Category Archives: Budgets

State Basic Aid for Schools Still Below Recession Level

Source: Joint Legislative Audit and Review Commission

Virginia spent about $6 billion in FY 2018 to fund the state’s constitutionally mandated K-12 standards of quality (SOQ), representing an increase in both total spending and spending per student every year since 2011, according to data published by the Joint Legislative Audit and Review Commission (JLARC). However, while the state now spends more money on support for K-12 education than before the 2007 recession, adjusted for inflation, spending per student was $649 less on average.

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(Fiscal) Winter Is Coming

Congressional Budget Office projections of federal government annual budget deficits.

Let me set the scene by reviewing a few numbers. The federal deficit is on course to hit $1 trillion annually by Fiscal Year 2020. With retiring Baby Boomers swelling Medicare, Medicaid and Social Security expenditures, deficits will increase inexorably for decades. The U.S. national debt stands at $21.7 trillion. As deficits pile up and interest rates rise, the national debt expressed as a percentage of the GDP, 78% today, will reach 96% by 2028. CBO projects that interest payments on that debt will increase from $263 billion in 2017 to $915 billion by 2028, putting increasing deficits on autopilot that no amount of budget cutting can offset.

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Fairfax Supervisors Face County’s Monster Pension Crunch

Fairfax County Board of Supervisors Chair Sharon Bulova

Once upon a time, way back in the year 2000, Fairfax County’s general-employee pension plan was amply funded at 109% of projected needs. But the funding ratio dropped severely during the last recession and has been hovering around 70% in recent years. Today unfunded pension liabilities for Virginia’s largest local government are roughly comparable in size to that of the Virginia Retirement System, which which state employees and many local government employees participate.

Taxpayer groups are sounding the alarm and, astonishingly, the Board of Supervisors is actually studying proposals to address the shortfall.

County officials have proposed a range of tweaks to the pension plans for public safety workers and general employees. (School teachers have their own plans not controlled by the county board.) Among the changes: The minimum retirement age would be bumped from 55 to 60, the retirement-eligibility formula would increase age + years served from 85 to 90, and the final salary-averaging period for calculating retirement-payments would be increased from three to five. The changes would apply only to new employees hired on or after July 1, 2019, reports Inside NoVa.

Said Board Chair Sharon Bulova (D): “The Board, all of us, have felt this is a contractual, really, issue. If you joined the county under certain expectations and you’ve based your retirement plans on what you believed would be the deal when you came to the county, we are not changing that for current employees.”

Sean Corcoran, president of the Fairfax Coalition of Police Local 5000 described the proposed pension changes as “a completely contrived crisis.” Others speaking for county employees warned that the plan would create a new class of “second-class employee” and would hurt morale and recruitment.

But taxpayer advocates said the proposed reforms were just a start.

Arthur Purves, president of the Fairfax County Taxpayers Alliance, said while the county’s population increased 20 percent since 2000, inflation-adjusted salaries for county employees rose 35 percent, health-insurance payments went up 194 percent and pension costs increased 244 percent.

County real estate taxes since 2000 have increased three or four times more than the inflation rate, said Purves, who blamed compensation increases as the culprit.

The proposed pension cuts for new employees “are only a small and necessary start,” he said. “You need to look at raises.”

McLean Citizens Association president Dale Stein said county pension borrowing went up $600 million during the last three years and added officials were basing their calculations on average annual returns on investment of 7.25 percent, while returns over the past decade averaged just 5.9 percent.

“We strongly urge the Board of Supervisors to ensure a strong, competitive compensation package for all county employees,” Stein said. “In making those packages possible, the realistic question is, ‘Where in the heck is that money going to come from?'”

The Inside NoVa article did not say how much the proposed changes would reduce the unfunded liabilities.

Bacon’s bottom line: You can keeping kicking the can down the road but eventually you run out of road. The time to act is now. Relatively small changes today can fix a problem that is still a couple of decades away from a full-blown crisis. Failure to enact reforms, however, will make necessary changes all the more painful in future years.

Whispers of the “R” Word

Source: World Economic Forum

With the stock market taking a beating, all of a sudden economists are uttering the “R” word — recession. JPMorgan Chase & Co. has put the odds of a U.S. recession beginning within 12 months at one in three — up from an 8% probability a year ago, reports the Wall Street Journal.

Central Banks in Europe, Japan and the United States are walking back quantitative easing policies designed to fight the past recession, and interest rates are rising. Germany and Japan both reported negative growth in the past quarter, and the Chinese economy is slowing. The expansion of global trade has diminished to a crawl. The dollar is increasing in value, putting developing countries that went on a borrowing binge — in U.S. dollars — under heavy pressure.

