New Northam Financial Directive Late, Clueless

By Steve Haner

When I’m wrong, I should rush to admit it. The concerns expressed by others on this blog that the Northam Administration was failing to recognize the financial aspects to the COVID-19 pandemic were valid. The person exhibiting wishful thinking was me, with my assumption they were already acting.

That’s because they just acted, with an executive order to state agencies to freeze hiring, tighten spending and otherwise batten down the fiscal hatches for a storm. “We can expect to enter a recession soon,” Chief of Staff Clark Mercer writes in a four-page memo quoted by the Richmond Times-Dispatch.   

Wrong. The economy has been in recession for a month. A month. The concern now is a depression.

Mercer said the state expects “significantly less revenue” than the most pessimistic forecast Northam’s economic and revenue advisory councils considered last fall and reduced cash balances at the end of this fiscal year that will carry into the next two-year budget and require cuts in spending.

“Our intention is not to cut the budget in the short term, but decisions will depend on how much revenue comes in,” he said.

Wrong again. The state will be slashing the budget as never before, and the Governor should have started the process weeks ago. One can only hope, and it may be a forlorn one, that agency financial managers saw the clouds and acted on their own. If the Governor’s people are only now getting serious about the amendments to the budget due in seven days, shame. 

This will be a long and deep problem, with revenue reverberations into the next several years, so perhaps three- or four-weeks delay in recognizing that won’t matter much in the long run. But on March 19, the Governor issued another order making several benefits changes. He removed Medicaid co-pays, expanded prescription benefits, took financial burdens off day-care clients.

Many steps he took two weeks ago involved a reduction in revenue to the state or increased utilization of services, increasing pressure on the state budget. At the very least, the complimentary steps to reduce fiscal pressure elsewhere should have been taken right then! The memo just issued should have come out March 19. Frankly, I assumed it was being done internally but just not announced. Wrong again.

The final few times we visited restaurants to dine in, they were all but empty.  An economist friend posted a comment on Instagram after noting the same about the coming “brief contraction.” My unsocial media response was those were famous last words. It was clear three weeks ago that the Virginia budget, dependent on income, sales and excise taxes, would be far more vulnerable to lost revenue than local budgets depending on real estate and business property taxes. The state collects zero property taxes.

And it is not just the general budget. Look at the empty highways and car dealer lots and think about the transportation budget. Fuel taxes and vehicle sales and use taxes may go down by incredible amounts for two or three quarters. If electricity usage drops dramatically, that has a revenue impact for both the state and its localities (that’s one of those excise taxes you don’t see.)

The impact on income taxes is delayed, but excise taxes are collected month to month and I’m certain March showed deterioration and April will be a disaster.  And the state took steps weeks ago to slow collection of that revenue, cutting its own throat to try to help businesses.

During Governor Ralph Northam’s press conference yesterday, the question came up again about why are the ABC stores still open? What makes them essential businesses? MONEY. All the revenue goes to the state and its localities, that’s what. With the restaurants and bars closed, a surge in ABC sales might be the only bright spot in a dark several months.

My instinct is still to pull for success, to encourage support for the painful steps which are going to be necessary. But my previous defenses of the Northam Administration turned out to be based on hope. Having kept my powder dry, I’m now on the firing line.

Here’s the first salvo: Anybody checking in with the Virginia Retirement System? That should be at the top of the list of impolite questions. I’m aware of a reporter who was getting the run around from them a few days ago. Time to come clean.

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27 responses to “New Northam Financial Directive Late, Clueless

  1. I thought a recession was two quarters of negative growth. Is that the case as of March? If so, thst is news to me

    • Driving while exclusively looking into the rearview is dangerous. The time to act isn’t after the bureaucratic paper pushers in government tell you what you already know. The time to act is now.

    • No recession in my lifetime has had a more obvious starting point. Perhaps 9-11. We ARE in recession.

      • Nah… the starting point isn’t that obvious for this recession. True, at first blush, people will assume that it stated in January, and they’ll be part right. However, serious study will get the year of 2017.

  2. The administration is not as dense as you seem to think it is. Because of the logistical problems created by social distancing and most state employees telecommuting, state hiring has likely slowed to a near standstill. Budget directors and their agency heads can see the empty restaurants and the unemployment claims just as well as you can and they know what is coming. The Governor’s order formalizes and makes official what is already happening and reins in those few agency heads who might have been oblivious.

    Clark Mercer’s comment confirms that they won’t be seeking changes to the biennial budget now (“in the short term”) but later, when they know how much revenue is coming in or, from another perspective, how much is not coming in. As Aubrey Layne commented to the Washington Post and the Richmond Times-Dispatch, now is not the time for a budget rewrite because we have to wait for the “fog to clear.” At this point, he is continually having to adjust his revenue projections. “Right now, if we were to do a formal forecast, I suspect it would be very, very bad,” he said. He probably meant “bad” in both senses of the word: bad as in inaccurate and bad as in very large reductions,

    As I have explained in previous comments, there is a process laid out in statute and the Appropriation Act that enables the Governor to reduce appropriations on his own as a result of significant revenue declines. That takes time to do it right and when you have a better idea of the revenue hit.

