By Dick Hall-Sizemore
Not surprisingly, the Governor did not try to re-write the budget in the reconvened session. There is just not enough information available now regarding the extent to which state revenues will be affected by the economic downturn brought on by the novel coronavirus. Using the process set out in the Appropriation Act and implemented several times in recent years, the re-rewrite (with major cuts) will happen next fall.
The Governor used his proposed budget amendments to accomplish several objectives: increase the amount of general fund cash available to address revenue shortfalls; freeze spending on his and on General Assembly initiatives; allow additional spending to proceed in specified, de facto mandated areas; and give himself and agencies administrative flexibility in dealing with COVID-19 situations.
Liquidity and flexibility
The most pressing budget issue is getting through the current fiscal year. The amendments proposed for the caboose bill (the budget bill for the current fiscal year) are aimed at accomplishing that, as well as dealing with the immediate effects of the novel coronavirus.
The first imperative was freeing up general fund cash to plug the anticipated revenue hole. The Revenue Reserve Fund (not to be confused with the Revenue Stabilization Fund, otherwise known as the Rainy Day Fund) is the most obvious source for that task. After actions by the 2019 General Assembly, the Governor’s introduced budget, and the amendments by the 2020 General Assembly, there was a proposed $602 million deposit to the reserve fund. The Governor’s proposed amendment would negate that deposit, thus freeing up that general fund revenue.
One of the federal COVID-19 bills increased the federal match for Medicaid expenditures by 6.2% and lowered the state’s share by a corresponding amount. According to the Richmond Times-Dispatch, that change will save up to $150 million in general fund costs every three months, dating back to January 1.
The administration is hoping that the combination of: (i) higher-than-projected revenues collected through March, (ii) the short-circuiting of the deposit into the Revenue Reserve Fund, (iii) the $300 million in Medicaid general fund savings, and (iv) savings generated through the hiring freeze and clamp down on discretionary spending already ordered by the Governor will get the Commonwealth through this fiscal year.
The Governor did propose some new spending. The largest of these is $50 million for any required state match of federal COVID-19 funds and for other emergency situations related to the novel coronavirus crisis. In addition, there is an item for DMAS (the Medicaid agency) for approximately $300,000 to cover the costs of policy changes implemented in response to the crisis.
In addition to language providing agencies more flexibility, there were three other policy changes proposed as a result of the pandemic. The first one would increase, by $20 per day per patient, the rate paid to nursing homes and specialized care facilities caring for Medicaid patients. There was no appropriation accompanying this amendment. The Times Dispatch reported that the cost would be approximately $14 million every three months.
Another amendment was the authorization for the Department of Corrections to release early from prison offenders who have less than a year on their sentences to serve. That authorization would expire July 1, 2021. (That authorization was discussed here on this blog.)
The other proposed major policy change is the moving of local elections scheduled in May to the November general election date. The Daily Press reports that this proposal is running into a lot of opposition, with at least one Democratic senator, Chap Petersen, saying he will oppose it.
Proposed amendments to the biennial budget bill continue the Medicaid rate increase and the prisoner release authorization.
My Soapbox: I was surprised that the authorization for early offender release would be effective for more than a year. It would seem to be more appropriate to make it effective only while the Governor’s Order of Public Health Emergency was in effect.
Unallotments and Spending
In addition to language providing flexibility to deal with the pandemic, most of the amendments to the biennial budget would unallot approximately $2.0 billion in new spending authorization over the biennium.
“Unallotment” is a budget term that says to an agency, “Although you have this appropriation, you cannot spend it until you have express permission (an allotment) to do so.” The language of the 83 unallotment amendments is basically the same, stipulating that the amounts “shall remain unallotted until re-enacted by the General Assembly after acceptance of a revenue forecast that confirms the revenues estimated within this Act.”
That language guarantees the General Assembly will have to meet in special session next fall. Otherwise, agencies would have to wait until after the regular 2021 Session before they could be sure of their revised FY 2021 appropriations, which would be well after half the fiscal year had elapsed.
The Governor’s actions regarding higher ed were curious. He did not submit an amendment that would change the optional tuition freeze imposed by the General Assembly. However, he did submit amendments unalloting additional funding for those institutions electing to freeze tuition as well as additional funding for tuition assistance. In essence, he would take away the carrot to induce colleges and universities to freeze tuition. If the General Assembly accepts these amendments, it would be a safe bet that some, if not all, higher ed insitutions would raise their tuition rates, at least for the second semester.
From a budget perspective, there was no need or reason to unallot appropriations in the second year of the next biennium. Agencies could not begin spending those second-year appropriations until July 1, 2021. The budget cuts and other adjustments needed for the second year will be presented by the Governor to the 2021 Session of the General Assembly, if not to the special session that will meet this fall.
The only plausible reason to unallot the second-year appropriations is a P.R. one. Apparently, the Governor wanted to impress the public that he was taking strong action. “Governor Freezes $2 Billion in New Spending” makes a good headline. It probably was not a coincidence that the $2 billion in total unallotments matched the administration’s earlier projection of the revenue shortfall.
I still am perplexed that the Governor chose to unallot the new spending in this manner. By using this method, he subjects the whole budget cut process to the vagaries of a special session of the General Assembly.
