9/22/2016
Local Government Finance
A presentation to the
Virginia Municipal Clerks Association
September 26, 2016
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Local Government Finance
Part I: How We Got Here
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Part I – How We Got Here
In the beginning…..
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Part I – How We Got Here
• In 1494 the Treaty of
Tordesillas divided
the newly explored,
and unknown, areas
of the world between
Spain and Portugal.
• Other European
powers, including
England were left
out.
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Part I – How We Got Here
Spain colonizes the
Atlantic coast.
• Francisco Gordillo and Pedro de Quejo
explore coastal southeastern United
States in 1521
• Their expedition is the origin of the
mythical Kingdom of Chicora:
• Wealthy
• Abundant resources
• A possible passage to the Pacific
Ocean
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Part I – How We Got Here
Spain colonizes the
Atlantic coast.
• Luis Vásquez de Ayllon embellished
and popularized Chicora legend
• Effort to gain support
• The Legend of Chicora prompted
Spanish and French exploration
and efforts to colonize he
Southeast Atlantic coast
Luis Vásquez de Ayllon
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San Miguel de
Guandape
• Founded in 1526 by Luis Vásquez
de Ayllon. • De Ayllon died shortly after arrival
• Failed in 1527
• Only 150 of 600 colonists returned to Hispaniola
• Location unknown ‐ South Carolina to Jamestown.
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Part I – How We Got Here
Spain colonizes the Atlantic
coast
• Pedro Menéndez de Avilés (1519 to 1574):
• Born in Spain to a noble family
• Capitan General of the Spanish Treasure
Fleet
• First Governor of Spanish Florida
• Governor of Cuba
• Died in Spain
Pedro Menéndez de Avilés
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Part I – How We Got Here
Fort de la Caroline
• Established by the French near present
day Jacksonville in 1564
• Intended as a safe haven for French
Huguenots
• Angered King Philip II who ordered
Pedro Menéndez de Avilés to destroy
the settlement and occupy Florida
• Destroyed by the Spanish in 1565
• Occupied by the Spanish as San Mateo
until 1569
Fort de la Caroline
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Part I – How We Got Here
St. Augustine
• Founded in 1565 by Pedro Menéndez
de Avilés
• First permanent European settlement
in the U.S.
• Capital of Spanish Florida - 1587 to
1819
• Capital of Florida Territory - 1819 to
1824
• Prompted by the establishment of
Fort de la Caroline by the French in
1564
St. Augustine
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Part I – How We Got Here
Santa Elana
• Founded in 1566 by Pedro
Menéndez de Avilés.
• Near Present day Parris Island,
SC
• Built on the site of the French
settlement of Charlesfort –
destroyed by the Spanish in
1563
• Capital of Spanish Florida from
1566 to 1587
Santa Elana
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Part I – How We Got Here
Santa Elana
• Outlying settlements included Fort
San Juan and five other forts as far
as western North Carolina
• Burned by Native Americans in 1587
• Spanish refocused on Florida.
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Part I – How We Got Here
Sa Juan
• Founded in 1567 by Juan Pardo
• Sent by Pedro Menéndez de
Avilés from Santa Elana
• Near Present day Morganton, NC
• Built next to the Native American
city of Joara
• Five other forts were buit in the
Appalachians
• Burned by Native Americans in
1568
Fort San Juan
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Part I – How We Got Here
Spain in Virginia
• In 1561, Menéndez visits the Chesapeake
Bay (Bahía de Santa Maria):
• Named Virginia “Ajacán”
• Seized a seventeen-year old Indian
named Paquiquino on the York River,
near Yorktown
• Paquiquino taken to Mexico and Spain
• Educated as a Jesuit
• Took the name Don Luís de Velasco
Pedro Menéndez de Avilés
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Part I – How We Got Here
Santa Maria
• Non-military Mission
founded on the York River
in 1570
• Destroyed by Native
Americans, led by
Paquiquino, in 1571
• All settlers were killed
excepted for Alonso de
los Olmos, the alter boy
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Santa Maria – Rescue
and Revenge
• Menéndez led a rescue mission in
1572
• Alonso de los Olmos rescued
• 40 Native Americans killed,
including 7 hung from the ships
rigging
• Paquiquino (Don Luis) was not
captured.
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Part I – How We Got Here
Santa Maria
Santa Maria
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Part I – How We Got Here
Atlantic Coast Colonies (1564 to 1607):
Santa Maria – Spain (1570 - 1571)
Jamestown – England (1607 - Present)
Roanoke – England (1585-1587?)
