December 20, 2016
Early Look: Governor McAuliffe’s Proposed Budget Amendments
Policymakers have been struggling for months with revenue that fell short of forecasts despite a growing economy. Last week, the governor proposed a set of budget amendments to address that revenue shortfall and implement his priorities. His proposal preserves much of the progress made in the last legislative session in restoring support for Virginia’s public schools and includes well-thought out tax reforms that will increase revenue. A challenge for all lawmakers, however, is the ongoing reliance on the state’s rainy day fund even during an economic expansion to plug budget holes. The practice runs the risk that the fund won’t be sufficient to meet the state’s needs during the next recession since stronger balances aren’t being built up.
Filling the Shortfall
Despite the state’s growing economy, Virginia is faced with a $1.5 billion shortfall, in part because revenue and available cash is now expected to fall $1.2 billion short of prior expectations. In October, the governor announced his first set of recommendations to address that shortfall, and his proposed budget amendments implement those October suggestions and offer a number of additional proposals.
The proposed budget includes $138.6 million in proposed new revenue from policy changes. That fills almost 10 percent of the state’s budget hole.
Among these proposals are solid reforms that will increase revenue. This includes reducing abuse by wealthy individuals and corporations of the Education Improvement Scholarship and Neighborhood Assistance Program tax credits by stopping double dipping on deductions and credits. The governor also proposes important reforms of the historic rehab and land preservation tax credits that will help make sure they are effectively incentivizing good decisions by a wide range of taxpayers, rather than providing huge handouts to a few wealthy individuals. Requiring collection of state sales tax by on-line vendors and offering a tax amnesty program are also proposed.
However, in the absence of apparent political will on the part of legislators to seriously address Virginia’s underlying revenue problem, the governor’s budget does continue to rely on the state’s “rainy day” fund to close a portion of the shortfall, proposing that the state withdraw $567.2 million during the two-year budget. The budget also includes saving $128.5 million by borrowing to pay for capital projects rather than paying cash. Together, those proposals fill almost half of the state’s revenue hole.
The remaining shortfall is filled through a blend of cuts and swaps: the cancellation of raises for teachers and state employees (a mechanism that was built into the budget lawmakers passed in Spring 2016); supplanting general fund support for K-12 education with lottery and literary fund dollars (as proposed by the governor in October); cuts to Virginia’s public colleges and universities; and reductions to state agency budgets.
The governor’s proposal preserves much of the progress made in the last legislative session in restoring support for Virginia’s public schools, which is a significant accomplishment given the revenue shortfall. This is important because Virginia is failing to do its part in making sure all Virginia communities can have high-quality schools, and is doing less than in the past. The numbers show that we’re still down in supporting Virginia students since the recession. While the proposed budget protects much of the investment, it does not address the recent recommendations from the state Board of Education calling for large-scale improvements to Virginia’s educational funding formula and it does not provide any permanent solutions for Virginia’s lagging teacher compensation.
The proposed budget also removes general fund investments of over $100 million for K-12 by supplanting these funds with other revenue sources already dedicated for public education. This includes $52.3 million in lottery proceeds that came in above projections and $50 million in literary fund revenues that come from the collections of fines and forfeitures. These funds are directed by Virginia’s Constitution to support public education and should be used to make increased investments, rather than as mere substitutes for general fund dollars.
Revenue Stabilization Fund
Virginia continues to draw on its rainy day fund to fill budget holes. The proposed budget amendments would withdraw a combined $567.2 million from the stabilization fund in fiscal years 2017 and 2018. This would drop the fund to $281.7 million in 2018, down from $1.2 billion before the 2007 recession. This means the money the state relies on to preserve needed services in trying economic times will have been reduced by almost $1 billion dollars since fiscal year 2007 and would stand at less than a quarter of its former size, even before accounting for inflation and the rising cost of providing the same level of services to a growing population.
The governor’s amendments to the biennial budget do not include an immediate expansion of Medicaid, which could provide health coverage for hundreds of thousands of low-income Virginians struggling to make ends meet. However, the governor did include language that would allow him to do so if efforts to repeal the Affordable Care Act leave that or some similar option available. Doing so could save the state $213 million by using available federal funds to expand Medicaid now.
The governor also proposes an increase in mental health and substance abuse funding of $31.7 million. Lawmakers have the opportunity to build on this progress and commit to fully funding the priorities identified by the Joint Subcommittee Studying Mental Health Services in the Commonwealth in the 21st Century. That subcommittee has costed out what it would take to provide “consistent access to the full array of comprehensive, high-quality mental health services to individuals of all ages regardless of their geographic location or their ability to pay” and the estimated total is around $184 million, with many of the costs occurring on a yearly basis.
Of the subcommittee’s request for $13.8 million for improved screening services over the upcoming biennium, their top priority initiative, the governor has allocated $8.2 million. It is important to note that the subcommittee’s $13.7 million cost estimate did not include any Medicaid reimbursements for the services, so the governor’s allocation may be closer to the actual cost of meeting these services than face value would suggest. In a year with numerous budget cuts, it is encouraging to see funding for mental health increase, but more steps must be taken to provide adequate mental health and substance abuse services to all Virginians who need them.
Budget & Revenue, Education, Health Care