The U.S. economy remains strong for the moment. But if developing nations start going Venezuela on us, it’s not entirely clear which banks, hedge funds, and other investors might go belly up, launching investors worldwide into risk-avoidance mode and sending cascades of fear ripping through the global economy in unpredictable ways — just as the subprime-mortgage fiasco did in 2007. The governing authorities did not foresee the last recession, and it’s like that the masters of the universe won’t see the next one coming until it’s upon us. One thing you can count on: With global debt as a percentage of global GDP at record highs, the unwinding of trillions of dollars of banking, corporate, government, and consumer debt will be frightful.

As I reported three weeks ago, Secretary of Finance Aubrey Layne conducted a sensitivity analysis of the Virginia budget to see what would happen if a recession comparable to the last one occurred. General Fund revenues would decline from $21 billion a year by $9 billion a year over three years. Admittedly, no one is predicting such a scenario… at the moment. But we would be fools to ignore the possibility, given the fact that the Commonwealth has set aside reserves utterly inadequate to help it through a 40% downturn in General Fund revenue. The impact on state governance would be catastrophic.

Against that backdrop, Virginia is flush with revenue right now from better-than-forecast economic growth and a series of potential windfall gains resulting from federal tax cuts, a Supreme Court ruling on Internet sales taxes, proposed entry into a regional carbon cap-and-trade system, and a Medicaid tax on hospitals. The big question is, what do we do with this money? Do we crank up new spending programs? Do we give some of the money back to taxpayers? Or do we build up our financial reserves to spare Virginia some of the trauma stemming from a possible reprise of the last recession?

Medicaid Is The Story With State Budget

New hospital taxes collected from Virginia private hospitals in this budget cycle, and the federal matching Medicaid dollars they draw down. The larger portion covers higher payment rates, not coverage of new patients.

The General Assembly’s key money committees gathered in their annual end-of-year financial retreats last week to talk about Medicaid.  Sure, the state’s multi-billion-dollar budget delves into plenty of other areas that were mentioned, and the Amazon location announcement grabbed headlines, but the meetings were about Medicaid.

The explosive and uncontrolled growth of Medicaid is all but eliminating any new dollars for those other areas of state responsibility, and existing dollars are under pressure.  There is no point in talking about anything else.  The opportunity for tax reform due to windfall revenue may be short-circuited by Medicaid.  If the rosy projections of new state money from Amazon come to pass, every dollar may be needed for Medicaid.

Every year the Joint Legislative Audit and Review Commission (JLARC) does this dry report about the growth in state spending.  The simple bottom-line fact it has demonstrated over and over is that Medicaid is squeezing everything else out.  It looks back at a ten-year period and during the ten years leading up to and including 2017, 60 percent of all General Fund growth went to for Medicaid.

JLARC: 60 percent of the growth in state spending over ten years has gone to Medicaid (Department of Medical Assistance Services). The was before the 2018 expansion.

At the beginning of the period the state’s allocation to localities for public schools was the top expenditure, but it dropped down to second by Fiscal Year 2017.   During that same ten-year period, from FY 2008 through 2017, the Department of Education didn’t even make the list of the ten agencies with the highest growth in General Fund dollars.

Right behind Medicaid’s 60 percent of the new money over the decade was the Treasury Board (debt payments) and the Department of Behavioral Health and Developmental Services, the other state agency providing major direct medical services to citizens.  A similar chart from the 2009 report, looking at 2000-2009, had Medicaid getting 19 percent of the growth revenue, and the Department of Education 39 percent.  A healthy share of growth dollars going to education may never happen again.

Medicaid (DMAS) and Department of Education have switched places on JLARC’s latest report on state spending. This includes state and federal shares.

The figures in the JLARC report, of course, do not include the impact of the expansion of the program to an estimated 375,000 more recipients by July 2020.  Nor do they include the $463 million in cost overruns announced since the budget was adopted (several months late, remember) in the existing pre-expansion program.  Those will not show up in a JLARC look-back report until the 2020 report on Fiscal Year 2019.

That would be after the next election.

The state’s economy is improving and an additional $600 million or more in tax dollars are expected this year and next, the committee staffs reported, but about 75 percent of those new dollar will be needed for that overrun.

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Blue Wave Does Not Change Do-Nothing Consensus

The 2018 Congressional elections have been dubbed by some as “the most important mid-term elections in history,” but that’s mostly partisan blather. Democrats did indeed re-take control of the House of Representatives. But two more years of hyper-partisan gridlock will not change the nation’s perilous fiscal trajectory.

While many bemoan the lack of consensus in Washington, there is in fact a consensus — a consensus to ignore growing deficits and the surge in the national debt, except as a club to be wielded hypocritically against the other party. No one wants to touch entitlements. No one is serious about cutting discretionary domestic spending. And no one has articulated a scaled-back foreign policy that would permit a prudent shrinking of military spending.