Fort San Juan and Five Others– Spain (1567-1568)
San Miguel de Guandape Spain (1526-1527)
Charlesfort – France (1562-63) / Santa Elana – Spain (1566-1587)
Fort de la Caroline– France (1564-1565) San Mateo – Spain (1565 – 1659)
St. Augustine– Spain (1565-Present)
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Part I – How We Got Here
English Claims
• England had claims of its
own in North America.
• These claims were based
on the voyages of John
Cabot during the reign of
Henry VII.
• England was occupied
by internal conficts in the
early 16th Century.
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Part I – How We Got Here
English Claims
• This led to conflict as
England began to assert
itself.
• Raiders such as Sir
Francis Drake, Sir John
Hawkins attacked
Spanish colonies and
ships.
• One of the Causes of the
Anglo-Spanish War
(1585–1604).
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Part I – How We Got Here
Elizabeth I of England: Ruled
1558 to 1603
Philip II of Spain: Ruled 1556 to
1598
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Anglo-Spanish War (1585–
1604)
• Multiple causes:
• Religious – protestant reformation
• Political –Spanish alliance with
France, English support for
rebellion in Holland,
• Economic - English raids on
Spanish treasure ships and
colonies
• Personal – Philip II had been
married to Mary I.
Rebellion in Holland
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Part I – How We Got Here
Anglo-Spanish
War (1585–1604)
• Mainly fought in Europe.
• Disrupted early English
attempts to colonize
North America.
Spanish Armada - 1588
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Part I – How We Got Here
Roanoke Colony
• Founded by Sir Walter Raleigh in 1585
and 1587
• Queen Elizabeth I granted a charter to
Sir Walter Raleigh to colonize North
America
• 1585 expedition led by Sir Richard
Grenville
• 1587 expedition led by John White
• White is appointed Governor by
Raleigh
Sir Walter Raleigh
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Part I – How We Got Here
Roanoke Colony
• Established on the North end
of Roanoke Island
• The colony had two purposes:
• Development of English
claims in North America
• Serve as a base for raiding
Spanish treasure ships.
• Conflict arose with local native
Americans
• Supplies were limited
Roanoke Colony
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Part I – How We Got Here
Roanoke Colony
• Governor White returned to
England for supplies in
1587
• Returned delayed by winter
• Return further delayed by
Spanish Armada of 1588
• White finaly returned in
1590
• Roanoke Colony was
abandoned
The Lost Colony
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Part I – How We Got Here
English Charter Companies
• Interest in colonizing North America
revived under King James I
• The First Royal charter were granted to
the Virginia Company in 1606
• A joint stock company
• Two branches the London Company and
the Plymouth Company
• Governed jointly by “His Majesty’s
Council for Virginia”
• 13 member Appointed by the King
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English Charter Companies
• London Company: Comprised of
shareholders from London.
• Granted territory from the 34th parallel
(Cape Fear) north to the 41st parallel
(in Long Island Sound).
• Plymouth Company: Comprised of
shareholders from Plymouth.
• Granted territory from the 38th parallel
(Assateague Island) north to the 45th
parallel (Bay of Fundy).
• Settlements to be 100 miles apart
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Part I – How We Got Here
Plymouth Company
• First attempt captured by the
Spanish in 1606
• Founded the Popham Colony
along the Kennebec River in
Maine in 1607
• Led by George Popham and
Raleigh Gilbert
Popham Colony
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Part I – How We Got Here
Plymouth Company
• Intended to show that
shipbuilding was possible in
Viriginia
• Popham died in 1608 – only death
in the colony
• Colony was successful – built the
first ship in English North America
the Virginia
• Abandonded in 1608 when
Raleigh Gilbert inherited a fortune
Raleigh Gilbert
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Part I – How We Got Here
Jamestown Colony
• Founded by the London
Company on the James River in
1607
• 104 initial colonists
• Governed by a seven member
council selected by the
Company – one elected as
president
• Purpose was to make a profit
for shareholders
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Part I – How We Got Here
Jamestown Colony
• Two supply missions arrived in
1608
• Spanish might have destroyed
Jamestown in 1609 – driven off
by the arrival of Captain Samuel
Argall of the Mary and John
• Over 600 additional colonists
from 1608 to 1609
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Part I – How We Got Here
Second charter in 1609
• London Company governed by an
elected Treasurer
• First Treasurer – Sir Thomas Smythe
• 50 Elected council members
• Boundaries reduced in the north and
extended to the south and to the
Pacific Ocean
Sir Thomas Smythe
