Budgeting in the Time of COVID

Photo credit: Pilot Online

by James A. Bacon

When last we read news reports about the ongoing budget negotiations between the General Assembly and Governor Ralph Northam, lawmakers said they were making “progress” but had not yet come to a resolution. One outstanding issue is how much money to put into General Fund reserve funds to buffer against revenue shortfalls stemming from the COVID-19 epidemic. Another is how much of the federal CARES Act revenue to spend now on coronavirus relief and how much to hold back for future needs.

I caught up with Secretary of Finance Aubrey Layne over the weekend, and he shared the perspectives that are shaping his advice to Northam, whom he describes as “middle of the road” fiscally and not inclined to accommodate all the spending demands emanating from the House of Delegates. Says Layne: “His instinct is to be cautious.”

Caution is called for, he adds, when there are so many economic and fiscal unknowns arising from the epidemic and the presidential elections.

The good news, says Layne, is that Virginia escaped the fiscal battering experienced by other states. He attributes our good fortune to two factors. One, which is widely acknowledged, is the large contribution of the federal government to Virginia’s economy. Federal employment was barely affected by the virus. Less widely appreciated is the fact that the commonwealth’s major private-sector employers also provide a stable employment base.

The largest 1,300 employers in the state — government, tech companies, defense contractors, shipyards — account for 52% of payroll withholding taxes, and their employment has increased slightly over the year. Economic pain and job losses were concentrated in firms generating $3.5 million per year or less in revenue. Layne doesn’t minimize the hardship of those small firms, but notes that the fiscal impact on the state was modest. “The worst hit industries don’t pay a lot. A lot of people were out of work, but they weren’t large payers of withholding taxes.”

Virginia’s revenue shortfall in FY 2020, ending June 30, was modest compared to that that of some other states. New Jersey, for instance, had to borrow $10 billion.

The flip side of the budgetary coin is that, having experienced only a modest downturn, Virginia will experience a muffled upturn. Further, warns Layne, the national economy is slowing. “It’s not as bad as people thought, but we’re not in the all-clear,” he says. “We’re probably 24 to 36 months before we’re back to normal. … We’re still in a pandemic. I don’t think full business confidence will come back until there is a trusted vaccine.”

Layne’s recommendations are based on the assumption that Virginia’s two-year General Fund revenue will fall $2.7 billion behind budget, but says he’ll have better information with the next official revenue forecast in January.

Early in the Northam administration, Layne spent much of his time talking to Wall Street and fending off a threatened downgrade to the state’s AAA bond rating. The administration restored investor confidence in Virginia’s bonds by bolstering financial reserves and the rainy day fund, which had been drawn down during the McAuliffe administration. He has urged rebuilding those reserves to protect the state from another 2008-style recession. The administration had planned to add another $900 million to reserves in fiscal years 2021 and 2022 when COVID-19 hit.

To limit the risk of a revenue downturn the next two years, the Northam administration is resorting to a rarely used technique called “unallotment.” Says Layne: “It’s a way of suspending spending, to buy time to see if our revenues come back.” The spending has been appropriated by the General Assembly, so the money is in the budget. But the funds won’t be spent without further action from the General Assembly and Governor Northam.

Anticipating a possible shortfall of $2.7 billion, the administration has “unalloted” the same amount. To preserve the continuity of existing programs, the unallotments will be focused on new spending programs, Layne says.  “The priority is protecting the base budget.”

Northam called a special session of the General Assembly to deal with police reform, appropriate funds to ensure the integrity of the November elections, and decide what to do with $300 million in carry-over funds from the previous budget that the governor had deliberately left unallocated. Lawmakers are proposing a bigger budget re-write than the Northam team had been banking on.

Virginia has until early next year to decide how to allocate its share of the coronavirus relief fund from the Cares Act. Layne doesn’t want to spend it all now. What if a vaccine comes out, he asks. It would be prudent to hold some monies in reserve in order to buy the vaccine and ensure that Virginians have access to it.

Layne is concerned about the lawmaking process in the time of COVID and a virtual legislature. “I’ve watched committees where speakers have 30 seconds before they get cut off. This is not the environment to rewrite the budget.” Expressing additional frustration with some legislators, Layne said, “Regarding risk and fiduciary responsibility, I might as well talk to the wall.”

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15 responses to “Budgeting in the Time of COVID

  1. Where is Bacons Bottom Line?

  2. James Wyatt Whitehead V

    Don’t forget the local budgets! In Fauquier 8% decline in public school enrollment. That is 5 million less for the school budget. That is unless Superintendent Lane allows schools to use last years enrollment figures for budgeting. Lots of belt tightening coming.

  3. It’s hard to listen to Mr. Layne words (and his deeds) and come away believing the anti-taxers cries of fiscal irresponsibility of Northam are actually true.

    I was alarmed to read that Virginia might lose it’s AAA rating but I’m
    glad Layne with Northams support is going to demand fiscal discipline from the GA.

    I have to admit, that without Layne – the Dem GA would likely screw up big time.

    On the schools, in our County, the word is that enrollment is also down and that it’s due, in part, to people (who can afford so) putting their kids into private schools or pandemic pods, etc… and so , yes… Schools in Virginia get their funding on a per enrolled pupil bases and if they have less enrolled, they will get less money – unless some consideration is provided by the GA or State. Might be interesting to see how many come back to the public schools after a vaccine is available.

