Koelemay's Kosmos

Doug Koelemay




Harry Potter might ask Mad Eye Moody for a look at the Budget Shortfall That Must Not Be Calculated, but the investor service now says “Watchlist” for Virginia’s bond rating right out loud.


It may seem impossible in a campaign season to get straight answers to questions about government finance. The pressures to remain vague are great, and voters accustomed to feel-good politics don’t necessarily reward candor. Why discuss 700,000 fewer Americans working this September than last, for example, when one might talk instead about “putting people back to work”?


But there has been some straight talk in the beginning of the Labor Day-to-Election Day sprint, including Moody’s Investors Service placing the Commonwealth of Virginia’s general obligation bond rating, currently rated Aaa with a negative outlook, on its watch list for possible downgrade. Meanwhile, Gov. Mark R. Warner and senior legislator Del. James Dillard, R-Fairfax, have sounded storm warnings.


Start with the news about that bellwether of Commonwealth fiscal conservatism, the triple A bond rating. “The Watchlist action is prompted by fiscal pressures brought on by a weak economy and a significant revenue shortfall experienced since the recession began,” Moody’s explained September 4, “exacerbated by the initial phase-out of a tax on automobiles that was introduced prior to the recession. Consequently, the Commonwealth has experienced a significant deterioration of its balance sheet over the last two years, and ended fiscal 2002 with a negative general fund GAAP balance of $217 million.”


Moody’s did acknowledge the “aggressive actions” Virginia has taken to balance current operations, but also signaled that with the rainy day fund reservoir low, more responsible action immediately will be required to keep those three As. Lower ratings translate into the state having to pay higher interest rates for the bonds it issues.


Slow economic and fiscal recovery coupled with increasing spending requirements for Medicaid and other programs will likely compete with the need to replenish reserves and restore structural balance in the near term,” Moody’s concluded. “In evaluating the potential for downgrade, Moody’s will review the state’s current and projected financial position with a particular focus on the state’s plans to restore structural budget balance in the next biennium.”


That is a lot of candor right there -- significant revenue shortfall, negative general fund balance – and a clear warning -- restore structural budget balance, do it in the next biennium (the budget for which will be submitted by the governor to the General Assembly for action in January 2004). As a mirror, however, Moody’s reflects the same concerns spelled out in more detailed fashion by Del. Dillard, the Chairman of the House Education Committee and a senior member of the House Appropriations Committee, a week earlier.


“We have no choice other than to close our deficit and fund statutory obligations before we can even think of the additional needs that will surely be on the 2004 legislative agenda,” Dillard wrote his colleagues August 25. “This will cost $2.16 billion above projected revenues.”


Dillard started his calculations with the almost $1 billion state budget estimate suggested by Governor Mark R. Warner in remarks to the money committees of the Virginia House of Delegates and Senate, but Dillard added another $1.26 billion of services the state already has promised, but failed to deliver for public education, higher education, health, parks and other services. Even if the economy improves at a rate of five percent per year, Dillard said, state revenues will not keep up with rising costs.


“None of the $2.16 billion includes re-benchmarking non-Standards of Quality education programs, such as K-3 class size reduction, Standards of Learning remediation, English as a Second Language instruction and programs for at-risk four-year-olds,” Dillard wrote, “or the $324 million the State Board of Education has recommended to update the Standards of Quality over the next two budget cycles.”


An honest accounting of unfulfilled responsibilities in the next two years, Dillard concluded, has to include $360 million more mandated for operations, faculty salaries and facilities maintenance at state colleges and universities, $230 million more in mandated parks and conservation programs, $132 million more in Medicaid and other health programs and $100 million more in transportation maintenance payments to localities.


Del. Dillard called the state’s neglect of core services “appalling” and called on others to give up the myth that needed services can be delivered merely by reshuffling priorities. His assessment of the full shortfall facing Virginia is $8.4 billion -- to update the SOQs, raise teacher salaries to national average, fund Virginia Student Financial Assistance, clean up the Chesapeake watershed and parks, fund identified transportation needs and give state and state-supported employees a one percent raise. $8.4 billion is what the popular Harry Potter novels might term the Budget-Shortfall-That-



Gov. Warner, for his part, signaled his agreement that the Commonwealth again should focus on goals and accountability, not just wait to see how much money might show up each year, then ration services accordingly. In a multi-day race across Virginia’s regions, Warner outlined new “Education for Lifetime” initiatives that would fund the SOQs, improve teacher recruitment and retention, streamline workforce development and increase research and graduation numbers at state colleges and universities. “Educational achievement is probably the single best predictor of prosperity, a more stable family life, and good citizenship,” the Governor told educators, students, business and community leaders in eight different venues in three days.


He is calculating that revenue-side adjustments, including a comprehensive tax reform package, make sense to economic conservatives as a part of a comprehensive new commitment to correcting the structural imbalance now spotlighted by a national rating agency. “I always have worked to be a low-tax legislator,” another Republican legislator responded when asked about the suddenly straight talk of the early campaign season, “but I did not seek election to preside over the demise of Virginia.” No one in Virginia politics wants to be responsible for turning AAA into XXX.


The challenge is straight forward. New students, automobiles, prisoners, patients and pollution keep showing up for Commonwealth government faster than new tax dollars. Moody’s has signaled that a passive strategy of “wait and see how much revenue we have” won’t be satisfactory. More candor and lifelong learning are Virginia’s best options.


September 8, 2003






























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J. Douglas Koelemay

Managing Director

Qorvis Communications

8484 Westpark Drive

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McLean, Virginia 22102

Phone: (703) 744-7800

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Email:   dkoelemay@qorvis.com