Buying Time to Fix the Budget Hole

by Dick Hall-Sizemore

To deal with the virus-created budget crisis in the short term, the Northam administration has announced sort of a “time out.” According to the Richmond Times-Dispatch, the plan will consist of two primary components: freezing all new spending and diverting planned deposits in the cash reserve to pay for essential services in the current year.

The Governor will propose an amendment that would allow the administration to use about $600 million that had been planned for deposit in the cash reserve fund for essential operations of state government. This is not the Rainy Day fund, but money in the additional cash reserve established a couple of years ago.  Under the provisions of the state constitution, the Rainy Day fund cannot be tapped “unless the general fund revenues appropriated exceed such revised general fund revenue forecast by more than two percent of certified tax revenues collected in the most recently ended fiscal year. “Therefore, the state would need to wait until a re-forecast is conducted in the late summer before counting on the Rainy Day fund.

In addition, the Governor will propose a large block of amendments restricting, but not eliminating, new spending. That will give the administration time, after the revenue picture is clearer, to decide what specific areas of the budget to cut and by how much. According to Clark Mercer, the Governor’s chief of  staff, “Every item in new spending will have language attached to it that instructs state agencies they don’t have authority to spend it.” In budget parlance, that money will be unallotted. My former colleagues in DPB are no doubt in a frenzy now identifying all the new spending and preparing the appropriate amendments. That will not be easy because the legislature modified a lot of the new spending proposed by the Governor.

This is an interesting approach. The Governor has the authority to unallot appropriations after a re-forecast showing revenues being lower than expected. By attaching this language to specified appropriations in the budget bill itself, he will be limiting his flexibility next fall, because only the General Assembly can amend budget bill language.

The Governor could have instructed agencies, as he already has, to curtail all discretionary spending and that could have included new spending authorized in the budget.His asking the General Assembly to put in actual language limiting the expenditure of new funds may reflect his fear that agencies will not comply and his distrust in the administration’s ability to control agencies’ actions.

On the other hand, there is the argument that the Governor cannot legally prohibit agencies from spending any appropriations, including embarking on new programs mandated by the General Assembly in the Appropriation Act. But the reality is agencies usually take several months to get a new program off the ground; it takes time to recruit and hire new staff, for example. Therefore, there would little ground for challenging such delays. As for new spending that is an expansion of existing programs and appropriations, it could be argued that the agencies are not spending the new money in the first half of the fiscal year, but are holding it for the second half. Agencies would be put on notice that that extra revenue likely would not be there in the spring and they should not plan on it. That would make it available for budget cuts in the fall.

Another possibility is that the unallotment language being proposed by the Governor will provide him the discretion to allot those funds, or a portion of them, when he chooses. In such a case, he would preserve his flexibility while preventing agencies from spending the new money without violating the legal prohibition of withholding appropriations.

This action freezing all new appropriations will place local governments in a dilemma because they will not know how much they can expect from the state for their K-12 programs for the next school year. Of course, they may have been in the dark about that funding even without an official freeze.

It seems that part of the reasoning behind the administration’s approach is a desire to involve the General Assembly in the budget decisions more or, at least, to let the legislature think they are involved. From comments in the news reports, it seems that the Governor or Secretary Layne have been conferring with the money committee leadership. It will be interesting to see how the amendments are worded and how this all plays out.

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28 responses to “Buying Time to Fix the Budget Hole”

  1. LarrytheG Avatar

    Thanks Goodness! Finally a blog post NOT about progressives trying to turn Virginia into a socialist state! Whew!

    We KNOW that Virginia revenues are going to come up way short.

    Might be good to look at a pie chart of our revenues:

    Now we are told that the lower level service workers, food and retail , pay NO taxes, right?

    So where will our revenues fall short?

    1. TooManyTaxes Avatar

      The IRS regularly reports that 47% of Americans do not pay the federal income tax. They ride free for federal services. I would suspect that a much higher percentage of Virginians pay state income tax and, as such, those that pay are not free riders on the system for state services.

