Del. Barry Knight (R-Virginia Beach, chairman, House Appropriations Committee

Budget is policy. A budget reflects what an organization chooses to spend its money on.

The differences between the versions of the 2022-2024 biennial budget passed by the House and Senate this year are starker than they have been in recent memory. There are major philosophical and policy differences that the conferees will need to work out.

However, before they even get to those differences, there is another obstacle they will need to confront: they differ significantly on how much money the state will bring in. They have to agree on ow much money they have to spend before they can seriously discuss how to spend it.

The Senate budget is based on total general fund revenue that is about $3.4 billion higher than projected by the House. (Unless otherwise specified, all funding amounts in this article refer to the general fund.) The reason for the wide gap, of course, is the House adopting greater tax cuts than the Senate. Steve Haner has very ably compared the different approaches to tax cuts on this blog here, here, and here.

In developing a budget for the biennium, the General Assembly uses the budget introduced by the Governor as a base or starting point. Therefore, all its actions are expressed in terms of changes to the Governor’s budget. (In this case, the initial budget bill was prepared and introduced by then-Governor Northam before his term ended.) The purpose of this article is to identify, in macro terms, the spending reductions that the House proposed in the Northam budget in light of the additional tax cuts it was proposing.

There is another clarification that needs to be made. Many changes to the provisions of the current budget (the “caboose” bill) had a significant impact on the biennial budget that will become effective July 1. These changes include a $1.25 billion increase in the revenue forecast for FY 2022 (the current fiscal year), as well as the shifting of some expenditures from the first year of the next biennium to the current biennium. Consequently, unless specified otherwise, the data cited in this article include changes for FY 2022, as well as for FY 2023 and FY 2024.

The House budget estimate for revenue in the upcoming biennium is about $3.1 billion lower than what was included in the introduced budget. As a result of a windfall in the mid-session revenue forecast for FY 2022, that shortfall was reduced by $1.3 billion. After all the additional revenues, additional FY 2022 expenditures, and various balances were accounted for, the House needed to reduce the spending in the introduced budget by about $1.7 billion.

Before discussing where these cuts were made, it is important to note the following:

  1. Even after taking into account the additional tax cuts built into the House budget, the amount of revenue available is still significantly higher than was the case in the revised 2020-2022 budget bill passed last year. For the 2022-2024 biennium, the House budget projects $5.7 billion more in general fund revenue and $10 billion more in general fund resources available than the 2021 budget bill projects for the current biennium, a 21% increase.
  1. As a result of this additional money in the House budget, compared to the current budget, one needs to keep the “cuts” in perspective. As already explained, the House actions are made to the introduced budget. Therefore, the reductions are made to recommended increases. Very few, if any, reductions are made to existing appropriation levels. However, interest groups will use one of their favorite tactics to complain that the House has “cut” their appropriations, when, in fact, the House action means only that they would be getting less than Northam had recommended, but not necessarily less than what they are currently getting. (I plead guilty to using this tactic in the past.) In this vein, I am no longer using the term “paying for the tax cuts.”  In this context, “pay” is a loaded word. It implies that somebody has to give up something and, in the case of the House budget, that is almost never the case. For example, state employees and teachers will still be getting pay increases under the House budget, just not as much of an increase as had been proposed by Northam. Whether the higher pay increases or any of the other higher amounts reduced by the House are more justified than the resulting amounts proposed by the House is another question to be debated elsewhere.
  1. A complete analysis of budget amendments can be complex because there are many moving parts. In each of the major categories listed below, there were amendments that increased appropriations for certain activities, as well as those that decreased them for others. This is the way that the General Assembly asserts its priorities for spending. Another complicating factor is that a reduction in general fund appropriation does not necessarily mean that the item in question will not be funded. Sometimes, the House would supplant the general fund appropriation with a non-general fund appropriation.  The net result of all the general fund pluses and minuses is reflected in the overall amounts shown below. The ensuing discussion for the major category highlights some of the major internal changes, as well as some items that have been discussed on Bacon’s Rebellion. To go into more detail would probably be beyond the interest and patience of most readers. For anyone wishing to get further into the details, all the budget amendments, sorted by major budget bill area, along with details, can be found here.
  1. Spin is important. Although the House amendments take the form of reductions or additions to the introduced budget, the House narrative is always positive, which pretty much ignores the existence of the Northam budget. For example, in his opening remarks at the committee meeting in which the amendments were reported, Delegate Barry Knight, R-Virginia Beach, chairman of the House Appropriations Committee, proudly declared, “The amendment package also provides an unprecedented lump sum $500 million deposit to the VRS to help address unfunded liabilities and reduce future spending requirements.” That is a true statement. Left unsaid, however, is that Northam had proposed a deposit of almost double that amount. An accurate, and more complete, statement would have been, “We reduced the deposit proposed in the introduced budget by about $424 million to a still-unprecedented $500 million.”

