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Budget surplus loosens purse strings a bit in Virginia

By Rosalind S. Helderman
Washington Post Staff Writer
Thursday, July 15, 2010; B01

RICHMOND -- For the first time in nearly four years, Virginia state employees are going to get a pay boost. And after years of cuts so deep that teachers were laid off and highways went unrepaired, schools and roads are going to get millions in unexpected state cash.

The rare bit of positive news came Wednesday, when Gov. Robert F. McDonnell announced that Virginia has an unexpectedly large budget surplus of about $220 million. The surplus makes Virginia one of at least 10 states that have reported finishing the past fiscal year in the black, and it provides hope that the recovery is real.

"Economic activity is on a slight uptick in Virginia, which we can embrace and celebrate," McDonnell said. "I think we're tracking in the right direction."

But experts said the turnaround is slow, fragile and uneven across the country. Without the significant gains in employment that have historically followed economic downturns, state surpluses are likely to be fleeting, particularly as federal stimulus money runs out and demands for Medicaid and other services continue to rise.

"We're seeing some improvements but with huge caveats," said Scott D. Pattison, executive director of the National Association of State Budget Officers. "None of the data indicates that this is like past recessions, where you see good, exciting, quick growth after" the downturn.

One major caveat in Virginia was that even though there was a surplus, revenue for the past fiscal year fell again, from what were considered dismal fiscal 2009 numbers. The good news was that revenue dropped just 0.6 percent instead of the projected 2.3 percent.

Even better, Virginia officials said, the revenue outlook was brightened largely because of improvements in individual and corporate income tax withholdings, signs of a stabilizing economy.

Maryland will not finish calculating its year-end revenue numbers until next month, said Warren G. Deschenaux, chief legislative policy analyst. But he said the state is on track to exceed a projected $153 million surplus by at least $100 million.

"We're no longer in a terrible position," Deschenaux said. "And that's what we take pleasure from, being something other than terrible."

A report released Tuesday by the Nelson A. Rockefeller Institute of Government shows state revenue nationwide grew by 2.5 percent in the first quarter of 2010, the first time that has happened since summer 2008.

Pattison said he and his staff have become so accustomed to bad news that when the report landed in his office, they turned to one another and said: "Good news, what do we do with this?"

But the study authors cautioned that the improvement might not last long. The revenue growth came in part because some states raised taxes, they said, and state revenue continues to lag considerably behind levels before the economic crash.

"They're doing better, but compared to what?" asked Lucy Dadayan, a senior policy analyst at the institute, which is at the University of Albany in New York. "Compared to a year ago, yes, they're doing better. But compared to pre-recession levels, they're still doing very badly."

Surpluses elsewhere

In addition to Virginia, states where surpluses exceeded expectations include Maine, Iowa, South Carolina and Connecticut. In each case, officials said they are hopeful that revenue is starting to grow after unprecedented declines.

In Connecticut, budget analysts revised the projected surplus upward by $76 million last month after seeing promising tax collections. Gov. M. Jodi Rell (R) called the news "uplifting."

The surpluses, generally mandated by state laws, came after states scaled back services and laid off thousands of employees. State budgets were also bolstered by hundreds of millions in stimulus aid from the federal government and, in many cases, by one-time maneuvers that included spending rainy day funds and deferring pension payments.

But now federal stimulus dollars are ending, and the demand for services, particularly for Medicaid health benefits, continues to rise. Most experts agree that modest revenue improvements are likely to be swamped by spending obligations for the fiscal year that began July 1 and that rosy news of recent weeks could fade quickly in Virginia and elsewhere.

"I'd say this is nice, but any of those end-of-year statistics or quarterly statistics don't get you very far," said Raymond C. Scheppach, executive director of the National Governors Association. "In this economy, until you've got nine months or a year of stronger data, I would not cheer very much."

Across the country, Scheppach said, states are facing a $137 billion shortfall over the next two years, and revenue is not estimated to return to 2008 levels for three years.

In Virginia, the General Assembly had to close a $4 billion shortfall when writing the two-year budget for fiscal 2011 and 2012, even after assuming that revenue would turn the corner and begin growing by 4.3 percent next year. At McDonnell's urging, the legislature adopted a budget that included no general tax increase but hundreds of millions in spending cuts, including to health care, schools and public safety.

Still in the woods

"We are not at all out of the woods in this unprecedented economic downturn," McDonnell said Wednesday. "We have challenging times yet ahead."

Still, he said the surplus announced Wednesday is sufficient to offer state employees a 3 percent bonus, their first pay increase of any kind in nearly four years. Local schools will get $18 million in additional funding, and Virginia's Water Quality Fund, which is used for the Chesapeake Bay cleanup, will receive $22 million. McDonnell estimated about $20 million would go for road maintenance.

The key to continued budget improvement, McDonnell said, would be job growth. He said he will hold a news conference Thursday to tout the state's latest job numbers, which indicate 72,000 jobs have been created in the past three months, the third best such figure in the country.

"That's the issue going forward," said Virginia Finance Secretary Richard D. Brown. "We're not going to get out of it without growth in employment."

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