What awaits the new governor: budget slashing

The new governor elected Tuesday will be brimming with ideas on how to move Virginia forward, but one of his first jobs will likely be proposing deep cuts in state spending to deal with a budget shortfall of at least $1 billion.

State budget analysts and outside experts agree that the cash crunch is coming: They point to the recession, which has drastically cut state revenue, and to requirements that Virginia take over a larger portion of Medicaid payments.

They disagree only about how big the shortfall will be.

The potential size of the looming shortfall came as a surprise this weekend to both candidates for governor, Republican Bob McDonnell and Democrat Creigh Deeds.

In interviews, both appeared taken aback at the thought of a billion-plus hole in the budget. Yet each stuck to the fiscal plan he’s touted during the campaign.

Both agree that the key to funding state government is reviving Virginia’s economy. Deeds has said a statewide transportation plan – which would likely mean new taxes of some kind – is the best way to provide jobs and spark business growth.

McDonnell, a former state attorney general, has vowed not to raise taxes. Instead, he wants to ease restrictions on businesses and offer more incentives to lure companies to the state. H e predicted Friday that, if elected, it would take six months to a year before people see results from his economic policies.

“In the short run, I absolutely believe that we are going to have some economic pain and some tough budget decisions to make in Virginia,” McDonnell said, adding that he can’t say whether that includes cutting funding for K-12 education.

“Until I get a full briefing, if I’m privileged to win next week, it’s hard to say exactly what needs to be done. But there are going to have to be – if obviously we’re a billion short – we’re going to have to find ways to reduce spending,” he said. “I don’t think that the taxpayers and business people of Virginia with all the hurdles they’re facing now could sustain a tax increase.”

Deeds said performance audits of state departments would help identify where to cut and to “create some efficiency.” “We’ve got an awful lot of work to do,” he said Saturday. T he state senator said, though, that he would avoid cutting education spending – one of the largest part of the state budget.

Both candidates’ plans rest on a more optimistic view of the state’s finances than is held by many budget analysts.

James Regimbal, an independent tax policy and revenue forecasting expert, described the state’s budget as a “train wreck about to happen” in an analysis he wrote recently for the University of Virginia’s Weldon Cooper Center for Public Service.

“While the great recession of 2007-2009 appears to be ending in a technical sense, the worst is not over for Virginia’s state and local governments,” Regimbal wrote. “Virginia’s government is going to continue to get smaller and even core programs are going to be further reduced.”

State officials “can’t wave a magic wand” and make everything right again, he said in an interview last week. “These are very large issues.”

Any future cuts will be on top of more than $7 billion in revenue reductions over the past 18 months. The most recent spending reductions, announced on Sept. 8 by Gov. Timothy M. Kaine, totaling $1.35 billion, included eliminating 929 state jobs, an unpaid day off for all state workers, the closing of three correctional facilities and cuts of as much as 5 percent in funding to state colleges and universities. Funding for local public schools was largely spared.

Kaine, who leaves office Jan. 14, is expected in December to propose a spending plan for the next two years . The new governor will likely offer his own proposal.

Robert Vaughn, staff director for the House Appropriations Committee, foresees a $1 billion shortfall for the budget year that begins in July.

To make ends meet, Vaughn said, state leaders will have to consider options such as continuing a freeze on pay raises and ordering departments to make more across-the-board spending cuts. Any decisions about cuts or other changes will be made by the governor and the General Assembly.

One bright spot is that Virginia still has about $330 million in federal stimulus money that must be used for education, he said. But that is a one-time pool of money.

Senate Finance Committee staff director Betsey Daley agrees that more cuts will be needed.

“Members are going to have to make tough decisions,” she said.

Some analysts say Vaughn’s estimate is too conservative. They also warn that cities and counties will also face deep budget cuts of their own.

Michael Cassidy, executive director of the Commonwealth Institute for Fiscal Analysis, which is concerned with how state policies affect low- and middle-income Virginians, predicts the revenue shortfall “is going to easily be north of $3 billion.”

Daley predicts “it’s a multi billion-dollar problem, because you’re kind of falling off the cliff with the Medicaid money and losing the stimulus money,” noting that typically there is greater use of government-subsidized medical services in a down economy.

Cassidy said he is disappointed that McDonnell and Deeds have not had a candid discussion about the growing hole in state revenues. “Neither candidate has been up front with voters about how they’re going to close it. They’ve both been, quite honestly, whistling past the graveyard,” he said.

Few options, such as more federal stimulus money or state reserve funds, remain available to avoid hard cuts in spending – unless new tax revenues are sought, said the state and private experts.

John Taylor, president of Tertium Quids, a free-market advocacy group, said given the depth of the budget problems, some sort of tax increase may be coming no matter who wins on Tuesday.

“I would be surprised to see any governor in Virginia over the next four years not support a spending increase,” he said. Bill Bartel, (757) 446-2398, bill.bartel@pilotonline.com

Julian Walker, (804) 697-1564, julian.walker@pilotonline.com