Following are the reductions by major category:

Compensation and retirement: -$550.9 million. The major components in this category are the $454 million reduction in the deposit to VRS and a $159.5 million savings resulting from reducing the salary increases for state employees. The introduced bill provided for 5% increases each year. The House budget would provide for 4% salary increases each year, as well as 1% bonuses each year.

Capital expenditures: -$407.8 million. The chairman of the subcommittee making the capital recommendations justified the funding reductions resulting in delay of projects on “current market volatility due to material and labor constraints” and the need to “allow time for the market to cool.” This is a nonsensical explanation. It takes at least a year, often longer, for a capital project to get to the stage where it is ready to bid. By that time, the market would have had time to “cool.” If the legislature in following years decides any of these “deferred” projects are needed and approves them, the cost will be higher and bond funding, rather than cash, will likely be the means to pay for them.

Education, K-12: -$166.8 million. Several details in this category deserve mentioning. The biggest reduction, or “savings,” came in the At-Risk Add-On categorical program. This program provides funding to cover the additional costs of educating at-risk students. The introduced budget would have expanded the parameters of the program and provided an additional $268.4 million over the biennium. The House budget reduces that additional funding by $210.2 million.  Another large saving resulted from reducing teacher salary increases. The introduced budget proposed raising teacher salaries by 5% per year.  The House budget provides a 4% increase per year plus a 1% each year. The reduction produces a savings of $68.4 million.

Addressing the need for school construction and renovation has been a prominent issue this year. The introduced budget had included $500 million for grants to localities for this purpose.  he House came up with a different approach. It reduced the general fund appropriation for this activity by $208.3 million, but replaced that amount with $250 million from the Literary Fund. The funds would be used to pay a portion of a locality’s costs to borrow money for school construction. Localities with the greatest level of fiscal stress would qualify for a grant equal to 30% of the loan and interest costs. Other localities, with less fiscal stress, would qualify for a grant equal to the interest costs on the loan. House spokesmen claim that the program would leverage up to $2 billion in construction costs. Of course, that claim omits the fact that, of that $2 billion, localities would be depending on their property tax revenues to repay the large bulk of the loan amounts.

Offsetting some of those reductions are increases for four items of particular interest to Bacon’s Rebellion readers. The first is the $150 million that the Governor requested for College Partnership Lab Schools. Money will be distributed to these schools for each child attending. According to the Code section authorizing the establishment of these schools, their purpose is to “stimulate the development of alternative education programs for preschool through grade 12 students by providing opportunities for innovative instruction and greater cooperation and coordination between institutions of higher education and preschool through grade 12 education systems.” Some contributors and commenters on this blog are probably shuddering at this prospect.

The House provides $103.6 million to ensure that every school has a full-time principal and to increase the required ratio of assistant principals to one per 500 students. It also adds $58.6 million to help hold localities harmless from the elimination of the local sales tax on groceries.

Finally, there is $13.5 million to implement the Virginia Literacy Act (HB 319), which has passed the House. Our resident education guru, Matt Hurt, has raised a lot of concerns about this bill.

In summary, although $168 million is a lot of money, in the context of the public education budget, it is relatively small. It amounts to a 1% reduction in the amount proposed by Northam. The total House-proposed 2022-2024 budget for assistance to K-12 contains $2.6 billion more than is included in the current biennial budget (an 18.7% increase) .

Transportation: -$149.7 million. Who knew that there was this much general fund appropriation in Transportation to take? The introduced budget bill included a general fund appropriation for VDOT of $207.4 million to plan, develop, and construct several multi-use trails. The House reduces that amount by $145.5 million and directs that the remaining appropriation be used to develop two trails, improve I-64 between New Kent County and James City County, and to expedite the replacement of two major bridges.

Commerce and Labor: -$128.3 million. The biggest reduction in this category is $190 million from the Virginia Housing Trust Fund. This is the entire additional amount proposed in the introduced bill.

Of interest to BR readers, the House budget eliminates the $30 million proposed in the introduced budget to fund the Solar Loan and Rebate Program. On the other hand, it provides $5 million for a “program designed to build a supply chain for the offshore wind industry by investing in equipment.”

Health and Human Resources: -102.5 million. There is a lot of shifting funding around in this category, a lot of that is related, not unexpectedly, to Medicaid. Except for one item, the minuses and pluses almost cancel each other out. That one item is the elimination of $101 million included in the introduced bill for a study and reform of the behavioral health system. (See extended comments on this issue at the end of this article.)