The budget bill sets out a process for “withholding of appropriations” after re-forecasting revenues. It is true that the budget bill language goes on to prohibit the Governor from withholding appropriations (unallotting) until he has presented a detailed budget reduction plan to the General Assembly. Presumably, the administration would argue that it was important to freeze new spending right away and the Governor did not have the legal authority to direct agencies not to spend any of the new appropriations.
Such an argument ignores the option of proposing an amendment to this budget language that would give the Governor the authority to unallot appropriations on his own initiative prior to the development of a budget reduction plan. The General Assembly could rescind that authority when it took up the budget revision at the 2021 Session. After all, the Governor submitted numerous amendments that would waive existing requirements in order to deal with the pandemic crisis. He even submitted an amendment that would allow him to exceed the 15% limit on budget cuts that is currently in the budget bill. Certainly, an amendment giving him additional authority to unallot appropriations would not have been out of line.
It is highly unusual for a Virginia governor to show such deference to the legislature. Perhaps it is because Democrats hold a majority in both houses and he feels they should be involved more fully in the budget reductions. Perhaps, having served in the Senate for six years and presided over it for four years as Lieutenant Governor, he is still somewhat “a creature of the legislature” and thus tends to be deferential, especially since his party in in the majority. Perhaps it is because he and his advisers are inexperienced. After all, Aubrey Layne, the Secretary of Finance, has less than three years’ experience in the budget wars. (Where is Ric Brown when he is needed?)
About a week before the Governor submitted his budget amendments, the Times-Dispatch led off a story with, “Gov. Ralph Northern will suspend all new spending in the pending two-year, $135 billion state budget….” Chief of Staff Clark Mercer was quoted as saying, “We’re going to hold all new spending.” Except the Governor didn’t.
On this issue I do not fault the Governor. There were some additional appropriations that were not “new spending,” per se, but were were needed to keep the status quo intact. Other new appropriations were needed to satisfy mandates or to address health/medical issues. In its news releases and interviews, the administration was announcing its basic approach, without going into the details or exceptions.
Following are the main exceptions in which new appropriations were not unallotted:
- Technical adjustments—Every budget bill contains new appropriations that are not for new programs or expansion of existing programs (policy decisions) but, rather, are needed to continue policies already in place. The most common of these so-called “technical” amendments are related to state employee compensation and benefits. There is no total for these amendments publicly available, but it most likely is close to $200 million for the biennium. For example, $110 million was needed over the biennium to “annualize” the funding for the 2019 employee salary increases and other employee benefits for the Department of Corrections, the largest state agency.
- Legislative branch—Because the legislature is a separate, co-equal branch of government, governors traditionally have not tampered with its appropriations. In accordance with this tradition, the Governor did not propose unallotting any of the $12.2 million in new biennial appropriations provided for the legislative branch in the amendments adopted by the General Assembly.
- New legislation—The 2020 General Assembly passed 28 bills that needed budget amendments. (For the list of those bills, see here.) Those amendments totaled $21.7 million for the biennium. The Governor proposed unallotting only $1.5 million of that amount. There are few, if any, of these bills that are so important that their effective date could not have been delayed, especially in the face of having to deal with a pandemic. Furthermore, it seems contradictory to tell agencies on the one hand to freeze hiring and then to sign legislation directing them to establish new programs or positions, such as the Office of the Children’s Ombudsman in the Governor’s Office (HB 1301) or the position of Animal Welfare Inspector in the Department of Agriculture and Consumer Services (SB 891). Presumably, the agencies involved will not move to implement these bills and any savings will be available for budget cuts in the fall.
- K-12—The Governor chose not to unallot the additional appropriations needed to fund the state’s share of the increased costs of the current SOQ. The primary items in this category were the cost of “rebenchmarking” and updating student enrollment projections. The total cost for all items in this category was approximately $400 million per year.
- Medicaid—In addition to leaving allotted the increased appropriations tied to utilization and inflation, the Governor exempted the proposed new money for an increase in the number of developmental disability slots and the funding provided to increase the rates for organizations providing personal care and services to elderly and disabled persons. In total, $277.9 million in the first year and $652.2 million in the second year in new spending for Medicaid would remain allotted.
- DOC medical—The Governor left allotted the additional appropriations of $16.5 million in the first year and $20.5 million in the second year for offender medical costs.
The Governor did include several traditional budget amendments in his submission. One provided an additional $1.0 million to DMAS to cover policy changes implemented in response to COVID-19. Two other amendments actually reduced or eliminated appropriations:
- Virginia Innovative Partnership Authority—reduction of $6.1 million in the first year;
- Department of Education—elimination of $21.7 million in the first year and $28.4 million the second year provided to expand the number of counselors in public schools.
In case revenues lag more than anticipated or there are more COVID-19 related expenses than projected and funded, the Governor’s budget amendments for both the caboose bill and the biennial budget bill would provide an additional tool—short-term borrowing.
The unusual provision would authorize the state to issue tax and revenue anticipation notes issued as commercial paper to assist the Commonwealth as well as local governments in managing their cash flows and any shortfalls. The limit on the issuance of such notes for the benefit of the state would be $500 million and they would mature within 12 months of their issuance. The limit on notes to benefit localities would be $250 million and they would mature in 24 months.