McDonnell reports surplus, braces for federal cuts

RICHMOND

Virginia ended this budget year with a $545 million surplus, but rough times are ahead as the federal government looks to cut spending. To cope with those cuts and reassure credit rating agencies of the state's stability, Gov. Bob McDonnell wants to invest a portion of the surplus into a new fund.

In a speech to the General Assembly's money committees Thursday, McDonnell recommended putting $30 million into the fund as a backstop for Virginia, whose largest regional economies rely on defense spending.

"We're still developing the blueprint on how we do it, but the Hampton Roads and Northern Virginia economies will be hit over the next decade if we don't start this right now," he said.

Officials continue to closely monitor the status of the state's prized AAA credit rating - they were shaken when one agency recently put Virginia on a watch list before affirming its rating.

The aim is to avoid a costly downgrade, similar to what Standard & Poor's recently did to the nation's credit rating, which could affect Virginia's ability to borrow. The thinking is the additional account will signal that state officials have prudent financial plans.

"I thought it was critically important to present that idea now in light of this last month and a half with bond rating agencies on us," the governor said. "And it's completely related to the federal government. The more they contract, which they have to and I support, the more potential impact on Virginia."

The state surplus resulted from better-than-expected revenue collections and government savings, some of which came from reduced spending and hiring. It is the second consecutive year Virginia has closed an annual budget cycle with extra funds; last year's surplus and savings totaled $403 million.

Such an outcome is the result of "budgeting conservatively, keeping taxes low, reforming how state government works, and investing wisely in core functions of government crucial to private sector job creation and economic development," McDonnell said.

Democratic critics characterize it differently, calling it a byproduct of creative accounting, unmet obligations, and deep cuts to core services rather than fiscal management. Last year, the state deferred a $620 million payment into the state pension fund in order to free up cash. The money is to be repaid with interest over 10 years.

"No matter what he calls it, the balance he announced today isn't enough to pay our outstanding bills to the Virginia retirement system and make the investments we need in education, public safety, mental health, and other services that create opportunity for working Virginia families," said David Mills, executive director of the state Democratic Party.

McDonnell heralding this surplus, Mills added, is like "a family refusing to pay their mortgage for a year and then celebrating the balance in their savings account."

In his speech, the governor

said neither the pension deferral nor the temporary acceleration of sales tax collections contributed to the surpluses.

"We can and must have legitimate, enthusiastic debates about spending priorities and future budget needs, but this surplus is a simple matter of math, not politics," McDonnell told legislators. "When revenues exceed the forecast, and spending is less than budgeted, basic math produces a surplus."

The surplus announcement comes after budget cuts totaling roughly $4 billion were made to weather the economic downturn. While revenues were stronger than expected, they're still less than what the state collected in 2007.

So although the state ended the fiscal year in the black, there isn't a lot of extra money to spend freely.

The surplus includes nearly $311 million in additional revenues and $234 million in state agency saving and balances, much of which is already accounted for by law.

Some surplus funds will be invested in the Virginia Retirement System, McDonnell said.

Deposits will be made to the state's rainy day fund, which lawmakers can use to help balance the budget in some circumstances; the water quality improvement fund to restore the Chesapeake Bay; and the transportation trust fund. Other balances will revert to the general fund.

McDonnell plans to use $7.5 million to aid in the acquisition of property near Oceana Naval Air Station in Virginia Beach, nearly $9 million to pay interest on a federal loan to the state's unemployment fund, and $7.4 million to restore some cuts made to sheriffs' departments.

Plenty of expensive obligations loom in the next two-year state budget.

There is the estimated two-year price tag of $319 million to update state education standards, not to mention all the other services supported by the budget, McDonnell reminded lawmakers.

Plus, there are costs associated with implementing federal health care and environmental protection mandates, shoring up the pension and rainy day funds, and making new investments in higher education the governor wants.

All those programs need funding even as concerns persist about a double-dip recession that could further depress state revenues and spending.

Considering all that, Del. Chris Jones said McDonnell struck the right balance between optimism and caution as he assessed state finances, "mindful of what lies ahead" and how that will shape the next budget that will be debated this winter.

"I don't want anyone to take away that because we ended the year on a good note, there is extra money to spend, because there is not," said Jones, a Suffolk Republican who serves as a budget negotiator. "We've made some difficult decisions along the way, but there are still many... that have to be made."

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