October 15, 2009 — While the "great recession" of 2007-09 appears to be ending in a technical sense, the worst is yet to come for Virginia's state and local governments, according to a report in the current issue of the Virginia News Letter, published by the University of Virginia's Weldon Cooper Center for Public Service.
In the 2010-12 biennium, the state budget will experience the full force of the worst economic downturn since the 1930s, writes James J. Regimbal Jr., a leading expert on government finance policy. As a result, even more painful changes and severe cuts to state-funded programs will be coming, he warns.
A longtime former economic analyst for the Virginia Senate Finance Committee and the state departments of Treasury and Taxation, Regimbal heads a fiscal consulting firm that advises local governments and business groups. He points out that state finances, already facing sharp reductions, have been shielded by cash balances built up from better days, the deferral of various state obligations and payments, and, most importantly, the receipt of federal stimulus funds.
"Now the reserves are gone. The federal stimulus funding will soon be over. Does anyone expect an economic boom to restore most of the lost jobs anytime soon?" Regimbal asks in his analysis, "Virginia's State Budget: A Train Wreck About to Happen."
With issues of taxation and funding for education and transportation looming as key elements in the current election campaigns for governor and state offices, Regimbal points out that in the proposed 2010-12 general fund operating budget, the amount needed just to maintain current state services is still at least $3 billion higher than expected revenues.
Raising general taxes or reducing the state's car tax reimbursement program to deal with the budget crisis may well "be debated by our new political leaders in the not-too-distant future," he writes.
Virginia's Medicaid budget alone will require all of the additional $2 billion in general fund revenues available in 2010-12 to keep the same reimbursement policies that are now in place, he writes. "Since Virginia already ranks 48th-lowest in per capita Medicaid expenditures, it will be difficult to make significant policy changes without real harm to the program."
The state's largest programs – aid to public education and aid for higher education – have already had their general fund support cut by 13 percent from the original appropriation for the current fiscal year. "While $652 million in federal stimulus aid has blunted the declining general fund support for education in 2010, it is unlikely that federal funding can be replaced when the federal stimulus program ends," Regimbal writes. "In fact, there is every indication that general funds will be reduced even further."
The 9.2 percent decline in general fund revenues for the 2009 fiscal year is three times larger than the percentage decline during the last recession in 2002 and is the largest decline in the last 70 years, Regimbal asserts. The 1.6 percent decline now expected for 2010 would be the first time since the 1930s that Virginia general fund revenues have declined two years in a row.
State tax revenues will not experience a significant increase until employment gains resume and consumers begin to spend again, Regimbal says. Local tax revenues, too, are still falling, since real estate assessments are just now beginning to reflect the full impact of housing price declines experienced over the last two years.
Local governments and public education will be hit doubly hard, he says, because the state is a major funding partner in providing local services. About half of the state general fund budget is devoted to local aid programs, with the lion's share going to kindergarten-12th grade public education.
"While federal stimulus funding has temporarily lessened the impact of the general fund reductions, expect further public education cutbacks and the loss of federal aid in the next biennium."
What options are left for state officials and the next governor?
First, says Regimbal, "do everything possible to encourage job creation in Virginia by prioritizing Virginia's investments in education and improvements to our infrastructure. A healthy economy is the only long-term answer to a healthy public sector."
Virginia's government is going to continue to get smaller and even core programs are going to be reduced further, he warns.
Finally, he says, Virginians will soon have to decide whether their current tax structure and rates "are adequate to sustain a high-quality public education, public safety, health and welfare, and transportation system that Virginians have come to expect."
James J. Regimbal Jr. is head of Fiscal Analytics Ltd. economics consulting firm in Richmond. For interviews he may be reached at 804-644-5147.
The Virginia News Letter, edited by U.Va. senior economist John L. Knapp and published about six times a year, is available online here.
Knapp may be reached at 434-982-5604.