When Virginia’s fiscal year ends on Wednesday, the state’s budget will be in the black, says Republican governor Bob McDonnell: “We turned a $4.2 billion deficit into a surplus, demonstrating good fiscal management on our part.” Elsewhere, the budgets of state and local governments are in such bad shape that President Obama has proposed spending $50 billion to bail them out.
How did Virginia succeed where so many others have failed? And are its gains authentic, or merely the result of budget gimmickry, as certain critics allege?
Shortly after McDonnell’s election last fall, outgoing Virginia governor Tim Kaine — the current chairman of the Democratic National Committee — announced a budget shortfall and proposed to close it with $2 billion in spending cuts and another $2 billion in tax increases.
Because of the timing of his election and Virginia’s legislative session, McDonnell had to work with the budget Kaine had prepared — but he also promised to alter it fundamentally. “I made clear that I would not accept tax increases,” he says.
McDonnell’s opposition to tax increases wound up enjoying broad bipartisan support. When Democratic state delegate Robert Brink introduced a bill to implement Kaine’s proposed tax increase, the chamber voted against it by a margin of 97 to 0, with Brink abstaining. “The Democrats did work well with us,” says William Howell, speaker of the Virginia house of delegates.
Democrats were also pleased with the results. Charles Colgan, president pro tempore of the Virginia senate, praised the efficiency with which the legislature passed the budget: “I thought it would be six months at first, but it only took one extra day.”
The budget, which covers fiscal years 2010 and 2011, trimmed 11.5 percent from spending on K–12 education and cut health-care funding in part by reducing Medicaid eligibility and cutting Medicaid-provider-reimbursement rates. These moves are expected to save almost $311 million over two years. McDonnell also took a 5 percent pay cut, and members of his cabinet took pay cuts and reduced the size of their staffs.
The Virginia Education Association (VEA) opposed the education cuts, preferring a tax increase. “Our income taxes in Virginia rank 41st out of 50 states. Can you rank this low and still have good schools, good universities, good roads, and good public safety? Probably not,” says Robley Jones, the VEA’s chief lobbyist.
Tucker Martin, the governor’s communications director, counters that spending on K–12 education has grown by 55 percent over the past decade while student enrollment has risen by only 7.6 percent. Moreover, he says, “education spending accounts for 39 percent of all general-fund budget growth over the past decade.”
On June 14, McDonnell said that Virginia’s tax collections have been stronger than expected — enough to give the state a surplus of about $138 million when it closes the books on its current fiscal year this week. Yet some critics have said this is an illusion, made possible only because the state deferred payments of $720 million to the Virginia Retirement System (VRS), the institution that administers state employees’ pension plans.
Frank Keegan, a national editor at the Franklin Center for Government and Public Integrity, questions Virginia’s promise to repay the $720 million to the VRS with the promised 7.5 percent interest. “If they don’t have the money this year, how will they have the money plus the 7.5 percent interest to pay it back later?” he asks.
Deferred payments may compound the problem of underfunded pension plans. “Anyone who says they are fully funded is probably lying or doesn’t know what he is doing,” says Edwin Burtin, an economics professor at the University of Virginia and a member of the Investment Advisory Committee of the VRS for 16 years. “This is a bipartisan sham. Both Republicans and Democrats are responsible. No one wants to confront the real situation. The situation is truly that bad.”
McDonnell’s team insists on the soundness of its approach. “We turned a $4.2 billion deficit into a surplus, which is a noteworthy achievement,” says Martin.
Virginia officials also claim that pension reforms will save money over time. These reforms include a requirement that new state employees must contribute to their pensions, and instituting a so-called “rule of 90,” meaning that an employee is eligible for retirement when age added to years of service equals 90. The previous rule stated that an employee must be at least 50 and have served for at least 30 years.
Keegan called these reforms a “step in the right direction,” but he said they do not address the fact that the budget is still not balanced.
McDonnell plans to use the surplus to award Virginia state employees a one-time 3 percent salary bonus, because they have not received a pay increase since 2006. This bonus is expected to cost $83 million.
Steve Slivinski, former director of budget studies at the libertarian Cato Institute, believes McDonnell should reconsider. “I would advise the governor not to spend the surplus,” Slivinski says. “He should keep spending under control and allow spending increases of no greater than population growth plus the inflation rate. He might also want to cut taxes, and even give the surplus back to the taxpayers.”
– Jesse Naiman, Collegiate Network intern at NR, is editor-in-chief of The Observer at Boston College.