debt Management Operations Risk Management Information Systems Unclaimed Property 3
Treasury Debt Management Division Overview Responsible for the issuance and monitoring of debt for the following boards and authorities: Treasury Board General Obligation (GO) Bonds and Leasing Programs Virginia College Building Authority (VCBA) Virginia Public Building Authority (VPBA) Virginia Public School Authority (VPSA) Responsible for modeling the Commonwealth s debt capacity Debt Capacity Advisory Committee (DCAC) Responsible for rating agency relations Manage day-to-day communications with ratings analysts 4
Debt Overview Framework of Article X of Constitution Type Purpose G.A. Action Referendum Security Issuer 9(a) Emergencies, Deficits, Redeem Prior Obligations General Authorization No GO Board Treasury 9(b) Capital Projects Specific Project Authorization Yes Board GO Treasury 9(c) Revenue Producing Capital Projects 2/3 Majority Project Authorization No Revenues Treasury +GO Board 9(d) Anything Else General Authorization No Revenues/ Agencies Appropriations Authorities Institutions 5
Debt Overview - 9(b) and 9(c) Debt 9(b) General Obligation Debt Requires authorization by General Assembly and approval of voters at a referendum Secured by full faith and credit of the Commonwealth (G.O. Pledge) Paid by general fund revenues Impacts debt capacity AAA/Aaa/AAA ratings provide lowest interest rates Last voter approved referendum 2002 9(c) General Obligation Debt Revenue producing projects (eg. dorm, dining and toll roads) Paid by revenues from project, but backed by Commonwealth s G.O. Pledge AAA/Aaa/AAA ratings provide lowest interest rates Tax-supported debt; does not impact debt capacity 6
Debt Overview - 9(d) Debt 9(d) Appropriation-Backed Debt (eg. VCBA 21st Century Program and VPBA) Higher Education & General state projects Secured by appropriations from the general fund Slightly higher interest rates due to appropriation-backed security (AA+/Aa1/AA+ ratings) Tax-supported debt; impacts debt capacity 9(d) Higher Education Debt Eligible for all project types May be issued by institution or through VCBA Pooled Bond Program Secured by general revenues of higher education institution Not considered tax-supported debt 7
Debt Overview Outstanding Tax-Supported Debt Fiscal Years 2011-20201 Millions $12,500 $10,000 $7,500 $5,000 $2,500 $0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 (1)Excludes other long-term obligations such as pension liabilities, OPEBs and compensated absences. 2021 Data available upon completion of Annual Comprehensive Financial Report. 8
Debt Capacity Advisory Committee The Committee s general mandate is: Submit to the Governor and the General Assembly before January 1, an estimate of the maximum amount of new tax-supported debt that prudently may be authorized for the next biennium (Section 2.2-2714 Code of Virginia)* The Committee s December 2020 Recommendations were: Up to an additional $544 million could prudently be authorized and issued during each of fiscal years 2021 and 2022 Committee urged the Governor and the General Assembly to consider the implication of a future rise in interest rates that could occur between when any new debt is authorized and when it is issued Committee urged the Governor and the General Assembly to consider whether any new debt authorizations are necessary at this time *This estimate is advisory and in no way binds the Governor or the General Assembly. 9
Virginia Public School Authority Who We Are (Cont.) Board of Commissioners Ex-Officio Superintendent of Public Instruction State Treasurer State Comptroller Citizen Appointed by Governor Appointed by Governor Appointed by Governor Appointed by Governor Appointed by Governor 11
Virginia Public School Authority Who We Are (Cont.) Goals To provide efficient market access and low-cost financing to Virginia Local Governments and their Public School Divisions. To maintain high credit ratings to ensure the lowest possible cost of funds. 12
Capital Financing Options for Virginia Public Schools Local school divisions have the responsibility for controlling, erecting, furnishing, equipping and maintaining necessary school buildings School divisions in Virginia do not have taxing power or the ability to issue debt Financing approaches available for school capital projects: Cash Bank Loans Bonds General Obligation Bonds Subject to Appropriation Bonds Virginia Public School Authority Literary Fund Cost, funding availability and timing considerations will influence the approach taken 13
