Conservative Budgeting–Still the Virginia Way

Aubrey Layne, Secretary of Finance

By Dick Hall-Sizemore

Secretary of Finance Aubrey Layne is following in the classic conservative tradition established by his predecessors: under project your revenues and then look good when they come in higher than projected. In his case, he gets to bask, not in a bigger surplus than projected, but in a much lower shortfall than he had projected and much lower than others had expected.

The Richmond Times-Dispatch is reporting that the preliminary data for FY 2020 show a general fund revenue shortfall of $236.5 million, rather than the $1 billion that had earlier been projected due to the effects of the economic shutdown in response to the coronavirus. Although the final numbers will not be available until July 24, it appears that the FY 2020 revenue will be about 1.1% lower than projected. That gap is just above the minimum deficit of 1.0% that legally triggers a re-forecast of 2020-2022 revenues.

Even that much of a revenue shortfall sounds ominous. However, Layne has not reported on the other side of the budget equation: expenditures. Several months ago, the state instituted a hiring freeze and put a halt to all other discretionary expenditures. Those measures will produce savings. In addition, there have been other areas in which savings were accrued, such as an estimated $150 million in Medicaid resulting from COVID-inspired changes in the federal matching formula. I described earlier some other budget measures that would result in savings.

In the end, there will be a budget surplus (balance) for FY 2020. It may not be as large as the General Assembly had planned on to use for the upcoming biennium, however. Furthermore, Layne is sticking to his estimate of $1 billion less in general fund revenue than had been anticipated in each of the upcoming two fiscal years. In summary, there will be budget reductions for the upcoming biennium, but perhaps not to the extent that had been feared. We will have to wait until mid-August, at least, when we have a revised forecast before we have a better idea of the road ahead.

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25 responses to “Conservative Budgeting–Still the Virginia Way

  1. I just don’t get it. How in the world can these virtue-signaling leftsts and social justice warriors be “conservative”.

    Someone is promoting a line of BS about a mile long!

    Dick – where are you getting this clearly false information from?

    The MSM I bet… more lies and disinformation for sure…

    And now you’re promoting these clear falsehoods right here on BR.

    Lord. Lord,

  2. My apologies but I’m quite sure my little thing will look pretty puny next to the real thing… 😉

    but someone has to get a handle on all this blatant MSM bias.. it’s getting way out of hand……..

  3. But wait, the opposite, over projecting revenues, is just plain crazy, so at least he ain’t as whacked as previously reported in the BR columns.

    So, he’s merely doing the budget equivalent for a Friday night out of stuffing a $100 bill in his boot. The trick is to remember to use it for car fare, ant not to buy another round.

  4. Dick, you mention only the increase in federal contributions to Medicaid. How much of the rest of the reduced shortfall is federal money from the $2.2 trillion in stimulus?

    • The reduced shortfall is in general fund revenues. The change in the Medicaid rate produced GF savings because less GF than expected had to be used to match federal dollars. About half of that $2.2 trilllion goes to local governments, so that will not show up on the state’s books. The state share is nongeneral fund, so it does not serve to reduce the GF revenue shortfall. However, the federal money will serve to reduce GF expenditures, sort of indirectly. Agencies spent GF during the spring responding to COVID–PPE, testing, etc. When the fiscal year ended, those expenditures showed on the agencies’ books as GF expenditures. However, the Dept of Accounts will work some of its accounting magic and those expenditures will suddenly be shown as nongeneral fund expenditures, paid for by federal CARES money, thereby freeing up those former GF expenditures as balances on the bottom line. Again, all this is on the expenditure side of the equation, not the revenue side.

  5. Virginia’s seasonally adjusted unemployment rate fell 1.8 percentage points in May to 9.4 percent, which is 6.6 percentage points above the rate from a year ago.

    Northam closed schools on March 23. Hard though it may be to believe, Coronavirus in Virginia is still less that four months old.

    FY2020 was never the problem, especially with the Federal money spigot turned fully on. However, the Federal government’s unemployment kicker is scheduled to end on July 31 and there may not be additional $1,200 checks forthcoming.

    I’d resist the temptation to throw out your shoulder patting yourself on the back until this time next year.

    • “Hard though it may be to believe, Coronavirus in Virginia is still less that four months old.”

      Well, don’t use time, use the body count.

  6. I dunno why this should be so shocking. NoVa and NN are significant parts of Virginia’s economy – and the last I heard, the Feds were not laying off employees… just letting them work from home…

    The only way Virginia really gets hurt is if Congress decides to cut Federal expenditures and pay down the debt – THEN Virginia would be in trouble.

    Otherwise, we are well insulated from the chaos in the private sector.

    That’s probably not a secret to Mr. Layne.

    BR is the wrong state to peddle Boomergeddon Gloom & Doom.

    My suspects are that Maryland is also well positioned.

