Capitol crisis: Second take

McDonnell inherits a dismal budget without new stimulus money

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Print this page by Jessica Sabbath

For the second year in a row, Virginia legislators will be required to take an ax to the state budget. But this year’s session will be markedly different. There’s a new governor on board, and this time the federal government isn’t coming to the rescue.

Republican Gov.-elect Bob McDonnell and the General Assembly face quite a quandary. They must make up a huge budget shortfall — as much as $3.6 billion — while finding consensus on bolstering the state’s deteriorating transportation system. Virginia has $14 billion less to spend on highway construction than it did eight years ago.

NewsDespite the economic woes, McDonnell plans to hit the ground running. He’s laid out ambitious plans for his first year, promising to double the Governor’s Opportunity Fund and push other economic development investments while closing the budget gap.  “I don’t look at [economic development funding] as an option, as the long-term sustainability of the commonwealth’s economy depends on making these investments now,” McDonnell says. “While we have a very solid business environment overall in Virginia, we can’t keep relying solely on the basis of reputation.”

Whether the legislature will tackle transportation during the regular session remains unclear. McDonnell says he’s committed to transportation reform this year but adds that the severity of economic conditions may make that goal unrealistic. He could tackle the issue in a special session later in the year.

Many General Assembly observers doubt a transportation solution is possible during the 60-day regular session. “Transportation has been one of our priorities for a number of years, but we know in order to get some traction with that it requires money,” says Keith Cheatham, vice president of government affairs for the Virginia Chamber of Commerce. “I would say for the upcoming session that the number one issue for everybody is really the deteriorating fiscal conditions that the state is going to have to deal with and the challenge that will present to a new administration.”

Still, the news isn’t all bad for McDonnell. Democrats still control the Senate, but after leading the Republican Party to a statewide sweep of top-elected posts, his party has fortified its hold on the House of Delegates with a gain of six seats in the November election.

So, this year should be about more than just dollars and cents, because it presents an ultimate leadership test for the GOP. The question is can McDonnell and his cohorts pull it off? Can they rebrand and streamline state government without raising taxes?

Closing a budget gap
The state already is reeling from $7 billion in cuts to the general fund during the past couple of years. The continued decline of income, sales and real estate taxes has depleted state revenues.
Last year, legislators faced a similar $3.7 billion shortfall, but the federal stimulus package provided $1.5 billion to boost funding for public schools, higher education and Medicaid. “The problem now is in the second year of the upcoming budget without stimulus money,” says McDonnell. “The tough decisions could have been made a year ago, and now they’re going to have to be made on my watch.”

Even with the stimulus money, state funding cuts have been bruising.

Colleges and universities, which have taken much of the brunt of recent budget cuts, have been forced to raise tuition during the school year. The College of William & Mary, which received a 15 percent reduction in state funding in September, is adding $300 to its spring semester tuition, while the University of Mary Washington is raising tuition by $100.

Virginia localities, many of which avoided drastic cuts last year after the stimulus, also are looking at grim budgets. For example, Chesterfield County has suggested its $60 million shortfall could mean layoffs of teachers, police and firefighters. 

Despite these circumstances, Republicans say the shortfall presents a chance to evaluate the state government’s priorities. “As a business person, you look at this and say, ‘This is an opportunity to take a hard look at the entire government and at every agency,’” says Speaker of the House of Delegates William J. Howell. “Are there agencies that could be consolidated, downsized or outsourced?”

McDonnell is on the same page. Although he has not pointed to any agency to be eliminated, his transition team has been closely evaluating state operations. “I think it’s an opportunity to think outside the box and find new ways to deliver government services and take a fresh look at whether parts of the entire administration are working well or whether certain agencies or boards are still necessary,” he says.

If there’s one thing for certain, McDonnell is adamant that higher taxes will not be part of the budget solution. In addition, he says the repeal of existing state tax credits and exemptions would amount to a tax increase.

Senate Majority Leader Dick Saslaw, D-Fairfax, warns that public education, higher education, and health and human services face drastic cuts without tax increases or any repeals of tax exemptions. “They ought to take a look at them,” Saslaw says of tax exemptions, “but the administration says that’s a tax increase so that’s going to happen.”

More pot holes
While the state’s general fund revenue declines, transportation problems have also accelerated. The poor economy has slowed the flow of tax revenues from insurance premiums, car sales and gasoline sales. “We’ve got derelict payments, bridges that are close to falling down,” says Ben Dendy, president of Vectre Corp., a Richmond lobbying firm. “I really think that if the state doesn’t address transportation, what I would call a crisis, we’re at risk of losing that rating as the best managed state in the country.”

Since spring 2008, the Virginia Department of Transportation has been forced to cut $4.6 billion from its six-year road-building plans. In response to lower budgets, VDOT has laid off hundreds of workers, reduced its maintenance plans and cut highway construction projects to the bare bone.

During the past few years, transportation funding proposals have fallen victim to an impasse in the General Assembly, with the state Senate and Gov. Timothy M. Kaine favoring new taxes and the House of Delegates opposed. The legislature finally passed a major transportation plan in 2007, but it was soon ripped apart. The Virginia Supreme Court ruled that taxing authorities set up in Hampton Roads and Northern Virginia were unconstitutional. In addition, the state has so far been unable to sell any of the $3 billion in bonds authorized by the plan because of shrinking revenues from insurance premium taxes. (However, the state may be able to issue some bonds in 2010 as the insurance premiums tax revenues are rising again.)

“In the old legislature and in the new legislature there is no political will to make the tough decisions necessary to deal with the state’s transportation crisis,” says Stephen J. Farnsworth, an assistant professor at George Mason University. “The most that either party is able to accomplish is incremental changes at the margins. Most Republican legislators do not represent urban districts and therefore have little interest in solving urban-area problems.”

McDonnell says he’s committed to pushing transportation reform this year, even if it doesn’t happen during the regular session. The governor-elect also wants to make public-private partnerships a key part of his solution. Some of his plans, however, are more long term, such as collecting royalties on offshore drilling for oil and gas, and prosperity-driven incentives like using a percentage of the budget surplus or increased revenue at the Port of Virginia.

Howell and McDonnell support the same approaches to transportation. “Republicans have said for years that we can’t address transportation problems by raising taxes and then dumping that money into VDOT,” says Howell. “We need to look at land-use reform, we need to look at public-private partnerships, we need to look at [highway tolling]. All of these are on the table now.”
Saslaw is doubtful of the plans. “There aren’t going to be any transportation initiatives for the next four years,” says Saslaw, who supports a gas tax increase to boost transportation revenue.
McDonnell’s proposals don’t come close to solving the state’s transportation problems, says Saslaw, including McDonnell’s high-profile plan to privatize ABC stores for an estimated $500 million upfront payment. “It’s not going to pass, and it’s not going to solve our transportation problems,” says Saslaw.

Meanwhile, a group of Northern Virginia Republican legislators are starting to craft their own transportation proposal. Del. Joe T. May says he and Delegates David Albo and Tom Rust are working on a plan that would boost transportation revenue for Hampton Roads and Northern Virginia and the statewide maintenance fund with taxes and fees similar to the 2007 regional authorities.

Cheatham, the Chamber of Commerce executive, expects the budget to dominate the 2010 session, leaving little time to tackle the transportation crisis. “It will happen eventually,” he says. “It will have to happen eventually or our transportation system will crumble to the point that it’s not really effective — but we are in very unusual times.”

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