After Fixing this Budget Shortfall, What Comes Next?

Governor McAuliffe explains his plan to close budget shortfall this year. Secretary of Finance "Ric" Brown stands in the background.
Governor McAuliffe explains his plan to close budget shortfall this year. Secretary of Finance Ric Brown stands in the background. Photo credit: Richmond Times-Dispatch.

As state revenues continue to lag projections, Governor Terry McAuliffe announced yesterday his plan to balance the FY 2017 budget. The plan implements three main strategies: eliminating $125 million in budgeted pay increases for state employees, withdrawing $392 million from the revenue stabilization fund, and scraping together unspent fund balances and agency spending cuts to cover the rest.

“There will be no program cuts to public education, Medicaid for our families most in need, nor our core public safety services. We did not kick our budget problems to local governments by reducing payments to cities, counties or towns,” said McAuliffe in making the announcement yesterday. “These are obviously difficult decisions to make and there may be more to come, but I am confident that the progress and investments we are making today will put Virginia on course for strong growth well into the future.”

Overall, it’s a reasonable set of priorities, and (unless you’re a state employee) relatively painless. Republican legislators and the Democratic governor will quibble over details, but there shouldn’t be too much sturm and drang.

Next year is a different matter. As the Richmond Times-Dispatch reports, the following fiscal year is projected to have a $654 million revenue shortfall. McAuliffe says the state could free up $211 million a year now spent on mental health, inmate hospital care and uncompensated care subsidies to hospitals if the state expanded the Medicaid program as provided under the Affordable Care Act. Republicans have opposed expansion because the state eventually would be responsible for picking up 10% of the cost of the expansion, adding to long-term budget liabilities. That debate is sure to be contentious.

Broadly speaking, Virginia can take one of three approaches to dealing with the budget crunch. First, it can raise taxes. But there seems to be no political appetite for that at the moment (thankfully). Second, lawmakers can address budget shortfalls on an ad hoc basis year by year, drawing from the same limited range of options. But there is a limit to how long we can lurch from short-term expedient to short-term expedient before we run out of expedients.

Lawmakers must confront the reality that there is a long-term mismatch between spending and revenue. That mismatch would look even worse if we made realistic assumptions regarding Virginia’s under-funded pension liabilities, and yet worse if we acknowledged that the rate of economic growth (and the new revenue generated by that growth) most likely will slow in Virginia the years ahead, as it will nationally and globally. Factor in the likelihood of a recession eventually, and we can predict a crisis-level budgetary crack-up within the next couple of budget cycles.

There is a third path, and that is rethinking government from stem to stern. Is there a different way to fund and prioritize transportation spending? Is there a different way to ensure that Virginia school children receive the education they need? Is there a different way to deliver health care? Is there a different way to provide Virginians the college-level skills and training they need to compete in the marketplace? Is there a different way to organize our human settlement patterns to make them more tax-efficient? Is there a different way to approach economic development? Is there a different way to ensure public safety? Is there a different way to protect the environment?

Virginia is wedded to approaches that have evolved over decades, and we tweak them every year with incremental reforms. Incremental reforms won’t work much longer. Muddling through won’t work much longer.

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3 responses to “After Fixing this Budget Shortfall, What Comes Next?”

  1. djrippert Avatar

    Or, the General Assembly could cap corporate tax breaks for specific companies or industries at five years and only extend those tax breaks by GA vote on a break by break basis (as Sen Petersen has suggested). What Jim Bacon calls a fundamental mis-match between revenue and spending ignores a big issue – crony capitalism in Virginia. There is no way in hell that any corporate tax break for a particular company or industry should last forever. This year the state’s employees will be penalized for the Santa Claus act performed by our political elite. Next year, it will be all of us. It is high time the bums we’ve elected are held accountable for their misguided actions.

    1. baconius Avatar

      OK, add a fourth broad option for balancing the budget long-term — cut the crony tax breaks. Or at least restructure the tax code to be more pro-growth.

  2. Larrytheg Avatar

    If you cut 654 million dollars – whether you just decide to forgo the benefit provided or you find a better, more cost-effective way to provide the same or better – it still means cutting about 13,000 jobs at the state and local level ( at about 50K per job).

    there is no way around that – given that most expenditures on the operational (not capital) budget translate into salaries.

    I’m not arguing in favor or in opposition to doing that – only arguing that we ought to recognize it as the reality of taking those kinds of cuts.

    If you spread it across the state evenly between local and state jobs – it comes to about 100 jobs per each of the 133 jurisdictions…

    but I do worry about “doing things a better way” as basically a bail-out response to a budget issue rather than doing the analysis on changes on the front end – to include risk analysis – but I DO support that approach.

    For instance, many stand-alone jurisdictional functions could well be converted to regional entities…. and obvious cost-savings….

    And the state could offer incentives for doing so…..

    but again – doing this on a one-year timeframe – linked to expected budget savings is risky… the time and place to do this – is apart from any direct linkage to budget dollars… we’ve seen the evolving disaster in Kansas where they tried to do this by the seat of their pants ….

    Finally – the idea that this is a political “left” or “right” issue is just plain dumb and it really does just gridlock any way for people of differing political philosophies to get together and find some common ground and move forward on what can be agreed on.

    It seems to me that right now we are bound and determined to create a wedge that really leads no-where… The MedicAid issue ought to be fairly simple… how much money are we spending right now – out of the current state budget for MedicAid that would be supplanted by Federal funding and is that path – over the longer term – less or more in total outlays?

    We take FED highway and DOD money on the very same basis – that some day it might be cut – we do that with school and FEMA flood insurance money, etc…. the only place where we say we can’t do it – is MedicAid…

    If the Feds cut MedicAid we have the same problem we’d have if they cut DOD money to Hampton or FHWA money to VDOT….

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