    The jab at Mercer about “recession” was unfair. You know very well that a “recession” is defined as two consecutive quarters of GDP decline. That is what he was talking about.

    • In what parallel universe does the economic “fog clear” before the next crisis is upon us? In what pretend world can you sit back and wait twiddling your fingers until you see how much revenue comes in?

      Oh right – in the world of government where your mistakes are paid for by the confiscation of citizen’s property under threat of force.

      Who can forget Harvard educated gubernatorial candidate Mark Warner’s crystal clear vision of the economic future in Virginia? “I will not raise taxes as governor” he proclaimed. Then, once elected I guess the fog cleared. He immediately pushed through a tax hike.

      The time to act is now.

  3. This situation can be viewed as incompetence or conspiracy. The incompetence theory holds that our state government just can’t mentally absorb a crisis and its inevitable consequences. The conspiracy model is that Northam, Saslaw, Filler-Corn, et al know full well the implications of an economic sudden stop. They also know that hard cuts to the budgets they just voted to expand will help dampen the inevitable fiscal crisis. But maybe a crisis is what they really want. By letting the economic mess run unchecked there will almost certainly be a point in the future when all kinds of bad financial events start to occur. Losing the primo bond rating is just one example. What will they do then? Oh! A massive tax hike putting Virginia on a par with New York and Illinois. That’s what the NoVa liberals in the General Assembly think should be done.

    Remember, before you have a crisis not to waste there has to be a crisis.

    • I reject both your scenarios. It is clear that the state government leaders can see the broad fiscal consequences of this crisis. They do not know yet, nor does anyone know, the breadth or depth of those consequences. It is prudent to wait until one has a better idea of what one is dealing with. State agencies can’t spend all the money at once. Those appropriations for Fy 2021 are for the whole year. Using the process that is set out in law and has been followed several times over the past several years to take some time to review revenues and identify the budget cuts that can be made with the least damage, using input from the agencies is a lot better than rushing in and whacking the budget half-blind.

      Agency heads knew what was coming. The Governor’s order has put them on notice that they must do, or not do in some cases, certain actions; otherwise they would be in violation of the Governor’s directive. I have not seen the memo from the chief of staff, but I assume that, as in the past, agencies must get clearance from their Secretaries to fill any position. They will not be allowed to determine on their own what is essential. Cuts will be coming and they will be painful. Taking actions now, i.e. not filling positions and not starting new programs in the new year, will make those cuts a little less painful.

      The other model, or scenario, assumes that the top leaders of the Democratic party are diabolical and would put ideological interests above the the overall welfare of the state. I see no evidence of such attitudes. Trust me: no governor or legislature wants to be the one that was in charge when Virginia lost its AAA bond rating.

  4. Glad to see that you’ve come around, Steve! Here’s the most telling information in your post — information that has gone virtually unnoticed in the wider world: “On March 19, the Governor issued another order making several benefits changes. He removed Medicaid co-pays, expanded prescription benefits, took financial burdens off day-care clients.”

    Rather than putting on the spending brakes, the Guv was increasing spending pressure.

    I have to agree with Don and respectfully disagree with Dick that anyone could have seen this coming a month ago (we all did) and would have started taking corrective action immediately. Better to start cutting the budget in March than April or May if you want to address budget shortfalls.

    We’ll see what happens comes out of the budget negotiations between the Governor and General Assembly during the veto session. Maybe the state’s leadership will redeem itself. I’m not optimistic.

  5. This communication comes from Del. Dave LaRock, R-Loudoun in a newsletter to constituents:

    “This week, I sent a letter to Governor Northam asking him to amend the budget and other bills which add costs and regulatory burden to businesses and residents.

    “The letter made these recommendations:

    1. Reduce essential spending across the board and tie all non-essential spending to revenue benchmarks.
    2. Delay enactment of ALL legislation which adds to cost of living or doing business in Virginia, and ALL unfunded mandates to local governments.
    160,000 of our friends and neighbors in the Commonwealth lost their jobs in the two weeks between March 15-28, and countless more this week.

    “Virginia’s biennial budget proposes significant spending that is non-essential and that must be curtailed. We need to stop any additional taxes and regulations that would stall a recovery.

    “I talk to people, including business owners, each day and they are genuinely very concerned about what is ahead; they are taking steps to hunker down, our state government needs to do likewise and avoid burdening others in these difficult times. The Governor’s deadline to act is April 11th.”

  6. This is playing out in all 50 states right now and no one knows precisely the impacts – not GOP nor Dem Govs.

    One could argue that it’s time to do “something”, “anything” and of course the folks who all along disagreed with the Virginia budget have their favorite ways to cut but in the end – we’ve got a long way to go and we need to be smart about how we cut – scalpel not machete because the cuts themselves could have unintended consequences.