As Trump and his antagonists mud-wrestle one another and the news media focus on political spectacle to the exclusion of all else, deficits will continue to climb, the national debt will continue piling up, un-cuttable interest on the national debt will consume an ever-increasing share of spending, and the Medicare and Social Security trust funds will get two years closer to depletion. The Medicare Hospital Insurance trust fund is scheduled to run out in eight years, Social Security’s Old Age and Survivors fund in 16 years. If you think politics are ugly now, just wait.

I would say that Americans are like ostriches with our heads stuck in the sand — but that would be an insult to ostriches.

Meanwhile, back at the ranch… Insofar as the 2018 elections can be said to have been a blue wave, the epicenter of that wave was Virginia. The switch of three congressional seats from red to blue portend gathering strength for the Democratic Party in the Old Dominion. If the electoral trends of the past two years continue — and there is no sign that they won’t — Democrats will take control of the General Assembly in 2019, seize the machinery of redistricting, and ensconce themselves in power for the next generation.

For the moment at least, the Republican Party is in no condition to resist the blue tsunami. Corey Stewart was an unmitigated electoral disaster. Being Trumpier than Trump is not a winning electoral formula in Virginia. But pursuing a moderate, technocratic formula didn’t work much better for Ed Gillespie in the 2017 gubernatorial race. The GOP has roped itself to the shrinking demographic base of rural/small town Virginia. It has no coherent message. It is floundering.

A blue Virginia portends a more activist government, more spending on “social justice” priorities, and higher taxes. Steve Haner’s recent piece, “Taxaginia,” lays out where we’re heading in 2019. Admittedly, the blue wave this year was propelled in great measure by culture-war issues — in particular the #MeToo movement and suburban women’s revulsion against Donald Grab-Them-By-the-Pussy Trump. But if you think the electorate will exercise a moderating influence on the tax-and-spend proclivities of the political class, just consider the referendum on Question No. 1.

Seventy-one percent of Virginians voted in favor of a constitutional amendment that would subsidize continued building in flood-prone areas. Given all the other fiscal challenges Virginia faces — unfunded pensions, under-funded capital spending, budgeting sleight-of-hand, and all the rest chronicled on this blog — the vote was utter folly. Virginians are in fiscal denial. I once thought of state/local government as the bulwark against federal collapse. I’m no longer so hopeful.

Update: Looks like John Rubino at Dollarcollapse.com and I are in sync on our appraisal of the national election. Writes John today:

As contentious as the US midterm elections were, there was never a scenario in which they mattered. Any possible configuration of Republicans and Democrats in the House and Senate would have yielded pretty much the same set of economic policies going forward: Ever-higher debt, upward trending interest rates and (through the combination of those two) rising volatility. … The system is on autopilot and it matters exactly not at all which party or which configuration of parties is running the asylum.

Medicaid: the Program that Ate the Budget

Budget forecasters have under-estimated the cost of the Medicaid program by $202 million this year and $260.3 million next year, a total of $462.5 million in the biennial budget, reports the Richmond Times-Dispatch.

Finance Secretary Aubrey Layne was at pains to explain that the added costs were not related to Medicaid expansion covering an estimated 400,000 near-poor Virginians beginning in the new year. “This isn’t about expansion. This is about the base Medicaid forecast.”

Medicaid is growing by 6.2% compared to an estimate of 2.5%. For years, the $11 billion healthcare program for the poor has been crowding out spending for K-12 education, higher education, mental health, the environment, and other priorities. In rough numbers, the program now accounts for $5 billion of state spending in a $21 billion General Fund budget.

State officials had hoped that herding Medicaid patients into managed care programs might slow the rate of spending increases. They blamed a forecast based upon assumptions generated by an actuary, who has since been canned. The actuarial analysis overestimated the savings gained by switching from traditional fee-for-service to Commonwealth Coordinated Care Plus, a program that relies upon private insurance companies to provide managed care for 215,000 elderly and disabled Virginians. 

Doug Gray, executive director of the Virginia Association of Health Plans, said it’s not unusual for states to make mistakes in their forecasts when they move from a system based on provider billing to managed care. “When you first start a program like this, you’re guessing based on coming from fee-for-serve experience,” he said.

But officials also cited an unforeseen jump in the number of children enrolled in Medicaid ($52.8 million), delayed payments to hospitals for uncompensated care ($26 million), and updated hospital rates for serving children under the Medallion managed care program ($25.5 million).

If it’s any consolation, Layne says that Medicaid expansion actually will save the state money. How’s that possible? First, because the federal government will pick up 90% of the tab for the expanded program, as opposed to the 50% for the legacy program. Second, because expanded Medicaid will cover populations for which the state spends money in other programs.