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Second charter in 1609
• Virginia Company appointed a strong
Governor
• Sir Thomas Gates – First Governor
1609
• Thomas West Baron De La Warre –
2nd Governor 1610
• Glass making, pitch and tar production
and beer and wine making were begun
• Lack of skilled farmers made food in
constant short supply
Sir Thomas Gates
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Part I – How We Got Here
Second charter in 1609
• Wreck of the Sea Venture in 1609 almost
caused the abandonment of Jamestown
• Lack of supplies and farming led to the
Starving Time of 1609-1610
• Arrival of a fleet commanded by Thomas
West Baron De La Warre aborted
abandonment
Wreck of the Sea Venture
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Part I – How We Got Here
Boundaries of
Virginia in 1609
Virginia
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Part I – How We Got Here
Third charter - 1612
• London Company
Council replaced by an
assembly of investors
• Authorized lotteries to
fund expenses
• Boundaries extended to
the 29th parallel in the
south and to Bermuda
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Part I – How We Got Here
First Anglo – Powhatan War
• War between the English and the
Powhatan Confederation began in 1609
• Main cause was the demand for food by
the English settlers
• Pocahontas, Chief Powhatan’s daughter
was seized by the English in 1609
• The war was fought until 1614, when
Pocahontas married John Rolfe
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Part I – How We Got Here
Virginia Localities
Emerge
• Kechohtan was siezed from the
Powhatan Confederation in
1610 and renamed Elizabeth
City Parrish
• Henricus was founded by
Governor Thomas Dale in 1611
Reconstructed Palisade at Henricus
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Virginia Localities
Emerge
• The Virginia Company divided
Virginia into four military –
administrative districts in 1618:
• Kecoughtan (later renamed
Elizabeth Cittie)
• James Cittie
• Charles Cittie
• Henrico Cittie
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Part I – How We Got Here
The Great Charter
• The Virginia Company sent
new instructions on
governance in 1619
• Extended English Common
Law to Virginia
• Land reform
• Establish a College at Henricus
• Representative Assembly
First House of Burgesses - 1619
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Part I – How We Got Here
Second Anglo – Powhatan War
• War between the English
and the Powhatan
Confederation began in 1622
• Surprise attack on English
settlements
• Led by Opechancanough,
Powhatan’s brother and
successor
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Second Anglo – Powhatan War
• About 347 colonists -onethird of the English
population - were killed
• Opechancanough’s goal was
to exert control and limit the
English to a small trading
post
• The war was fought until
1632
• Greatly expanded English
territory in Virginia
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Part I – How We Got Here
Was Opechancanough
the same person as
Paquiquino (Don Luis)?
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Part I – How We Got Here
Trouble in Paradise
• Growth in Virginia was slow
• Expected profits had not been
realized
• The Virginia Company was over
£9,000 in debt (About $400,000,000)
• Stockholder dividends were unpaid
• Recruiting new colonists was difficult
and expensive
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Trouble in Paradise
• Samuel Wrote - an investor
• Since 1619 the colony's
population of 700 had
been supplemented by
3,570 new arrivals,
• 1622 population was
only 1,240
• 3,030 had died of
disease, starvation, or
war
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Part I – How We Got Here
Royal Commission Investigation
• England’s Privy Council established a Royal Commission to
investigate the Virginia Company in 1623
• The Second Anglo-Powhatan War
• Tensions within factions of the Virginia Company’s
Directors
• Smythe Faction: Wealthy merchants favored a longterm investment.
• Earl of Warwick Faction: Port of protection for
ships raiding Spanish Treasure Ships.
• Sandys Faction: Smaller investors who were
dissatisfied with Smythe regime.
• King James I disliked Sandys, Tobacco smoking, and
the House of Burgesses
Sir Edwin Sandys
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Part I – How We Got Here
Royal Commission
Investigation
• 1624 Commission members visited
Virginia
• Royal Commission Report
recommended changes to the
Virginia Company Charter in 1624
• Stockholders rejected the proposed
charter changes
Privy Council
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Part I – How We Got Here
Royal Commission
Investigation
• James I revoked the Third Charter and
Virginia became a Royal Colony
• House of Burgesses remained, with laws
reviewed by the Privy Council
• Governor of Virginia appointed by the King
• Royal census showed 1,232 settlers in
Virginia in 1625
Sir Francis Wyatt – 1st Royal
Governor of Virginia
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Local Government Finance: Part I – How Did
We Get Here?
