Storm clouds off the Virginia coast, circa February 2017. Photo credit: Strange Sounds.
Moody’s Investors Service, one of the nation’s three bond rating agencies, has reaffirmed Virginia’s AAA bond rating and stable financial outlook, the Richmond Times-Dispatch reports.
Moody’s had issued warnings that Virginia’s hallowed AAA status was looking fragile, due mainly to a sharp draw down in previous years of the Commonwealth’s budget reserves. The Revenue Stabilization Fund had shrunk to 1.5% of state general funds.
But the new budget, which awaits Governor Ralph Northam’s signature, appropriates an additional $90 million for the cash reserve, writes the T-D‘s Michael Martz, on top of the $156.4 million already pledged from excess revenues carried over from the fiscal year that ended June 30. The budget also will carry forward an expected $60 million in additional revenues from the current year into each year of the new biennium.
Moreover, said Secretary of Finance Aubrey Layne, a surge in income tax payments after the December tax cuts could produce $500 million in additional one-time payments of income taxes.
Bacon’s bottom line: Governor Northam has pulled off quite the trick, expanding Virginia’s Medicaid entitlement while shoring up state finances. While I am happy to see that Virginia remains one of the 14 states with the coveted bond rating, I regard AAA status as a minimal standard, not a mark of great fiscal probity.
Senate Majority Leader Tommy Norment, R-James City told Martz that the Moody’s report came as “no surprise.” He had characterized the warning about losing the AAA rating as “demogoguery and false assertion to try to scare legislators into voting for [Medicaid] expansion. Complete poppycock.”
I sympathize with Norment’s frustration over his inability to thwart the entitlement expansion, which will be paid for in part by a new tax on hospital revenue, which in turn, to an unknowable degree, will be passed on Virginians in the form of higher private health insurance premiums. I also resent that the public was not informed during the Medicaid-expansion debate of the full cost of the expansion, which will require additional revenues, as yet not identified, to increase reimbursement rates for physicians.
However, I also believe that numerous states and the U.S. government are building unsustainable mountains of debt that eventually will collapse during my lifetime with horrific consequences. The Medicare HI trust fund (for hospital payments) will run out in seven years, requiring Congress to come up with $52 billion (and more in future years) to maintain benefits. Social Security is dipping this year into its own trust fund for the first time since 1982; the trust fund will run out in 16 years, precipitating a 22% cuts to the program. Despite a tax-reform boost to revenues and a surge in economic growth, federal budget deficits are approaching $1 trillion a year. And an increasing number of states are one recession away from fiscal meltdown.
Incredibly, as the nation hurdles toward its rendezvous with Boomergeddon, national political leaders have abandoned any pretense of fiscal sanity. The Democratic Party is moving to the left, entertaining dreams of even greater entitlements. Trump-led Republicans fight increased deficit increases only fitfully, trading off increased domestic spending to pump up the military.
Yes, America is enjoying greater economic growth right now, but the jury is out whether the latest rounds of tax cuts will “pay for themselves.” (I remain dubious.) Global growth has been fueled since 2008 by unprecedented credit creation and debt accumulation, and massive structural vulnerabilities lie beneath the relatively placid surface of international finance. Sooner or later, a gasket will blow — Argentinian bonds, Italian banks, the Venezuelan economy, Chinese real estate markets, war in the Middle East, a cyber attack on the electric grid, or a black swan that no one can even imagine — and the shock will cascade in unpredictable ways through the global economy as one debt domino topples another. Sooner or later, the U.S. will experience a recession, and it will be a doozey.
So, yes, there is every reason to question the ability of the federal government to stick to its Medicaid-funding promises. There is every reason to fear that fiscally crippled states like Illinois, New Jersey, Connecticut and Kentucky will slide down the path to Puerto Rico-style insolvency and throw themselves upon the mercy of an already-overextended federal government, even while the threat of massive defaults roils financial markets and drives up the cost of government borrowing. And there is every reason to think that Virginia will experience a repeat of 2008-style fiscal stress, if not worse — even as it is forced to confront multibillion-dollar shortfalls in public-employee pensions that can no longer be deferred.
Virginia needs to bullet-proof its budget, not with any old army-surplus vest but ceramic-plated Kevlar-backed body armor. We need a AAA+ bond rating. We need to restructure our economy, our land-use patterns, our transportation system, our health care system, our K-12 and higher-ed systems, our criminal justice system, and every other sphere of state and local government to be more fiscally sustainable during bitter times.
I know this gloom-and-doom talk sounds bizarrely unreal in a growing economy with a 3.4% unemployment rate. But the time to prepare for the storm is when it is far offshore, not when it is upon us.