That’s assuming, of course, the actuaries guess right on what the expanded program costs.

How Bad Can It Get? You Don’t Want to Know.

Try taking $9 billion out of this, and see what happens. Image source: Department of Planning and Budget

The United States is enjoying 112 months of uninterrupted economic expansion. We’re basking in one of the longest business cycles in American history — the average expansion since World War II has lasted 58 months. Unless someone has repealed the laws of economics, sooner or later, we’ll experience another recession.

There is a widespread belief among economists that the longer and stronger an expansion lasts, the more complacent people get about the chances of anything going wrong. They take greater financial risks, misallocating capital and seeding the next financial crisis and recession. Compound inevitable investor greed and folly with years of highly stimulative central banking policies in the U.S., Europe, and Japan that expressly encouraged people to take more risk — resulting in unprecedented borrowing and debt accumulation around the world — and the global economy could be cruising for a major bruising. When the next recession comes, it could be a doozy.

How would another 2008-scale recession impact state government finances here in Virginia? Someone asked that question of Virginia Finance Secretary Aubrey Layne, and he gave an answer at an Oct. 25 hearing of the Senate Finance Committee. (You can hear his remarks here. Go to the 23-minute mark.)

Layne emphasized that he knows of no mainstream economist who is predicting such an event, at least not in the next 24 months. But the fiscal consequences would be cataclysmic. Virginia’s General Fund budget would experience three years of what Layne, in his understated manner, described as “fairly significant” declines in revenues:

Year 1 — $2.6 billion
Year 2 — $3.7 billion
Year 3 — $3 billion

Those numbers are cumulative. The declines would total $9.3 billion over the three years. As a point of comparison, the FY 2019 General Fund budget is a bit more than $20 billion. That wouldn’t be a mere budget crunch. It wouldn’t cause routine pain and hardship. It would mark the end of state government as we know it. It would unravel the social fabric.

As Layne noted, Virginia has limited policy “levers” to pull to counteract such a drastic revenue fall. The Commonwealth is prohibited from running deficits, and it can’t print money. The state has about $1 billion in reserves — that would get wiped out in the first year. 

Broadly speaking (this is my analysis, not Layne’s), Virginia has three options: raise taxes, cut spending, or engage in fiscal sleight-of-hand. Higher taxes would reduce the state’s long-term economic competitiveness, crippling the state in the long run. As for cutting spending, many argue that the state is already under-investing in key areas such as K-12, higher education, mental health… and the list goes on. So-called “unmet needs” are limitless.

That leaves fiscal sleight of hand. Remarkably, Virginia has retained one of the gimmicks it adopted during the last recession — the “accelerated sales tax,” in which the state compels large retailers to accelerate payment of the sales tax by a month. That created a significant bump of revenue in 2010 when the state needed it most. But budget makers never fully unwound the measure. Lawmakers, suggested Layne, might consider reverting to the traditional way of collecting the tax. (Total state sales tax revenue this year is projected to be around $3.5 billion. Unwinding the accelerated payment, I presume, would entail foregoing about 1/12th of that sum, about $300 million.)

The state also could do what it did from the last recession, short-changing payments to the Virginia Retirement System and paying back the balance over time. But this time around, we’d be ten years closer to actually needing the money to pay for the pensions and healthcare benefits promised to the latest wave of retiring state employees. Borrowing from the VRS at this point would be reckless in the extreme. Without getting into specifics, Layne suggested that legislators might want instead to “look at” the retirement benefit plan obligations.

One other option would be to refrain from issuing long-term debt. Virginia tends to borrow up to the limit of its bonding capacity. (To preserve the state’s AAA bond rating, bipartisan policy dictates that debt payments not exceed 5% of General Fund revenue). Exercising self-restraint now would preserve the state’s debt-issuing capacity in the event of a major revenue downturn.

The Northam administration is preparing its budget recommendations for the next fiscal year, and legislators will have a lot of their own ideas on how to modify it. Virginia will benefit from windfall revenues from a variety of sources, and likely run a budget surplus, too. This may be one of Virginia’s few remaining opportunities to put its fiscal house in order before another recession. Failure to prepare for the inevitable downturn would be unforgivable.

Local Governments’ Alarming Capital Spending Ratios

Reinvestment ratios for Virginia cities and counties have been declining in recent years. Source: Moody’s. (Click for larger image.)

I’ve been strenuously making the point over the past several months that there are many ways for state and local governments to run hidden deficits. One of those is deferred maintenance — an issue that has played out most prominently in the debate over aging, run-down school buildings. What I never realized is that there is a way to measure the extent to which local governments kick the maintenance can down the road. It turns out that we can track what Moody’s calls the “median capital asset reinvestment ratio.”

