The town of Martinsville lies in a very pretty rural area of Virginia, just north of the border with North Carolina and east of the Cherokee National Forest. The town goes way back. It was named after a settler and Revolutionary War general named Joseph Martin, who was a friend of Patrick Henry. The county in which the city resides was (and is) called Henry County.
The town website is subtitled “A city without limits.” That isn’t entirely true. The city, like all cities in Virginia, is funded under state law restricting the amount of debt that can be incurred by the government.
In a Martinsville Bulletin article earlier this week, “City must decide on debt limit,” residents were informed that the Martinsville City Council learned that “the city has a long way to go before reaching its legal debt limit.” The city finance director described the state law limiting city debt, and reportedly said that it constrained total debt to less than 10% of the value of taxable real estate. With that value estimated at $641 million by a financial advisor, the city’s current “total debt” of $17 million was well below that amount.
We’ve learned that reported “total debt” can be a little fuzzy, and may or may not include important obligations due to incomplete accounting, either in financial reports or budgets.
Looking at Martinsville’s latest “Comprehensive Annual Financial Report” (CAFR), current liabilities were reported at about $7 million, which combined with what was reported for long-term obligations of $22 million to lead to total (reported) liabilities of about $29 million -- well above $17 million.
For the purposes of state law, however, “total debt” is reportedly defined as bonded debt. That is not the total debt citizens and taxpayers are facing.
Especially when you start counting debt that doesn’t show up on the city’s balance sheet. In the footnotes, we learn that Martinsville’s unfunded liability for retirement pensions is reported at $30 million. In coming years, that debt will be arriving on the city’s balance sheet as new accounting standards are implemented. And you also have to consider $3.6 million in current unfunded liabilities for retiree health care benefits. Adding these off-balance-sheet amounts to the total debt reported on the balance sheet gets you up close and snuggly to the $64 million “limit” for the “city without limits.”
It depends on how you count.
Debt limits like these can lead to incentives to borrow money in ways that may not technically count, but still represent real costs for the future. And they can undermine confidence in the integrity of our governments.
... in towns like Martinsville, as well as the massive beast owing its origins to the likes of Patrick Henry.
Debates over the federal government’s “debt ceiling” (another fuzzy limit) are now intensifying. Those debates are over semantics, however, not financial reality, given that the vast majority of federal government obligations lie outside the technical definition of “debt” for the “debt ceiling.”