VPSA Pooled Bond Program Bond Bank established in 1962 which provides low-cost financing of capital projects for primary and secondary public schools in Virginia VPSA purchases General Obligation Bonds from Localities with the proceeds VPSA receives from the sale of its own Bonds 68 Series of bonds issued under current Bond Resolution (adopted in 1997) Key Statistics Credit Ratings: Bonds Outstanding: # Borrowers: Typical Issuance Cycle: Aa1/AA+/AA+ $2.3 Billion 98 Localities with bonds currently outstanding Spring and Fall 14
VPSA Pooled Bond Program (Cont.) Program Benefits for Localities Local General Obligation Pledge Referendum not required for Counties No out-of-pocket Costs of Issuance paid by Localities except for Local Bond Counsel Opinion No Rating Agency Fees No Economic Development Authority Fees Low interest rates supported by Aa1, AA+, AA+ ratings Flexible amortization with financing terms ranging from <10 to 30 years Projects include all types of real and personal property for public schools Land Buildings Equipment VPSA refinances its Bonds when the market is favorable Since 2010, $144 million in savings returned to localities 15
VPSA Pooled Bond Program (Cont.) Bond Bank To borrow through VPSA, a locality sells its General Obligation Bond to VPSA Example: 5 Localities want to borrow $10MM each for school capital projects through VPSA; each sells its own $10MM GO Bond to VPSA VPSA pools together the five Locality GO Bonds and sells its own $50MM bond in the competitive market to an underwriter on behalf of investors The underwriters (and ultimately the investors) own VPSA s $50MM Bond VPSA owns each Locality s $10MM Local GO Bond VPSA receives $50MM from the underwriters/investors VPSA passes along the $50MM to the Localities for their projects 16
VPSA Pooled Bond Program (Cont.) Bond Bank The Locality pays no up-front fee to VPSA The Locality s interest rate on its GO Bond sold to VPSA is 5 basis points (0.05%) higher than VPSA s interest rate on its Bonds VPSA pays for its bond ratings, its bond counsel fee, its financial advisor fee and all other cost of issuance out of pocket Over time, the additional 5 basis points from the Localities reimburses VPSA for the costs of issuance as well as paying VPSA s operating expenses 17
VPSA Pooled Bond Program (Cont.) Security Features for VPSA Bondholders Sum-Sufficient Appropriation State-Aid Intercept Mechanism General Obligation Pledge of Localities 18
Literary Fund The Literary Fund ( LF ) is a permanent and perpetual school fund established in the Constitution of Virginia for public school purposes LF must maintain minimum balance of $80MM, after which funds can be used for other school purposes; LF loans count as assets LF receipts come from Unclaimed Property, Fines, Fees & Forfeitures, Unclaimed Lottery Prizes, and interest earnings Disbursements from the LF are made for Literary Fund Loans, School Technology and Security Notes debt service, and Teacher Retirement 32 Localities currently have outstanding LF Loans totaling $65.6 million LF Loans outstanding projected to decrease 43% by 2026 Average Percentage of Literary Fund Revenues used for Teacher Retirement transfers: FY1981 - 2008: 46.79% FY2009 - 2021: 72.73% 19
Literary Fund Recommendation Letter Item 145(C)(11)(e) of the 2021 Appropriation Act, Chapter 552 required the Departments of Education and Treasury to (1) develop recommendations to make the Literary Fund loan program more competitive and attractive to school divisions and (2) increase the fiscal health of the Literary Fund. This report was provided to the Governor and to the Chairpersons of the House Appropriations and Senate Finance and Appropriations Committees on July 27, 2021 Prioritize and Increase Construction Loans Decrease the use of Literary Fund revenues for VRS and other payments Establish a minimum asset base of $250 million Increase Maximum Loan Amount from $7.5 million to $25 million Lower Literary Fund Rate Range, Prioritize Using Local Composite Index, and Conduct Annual Application Process Remove Inactive Projects from the Waiting List Provide Higher Loan Amount for School Consolidation Provide Incentive Grants for Loan Closing Costs 20