I cannot find an exact definition of this ratio, but, generally speaking, it expresses a local government’s capital investments as a ratio of its assets. A higher ratio indicates that local governments are spending more — building new buildings and infrastructure and/or renovating, retrofitting and otherwise updating older facilities. A lower ratio is a tip-off that a local government might be falling behind on repairs and maintenance.

The chart above shows that Virginia localities had healthy capital asset reinvestment ratios a decade ago, but those ratios have declined sharply in recent years — barely reaching replacement value for Virginia counties. As Moody’s writes in a recently issued report on the credit quality of Virginia localities:

The condition of capital assets has suffered from a lack of investment. Asset quality will likely improve if local governments make capital investment a priority. But funding will be a challenge, given the already above-average fixed-cost burdens many Virginia local governments carry.

A slowdown in capital investment is reflected in another statistic, the median age of capital assets.

Median age of capital assets, Virginia cities and counties. Source: Moody’s.

As this graph shows, the average age of Virginia’s capital assets is steadily and relentlessly increasing for both cities and counties. Needless to say, there is variability between jurisdictions. Some localities do a better job of maintaining the level of capital investment than others. The Richmond Public School System is noteworthy for doing a particularly poor job — keeping open more schools than justified by the number of students and scrimping on maintenance and repairs. But the problem goes far beyond the City of Richmond.

Growth Ponzi scheme. In past posts I have discussed Charles Marohn’s concept of the “growth Ponzi scheme,” a malady afflicting fast-growth counties. Under the logic of the growth Ponzi scheme, counties encourage inefficient growth (low-density, autocentric, segregated land uses in contrast to walkable, mixed-use projects) to get a quick hit of revenue from new development. Typically, developers pay for their own roads, water and sewer, plus proffers and impact fees, and then turn the assets over to counties for maintenance, so counties have only modest up-front costs. After 20 or 30 years, however, the assets need replacing and aging and tax-inefficient projects now cost more than they reap in revenue. Counties have kept the system going by soliciting more growth.

Eventually, the Ponzi scheme sputters and stalls. Counties run out of new land to develop. Recessions put an end to growth. We can see this happening in the top chart. In the go-go days of the early 2000s (not seen on the chart) and even in the recession, Virginia counties dedicated considerably more to capital investment than did cities. They built a vast, costly infrastructure of roads, utilities and other public amenities. Since then, maintenance has consumed an increasing share of capital spending. Absolute levels of capital spending may look robust compared to past levels, but as a ratio of assets, they’re not.

If you think Richmond Public School buildings are a blight, just wait twenty years and see what happens to the infrastructure quality of Virginia counties as they continue to under-invest in capital spending.

Essential ratios. There are undoubtedly complexities and nuances to the capital spending I’ve discussed here. And a general statement that applies to one locality may not apply to another. But these ratios are critical to evaluating the fiscal health of local government. Every city and county manager should have these ratios at their fingertips. Every council and board member should know them by heart. If they don’t, they have no idea what they’re doing, and they should be booted out of office.

Moody’s: Virginia Local Government Credit Quality Healthy despite High Debt Burdens

Moody’s bond ratings for 28 cities and 38 counties in Virginia. Source: Moody’s. (Click for larger image.)

Moody’s, the bond-rating firm, has disseminated a new report on the credit quality of Virginia local governments — answering many of the questions we have been posing on this blog.

The good news is that Moody’s rates Virginia’s business climate highly and says that local governments have “wide latitude” to protect their bond ratings by raising taxes and cutting expenses.

The bad news is that local-government flexibility to raise property tax rates might reassure bond holders but is not a prospect that taxpayers will relish. Which raises the question: How likely are local governments to raise property tax rates? Moody’s does not get into that, but it does observe that that Virginia local governments have high debt burdens, big pension obligations, and aging infrastructure to contend with.

For your reading pleasure, I have extracted verbatim the high-level conclusions from the Moody’s report:

  • High debt burdens can constrain local governments’ financial flexibility. In general, Virginia local governments have debt burdens that exceed national medians, largely due to debt issued for schools. High debt burdens lead to higher-than-average fixed costs, including debt service, the annual required contribution for pensions, and the “pay-as-you-go” portion of retiree health benefits. In turn, local governments’ flexibility to raise funds to address capital needs faces limits.
  • The federal government’s major role in Virginia’s economy is a strength but carries some risk of cutbacks. The state is home to the world’s largest naval base and the Pentagon as well as a number of non-military operations. In 2016, it ranked first in the US in military spending as a share of gross state product (11.8%). While the Hampton Roads and Northern Virginia economies benefit from the large federal government presence, both face exposure to federal budget reductions, though massive cuts are unlikely.
  • Continued private-sector investment will boost revenues and provide stability. A highly education workforce, weak union protections and significant population growth will continue to generate private-sector expansion. The expanding private sector will fuel tax base growth and provide a stabilizing factor in case of cuts in military and other federal government spending. Virginia has experienced a substantial bump in Eds and Meds with the higher education and healthcare industries consuming a greater share of employment.
  • Legal framework helps local governments maintain solid reserves. Cities and counties can raise property taxes, their largest revenue source, without state-imposed caps or voter approval. The ability to control the tax rate, along with flexibility to reduce personnel costs, has contributed to strong financial positions. However, operating funds include school operators, so reserves generally trail national medians.