Virginia Localities Emerge
• House of Burgesses divided Virginia into eight
Shires in 1634
• Accomac Shire (now Northampton &
Accomack Counties)
• Charles City Shire (now Charles City
County)
• Charles River Shire (now York County)
• Elizabeth City Shire (extinct - consolidated
with the City of Hampton)
• Henrico Shire (now Henrico County)
• James City Shire (now James City County)
• Warwick River Shire (extinct - consolidated
with the City of Newport News)
• Warrosquyoake Shire (now Isle of Wight
County)
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Part I – How We Got Here
Third Anglo – Powhatan War
• War between the English and the Powhatan
Confederation began in 1644
• Led by Opechancanough
• About 500 colonists - one-tenth of the
English population - were killed
• Opechancanough captured in 1645
• Killed by guard at Jamestown
• The war was fought until 1646
• Treaty of 1646
• Native Americans subjects of King
• Delineated boundaries
Treaty boundary for English
Settlement in red
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Part I – How We Got Here
Modern Virginia Localities
• Virginia has 32 local Governments in 2016
• 95 Counties
• 38 Independent Cities
• 191 Incorporated Towns
• Dickenson - Newest county formed in 1880
• Poquoson - Newest city formed in 1975
• Bedford - Newest town formed in 2013
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Part II: Alphabet Soup – The Regulatory
and Legal Environment
IRS
S&P
Caa1
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
John F. Dillon
• The most important person in Virginia
local government
• Iowa Supreme Court Justice (1864 - 1869)
• Federal Circuit Court Judge ( 1869 – 1882)
• Dillon’s Rule – 1868
• Shapes every aspect of local government
finance
John F. Dillon
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Dillon’s Rule – 1868
• City of Clinton v. Cedar Rapids and the
Missouri River Rail Road Company
• Set out the powers of a local government
•
•
“First, those granted in express words (from
the state);
second, those [necessary] … to the powers
expressly granted;
•
third, those absolutely essential to the
declared objects and purposes of the [locality]
…; and
•
fourth, any fair doubt …is resolved by the
courts against the [locality]...”
Old City Hall, Richmond, Virginia
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Dillon’s Rule – 1907
• U. S. Supreme Court - Hunter v.
Pittsburgh
“Municipal corporations owe
their origin to, and derive their
powers and rights wholly from,
the legislature. It breathes into
them the breath of life, without
which it cannot exist.”
U. S. Supreme Court
Old Senate Chamber 1861 - 1935
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
What is GAAP?
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
What is GAAP?
• Generally Accepted Accounting
Principles
• A common set of accounting standards,
rules, and practices used in financial
reporting.
• Allows users of financial statements to
rely on a commonly understood
meaning
• Facilitates comparisons and analysis
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Does everyone have to
use GAAP?
• There is no statutory requirement
establishing GAAP
• The Securities and Exchange
Commission requires that all
publicly traded companies use
GAAP for financial statements
• Every state government uses
GAAP
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Do Virginia Localities
have to use GAAP?
• The Auditor of Public Accounts is
responsible for setting Accounting
standards
• Section 30-137. Devising a system
of bookkeeping and accounting for
local offices; costs.
“…that conforms with generally
accepted accounting principles.”
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Where does GAAP come from?
• Committee on Establishment of Accounting
Principles
• Financial issues in the late 1960s and early
1970s
• The American Institute of Certified Public
Accountants study from 1971-72 (Wheat
Committee)
• Chaired by Francis M. Wheat – Chair,
Securities and Exchange Commission 19641969
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Committee on Establishment
of Accounting Principles
• Intended to strengthen and standardize
accounting principles
• Accounting Principle Board abolished
• Financial Accounting Foundation 1972
• Financial Accounting Standards Board
(FASB) – 1972
• Private not for profit organization
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Federal Accounting Standards Advisory Board
(FASB)
• Defines GAAP for federal agencies
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Governmental Accounting Standards Board
(GASB)
•
•
•
•
Founded in 1984
Private not for profit organization
Not federal laws or regulations
No enforcement authority
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Governmental Accounting Standards Board
(GASB)
• Required by some states
• Compliance with GASB’s
standards,
• Auditors’ opinions on financial
statements in conformity with
GAAP.
• GASB Statements define GAAP
for state and local government
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
GASB Statements
• 82 statements have been issued
• GASB 34 - Framework for financial
reporting (1999)
• GASB 45 – Other Post Employment
Benefits (2004)
• GASB 54 – Fund balance reporting
(2009)
• GASB 67 and 68 - Pension
reporting (2012)
• GASB 77 – Reporting corporate tax
incentives (2015)
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Basis of Public Accounting
• Cash Basis
• Revenues are recorded when received
• Expenses are recorded when paid
• Not GAAP
• Accrual Basis
• Revenues are recorded when earned
• Expenses are recorded when incurred
• GAAP
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Cash and Accrual Basis Examples
July 1: Barb and Bob started July with $0
• $3,000
Client Payment for June # 1
• $400
Client Payment for June # 2
• $2,000
Billed Client # 4 for July
• $1,000
Pay July Rent
• $300
Pay July Software Fee
• $400
Pay Copier Charges for June
Barb
Bob
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Bob Uses Cash Basis
Beginning Balance
Income
Client Payment for June # 1
Client Payment June # 2
Total Income
Expenses
Rent
Software Fee
Copier Charges for June
Total Expenses
Ending Balance
Bob
$0
$3,000
$400
$3,400
$1,000
$300
$400
$1,700
$1,700
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Barb Uses Accrual Basis
Barb
Beginning Balance
Income
Billed Client for July # 4
Total Income
Expenses
Rent
Software Fee
Copier Charges for June
Total Expenses
Ending Balance
$0
$2,000
$2,000
$1,000
$300
$0
$1,300
$700
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Summary – Why do we care about GAAP?