      It’s time for both the feds and the states to eliminate tax-exempt status from any nonprofit that spends money to lobby or influence public opinion.

      1. LarrytheG Avatar

        TMT – might want to read this:

        Remember The 47 Percent Who Pay No Income Taxes? They Are Not Who You Think.

        1. TooManyTaxes Avatar

          It doesn’t make any difference who they are. People who don’t pay income taxes are free riders.

          1. LarrytheG Avatar

            TMT – it makes a difference when it’s not the 47% you said though. It’s more like 12% right?

          2. TooManyTaxes Avatar

            The last figure I saw from the Tax Policy Center, affiliated with the left-leaning Brookings Institute and the Urban Policy Center, was 44% of Americans did not pay federal income tax. According to the Pew Foundation “The top 0.1% of families pay the equivalent of 39.2% and the bottom 20% have negative tax rates. That is, they get more money back from the government in the form of refundable tax credits than they pay in taxes.”

          3. LarrytheG Avatar

            Yes – but if you do a little more research NOT at partisan sites – get the facts from objective sites – you will see that a LOT of those who do not pay taxes now are retired with minimal incomes.

            The point is, your view about how many “takers” there are is patently wrong and poor justification for your attitude towards those folks. Many of the younger who do not pay tax – have kids – and that’s what gives them their refunds – it’s primarily to help the kids – just as we do to give those kids Medicaid and free & reduced lunches.

            These are people that do work, by the way, you cannot get EITC unless you do work.

            So you can continue to call them “free riders” but it’s not the simple thing you think it is.

            When someone works 40-60 hours a week and does not make enough money to pay for their needs – like food, health care and affordable housing – what should be our view?

            If someone works 50 hours a week, are they still “free riders”?

        2. TooManyTaxes Avatar

          Larry, the point remains that, for various reasons, a huge number of Americans don’t pay any federal income taxes. Whether the laws and regulations that excuse them are valid or appropriate is beyond my point.

          But someone who doesn’t pay federal income taxes doesn’t contribute to the operation of the federal government. That is a fact, not a judgment. Moreover, my main point is that people who don’t pay federal income tax are not subsidizing any tax breaks for others. That is both a fact and a judgment. Lots of lefties try to argue that tax breaks for either fossil fuels are subsidized by everyone in America. Any subsidy comes only from taxpayers. A person on the right could make the same fallacious argument about tax breaks for renewable energy.

          If we enforced our immigration laws, most especially against employers, people with lower skill levels and education would be making more money, some to the point where they might not need government assistance. People who support open borders and non-enforcement of our immigration laws are supporting policies that hurt Americans at the bottom of our economy. Would you support closing our borders to illegal immigration and forcing employers to use E-Verify to raise incomes of lower-skilled citizens and legal residents?

          1. LarrytheG Avatar

            TMT – people who work 40-60 hours a week DO pay taxes. They pay FICA taxes into the social security system AND they pay sales taxes on things they buy, gasoline taxes, personal property taxes AND income taxes if the don’t have kids. You’d be surprised how people who make only 15-20K DO pay Federal Income taxes. You need to change your channel from FOX to something more factual, guy.

          2. TooManyTaxes Avatar

            Larry, we went through this already. Social Security and Medicare Part A taxes are not federal income taxes. They support the Social Security and Medicare Part A programs that payers become eligible for at certain ages. Lower income folks pay these too and get benefits also.

            But these and the other taxes you mention are NOT federal income taxes. Everything I wrote is spot on correct. You just cannot admit that more than 40% of Americans, for whatever reason, don’t pay federal income taxes. As such, they don’t contribute to the operation of the federal government and, more importantly, don’t subsidize tax breaks others get.

            Do some lower income people pay federal income tax? Yes. I’ve done taxes for some of these folks (gratis). I never argued that these people don’t pay taxes. But most lower income people with any dependents don’t pay federal income taxes. It’s a fact.