I’ll provide details in future blog posts.

Virginia Ill Prepared to Weather a Recession

Thin ice

I’m not sure how Virginia’s Secretary of Finance, Aubrey Layne, sleeps at night. He is by nature a fiscal conservative, and he was in frequent touch with the rating agencies that threatened earlier this year to downgrade Virginia’s prized AAA bond rating. While elected officials may ignore the fiscal warning signs, it’s Layne’s job to pay attention to the warning signs. They’re coming fast and furious.

In recent days, I have drawn attention to analyses by Truth in Accounting and the Mercatus Center that have highlighted the precarious nature of the Commonwealth of Virginia’s finances. Now come new warnings from bond-rating firms S&P Global Ratings and Moody’s Analytics. As reported by Reuters:

While U.S. states’ financial health has strengthened in 2018 compared with last year, fewer than half have enough financial reserves to weather the first year of a moderate recession, according to an S&P Global Ratings report on Monday. …

Only 20 states have the reserves needed to operate for the first year of an economic downturn without having to slash budgets or raise taxes, S&P said.

Meanwhile, from Moody’s Analytics:

A Moody’s Analytics report, also released on Monday, said the number of states with sufficient reserves to withstand a recession increased to 23 from 16 last year.

However, that leaves 27 states lacking sufficient reserves. And who might they be? According to Moody’s (my emphasis):

Those states, in order of least-prepared, are Louisiana, Oklahoma, North Dakota, New Jersey, Montana, Kentucky, Virginia, Missouri, Arizona, Illinois, Pennsylvania, Wisconsin, Kansas, New Hampshire, Mississippi, Michigan and Arkansas.

More than nine years since the end of the 2007-2009 recession, and Virginia is one of the states least prepared to weather an economic downturn?

Virginia has a rare chance to put its fiscal house in order. We’re benefiting from a trifecta of (1) a temporary acceleration in economic growth and tax revenue, (2) a windfall from the federal tax cut, and (3) a windfall from the ability to start collecting a tax on Internet sales. Some people say, whoopee, let’s spend the windfalls! Others, including my esteemed colleague Steve Haner, say, let’s give it back to the taxpayers. I have yet to hear anyone (other than myself) say, let’s use the windfalls to pay down liabilities, build up reserves, and generally strengthen Virginia’s financial condition.

This is easy money. If we spend it or give it back, I can guaran-damn-tee you that a time will come when we’ll wish we’d set it aside for when we really needed it. Cutting spending and/or raising taxes at that time will be very painful.

Virginia Unfunded Liabilities: $5.4 Billion

Source: Truth in Accounting

Here is more confirmation, as if any were needed, that the Commonwealth of Virginia is running hidden deficits in the form of unfunded pension and retiree healthcare liabilities… Truth in Accounting, a nonprofit devoted to transparency of government finances, gives Virginia a grade of “C” for its financial practices.

By the standards of the 50 states (and District of Columbia), that’s not a bad score. Virginia’s unfunded liability averaging $1,900 per taxpayer is less onerous that that of all but 11 states. So, if you’re inclined toward Pollyanna-ish views on government finance and debt, we’re not doing so badly.

But here’s what Truth in Accounting has to say in its Virginia profile: “Virginia’s financial condition is not only disconcerting but also misleading as government officials have failed to disclose significant amounts of retirement debt on the commonwealth’s balance sheet. Residents and taxpayers have been presented with an unreliable and inaccurate accounting of their government’s finances.”

Highlights:

  • Virginia has $35.8 billion in assets to pay $41.2 billion worth of bills.
  • The $5.4 billion shortfall averages $1,900 per taxpayer.
  • Despite reporting all of its pension debt, the commonwealth continues to hide $936.9 million of its retiree health care debt.
  • Virginia’s reported net position is inflated by $1.5 billion, largely because the commonwealth defers recognizing losses incurred when the net pension liability increases.