• Allows the public to:
• Assess government financial
condition
• Compare actual financial results
with the adopted budget
• Assess compliance with laws,
rules, and regulations.
• Provides policy makers with accurate information
• Provides consistent financial information used by banks,
investors, and the credit rating agencies
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Public Debt in Virginia
• Virginia avoided public debt
• Effect of the Civil War
• $48,000,000 of stock in
turnpike, toll bridge, canal,
and water and rail
transportation enterprises
• Partially destroyed or in WVa
• Not settled until 1911
Supreme Court ruling
• $1,310,000,000 in 2016
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Harry F. Byrd
•
•
•
•
•
United State Senator 1933 – 1965
Governor of Virginia 1926-1930
Virginia State Senator 1916 – 1926
Pay-as-You-Go for improvements
1926 General Assembly approved tax
segregation
• Localities - taxes on real estate and
tangible personal property
• State would tax remaining sources,
including personal income.
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Total: $10,991.2 Million
Note: Does not Include $8,759
Million Other Tax Supported
Debt
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Debt - Article X §9
• §9(a) - General obligation debt for
emergencies
• §9(b) - General obligation debt for
capital projects; voter approval
required
• §9(c) - General obligation debt;
without voter approval for specific
revenue-producing capital projects
• §9(d) - Debt of an institution, agency,
or authority of the Commonwealth
without the full faith and credit of the
Commonwealth
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Virginia Debt
• “Virginia … has held its AAA bond
rating since 1938, longer than any
other state.” – Virginia Performs
• Most Virginia debt is 9(d)
• GOB 9(b) & 9(c) Rated AAA – 2.00%
• Authority Debt 9(d) Rated AA – 2.25%
• Difference on $1,000,000 is about
$50,000 annually
• Locality debt is rated AAA to BB
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Virginia Debt - Section 10.
Neither the credit of the Commonwealth nor of any
county, city, town, or regional government shall be
directly or indirectly, under any device or pretense
whatsoever, granted to or in aid of any person,
association, or corporation;
• No Stock
• No work of internal improvement,
except public roads and public parks,
• No assumption of the debt of any county, city,
town, or regional government,
• Economic Development Authorities are allowed.
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Key Figures in
Public Debt
• Municipal Advisor
• Bond Counsel
• Rating Agency
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Municipal Advisor
• A person who advises a state or local
government on municipal financial
products or the issuance of municipal
securities
• Required by the 2010 Dodd-Frank Wall
Street Reform and Consumer Protection
Act
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Bond Counsel
• An attorney or law firm
• Provides a written opinion that bonds are
validly issued and, if tax exemption is
intended, that the bonds are tax-exempt
bonds
• Prepares, authorization documents and
bond contracts
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Rating Agency
• An independent company
• Evaluates the financial condition of issuers
• Assigns a rating that reflects the issuer's
ability repay
• There are three major bond rating agencies
in the United States
• Moody’s Investors Service
• Standard and Poor’s
• Fitch Ratings
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Moody's Investors
Service
• One of the “Big Three” bond
rating agencies
• Incorporated in 1914
• Predecessor Organizations date to
1900
• Expanded into rating of State and
Local bonds in 1919
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Standard & Poor's
Financial Services
LLC (S&P)
• One of the “Big Three”
bond rating agencies
• Incorporated in 1941
• Predecessor
Organizations date to
1860
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Fitch Ratings
• One of the “Big Three” bond
rating agencies
• Founded in 1914
• Smallest of the “Big Three”
rating agencies
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Factors that May Affect a
Bond Rating
• The amount of existing debt compared
to its economy.
• Long-term financial management
practices
• a back-up plan to make sure it can meet
its obligations.
• Changing economic conditions
• Inaccurate forecasting
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Bond Ratings
• Section 2.2-4902 of the Code of Virginia
requires bond ratings on any public bonds
by a bond rating agency approved by the
State Treasurer.
