by James A. Bacon
About 18 months ago Secretary of Finance Aubrey Layne conducted an analysis of state government finances to see how they would hold up under the stress of another recession of the magnitude of the Great Recession. Hardly anyone thought that a downturn was in the cards; the economy was chugging along just fine. But you never know, and Layne wanted to know how vulnerable the commonwealth was in case the unexpected occurred.
Virginia’s General Fund budget, he concluded, would experience three years of “fairly significant” declines in revenues:
Year 1 — $2.6 billion
Year 2 — $3.7 billion
Year 3 — $3 billion
A cumulative decline of $9.3 billion over three years would be devastating. That’s why Layne became the most forceful advocate in the Northam administration of building up the state’s Revenue Stabilization Fund and financial reserves. Last fall, when the administration began working on its biennial budgets for the 2020 and 2021 budgets, Governor Ralph Northam was forecasting that the commonwealth would build up its reserves to $1.6 billion. “We start out this budget cycle in a good place,” he told the General Assembly money committees last August.
Then came an event that no one predicted, a true black swan: the COVID-19 epidemic.
It is too early to tell if the inevitable economic contraction resulting from measures imposed to slow the spread of the virus will be as devastating as the havoc sparked by the sub-prime lending fiasco. But it’s safe to say that the financial forecast underpinning Virginia’s FY 2020 General Assembly budget is now worthless.
Economic growth in the Commonwealth was projected to accelerate in FY 2020 relative to FY 2019. Total nonagricultural employment was expected to increase 1.0% (41,900 jobs) in FY 2020. Personal income was expected to grow 4.4%. General Fund revenues were expected to rise 1.8% to 22.4 billion.
Does anyone think those pre-pandemic forecasts will pan out?
As virus-control measures clamp down ever tighter on the economy nationally, predictions are growing ever more dire. Here’s a story from Bloomberg today quoting real estate billionaire Tom Barrack, CEO of Colonial Capital Inc.:
The U.S. commercial-mortgage market is on the brink of collapse and predicted a “domino effect” of catastrophic economic consequences if banks and government don’t take prompt action to keep borrowers from defaulting.
Barrack … warns in a white paper of a chain reaction of margin calls, mass foreclosures, evictions and, potentially, bank failures due to the coronavirus pandemic and consequent shutdown of much of the U.S. economy. …
“Loan repayment demands are likely to escalate on a systemic level, triggering a domino effect of borrower defaults that will swiftly and severely impact the broad range of stakeholders in the entire real estate market, including property and home owners, landlords, developers, hotel operators and their respective tenants and employees,” he wrote.
U.S. oil companies, many of which have been funded by junk bonds, look vulnerable. Indeed, U.S. corporations generally, responding to years of super-low interest rates, have replaced equity with debt, making them more vulnerable to a downturn. And look what’s going on in Europe, where the epidemic is even worse. As the Washington Post observes here, if a new financial crisis starts, it could start with Italian banks, which were in weak condition even before the crisis. The entire global economy is over-leveraged.
The Federal Reserve Bank is injecting unprecedented liquidity into the financial system, and Congress is working on a $2 trillion rescue package. Maybe these actions will fend off economic collapse. But there is no knowing whether the money will go to where it really needs to go.
Ergo, it would be the height of fiscal irresponsibility for Northam to sign the budget passed by the General Assembly predicated upon economic and revenue assumptions that we now know for a certainty to be flawed. The only explanation I have heard for refusing to re-convene and re-write the budget is that re-opening the process would increase uncertainty.
Increase uncertainty? Refusal to act now will simply displace the uncertainty to the next fiscal year when state expenditures will start outrunning revenues beginning Day One. The difference is that with each week that passes before the budget is re-written, it will be all the harder to bring spending and revenues in line. Refusal to act immediately represents fiscal malpractice of the highest order.
