Federal aid helped Va. avoid deeper budget cuts

RICHMOND

If the recession ends in two years, most Virginians will feel little effect from the General Assembly's work this winter to patch an unprecedented $3.7 billion revenue hole in the state budget.

But if the nation remains mired in the worst economic downturn since the Great Depression, deep cuts already are planned for education, health, public safety and a host of services that barely escaped the ax this year.

Despite the staggering size of the revenue shortfall, lawmakers balanced the budget with less than $1.1 billion in spending reductions. A large slice came from the 100,000-member state bureaucracy, which will lose about 1,500 jobs through attrition and layoffs. State workers and teachers will sacrifice a scheduled 2 percent pay raise and training opportunities.

What saved Virginia from deeper cuts was the windfall from federal stimulus dollars Congress approved to jolt the economy. That money will run out in two years, however, perhaps delaying the day of reckoning.

"The cliff is pushed off for two years unless the economy improves," said Robert Vaughn, staff director of the House Appropriations Committee.

While many economists and politicians expect conditions to ease, few are predicting when or by how much.

"We really don't know," said John Knapp, a senior economist at the Weldon Cooper Center at the University of Virginia. "The recovery date, in my mind, keeps getting pushed back. Everyone, myself included, is extremely cautious about making forecasts."

Virginia's two-year budget - which expires June 30, 2010 - totals almost $77 billion. It's divided in two parts. There is a $44 billion non-general fund that supports a variety of programs, including transportation and a large portion of colleges, with federal grants, tuitions and other earmarked sources that usually do not emanate from state government.

Often of greater note is the state's $33 billion general fund, which pays for education, public safety and health from general revenues such as sales and income taxes. The entire $3.7 billion shortfall occurred in this fund, caused largely by declines in retail sales and capital gains from stock sales.

Unlike the federal government, the General Assembly is constitutionally required to balance its budget. The stimulus allowed lawmakers to avoid many painful cuts proposed by Gov. Timothy M. Kaine in December. It erased deferred plans to lop $365 million from public schools, take $127 million from colleges, and trim the budgets of sheriffs and other constitutional officers by 5 percent or more. It paid for $962 million in state Medicaid obligations over the next two years.

A number of other major steps will also help balance the budget, including spending hundreds of millions in state reserves, borrowing more money and adjusting some tax collection and tax amnesty rules. Altogether, the measures are expected to generate a little more than $1 billion. The remainder of the shortfall, slightly less than $1.1 billion, was solved with budget cuts.

Most state agencies will experience reductions between 5 and 7 percent, saving about $750 million. In addition to layoffs and hiring freezes, agencies are cutting back spending on computers, parking, research, landscaping and furnishing. Several outdoor programs to rehabilitate juvenile offenders will close. There will be fewer inspectors in the Department of Environmental Quality and fewer psychiatrists in the prisons.

Canceling pay raises scheduled for teachers and state employees at the end of this year will save $250 million. Colleges will lose $86 million in funding but can make up the sum by increasing tuitions.

Although state budget writers avoided mass inflictions of pain, Virginians will face a new round of exposure this spring when local governments prepare their spending plans. Cities and counties face their own set of financial problems, largely caused by declining property values that threaten real estate tax receipts.

And there's the specter of massive statewide cuts if the recession remains for two years. The ability to respond will be weakened by the end of stimulus dollars and diminished reserves in the rainy day fund. Many lawmakers say the cuts avoided this year, which saved an estimated 7,100 state jobs, would become reality.

For now, however, the mood in the Capitol is upbeat.

The Kaine administration is forecasting 4 percent growth during the next budget. But that figure, when combined with this fiscal year's 5.5 percent decline, still would mean Virginia is generating less tax revenue in mid-2011 than it did in mid-2008.

The chairman of the Senate Finance Committee, Democrat Chuck Colgan of Prince William County, is confident the worst of the economy is over and future cuts will be avoided.

"I go out to dinner with my wife and we're still waiting i n line," he said. "Someone's got money somewhere. In Prince William County, people are competing to buy foreclosed homes.

"We're too pessimistic about the economy," he added. "Depression is a state of mind."

Warren Fiske, (804) 697-1565, warren.fiske@pilotonline.com