Virginia announces $311M budget surplus

By Michael Sluss

RICHMOND

 Gov. Bob McDonnell crowed about Virginia’s $311 million revenue surplus Tuesday and cringed at the prospect that the state’s credit rating could be lowered because of turmoil in the nation’s capital.

McDonnell announced that stronger-than-expected revenue growth in the fiscal year that ended June 30 left the state in the black for a second consecutive year. But the governor tempered his celebration with caution, citing economic uncertainties, budget demands and the fight in Washington over raising the federal debt limit.

Moody’s Investors Service put Virginia and four other states on review for a possible downgrade of their coveted triple-A bond ratings Tuesday. Analysts determined that the Old Dominion would be vulnerable if the federal government’s credit rating is lowered, a step Moody’s might take if Congress and President Barack Obama fail to strike a deal to increase the country’s $14.3 trillion borrowing limit. If Moody’s were to downgrade the federal government rating, it would decide within 10 days whether to lower Virginia’s status.

“I’m very unhappy,” McDonnell said in a news conference. “In fact, we’re furious.”

McDonnell blamed the development on “the inability and ineptitude of the president and the Congress to reach a deal on how to fund the obligations of the United States of America.” Virginia has held the highest-possible bond rating since 1938. A downgrade would increase the state’s borrowing costs and represent the first blemish on its reputation for creditworthiness.

 Moody’s deemed Virginia vulnerable because of its population of federal employees and the impact of federal procurement contracts on the state’s gross domestic product. McDonnell emphasized that Moody’s warning had nothing to do with the state’s financial management, citing the revenue surplus as evidence.

“Government must live within its means,” he said. “Every family understands that. Every business understands that. And government at every level must understand that. Obviously we do in Virginia, and obviously they don’t in Washington.”

McDonnell announced that general fund tax collections increased by 5.8 percent, exceeding the state’s projection of 3.5 percent growth.

The figures released Tuesday don’t include savings generated by state government agencies. The administration will announce those totals in the coming weeks.

Nearly half of the excess revenue – an estimated $146.6 million – will go to the state’s “rainy day” reserve fund. Significant portions will go toward the Water Quality Improvement Fund and transportation. McDonnell also plans to dedicate $4.3 million to cover costs associated with tornadoes that hit the state in April.

 This marks the second consecutive year that general fund revenue growth has exceeded the state’s projections, reversing a trend of shortfalls that occurred during the depths of the economic downturn. The state has slashed spending, employed various savings strategies and used federal stimulus money to weather the worst of the recession.

“It is more important than ever that the commonwealth tighten its belt, in light of the continuing recovery and uncertainty in Washington,” said House Speaker Bill Howell, R-Stafford County.

Some Democrats said Tuesday that the surplus is misleading because the state has balanced its budget with cuts that have shifted pressures to local governments and by delaying payments to the underfunded Virginia Retirement System. The state deferred $620 million in pension contributions last year to help balance the current two-year budget. The money is to be repaid over 10 years.

“What surplus?” said House Minority Leader Ward Armstrong, D-Henry County. “If we haven’t paid back VRS, we don’t have a surplus.”

McDonnell said shoring up the pension system is a priority. He will dedicate an undetermined amount of the year-end surplus to making an additional payment to the system, he said.

The governor said the state also must address unfunded liabilities in its unemployment insurance system and deal with costly federal health care, mental health and environmental mandates in the coming years.

The surplus was fueled by stronger-than-expected growth in individual income taxes, which account for about two-thirds of the state’s general fund. Net individual income tax revenue increased by 9.4 percent over the previous fiscal year and exceeded the state’s forecast by $198.1 million. As part of that total, payroll withholding taxes increased by 5 percent and exceeded the state’s forecast by $60.2 million.

Sales tax revenue decreased by 2.3 percent, but the state had expected a 3.7 percent drop-off from the previous year.