Dramatic growth in federal defense and anti-terrorism spending in Northern Virginia has fueled a rapid economic recovery in the commonwealth and boosted tax collections, economists told state lawmakers Tuesday.
But the rosy outlook is tempered by two realities, the economists and the House of Delegates budget staff said: The rest of the state is not experiencing the same prosperity as Northern Virginia, and growing state expenses are gobbling up the money as fast as it comes in.
"Even in times of prosperity, we continue to face a challenge," Appropriations Committee Chairman Vincent F. Callahan Jr. (R-Fairfax) told about three dozen colleagues gathered at the Boar's Head Inn for two days of discussion. "Restraint is necessary if we are to match our budget to the constraints of our ongoing revenue stream -- in other words, not dig ourselves a new hole."
Callahan's comments echo those of Gov. Mark R. Warner (D), whose staff concluded last week that the state could again face budget shortfalls in 2007 and 2008.
As lawmakers prepare for the 2005 General Assembly session in January, Callahan urged lawmakers not to repeat the mistakes of the late 1990s when, he said, they "went on a spending spree."
Tuesday's budget overview was far cheerier than a similar one a year ago. Budget officials cautioned then that the state had not yet emerged from the recession that followed the Sept. 11, 2001, terrorist attacks. They predicted that a large budget shortfall could force painful choices for lawmakers.
This year, Northern Virginia's economic boom is expected to pump an additional $800 million to $900 million into the state's economy, Appropriations Committee staff members said Tuesday. That is in addition to the $1.5 billion in new revenue generated by tax increases Warner pushed through the legislature last year.
George Mason University professor Stephen S. Fuller told lawmakers that higher-than-expected federal procurement is largely responsible for that growth. Since 1990, he said, federal spending in the region has more than tripled, from $10 billion to about $35 billion last year.
Most of that comes from increased spending on defense and homeland security projects, salaries for consultants and other professional services, he said.
That investment has led to record job growth in Northern Virginia, which has 36,000 more jobs than it did at its peak before the economic downturn started in 2001. Hampton Roads has grown by 10,800 jobs, and all other regions of the state are struggling to regain the jobs they lost in the past several years.
Robert Vaughn, staff director for the Appropriations Committee, said tax collections overall are expected to grow by 8 percent, well above the predictions. "What all this means is we are going to have more money," he said.
But Vaughn said the state's expenses are growing, too.
Inflation in Medicaid, which provides health care to the poor and the elderly, may eat up more than $210 million in the next budget year, and other health care expenses may add another $200 million, he said.
The cost of state construction projects has added about $50 million to the budget. And there is an $800 million backlog in needed repairs to state facilities.
In total, the lawmakers will be required to spend about $633 million more next year because of inflation and the natural growth in programs.
Del. L. Preston Bryant (R-Lynchburg), who was a chief architect of the compromise that led to the tax increase this year, said Tuesday's budget presentation makes it clear that the tax increase was necessary.
"If we had not had that tax reform bill, we would have had all these other obligations piling up on us, in spite of the booming economy," Bryant said.
Majority Leader H. Morgan Griffith (R-Salem), who opposed the tax increases, said the budget challenges prove that tax increases will never solve the long-term problem.
"The bottom line is that without taking a look at the role of government, we are going to continue to spend, spend, spend," Griffith said. "At what point do we stop the spend, spend, spend mentality?"