Higher Ed, -$29.2 million. The single largest reduction in the higher ed sector is the cutting of the additional $36 million that the governor had proposed for the G3 program in the Virginia Community College System. The program covers tuition and fees for individuals with a household income of less than $100,000, who seek degrees or certificates in high demand fields.

What is most interesting about the House amendments for higher ed is not the amounts involved, but the approach taken. For each institution, the House provides additional funding for instruction, called “affordable access,” but cuts the amount available for financial aid. The additional funding is tied to an increase in tuition of no more than 3%. Press reports have called it a cap on tuition, but the actual language in the amendments does not go that far. In the past, the General Assembly has placed a moratorium on tuition increases or made additional funding contingent on tuition increases not exceeding a specified level. The language in this year’s amendments is a little softer. Here is a sample of the wording.  This is an amendment for Christopher Newport University, but the wording is the same for each institution with only the amount different:

Out of this appropriation, $2,500,000 each year from the general fund is designated to support affordable access for in-state undergraduate students. The funding provides the institution with the ability to limit in-state undergraduate tuition increase to no more than three percent in fiscal year 2023.

There is no mention of any consequences if an institution declines to use this “ability.”

The total provided for “affordable access” is $92 million and the amount available for financial aid is cut by $140.4 million.

Agriculture & Natural Resources: -$34 million. The two main sources of savings for this area are a shuffling of the funding provided for the Virginia Water Quality Improvement Fund among its approved uses, resulting in a savings of $26.5 million and removal of a proposed $20 million increase in the Dam Safety Fund.

Public Safety: -$23 million. There were several major reductions in this area:

  • Start up funding for Cannabis Control Authority, -$9.2 million
  • Enhanced sentence credits, repealing (HB 735), -$16 million
  • COVID funding, -$36.3 million
  • Virginia Center for Firearm Violence Intervention and Prevention, remove funding this initiative, -$27.4 million
  • State Military Community Infrastructure Program, -$5 million

To offset most of these reductions, there were the following additional appropriations:

  • School resource officer grants,$51.6 million
  • Additional support for veterans services, $13.5 million

Other: -$64.7 million.

This reduction was created by actions in the caboose bill. The House eliminates the optional $563.9 million deposit into the Revenue Reserve Fund proposed in the introduced bill and substitutes an advance payment of $498.9 million into the Revenue Stabilization Fund (the “Rainy Day” fund). This is a false equivalence  Any deposit to the Revenue Reserve Fund is optional, a choice to set aside savings.  Deposits into the Rainy Day fund are required by the state constitution; it would have had to have been made, regardless of any House action.

My Soap Box

In preparing this report, it became apparent that there was so much money sloshing around last fall that the Northam administration could not figure out responsible ways to spend it all. Two examples illustrate this conclusion.

The introduced budget included a total of $27.5 million ($15 million the first year and $12.5 million the second year) and 13 positions for the Department of Criminal Justice Services (DCJS) to create a Virginia Center for Firearm Violence Intervention and Prevention.  The budget bill included no guidance on how the money was to be used.

To anyone familiar with how state government works, the idea that an agency like DCJS, which primarily functions as a grant coordinator, could set up an entirely new program, fill 13 positions, and responsibly spend $15 million in the first year is ludicrous.

DCJS did not request this appropriation or authorization. The explanatory bullet for this item in the Governor’s budget document has this description; “Provides funding and 13 positions to establish the Virginia Center for Firearm Violence Intervention and Prevention to support legislation that may be adopted by the 2022 General Assembly.” [Italics added]. There was no such legislation introduced in this session of the General Assembly. In summary, this item has all the hallmarks of a proposal emanating from the Governor’s policy office and thrown together hastily at the last minute.

As far as analysts in the Department of Planning and Budget (DPB) would have been concerned, this was an item “ripe for the taking” by the General Assembly, essentially a “gift.” And take it, the House did. The Senate did not take it (it should have), but at least it proposed a language amendment that spelled out how the funding was to be used.

One of the most astoundingly dumb budget proposals I have ever seen was the Northam administration’s proposal for the reform of the behavioral health system. First, it included $1 million in the budget for the Department of Behavioral Health and Developmental Services to provide for “a comprehensive study of the state and local behavioral healthcare systems.” It also provided $100 million (!) in the second year for the “implementation of approved funding recommendations arising” from such study.

First of all, it was a fanciful idea that a “comprehensive” study of state and local behavioral health systems could be conducted, recommendations formulated, and dividing up $100 million to implement those recommendations could be done in the course of a year. If the idea were that the study could be conducted and recommendations formulated in time for the 2023 General Assembly to participate in the decisions on the best way to spend that $100 million, I would not have much faith in the reliability of the study.

