GOV. JAMES GILMORE likes to talk about his plans to finance his proposed investments in Virginia's transportation system. He calls them "highly creative," "forward-looking" and even "daring." But whether these qualities are desirable is another question.
Mr. Gilmore says he will "securitize" some of the revenues that Virginia is expecting to get over the next 25 years as a result of the nationwide tobacco settlement. This means that Virginia will borrow money from investors now and pay them back using the tobacco money later. The governor says Virginia will get $600 million immediately from such a deal, which will make it possible to pay for new roads without raising taxes. His successors, however, will find that their share of the tobacco revenues has already been spent. Virginia's voters may wonder whether this is really "forward-looking."
The Wall Street firms that organize securitization deals naturally charge fees for their services. The governor's team says it is not yet sure how much these are, but this sort of deal could be expected to cost around $6 million or so in underwriting fees and $1 million or more in legal, accounting and other expenses. Virginia's taxpayers would pay out considerably less if Mr. Gilmore financed his roads by issuing regular bonds, which attract lower fees on Wall Street.
Mr. Gilmore is not the only governor attracted to securitization. California blazed the trail two years ago, and since then a handful of states have securitized revenues from utilities. If governors explain that these deals are akin to borrowing by issuing bonds, then not much harm is done -- particularly if, as in Virginia's case, the proceeds are used to invest in projects that may boost the local economy. But Mr. Gilmore and his colleagues should not pose as budget hawks unless they also are prepared to be open about their off-budget financial practices.