    I see the name-calling has ceased. Good!

  7. Dick’s comment above about protecting the AAA rating has me falling out of my chair, it’s so funny. Those probably all disappeared in March, too.

    • Virginia has built up its reserves just as the bond ratings agencies indicated they wanted. As long as the administration and legislature balance the budget with sustainable measures, and not gimmicks, I am confident the AAA rating will hold.

  8. johnrandolphofroanoke

    I have a feeling Virginians are going to get a refresher on what Reconstruction must have been like.

    • Yes.. maybe the word and concept but not the original. I do think the economy is going to “reset” and some things are going to go away and others are going to advance to the fore.

      And one really nagging worry. Are we going to see more pandemics more often in the future? Has something changed that is causing this? Will the economy have to change to one where pandemics are part of the future landscape?

  9. Geeze Dick… you obviously don’t know JUST HOW diabolical Northam and those heathen liberal wackadoodles REALLY are in the GA! 🙂

    By golly – all heck is supposed to break loose and by GAWD it better….

    😉

    • Larry:

      1) Saw an interview with Richard Preston (“The Hot Zone.”) His answer is yes, more and more pandemics, because there 8 billion humans, many living as densely as possible, and in 2019 there were 4.5 billion airplane trips. This bug was all the way around the world in days. The next one will be, too. People have been worried about the “next” Corona iteration for a while.

      This will not decimate the population: it is not black plague or small pox. In two years immunity will be widespread and a vaccine will be available. But these suckers keep changing.

      2) I don’t think they are diabolical, but I do think they will be very very reluctant to part with any of their “wins” from this General Assembly, reducing spending they think is essential, changing provisions that will harm the business recovery.

  10. re: ” People have been worried about the “next” Corona iteration for a while.”

    you mean BEFORE this outbreak?

    re: ” But these suckers keep changing”

    we better hope the “cycle” is months rather than days.. if it takes
    a year to do a vaccine…

    the Govt effort to deal with this – is national or worldwide?

    • As you often do, you are leading away from the main point of the post, but okay. Yes, the experts have watch Corona strains for years. I think he said the cycle of outbreaks is usually years. But this new strain can adapt, too. One of the downsides of hydroxy chloroquine as a treatment is it won’t work long, the virus may adapt to it. I think they tested it against SARS (also Corona-based) and found it eventually lost effectiveness. But it works for a while. Way better than no treatment. (TWO bottles of tonic water in today’s cart.)

      The planned defenses should be world-wide. Have to be. It should be the WHO, but confidence is shaken as they spread lies from China along with the virus. Several of the great research companies are international, really. These will be among the lessons offered for us to learn, if we will. There seems to be a wonderful spirit of cooperation in the medical/scientific response, and the Chinese did map and share the genome very rapidly.

  11. re:
    ” Yes.. maybe the word and concept but not the original. I do think the economy is going to “reset” and some things are going to go away and others are going to advance to the fore.

    And one really nagging worry. Are we going to see more pandemics more often in the future? Has something changed that is causing this? Will the economy have to change to one where pandemics are part of the future landscape?”

    yup. My bad. But in my defense, it WAS a comment about the effect on the economy and govt budgets.. 😉

    YOU, on the other hand used that to go to other stuff!

    I SHARE the blame – take your share? 😉

  12. 1. Seems it would be appropriate to allow state agencies to carry over unused budgets this year rather than the usual rush to spend or lose.
    2. To answer your VRS question Steve, I don’t see how we can expect them to fix anything immediately. Generally the advice given to investors is to not sell things now at the bottom. Personally, I’m not even looking right now. Changes may be needed, but now is not yet the time to make them personally, or with VRS. I’m sure the professional folks they have will make some changes if they think it prudent, but I don’t want them taking on more risk in that portfolio right now.

  13. And Steve, you still haven’t answered my question. Why are we now in a recession? This does not fit the definition. You are not an economist.

  14. The “two quarters” definition is a rule of thumb, but waiting till 2Q 2020 numbers are released to cut the budget would be the height of stupidity. I have a very bad feeling that same dumb ass question had been bandied about the Third Floor. Parts of our economy are already in depression. Leisure, dining, travel, retail, hospitality. The longer the shutdown, the longer the list.

  15. So, in your case, basic laws if economics do not apply. Interesting.

  16. https://thehill.com/opinion/finance/490172-the-coronavirus-recession-should-be-over-next-year

    https://www.foxbusiness.com/markets/coronavirus-us-economy-recession-deepest-post-ww2

    https://www.nytimes.com/2020/03/21/business/economy/coronavirus-recession.html

    That took two minutes. There were many, many more. Understand, I only waste time arguing with you when I can blow you out of the water. Fascinating that you and Trump want to deny this. I know why Trump does.

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