THERE was a time in Virginia when "debt" was more a political taboo than "tax." Today, as schools and other state services wilt under the burden caused by the recent series of heavy budget cuts, the burning anti-tax sentiment of Virginians has tied the hands of legislators. Fearing a vengeful rejoinder from the electorate, the General Assembly and governor have instead turned to innovative borrowing schemes to fund the long-term needs of the Commonwealth, such as the recent bond for construction on college campuses. Unfortunately, because Virginia is struggling to maintain a healthy revenue stream during this sluggish economy, a new threat faces both the governor's administration and the legislature.
The recent threat of a downgraded bond rating for the state government would significantly escalate the current fiscal crisis facing Virginia. The Commonwealth has lost its fiscal way. It is time that Virginia returned to her roots of fiscal responsibility. The decisions made during this budget cycle in the General Assembly could very well hold the financial future of Virginia in the balance.
Last month, Moody's, one of three national agencies whose AAA ratings allow Virginia to borrow money at the lowest possible rates, had said the state and several others had a "negative outlook." As a result, it placed the Old Dominion on its watch list this month. Moody's cited significant deterioration in Virginia's balance sheet and noted escalating costs in Medicaid and car tax relief. Putting a state on the watch list often foreshadows a pending downgrade. Should the AAA bond rating be downgraded, Virginia would pay higher interest rates on borrowed money, increasing the costs to service debt. In layman's terms: This would be very expensive and therefore, bad.
State Finance Secretary John M. Bennett addressed members of the House of Delegates Finance Committee last Friday and advised the legislature to build up the Commonwealth's cash reserves to hold off the pending downgrade. Bennett and Gov. Mark R. Warner intend to remind the rating services that it would be premature to make any decision regarding the bond rating before the upcoming legislative session in January. One of the top issues is predicted to be a massive restructuring of the Tax Code, which the Warner administration and others claim is inefficient and outdated. It remains unclear whether the political will exists to mount such a massive reform campaign. However, Bennett and others are correct in predicting that without some kind of dramatic change in Virginia's fiscal policy, the AAA rating will certainly be lost.
Though frightening due to the threat this downgrade promises to Virginia's fragile fiscal balance, legislators will certainly be goaded into action of some kind. Now is the appropriate time to return the Commonwealth to the fiscal responsibility that set the Old Dominion apart from other states for the first three quarters of the 20th century. In fact, the government was prohibited from assuming debt of any kind by the Constitution until it was rewritten in 1971. A return to such an anachronistic system is clearly not the answer, but it denotes the high priority of fiscal prudence. This priority has been lost today, in deference to an anti-tax cohort of legislators.
This month, the new pressure from the AAA bond rating creates a political impetus to reexamine our fiscal priorities. With revenue shortfalls such as they are, action is necessary to preserve this all-important symbol of fiscal well-being. That action should come either in increasing the revenue stream through some innovative program (just as lottery and slots have done for many states) or reorganizing the tax system to more efficiently assess the resources of the Commonwealth.
A renewed commitment to preserving Virginia's heritage of fiscal discipline and prudence has been eroded by contemporary efforts of the radical anti-tax Republicans -- i.e. the young suburban conservatives in the General Assembly -- to buy off votes through tax cuts. Indolent voters, gorged with the hearty tax cuts of the late 1990s, have created a growing cohort of populist legislators. By disassociating from the longtime wellspring of conservative governance in Virginia, a strong platform of fiscal responsibility, the Virginia GOP is setting the Commonwealth's economy up for disaster.
The question will be whether the impending implosion occurs during a Democratic or Republican gubernatorial administration and who will be blamed for the disaster. Warner, to his credit as a former businessman, has done his best to bail a sinking ship, but the water is rising fast. Political realities in Virginia indicated that a tax restructuring won't happen, and neither will a revenue increase. When the bond rating goes, a whole new set of problems hit the Old Dominion. Eventually those who let the economy fail will be debunked, but at what cost to Virginia? For those at the University who intend to stay in the Commonwealth, let it be hoped that the wakeup call comes sooner than later.
(Preston Lloyd's column appears Thursdays in the Cavalier Daily. He can be reached at plloyd@cavalierdaily.com.)
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