    Our scounty school, by the way, goes back to in-person on Monday on a hybrid basis.

  4. How dare Lane criticize legislators. Buffoons are just the type that the Post editorializes in support. Too bad there’s no way to tax stupidity. The MSM could fund all existing programs.

    At the school division level, I think there is a reason to use last year’s enrollment figures for one more year . It’s possible that some of the students who left public schools for private ones or home schooling may come back. Losing teachers now might be problematic in the future. However, beyond this, the state needs to cut funds if enrollment doesn’t come back.

  5. Snowblind…

    You say it was this morning when you last saw your good friend
    Lyin’ on the pavement with a misery on his brain
    Stoned on some new potion he found upon the wall
    Of some unholy bathroom in some ungodly hall (in Richmond)
    He only had a dollar to live on ’til next Monday
    But he spent it on some comfort for his mind
    Did you say you think he’s blind?

  6. I have little sympathy for Northam or Layne as far as the budget is concerned. They should have anticipated that the GA would embark on its own budget re-write. Contrary to Layne’s description, unallottment is not a “rarely” used budget tool.

    The tool was used as recently as the fall of 2016. The McAuliffe administration projected a a $1.2 billion revenue shortfall for the 2016-2018 biennium. Consequently, the administration went through an exercise in which it directed agencies to submit plans for five percent “savings” (read “budget cuts”). Using those submissions, the administration identified budget cuts to meet the shortfall. The plan was laid out here: https://dpb.virginia.gov/forms/20161013-1/2017SavingsPlan_10-13-2016.pdf

    The Governor then proceed to unallot those identified savings in the first year of the biennium (FY 2016). The difference between then and now was that the Governor had control over the process in 2016 through administrative unallotments. This year, the Governor turned that control over to the legislature. Unallotments is not a rarely used tool; it is just that this administration has used the tool clumsily.

    As for local schools, Governor Northam announced last week that he was allocating $220 million in federal CARES money for distribution to localities for aid to K-12.

    • re: ” This year, the Governor turned that control over to the legislature. Unallotments is not a rarely used tool; it is just that this administration has used the tool clumsily.”

      How do we know when an administration has retained control of “unallotments”?

      How do we know that Northam let go of it and gave it up to the GA?

      Also – he still has the ability to veto spending he disagrees with, right?

      • OK. This will be getting into the weeds some, but here goes.
        “Unallot” means, “You may have the appropriation, but you can’t spend it.” There is a special budget code that is attached to an unallotted appropriation, which does not show up in the budget bill, but is attached to the computer file that is transmitted to the Dept. of Accounts that keeps track of agency spending. Normally, any appropriation is automatically allotted. However, there are some occasions whereby the GA provides that certain conditions have to be met before any agency may spend an appropriation. In such cases, DPB will unallot such appropriations at the beginning of the fiscal year and then allot them when the conditions have been met.

        When the GA appropriates funds with no conditions, the governor legally may not unallot them. Otherwise, he could override the spending decision of the legislature. However, if there is a revenue shortfall and a re-forecast has to be made, there is language in the Appropriation Act that authorizes the governor to unallot appropriations in order to keep the budget in balance.

        This year, the governor chose not to take this approach. Instead, in the reconvened session last spring, he recommended that the GA formally unallot $2 billion in appropriations. Once the language unallotting the appropriations was in the Appropriation Act, the act would have to be amended to reverse any of those decisions and allot the appropriation. Only the GA can amend the Appropriation Act. Thus, the governor limited his flexibility in dealing with the shortfall.

        As with any budget, the governor can veto any item or the whole bill. The only new spending the administration really wanted was additional money to cover additional expenses for the election. He got that in a separate, stand-alone appropriation bill (outside the budget bill).

        • James Wyatt Whitehead V

          Very interesting Mr. Dick. I never knew any of this. It seems to me Northam ceded a great deal of budgetary power to the General Assembly. Will there be enough of a return for the Governor? Line item veto might be unwieldy as a check in this case.

        • That was pretty weedy. Sent me looking for a package of Zig-Zags.

          So basically, rather than go through the mushy details of the budget, unallotting individual line items and setting conditions for when they become funded that totals $2B, the GA simply put a hold on $2B without identifying any specific items.

          So everything “looks” to be fully funded except that in the course of spending what has been allotted, when the shortfall hits, the next GA will have to scrape up upto $2B?

          Oooh, this could be fun. Doesn’t this motivate the agencies to spend aggressively? I mean, doesn’t this create the situation of the big bowl of money where if I don’t grab as much as I can, I know there won’t be enough later, so I should spend like mad?

        • That was pretty informative. Why “unallot” rather than budget but not appropriate and who actually appropriates, the Adminitration or the GA?

          This is good. Thank You.

        • I have the same questions as Mr. Larry. Very informative as was Mr. Bacon’s original above.

  7. also – is “unallocate” the same as putting something in the budget but not appropriating it?

  8. Baconator with extra cheese

    I thought budgets were for sure an indicator of Whiteness… the GA and Governor just can’t kick this systemic racism.
    We need some anti-racist government spending.

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