• There are three major bond rating
agencies in the United States
• Moody’s Investors Service
• Standard and Poor’s
• Fitch Ratings
Manju Ganeriwala‐‐Treasurer of Virginia
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Bond Rating: Back-up Plans
• Credit Enhancement - Reassurance that the
lender will be paid through additional collateral,
insurance, or a third party guarantee
• State Aid Intercept Provision
• Section 15.2-2659 of the Code of Virginia
• Approved in 1988
• Upon proof of a locality's default on any of
its general obligation debt
• State aid payments are redirected to pay the
debt
88
Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Internal Revenue Service
• Two major categories on
government debt
• Governmental Bonds (Tax
exempt)
• Private Activity Bonds (Taxable)
89
Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Internal Revenue Service
• Governmental Bonds (Tax exempt)
• Construction, maintenance, or repair of
public infrastructure
• Less than 10 percent of proceeds are for
private business use.
• Timely use
• Non-Arbitrage
• Arbitrage – proceeds invested at a yield
materially higher than the yield on the bonds
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Local Government Finance: Part II: Alphabet
Soup – The Regulatory and Legal Environment
Internal Revenue Service
• Private Activity Bonds (Taxable)
• Construction, maintenance, or repair of
private infrastructure
• More than 10 percent of proceeds are
for private business use.
• There are exceptions where private
activity bonds may be tax exempt
91
Part III: How we pay the bills - Revenue
92
Part III: How we pay the bills - Revenue
Who collects state and
local revenue?
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Part III: How we pay the bills - Revenue
Collection of state and
local revenue
• Until 1870 taxes were collected by the
local sheriff
• Origins in medieval England
• Still the practice in West Virginia
94
Part III: How we pay the bills - Revenue
The Current Sheriff of Nottingham, Councilor Jackie Morris
95
Part III: How we pay the bills - Revenue
Collection of state and
local revenue
• Changed by the Underwood
Constitution in 1870
• Commissioner of the Revenue
• Treasurer
• Director of Finance
Nancy Pleasants, Louisa County
Commissioner of the Revenue
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Part III: How we pay the bills - Revenue
FY 2014 Local Revenue Sources
$ Millions
Total = $30,382.5 Million
97
Part III: How we pay the bills - Revenue
98
Part III: How we pay the bills - Revenue
Most Important
Local Sources
•
•
•
•
Real Estate Tax
Services Charges
Personal Property Tax
Sales Tax
Henrico County Government Center
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Part III: How we pay the bills - Revenue
Poll Tax
• Not currently used in the United States
• Exodus (30: 11-16) Jewish law imposed
a poll tax of half-shekel
• Important tax in Colonial Virginia
• Not an important revenue source by
1800
• Disliked by all classes of citizen
Silver Half Shekel
100
Part III: How we pay the bills - Revenue
Meaning of the
word “Poll”
• Poll – Middle English
meaning Head
• Collection of votes – 1620s
• Public opinion survey 1902
101
Part III: How we pay the bills - Revenue
120.0
104.0
Colonial Virginia Poll
Tax
1634 to 1750
100.0
Pounds of Tobacco
89.0
80.0
60.0
47.0
40.0
30.0
30.0
21.0
18.5
20.0
21.0
16.0
13.8
19.0
9.8
3.3
3.0
3.0
1740
1750
0.0
1634
1654
1671
1684
1685
1687
1692
1693
1696
1697
1698
1705
1710
Year
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Part III: How we pay the bills - Revenue
£3,500.0
£3,250.0
£3,000.0
£2,500.0
£2,000.0
Colonial Virginia Poll
Tax
1634 to 1750
£1,802.0
£1,500.0
£1,333.0
£1,075.0
£1,000.0
£790.0
£500.0
£0.0
1654
1671
1700
1740
1755
103
Part III: How we pay the bills - Revenue
160.0
$146.8
140.0
120.0
£112.4
100.0
Colonial Virginia Poll
Tax
1634 to 1750
($ and £ Millions)
$81.0
80.0
60.0
£62.1
40.0
$35.5
20.0
£27.2
$18.9
£14.5
$23.9
£18.3
0.0
1654
1671
1700
2016 £
1740
1755
2016 $
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Part III: How we pay the bills - Revenue
Poll Tax
• Association with voter restrictions in
1876
• Outlawed by the Twenty-fourth
Amendment in 1964
• 1966 Supreme Court ruling in Harper v.