The best funded states are Alaska ($56,000 surplus per taxpayer), North Dakota, Wyoming, Utah, and South Dakota, all of which have set aside more than enough money to pay their pensions and retiree healthcare liabilities. The top “sinkhole” states are New Jersey ($61,400 debt per taxpayer), Connecticut, Illinois, Kentucky, and Massachusetts.

Remember, the Truth in Accounting methodology does not take into account hidden deficits in the form of maintenance backlogs on roads, bridges, mass transit, school buildings, water and sewer plants, etc., much less the potential liability associated with rising sea levels. Nor does it cover the liabilities associated with local governments or a welter of independent and quasi-independent authorities. The fiscal health of the Commonwealth and its localities is far more precarious than even Truth in Accounting portrays it.

The national debt now exceeds $21 trillion, and I read recently that the federal government has unfunded liabilities of roughly $100 trillion over 30 years. Yet Democrats are campaigning on expanding entitlements (Medicare for all, free college for all, etc.) while President Trump is promising another round of middle-class tax cuts. Both political parties are in total denial. The federal budget is unsustainable, and when the national government can no longer maintain its promises and breaks its social contract, and the country slides into chaos, state governments will be the main line of defense against anarchy.

Hint: Do not even think about moving to New Jersey or Illinois. Alaska is looking pretty good right now. Grizzly bears don’t riot or throw Molotov cocktails.

Chesterfield’s $50 Million Fiscal Landmine

Virginia and its local governments are constitutionally obligated to balance their budgets ever year. But as I have repeatedly pointed out, there are many ways to duck that obligation. One is to rack up unfunded pension liabilities. Another is to under-fund maintenance.

Today we discover that even a highly reputed county with a AAA bond rating can engage in fiscal sleight-of-hand. From today’s Richmond Times-Dispatch: “Chesterfield County needs $50 million for school maintenance problems that could keep kids out of schools if they are not addressed soon.”

The county issued $300 million in bonds after a voter-approved referendum in 2013 to replace and renovate county schools. Apparently, there’s only $13 million left for fixing facilities — far short of what’s needed.

Dan Champion, a program manager for the firm EMG, said there are schools across the county with serious electrical, air conditioning and roofing problems. If not adequately addressed over the next two decades, the cost of the repairs could rise to nearly $1 billion, he said.

The Times-Dispatch article delves into the riff between the county administration and the school system. There’s a lot of finger-pointing going on. Regardless of who is to blame, it is clear that Chesterfield schools have run $50 million in maintenance deficits over the years. And now the county is on notice that, absent corrective action, the maintenance deficit could reach $1 billion over 20 years.

How many other Virginia school districts have engaged in deficit maintenance spending? How many other agencies and localities have piled up unfunded liabilities for deteriorating roads, highways, bridges, mass transit systems, water and sewer plants and pipelines, libraries, administration buildings, courthouses, jails, prisons, municipal gas systems, IT systems, automotive fleets, and the rest of the state’s vast infrastructure?

Administrators and elected officials have no interest in knowing the truth that might make them look bad. So, nobody tracks this information until it becomes an explosive issue. What’s that noise we hear in Chesterfield? Kaboom!

Oops, Where Did that $3-4 Million Deficit Come From?

The idea behind the Commonwealth Center for Advanced Manufacturing (CCAM) is fantastic: Create a facility where Virginia manufacturers and universities can collaborate on advanced-manufacturing research projects that all participants can share. Research staff for the Prince George County-based facility are expert in everything from “vertical diffusion furnaces” and “robot arm-based automation cells” to “thermal spray coating” and “corrosion crack healing,” and they conduct about $7 million a year in research.

Just one problem: The program is operating at an annual deficit of between $3 million and $4 million a year. Debts include $2 million in unpaid rent to the University of Virginia Foundation and a tapped-out bank credit line, according to the Richmond Times-Dispatch.

Said Secretary of Finance Aubrey Layne: “They’ve got to put together a business plan that makes some sense.”

The Center has procured state and federal funding commitments to build a $12.6 million Advanced Manufacturing Apprentice Academy next door. But state officials, reports the T-D, say they won’t release $9 million in bond money planned for construction of the academy without an answer to the center’s financial questions. Said Layne: “That is not going to happen until this issue is solved.”

Bacon’s bottom line: As I have ranted and raved and inveighed and fulminated, Virginians have no idea how many fiscal land mines are out there. Yes, the Commonwealth has a AAA bond rating (although we have skirted on the edge of a downgrade), but no one has tallied up the long-term commitments, unfunded long-term liabilities, maintenance backlogs, and fiscal tricks of all the local governments and independent authorities set up to serve the interests of the Commonwealth.

