McDonnell proposes creating account from budget surplus

August 18, 2011

— In a speech designed to assure Wall Street that the state’s finances are sound, Gov. Robert F. McDonnell proposed Thursday setting aside $30 million from a half-billion budget surplus to offset future federal cuts.

McDonnell (R) said he hopes the creation of the account will send a message to the nation’s three bond-rating agencies that they should keep the state’s stellar credit rating intact.

“We need to demonstrate to Wall Street that we are a vibrant and well-managed state with an economy that is flexible and diverse enough to withstand the potential fiscal stress that federal government cutbacks or inaction may deliver to us,” McDonnell said in his annual speech to the General Assembly’s financial committees.

Moody’s Investors Service confirmed the state’s AAA rating this month, but Virginia remains on a watch list for 90 days as the agency evaluates the state’s finances following the unprecedented downgrade of the nation’s credit rating.

McDonnell also said he will ask his jobs commission and state economic development officers to look for ways to diversify an economy that relies heavily on federal contractors and the military, particularly in Northern Virginia.

Some Democrats dispute the existence of a surplus after cuts and what they term budget “gimmicks,” but others expressed support for the new fund — the Federal Action Contingency Trust Fund — which is available to offset federal cuts to core services, such as public safety and health care.

“I think that approach is sound and one that I would embrace,” said Sen. R. Edward Houck (D-Spotsylvania), a member of the Senate Finance Committee and a budget negotiator.

McDonnell proposes putting $30 million in the account initially — which would be available at times the state’s rainy day fund is not — though he may add more when he unveils his two-year budget in December.

“I think the ratings agencies will be very high on that, the flexibility that creates,” said House Majority Leader M. Kirkland Cox (R-Colonial Heights). “We’ve shown them a lot of signs that we’re serious.”

Of the $544.8 million surplus, $310.7 million was generated through higher-than-expected tax revenue announced after the close of the fiscal year June 30. An additional $234.1 million, which McDonnell announced Thursday, comes from savings accumulated by a hiring freeze, the reorganization of agencies and employees’ saving ideas.

“Together, we are proving that, unlike Washington, we can actually spend less and still deliver good customer service for our people,” McDonnell said in a room full of legislators, lobbyists and state employees.

It is the second straight year that Virginia has ended the year with a surplus, as other states and the federal government continue to struggle with their budgets. A year ago, the state ended the fiscal year with a surplus of about $403.2 million — $229 million came from taxes, and the rest from savings.

Virginia law mandates the way a bulk of the money must be used, including setting aside some for the state’s rainy day fund ($132.7 million) and others for transportation ($83.2 million) and Chesapeake Bay cleanup ($50.3 million).

McDonnell proposed spending at least $18.7 million to shore up the state’s pension fund, which lost $3.2 billion in the past six weeks, as well as giving some of the unspent balance to sheriff’s offices across the state and localitiesin southwestern Virginia recently hit by tornadoes.

Officials from counties and cities across Virginia have lobbied McDonnell to restore $60 million in state aid to localities for fiscal 2012 and the two-year budget he will announce in December. About 50 jurisdictions have passed resolutions, and nine Northern Virginia localities, including Fairfax, Arlington, Prince William and Loudoun counties, sent a letter to McDonnell.

McDonnell did not include the $60 million but said he would consider the request when putting together his budget.

“I’m disappointed that it’s not part of his plan for the surplus,” said Sharon Bulova (D), chairwoman of the Fairfax Board of Supervisors. “But I expect he will do right in next year’s budget. We are the economic engine of the commonwealth.”

Democrats and progressive groups criticized McDonnell on Thursday for declaring a surplus after years of cuts to core services; delayed payments to the Virginia Retirement System; and a requirement that retailers pay sales tax a month early.

“This surplus is a result of heavy cuts to services like education, health care and public safety, the use of federal recovery act money, creative accounting, and skipping some of our bills,” said Michael Cassidy, president of the Commonwealth Institute for Fiscal Analysis, a member of Better Choices for Virginia, a coalition of 27 groups calling on the governor to combine new revenue with budget cuts.

In his 40-minute speech, McDonnell disputed that delaying the pension payments and having retailers pay sales tax a month early contributed to the surplus. “This surplus is a simple matter of facts. It’s a matter of math, not politics,” he said.

The state, which is required to make payments each year to the Virginia Retirement System for public employees, reduced its payments by $620 million, promising to return the money with interest.

McDonnell said the delay helped address a $4.2 billion shortfall that came before the budget was enacted.

Retailers are required to pay sales tax to the state early for one month — allowing the state to collect the tax in June, during the previous fiscal year, instead of in July, during the next fiscal year. Businesses oppose the policy, and legislators are phasing out the practice by 2013. McDonnell said the one-time event affected only fiscal 2010.

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