Train Wreck or Day of Reckoning?

Last year, Virginia was able to avoid serious budget cuts due to $652m of federal stimulus dollars that came our way. This year, those dollars are gone and things are still heading south.

Two weeks ago, Delegate Albert Pollard from the Northern Neck gave me a great article summing up where we stand called Virginia's State Budget - A Train Wreck About to Happen. by James J. Regimbald, Jr. Here are some important points:

• The entire bipartisan General Fund tax increase pushed through by Governor Warner in 2005 ($1.5B/yr.) has been depleted due in the last two years by (1) reduced sales tax on food (2006, $381M/yr.), (2) shifting auto insurance premiums and recordation taxes to the Transportation Trust Fund (200, $400M/yr.), and (3) Estate Tax Repeal (2009, $280M). P. 6.
  
• The General Fund revenue decline is the largest in 70 years. P. 1.
  
• The revenue decline expected for FY 2010 will be the first time revenue has gone down two years in a row since the 1930's. P. 1.
  
• We currently have a $1B/yr. shortfall going forward in providing existing reduced services. P. 2.
  
• Virginia only has the capacity to issue another $125M of bonded debt and maintain its AAA bond rating BEFORE the latest reduced revenue projections. P. 4. For some perspective, Fairfax County votes just approved $232M of bonds for school construction in November, 2009.
  
• Virginia's unemployment trust fund has run out of money and Virginia will need to borrow from the federal unemployment insurance trust fund to pay its benefits. P. 6
  
• He concludes by noting that we are facing at least a $3B budget gap in the next biennium (2010-2012) and that "major policy changes will be necessary to balance the 2010-12 budget." P. 6.
  
• While the state is currently projecting $2.5B of revenue growth for the 2010-12 biennium, nearly all of that is consumed by growth in Medicaid spending using conservative estimates. P. 8.
  
• By the way, this is only the General Fund we're talking about, not transportation. FY 2010 transportation revenues have declined by over 22% and the state's 6 year improvement plan was cut by $4B. P. 7.

In short - this is ugly. What is his conclusion? Here you go:

First, do everything possible to encourage job creation in Virginia by prioritizing investments in education and improvements to our infrastructure. A healthy economy is the only long-term answer to a healthy public sector. Next, Virginia's government is giong to continue to get smaller and even cor programs are going to be reduced further. Finally, determine whether Virginia's tax structure and rates are adequate to sustain a high quality public education, public safety, health and welfare, and transportation system that Virginians have come to expect. This debate may result in the roll back of tax relief that has been provided over the last decade. P. 8.

Do we have anything close to the revenue bandwidth to sell off the liquor stores or divert sales taxes to the Transportation Trust Fund as proposed by Governor-Elect Bob McDonnell? Does any of this take into account federal health care plans that contemplate a big expansion of state Medicaid plans? No.

We all know what happened in California with the state issuing IOU's after their assembly could not pass a budget. This story from today's New York Times is the latest in a parade of stories about the trainwrecks happening all across the United States as the fallout from the recession really hits and legislatures fail to deal with these problems. After the 2001-2002 budget cycle, I'm told that Mount Vernon Senator Gartlan and Governor Wilder never spoke again. This is going to be a very difficult cycle full of difficult choices for all sides.

On the one hand, this recession is as ugly as it gets. On the other hand, its hard not to look at the $3.7B/year of tax cuts enacted since 1999 (See P. 6) and wonder whether we would be this far in the hole with rotting infrastructure, bottom tier poverty programs, and skyrocketing college tuitions with those decisions. It is also clear that had we been more prudent - stashing more of our money away during boom times - would would be able to survive this budget crunch without as much disruption.

The first place to start with long term fixes is to take a hard look at changes to the Virginia Revenue Stabilization Fund ("the Rainy Day Fund") which was created after the crisis in the early 90's so we can better smooth out economic speed bumps. These problems also highlight the continuing structural problems in Virginia's tax structure where leaders have failed to adapt the government of this formerly rural state to an increasingly urban/suburban state with a service-based economy. The idea that the job and revenue engine of this Commonwealth (Fairfax County) receives 19% of its education budget from the Commonwealth while some rural jurisdictions get 80% is anachronistic.

In the meantime, get ready for a contentious 60 days session.