Virginia Board of Elections
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Part III: How we pay the bills - Revenue
Real Property Tax
• Originated by William the Conqueror
• Confiscated all the land in England
• Granted his supporters use of the land for a
fee
• free and common socage
• Failure to pay resulted in loss of the land
• Virginia Company Charter
• Extended the System to Virginia
• Company profits shared with the King
William the Conqueror
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Part III: How we pay the bills - Revenue
Real Property Tax
• English property tax system continued after
the American Revolution
• The State was substituted for the King
• “Fee Simple” similar to free and common
socage
• Primary source of local revenue in Virginia
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Part III: How we pay the bills - Revenue
Real Property Tax
• Federal Property tax in
federal government
levied a national
property tax in 1798,
1814, 1815, 1816, and
1861
• The Commonwealth
imposed a Property Tax
Until 1928.
War of 1812 – Burning of Washington
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Part III: How we pay the bills - Revenue
Real Property Tax
• Prentis Commission (1926 – 1927)
• Recommended amendments to the
Virginia Constitution
• Constitutional amendment in 1928
• Prohibited the state taxation of real
estate or tangible personal property.
• Taxation of intangible property
reserved to state
Robert R. Prentis
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Part III: How we pay the bills - Revenue
Real Property Tax
• Tax rates must be uniform for each
class of property
• Assessments must be at fair market
value
• A local tax – subject to General Law
• Important exemptions exist:
•
•
•
•
Government property
•
Religious property
•
Nonprofit Cemeteries
•
Libraries and non-profit
educational institutions
Intangible Personal Property
Enumerated purposes - Parks, cultural, etc.
Perpetually inundated land
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Part III: How we pay the bills - Revenue
Real Property Tax
• Tax rates vary
• $1.315 per $100 of assessed value
in Falls Church
• $0.38 per $100 of assessed value
in Lunenburg
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Part III: How we pay the bills - Revenue
Real Property Tax
• Assessed Values Vary
• Frequency of assessments
varies from annually to six
years
• 57 localities assess annually
on biannually
112
Part III: How we pay the bills - Revenue
Personal Property Tax
• Originated by William the Conqueror
• Property enumerated in the Doomsday
Book
• Ordered in 1085
• Completed in 1086
• The primary purpose was to assess
the value of real and personal
property for taxation
Doomsday Book
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Part III: How we pay the bills - Revenue
Personal Property Tax
• Application of the personal property tax
in Virginia varied over time
• Early 19th Century
• Horses and Mules
• Coaches, stages etc.
• Slaves
• 1851 taxation expended to all personal
property
• 1/3rd of all revenue in 1859
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Part III: How we pay the bills - Revenue
Sales and Use Tax
• Initiated by Governor Miles E. Godwin in
1966
• Primarily for support of public education
• 2.00% general sales and use tax
• 1.00% Distributed to localities based
on school aged population
• Automatic increase to 3.00% in 1968
• 1.00% local option sales and use tax
Governor Miles E. Godwin
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Part III: How we pay the bills - Revenue
Sales and Use Tax
• 2016 Sales and Use tax is 5.30%
• 4.30% State Tax
• 1.125% Distributed to
localities based on school
aged population
• 1.00% local option sales and
use tax
Princess Anne High School – Virginia Beach
116
Part III: How we pay the bills - Revenue
Sales and Use Tax
• 2016 Sales and Use tax is 6.00%in
Northern Virginia and Hampton Roads
• 4.30% State Tax
• 1.00% Distributed to localities
based on school aged population
• 1.00% local option sales and use tax
• 0.70% for regional transportation
projects
Monitor–Merrimac Memorial
Bridge–Tunnel
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Part III: How we pay the bills - Revenue
Inter-Governmental
Revenues
•
•
•
•
Payments in Lieu of Taxes
Non-categorical
Categorical
Shared Expenses
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Part III: How we pay the bills - Revenue
Inter-Governmental
Revenues
• Payments in Lieu of Taxes: Payments
for services such as police and fire
• Non-categorical: May be spent at the
local government’s discretion.
• State: personal property tax
reimbursement
• Federal: Community Development
Block Grants administrative monies
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Part III: How we pay the bills - Revenue
Inter-Governmental
Revenues
• Categorical: Designated for a specific
use
• State: Basic School Aid
• Federal: Impacted Area Aid grants
for Education.
• Shared Expenses: The state’s portion
of shared state/local responsibilities.