Moreover, it was completely ridiculous for the Governor’s office to think that the General Assembly would leave untouched $100 million appropriated in the second year for a vague purpose. Both houses took it, as well as the $1 million provided for the study. In its explanation for the elimination of the funding for the study, the House pointed out, “The newly created Behavioral Health Commission with full-time staff will have the opportunity to assess behavioral health issues and make recommendations.” (This happens to be the same point that I made several days earlier in comments on this blog.)

Any DPB budget analyst who had been there for at least a year would have known that the General Assembly money committees would take that money. The DPB director, who had been around state budgeting for more than 30 years, certainly knew it. The Secretary of Finance, who had worked for many years for one of the legislative money committees, had to have known it. The Governor just made the jobs of the legislative money committees easier.

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14 responses to “The State Budget: The House Reductions to Cover Tax Cuts”

  1. LarrytheG Avatar

    Dick. Can you put this in layman language? ๐Ÿ˜‰ I’m glad some folks understand this but suspect are just a few leaders and a lot of followers in the GA.

    My head is reeling!

    I thought the House and Senate approaches on these issues were different , some markedly. Is this budget what came out of the Conference committee?

    1. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      This is about the budget amendments adopted by the House. I have not looked at the Senate amendments yet. I think it is helpful, especially in a year like this, to know where the two sides stand with respect to each other.

      Steve is optimistic about a compromise on the revenue side. I am not that optimistic.

      The two houses still have to go through the procedural steps of rejecting each other’s bills and putting the budget bill into conference. Therefore, the conferees have not yet been appointed, although I assume there are preliminary talks going on, especially among the staff for the Appropriations Committee and the Senate Finance Comm.

    2. Stephen Haner Avatar
      Stephen Haner

      Once upon a time I paid that much attention. I seldom do now. ๐Ÿ™‚ He is talking about the two budgets that are now subject to conference negotiation. He may be working off the side by side spreadsheet which is prepared for the process. Maybe next week we see the conference report.

      Once they compromise on the revenue side, compromises on the spending side will fall into place. As he said, this is a Santa Claus year, tons of new money all around, so actual reductions in spending compared to this year will be rare, if there are any at all. The process is more painful in Grinch years.

  2. LarrytheG Avatar

    The other thing is that we seem to be awash in revenues even as some folks were saying that COVID whacked the state when we “locked down”.

    And the other thing is that some say we have a high tax rate.

    I found this COOL MAP:

    1. Stephen Haner Avatar
      Stephen Haner

      Again, unless you know the income tax brackets, size of any standard deduction, doesn’t mean a thing. That max rate in CA is $1 million and up. In VA, you pay the max rate at $17,000. In 19 of those states with income tax, the standard deduction is higher than in VA (including CA.)

      Was just adding it up. Including the surplus from last year, the projected surplus this year, and the revenue growth over the next two years, there is $16.7 billion on the table. The House uses less than one-third of that for tax relief. One-third.

      1. how_it_works Avatar

        ” In VA, you pay the max rate at $17,000.”

        How many decades has it been since that was changed? Back when Byrd was in office?

        1. At least 3 decades. My notes think it was 1990 although the standard deduction has been updated slightly since then.

          1. Went back and dug in my archives. Looks like Virginia tax tables changed in ’87 and ’89. Dunno if ’90 was another change or just reflected ’89 brackets.

            Harry Jr would have recently left the Senate and Baliles would have been Gov:)

            There’s been a lot of bracket creep in the last 35 years.

          2. how_it_works Avatar

            Even in 1990 you weren’t exactly rolling in the dough at a 17K yearly income.

          3. Lefty665 Avatar

            You are right. OTOH, the top Virginia rate is not very high.

            Virginia is notable in how quickly its rates escalate to the top bracket. Maryland, West Virginia and North Carolina have considerably wider tax brackets.

            Things could be worse, Maryland adds local income taxes on top of state, and it is Maryland.

        2. Stephen Haner Avatar
          Stephen Haner

          Holton, I think. ๐Ÿ™‚ Harry Senior was still around, probably. So 50 years? But we don’t need no stinking tax reform….

      2. LarrytheG Avatar

        Well I do support updating the code, no question. Virginia has a fair number of deductions that can be used directly if folks don’t itemize. Like Long term care insurance.

        Virginia also gives a 12K age deduction , times two if joint.

  3. James Regimbal Avatar
    James Regimbal

    My prediction is that this GA session will not end on time. The revenue differences are too large.

    1. Maybe, especially with some philosophical differences between the chambers.

      OTOH, it seems the only time things get really testy is when there’s not enough money for the politicians to spread around. That’s not a problem this year.

      It would be interesting to hear what the knowledgeable guys crystal balls envision.

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