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McDonnell promises new investment, cuts in two-year budget

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The following interview was conducted before the governor released his two-year budget. For more details on his budget, visit this story.

Virginia’s governors have one shot to get it right. Because of a one-term limit for Virginia governors and the calendar structure for the state’s two-year budgets, the commonwealth’s governors have only one chance to craft their own budget and see it through.

For example, Gov. Bob McDonnell in his first year inherited former Gov. Tim Kaine’s final two-year budget, which gave him time only to make changes around the edges. Likewise, he’ll write the budget that his successor will receive in 2014.

McDonnell wants to make additional investments in higher education, transportation, economic development and the Virginia Retirement System in his signature budget, which will be submitted to the legislature this session. These investments come despite estimates of a $1 billion shortfall, mostly because of the reduction in stimulus funds and increased costs in Medicaid. (The proposed budget was released after this issue went to press.)

He says the shortfall will be made up by spending cuts by state agencies, government reform initiatives and an evaluation of current funding formulas the state uses for programs ranging from Medicaid to K-12 education. “There will be significant reprioritization in the budget,” says McDonnell.

Virginia Business talked with McDonnell in December about the budget, Virginia’s challenges in seeking international investment and his prospects of becoming a vice presidential candidate later this year. (A longer version of this interview is available at

Virginia Business: Outside observers like are questioning the state’s economic outlook because of its dependence on federal spending. In addition, the state’s bond rating may be affected by the cuts. What do you think Virginia can do about this, and are you working with our congressional delegation to attempt any changes to automatic cuts that might affect Virginia?

McDonnell: Well, cuts have to be made. Our fiscal position in the United States is very bad. We’re $15 trillion in debt and growing by the minute, and so reductions in all areas of federal government spending are likely to take place.

I’m obviously very concerned about the $600 billion automatic [defense] cuts that are set to take place in January 2013. I discussed that with the congressional delegation. We’ve actually created by executive order a military facilities commission [Commission on Military and National Security Facilities] to take a look at protecting our infrastructure here in Virginia, and I’ve already proposed creating a new fund in the state budget — the Federal Action Contingency Trust Fund or FACT fund — to begin to put money aside in the event that these cuts come and help us to deal with that downturn from the federal government.

So we’re doing everything we can, from both a fiscal and a communications standpoint, to reduce the impact on our state.

VB: This year in the General Assembly, what initiatives do you expect to push toward your goal of awarding 100,000 more higher education degrees?
McDonnell: Over the last year there has been a work group of businesspeople and college presidents that have been meeting to give me advice on how new monies should be allocated to meet the goal of the legislation.

So this year I will invest substantial new money in higher education in my proposed budget … It will create incentives for the universities to increase their enrollment both online and on campus and also some incentives for private universities as well as community colleges, all which are part of the mix. In mid-December, McDonnell proposed spending an additional $100 million a year on higher education.

VB: With the anticipated shortfall in the budget, where are the savings going to come from?

McDonnell: There will be significant reprioritization in the budget. I think that’s what government’s got to be able to do is determine what are the core functions and priorities of government and then to analyze the $80 billion that’s being spent every two years in Virginia, and determine whether those dollars are allocated according to priorities.
The cuts will come from a couple areas. One is government reform, which is finding any number of ways to do things smarter and better, reducing boards, commissions, agencies, programs that don’t work or can be more efficient.

Secondly, it’s from the reductions that were proposed by the agencies and their submittals of the 2 and 4 and 6 percent budget reductions proposed. …
Thirdly, we’re looking at some of the formulas that have been in place for a while that drive everything from Medicaid to K-12 education and making a determination as to whether or not all these formulas can be afforded this year. …

There will be some structural rebalancing of the budget to increase our cash position, to increase our liquidity, all of which will help our bond rating and put us in good status for the future by making those strategic investments in education, transportation, job creation, things that need to be priorities.

VB: Have you had any surprises on your trade missions? What are you hearing over there? What do you think Virginia’s major strengths and weaknesses are when it comes to international investment?

McDonnell: The first challenge is getting on the radar screen, getting in front of big decision-makers and big companies and entrepreneurs and telling them strengths of Virginia. And we opened up trade offices in this year in Shanghai and Mumbai and an agricultural office in New Delhi, so we think we’ve got the posture now to do it.

Secondly, [we have to build] relationships and convince people to come to see our state. We’ve had a fair amount of success. I’ve actually met with several follow-up delegations from China and India and Korea that have come to the United States the last couple of months following up on our trade mission.

So we think there’s great opportunity, but these things don’t happen overnight. We’re laying the foundation with the offices and the visits and incentives, and now it’s the hard work of closing agreements with major job creators. I think we have great chances.

VB: Are we going to see additional plans on how Virginia can address its ongoing transportation shortfall, and how far do you think the $4 billion transportation package from last year will go toward improving the state’s overall transportation system?

McDonnell: I think we got a great start last year on improving money going to construction. It laid the foundation for $4 billion. We actually were only able to fund about $3.3 billion last year, but it’s my goal to get significant new monies into the Virginia Transportation Infrastructure Bank, which is going to dramatically leverage money to local levels.

So we have a good start, but the problem is we still have a maintenance drain that’s been over $400 million the last couple years, and we anticipate being over $300 million this year. So most of the reforms that I propose this session will be aimed at reducing the transportation drain into maintenance by putting more money into maintenance and [beefing up] up the infrastructure bank to leverage local resources to build local projects better.

VB: Are there other business initiatives that you plan to push?

McDonnell: Absolutely. The first two sessions we’ve secured about $100 million in new funding for economic development initiatives. That is going to continue this session. We have done a strategic plan to determine Virginia’s core strength and competencies that will give us the greatest payback, just like any other businessperson would. So, we’re looking at technology, biotechnology and life sciences, small-business manufacturing and, of course, research and development between universities and the business community.

VB: I have to ask, if offered the possibility to be the vice president to the Republican [presidential] nominee, would you be interested?

McDonnell: Listen, that’s a long way down the road. A lot of things are going to be happening in the next six months to even get a nominee, so I’ll let other people speculate about that. All I’ve said is that I think anybody who gets asked to come help their party and help their country would certainly consider doing that, but it’s got a long way to go, and I’m loving being governor of Virginia. 

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