After the Petersburg fiscal meltdown, the General Assembly began monitoring the health of local governments, looking for early warning sides of impending financial apocalypse — a big step forward. But no one is tracking dozens of non-governmental entities. Only a couple of months ago, for instance, was the public made aware of a $3.5 billion unfunded pension liability at the Washington Metro mass transit system serving Northern Virginia. Now we learn that CCAM is running a big budget deficit and racking up long-term debt.

The federal government has accumulated a $21 trillion national debt, and soon will be adding to it at a rate of $1 trillion a year — during an economic boom. The Medicare trust fund is projected to run out in 2026. The Social Security trust fund is expected to run out in 2034. Uncle Sam will never collect a big chunk of the $1.3 trillion in student loan debt outstanding, and taxpayers will have to pick up the tab. Meanwhile, states like Illinois and New Jersey are one sharp recession away from fiscal collapse.

As Boomergeddon looms, Virginia traipses merrily along, most recently creating a new Medicaid-expansion entitlement, with no clear idea of its overall fiscal condition. Our lawmakers look no more than two years ahead — the time horizon dictated by the biennial state budget. Although they are attuned to the necessity of maintaining a AAA state bond rating, the credit-worthiness of state bonds is just one piece of the whole. The credit-worthiness of Virginia’s counties, cities and towns is another piece. The credit-worthiness of our state universities is yet another. The credit-worthiness of a plethora of independent authorities is still another. No one, to my knowledge, has analyzed all the pieces as a whole and stress-tested the system. Until we do, we’re flying blind. It is foolhardy to pretend otherwise.

Hurricanes, Risk, and Fiscal Collapse

Graphic source: Wall Street Journal

John Rubino, publisher of Dollarcollapse.com, and I think a lot alike when it comes to the inevitable fiscal collapse of the United States. The country (indeed the globe) is riding high today on a giant credit bubble right now, but sooner or later the bubble will pop and the economy will crash. If you buy into my Boomergeddon theory — that the U.S. will experience massive social upheaval when federal and state governments are unable to maintain their commitments to core services and the social safety net — you might want to check his website for your daily frisson of fear.

I, like John, have been writing about the dangers lurking in states’ unfunded pension liabilities and the exploding student loan liabilities that are undermining our institutions of higher education. I’d urge John to give more coverage to the issue of hidden deficit spending in the form of growing infrastructure-maintenance backlogs. (Read the Strong Towns blog for a primer on state/local governments’ growth Ponzi schemes.) Meanwhile, in a recent post, John drives home a point to which I have given insufficient attention: the future cost of hurricanes.

Unlike unfunded pensions, student loan defaults and maintenance backlogs, upon which we can put reasonable figures, there is no way for Virginia to budget for hurricanes. The incidence of hurricane hits is relatively infrequent and highly random and the damages are so variable from storm to storm, that budgetary forecasts are a total crap shoot. But I think we can safely say three things about Virginia:

  1. Sooner or later, another large hurricane will hit Virginia;
  2. Subsidence and sea-level rise, which will occur even in the absence of global-warming scare scenarios, will magnify the impact of major storms;
  3. Continued development along the shorelines of the Atlantic Ocean and Chesapeake Bay will lead to more storm-related damage.

John is concerned about the prospect of a monster storm hitting a big city like Miami or New York and giving us “a trillion-dollar summer” that bankrupts major insurance companies, roils insurance markets, depletes federal flood insurance reserves and forces the U.S. government into another massive bail-out “just as federal deficits are exploding, public sector pensions are imploding, and student loans are defaulting en masse.”

I, too, worry that the federal government is headed for disaster. But as I observe the proceedings in Washington, D.C., I have written off the federal government. Our political culture in Washington is so dysfunctional, so toxic, so addicted to short-term political gain, that the federal government is beyond salvation. I don’t waste a lot of intellectual bandwidth wondering what might save Washington. Nothing can. But I would like to ensure that the Commonwealth of Virginia survives the wreckage. Some government entity will have to carry on when the federal government melts down, and state government is the only alternative.

But I worry about Virginia, too. As I blogged recently, we have no idea what governments and quasi-state agencies — from the Washington Metro to local economic development authorities — have piled up in long-term debt, unfunded pension liabilities, and maintenance backlogs, much less how vulnerable they are to the next economic downturn. Now, add the risk of damage from hurricanes to roads, bridges, railroads, water and sewer facilities, coal ash ponds, the electric grid, pipelines, and other infrastructure. How prepared are our state agencies and utilities to cope with a major disaster? What would the impact be on taxpayers and rate payers, what have we set aside in reserves?

In a word: How fiscally resilient is Virginia in the face of natural disaster? Puerto Rico showed how a hurricane can push a corrupt and mismanaged polity over the edge. Surely we’d hold up much better. But that assumes Uncle Sam can continue handing out billions of dollars in disaster relief and that insurance markets are functioning. No one knows. We live in ignorance at our peril.