            And I’ve never argued lower income people don’t pay sales, property and gas taxes. But the original argument made by another blogger was that the public, including low-income people, subsidize fossil fuel tax breaks. One more time, that’s true only if they actually pay federal income taxes.

  2. Simply freezing planned new spending sounds like a lame response to the huge scale of the fiscal challenge Virginia faces, but half a loaf is better than none, I suppose. The political reality is that Northam would face massive pushback from General Assembly Democrats if he vetoed spending increases outright. This approach threads the needle by saying, in effect, we’ll keep your legislated spending increases — we just may not be able to implement them right away.

    1. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      No, a lot of those increases will go away, for the next biennium at least. It is just better to wait to get a better idea of the revenue picture, and then make strategic cuts, rather than taking wholesale cuts blindly. As you say, the scale of the fiscal challenge is huge; it can’t dealt with responsibly in a short period of time.

      1. LarrytheG Avatar

        in other words, we want to take a cautious and “Conservative” approach to our actions? Lord be!

        I do note this:

        Worried that $2 trillion law wasn’t enough, Trump and congressional leaders converge on need for new coronavirus economic package

        Congressional leaders and the White House are converging on the need for a new assistance package to try to contain the coronavirus pandemic’s economic devastation, fearful that a $2 trillion bailout law enacted last month will have only a limited effect.

        House Democrats are eyeing a package of spending increases that would “easily” cost more than $1 trillion, Speaker Nancy Pelosi (D-Calif.) told lawmakers Monday, according to two officials on the conference call who spoke on the condition of anonymity to discuss it. Democrats are looking to extend unemployment aid and small-business assistance for additional months, as well as authorize another round of direct checks to taxpayers.

        Trump has signaled support for some of the ideas that Democrats back, such as expanded help for small-business owners and new bailout checks for households. Republican leaders, meanwhile, have also called for more corporate aid and money to boost the overwhelmed health-care system.

        What this tells me is that whatever Virginia does or not won’t matter that much if we do not do more Federal money… and if we do not, we drop into a recession.

        It’s hard to see how Virginia can proceed without the Feds…and if the Feds do not do something, we’re probably headed for a depression….


  3. Nancy_Naive Avatar

    On a side note, two juicy bits frame the CARE Act:
    1). Everyone gets a $300 Charitable Deduction this year without a Schedule A, so go ahead and give to WHRO.
    2). The RMD (MRD) is suspended for 2020. Youse old dudes can leave the money in your IRAs and not have to sell while the market is down.

    How do you say, “Time for some Coronavirus in Fort Lee,” in Chinese?

  4. djrippert Avatar

    It must be nice to be a state government leader. They can sit by and wait and see how the revenue collections unfold. They can do this, of course, because they know they can always confiscate the private property of the citizens under threat of force. However, we citizens who face the prospect of indemnifying the state government through the confiscation of our private property ought to demand more of our leaders than a “let’s just wait and see” response.

    I think a good approach would be to use the assets of the VRS as a secondary rainy day fund. People with 401(k)’s as their primary retirement funds have to suffer through the uncertainties of economic growth and pay the financial price for incompetent government decision making. Why shouldn’t state and local employees do the same? Under this approach we take a wait and see approach. When that proves inept we run off the rainy day fund. When that’s not enough we finance the expansion of our state government by failing to fund the VRS. After that we increase taxes and draw down assets from out of the VRS. Both state government retirees and general taxpayers get to share in the pain of another half-assed “wait and see” program.

    1. LarrytheG Avatar

      re: ” hey know they can always confiscate the private property of the citizens under threat of force”

      Is that what the Feds plan on doing to repay all those trillions they are “giving” us?

    2. Reed Fawell 3rd Avatar
      Reed Fawell 3rd

      Throw in a taxpayer run mortgagee in receivership of UVA that liquidates its students’ loan debt out of Strategic Investment Fund, plus auction sales to highest bidders for acquisition of $60 million dollar rehabbed Rotunda, UVA’s University hospital, and newly remodeled Carr’s Hill, do that and you got a deal.