• State: Constitutional Officers,
Medical Examiner, and
Registrar/Electoral Board
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Part III: How we pay the bills - Revenue
FY 2014 Inter-Governmental Revenues
State = $9.6 Billion
Federal = $1.9 Billion
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Part III: How we pay the bills - Revenue
Personal Property Tax
Reimbursement
• Non-categorical State Aid
• Originated by Governor Gilmore in 1998
• Pays the Personal Property Tax on Motor
Vehicles on behalf of Taxpayers
Governor James Gilmore
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Part III: How we pay the bills - Revenue
Personal Property Tax
Reimbursement
• To be phased in from 1999 to 2000
• Originally set at 100% of the first $20,000
of value
• Estimated annual cost of $620 Million
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Part III: How we pay the bills - Revenue
Personal Property Tax Reimbursement
• By 2002 program
costs exceeded
estimates
• Caped at 70%
from 2002 to 2005
• Capped at $950
million from 2006
to present
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Part III: How we pay the bills - Revenue
Personal Property Tax
Reimbursement
• Reimbursements are prorated based on:
• Shares of actual payments in 2005
• Effective local tax rates on August 1,
1997
• Taxpayers’ shares vary. Relief is lower in
localities with above-average growth in
registered vehicles
• Average reimbursement rate in 2015 was
62%
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Part III: How we pay the bills - Revenue
State Aid for Public Education
• APA defines as “Categorical State
Aid”
• Largest component is the
Standards of Quality (SOQ)
• Another $561.5 million from
Lottery Funds
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Part III: How we pay the bills - Revenue
FY 2017 State Aid for
Public Education
$7,455.9 Million
127
Part III: How we pay the bills - Revenue
FY 2017 State Education
Assistance Programs
•
•
•
$6,450.7 million
SOQ distributed on “Composite
Index of Local Ability-to-Pay”
$1,382.9 million Sales Tax for
Education is distributed based
on school age population
128
Part IV: Government Expenditures
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Part IV: Government Expenditures
FY 2014 Virginia Local
Government Expenditures
$ Millions
Total = $26,825.3
Source: Virginia Auditor of Public Accounts
130
Part IV: Government Expenditures
Source: Virginia Senate Finance Committee & House Appropriations Committee
131
Part IV: Government Expenditures
Comparison of Virginia Budgets
2008 Biennium v 2018 Biennium
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Part IV: Government Expenditures
Growth in the
Virginia’s Budget
has been
concentrated in six
areas.
• Only three exceed
the rate of
inflation through
2016
• Funding for most
areas has
declined
Percent Change in Virginia Budgets
2008 Biennium v 2018 Biennium
CPI 2008-2016 = 11.8%
133
Part IV: Government Expenditures
Virginia’s Budget Shortfall
134
Part IV: Government Expenditures
A budget
shortfall of
$1.5 billion
is projected
over three
years
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Part IV: Government Expenditures
• FY 2016 Revenues
Fell $279.3 Million
Short
• 96% of the shortfall
due to two sources:
• Individual Income
Tax - 73%
• Sales Tax – 23%
136
Part IV: Government Expenditures
Revenue Shortfall Possible Causes
•
•
•
•
•
•
Concentration of growth in lower
paying jobs
Retirement of Baby Boomers
• Replaced by lower paid employees
Use of Temporary Employees
Changes in spending habits after 2008
Recession
Student debt burden of Millennials
Final analysis may take years
137
Part IV: Government Expenditures
Impact on FY 2016
• FY 2016 is closed
• No impact on FY 2016
expenditures
• FY 2016 budget projected a
$265.3 Million Year End Balance
• That balance will not be
available in FY 2017
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Part IV: Government Expenditures
Impact on FY 2017 & 2018
• FY 2017 will be reduced by
$843.7 million
• FY 2016 Balance
• FY 2017 Revenue Reduction
• FY 2018 will be reduced by
$623.7.7 million
$(843.7)
139
Part IV: Government Expenditures
Revenue Shortfall - Possible
FY 2017 Actions
•
•
•
•
Total Required = $843.7 Million
$125.1 Million – Salary Increases for
State and State-supported Local
Employees
• Required by Budget Language
$378.2 Million – Rainy Day Fund
• Requires General Assembly
Approval
$340.4 Million – Budget Reductions
140
Part IV: Government Expenditures
Potential FY 2017 Budget
Reductions
•
•
•
•
Governor has the authority to reduce
agency budgets by up to 15%
Agency reduction options were due on
September 20, 216
Administration will work closely with
General Assembly to identify final
reductions
FY 2017 Reduction plans expected by
late October 2016
Governor Terry McAuliffe
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Part IV: Government Expenditures
Potential FY 2017
Budget Reductions
•
1st round reduction plans
typically:
• Exclude Aid to Localities
• Exclude Public Education
• Protect Aid to Individuals
• Protect programs that
guard health, life, or
property
142
Part IV: Government Expenditures
Potential FY 2018
Budget Reductions
•
•
•
•
FY 2018 Budget Reductions
will be included in the 2017
Session Budget
Introduction in December
2016
Subject to change by the
General Assembly
Final actions will be known in
Spring 2017
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