  7. 1) The real accounting is yet to be seen. This is just the revenue results of the General Fund’s sources, and still unknown is the rest of the ledger — spending during the same period. The General Fund is now a fraction of the state government operation. How about the transportation funds? What revenue shortfalls occurred at the universities or the state-connected hospitals? If there is less red ink than expected, how much of that is from the infusion of federal emergency money? Which brings me to:

    2) It is very easy to posture as a conservative when your financial house is built on billions, billions of federal deficit dollars. I outlined some of that earlier. Federal largess kept retail sales intact, keeps perhaps 100,000 or more Virginians on payroll (paying tax) and off unemployment insurance (no tax). The full extent of who got PPP $$ is just coming clear. I will concede I underestimated that impact. All those streams of federal aid are not accounted for in this report, because mostly they could not be spent on General Fund routine activities. So See 1.

    Dick is right that Virginia usually builds its budgets on the lower end forecasts, for just such an eventuality. I have noted before that Northam did not close as much of the economy as other governors did. And my respect for Layne is well known. But otherwise I hold my powder dry until I see the full reports and see just how transparent they are.

    Everybody remember this period the next time some politician rants, “We’re too dependent on the federal government!” Yes, there is a downside but this is the upside.

    • No argument here, except I still think Steve overemphasizes nongeneral funds. NGF plays a predominant role in three areas: transportation, Medicaid, and higher ed. As we saw earlier, transportation revenues were taking a hit from the shutdown and, when the final numbers for the fiscal year are in, there will likely still be a substantial hit. Medicaid is that big federal pie that will not be affected by the virus. The picture for higher ed is murkier. The institutions got through 2020 OK, but may be in trouble next years if a lot of students choose to sit out a year. If that is the case, the state will have to decide whether to use GF to bail out some of the smaller schools, especially on debt service.

      The remainder of the state’s budget–K-12, State Police, Corrections, state parks, mental health, local health departments, constitutional officers, courts, etc.–is supported by the GF.

      The forecast folks at the Dept. of Taxation will have their work cut out for them in re-forecasting 2020-2022 for the reasons Steve cites concerning the federal money going to individuals. Will the enhanced unemployments continue? For how long? How much did the $1,200 per individual payments affect Virginia’s sales tax revenue in 2020? Will businesses be able to keep employees on after the PPP loans run out? Will there be a second wave in the fall, keeping people at home and not spending, even if there is no shutdown?

  8. I don’t see this process as conservative, I see it as inaccurate. Predicting a shortfall (of anything) of $1B then seeing an actual shortfall of $236.5m ought to bring into question the accuracy of the forecaster. In business, deliberately mis-estimating so that reduced goal can be met or exceeded is called “sandbagging”. Consistently done, it always ends badly. The real decision makers (who certainly are not the finance people) become accustomed to the sandbagging. They assume that things will be better than expected because the estimates deliberately mis-forecast. Those decision makers start taking risks which would not be prudent if the forecasts were accurate. However, the decision makers are betting that the finance people are sandbagging as usual. Then one day the inevitable happens – the estimates are missed on the unfavorable side. The added risks taken under the assumption of sandbagging become all the more painful.

    Estimates and forecasts should be as accurate as possible. They should not be padded to over-achieve some goal. In the case of government, nobody elected Mr Layne. If he is sandbagging the numbers in order to avoid ever being wrong on the unfavorable side he is effectively setting policy. Worthwhile programs that might have been funded get stopped when finance people make willfully inaccurate predictions in order to look good with favorable budgetary variances. Policy decisions are rightfully the province of elected officials not appointed finance people. If Mr Layne is willfully mis-estimating he is effectively usurping the powers of our elected officials.

    The board game Monopoly had spaces where players would draw a card from a deck. One card said, “The bank has made an error in your favor. Collect $200” While this may seem fortuitous if this happened in real life you would collect your money and then immediately close all of your accounts at that bank. A bank that can’t keep accurate books is no place to bank.

    • If it seemed that I was implying that Layne was deliberately underestimating or sandbagging, I apologize. Whenever one makes forecasts, there are assumptions that need to be made. For revenue forecasts, those assumptions are usually in a range–from conservative to aggressive. Virginia financial officials have traditionally taken the conservative approach. The senior members of the GA money committees know this and usually approve. In fact, they are now involved in developing the final forecasts.

      As for the decision makers you mention, I am not sure who you mean. If you are talking about the legislature, it is constrained by the revenue estimates in the creation of its spending decisions. If you are talking about agency heads, they are limited by the actual appropriations they have.

      • Your post was good. DJ was playing the proverbial ” you never know, he could be beating his wife” game… government version…

        Layne has a fairly long history in Virginia govt going back to VDOT under McAuliffe, if not mistaken and he presided over and worked with Nick Donohue (now sec trans) to institute the Smart Scale prioritization process that VDOT adopted and received recognition for.

        Layne is a credible guy with a track record.

  9. re: ” ‘m sorry, Larry, but “VDOT under McAuliffe” does not qualify as a “long history in Virginia govt.”

    political history – yes. back-to-back administrations with dozens/hundreds of interactions with folks in the government realm including the General Assembly.

    so yes.. if you want to name the players in budgeting in Virginia – I bet Layne is well known compared to others.

    • I did not say he is not well known. I said he does not have a long history in Virginia government.

      • well he does though – in terms of someone who is not elected… he’s been around for a decade or more… name some others who you know that have been around that long or longer…

        not sure what your measuring stick is … 😉

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