    3. Atlas Rand Avatar
      Atlas Rand

      Why thanks Don. Now that state employees now have to contribute 5% to their own pension, in addition to anything they’re putting in their 401(a) (still administered by VRS), are you going to refund our individual contributions prior to stealing it or just take those too? Empty out our 401(a)s (at least those of us on the hybrid system) while you’re pilfering the rest? Virginia’s administration is mismanaging the crisis, so let’s try to clean out the state employees? Most of us are just public servants who traded much higher potential private sector salaries in return for the pension, health benefits, and lower salaries of VA. We are not the problem here.

    4. johnrandolphofroanoke Avatar

      I remember Bob McDonnell robbed the VRS once to achieve his budget goals. I do believe that money was returned with interest. I remember Bob got an earful for that.

    5. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      Hands off my retirement fund!

    6. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      Just remembered this: The state constitution requires the establishment of a retirement system for state employees, declares it a trust, and places the funds out of the reach of the government for other uses. “Neither the General Assembly nor any public officer, employee, or agency shall use or authorize the use of such trust funds for any purpose other than as provided in law for benefits, refunds, and administrative expenses, including but not limited to legislative oversight of the retirement system.”

      The government can indirectly make use of the funds by depositing less any year than is needed to keep the fund solvent. That is what McDonnell and the General Assembly did in 2009. It just meant that additional funds had to be deposited in later years.

  5. Steve Haner Avatar
    Steve Haner

    They are praying for a short term problem and a solid rebound. I think that’s wishful thinking again, but I have to say I hope that is correct. Trump of course is praying for the same thing so he doesn’t face the voters in the midst of a deep recession.

    Rippert, you touch the VRS for state spending needs and I’ll come find you myself….Nope, that’s not happening. A true third rail, that. As I said earlier, the VRS is being ignored, but it is likely to need an infusion itself. Nobody is talking or asking about it.

  6. Larry’s original comment and pie chart has not been answered: What is the expected revenue shortfall and in what categories? Obviously there will be a fall-off in income tax revenue from small businesses. Less so from personal and large-corporate income, perhaps? On-line business is booming. Sure, there are some who paid taxes last year and find themselves unemployed now, that’s less income tax. Sales therefore sales tax will be down, but not out. So what are the projections and who is making them? Are they credible? Are they convincing enough for the forthcoming budget re-write?

    Or as JimB put it earlier today, “How severe will the recession be in Virginia, and how sharply will it cut into state and local government revenues in the final four months of the 2020 fiscal year? What mid-term corrections must we make in order to balance budgets?”

    1. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      Analysts in the Tax Dept., with the help of private sector models they have contracted with, will be making the projections. But, they will not be doing that until the final FY 2020 revenues are in. The state is just entering the last quarter; the previous three quarters do not provide adequate data to go on.

  7. johnrandolphofroanoke Avatar

    They could cut the cord to higher education. I believe that was a big part of Doug Wilder’s recession crisis management.

    1. Reed Fawell 3rd Avatar
      Reed Fawell 3rd

      I don’t believe they should “cut the cord.” I think the state should force a shed of public higher education’s massive, out of control bloat, and in so doing also streamline those institutions in Virginia for the future to the full degree that it can be forced on those who run higher education. This would be a great silver lining of this virus crisis. Higher education was on an unsustainable path, headed over the falls in any event, taking America with it. Thus, such action would give Virginia a great advantage in future.

    2. LarrytheG Avatar

      I suspect higher ed is “toast” as long as the Coronavirus is running amok.

      Few folks in their right mind are going to live in a dorm/ share a room, etc.

      We might find out how staffing/salary levels are maintained in higher ed with no tuition and fees coming in……….. will they start using their endowments?

    3. TooManyTaxes Avatar

      I still hold Doug Wilder in high esteem. He frustrated the hell out of the Post by refusing to seek tax increases.

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