Virginia Gov. Robert F. McDonnell announces his new mental-health initiatives at the Capitol in Richmond on Dec. 10. The governor unveiled a two-year spending plan on Monday. (Steve Helber/AP)

Outgoing Gov. Robert F. McDonnell trumpeted hefty cash reserves and investments in education and mental health Monday as he unveiled a two-year, $96 billion proposed budget that also makes some cuts to schools and hospitals.

The budget is $10 billion larger than the current budget, with much of the added spending directed to Medicaid, K-12 education and state employee retirement and insurance programs. The state’s contingency fund also gets a boost, reflecting tepid economic growth and cuts to military spending that have defense-heavy Virginia bracing for a downturn.

“Current national data suggest that Virginia is expected to grow slower than the nation as a whole,” said McDonnell (R). “If the debt-ceiling debate is settled and a long-term national fiscal plan is put in place, growth should begin to accelerate, but that’s a pretty big ‘if.’ ”

The budget provides $583 million in additional K-12 funding, $300 million for the “rainy day” fund and a $183 million boost for state colleges and universities. The plan provides a one-time, 3 percent bonus for state employees and a 2 percent raise for state workers in jobs prone to high turnover, such as for certain court clerks and university housekeepers.

After bucking his party’s base this year to sign a sweeping transportation funding plan with $1.2 billion a year in new taxes, McDonnell has proposed no new taxes or fees.

McDonnell's budget

See the governor's proposed 2014-2016 budget.

The governor has prided himself on steering the commonwealth through the recession, which the state weathered better than most as the nation’s top recipient of Defense Department dollars. Now the industry that buoyed Virginia is contracting.

McDonnell premised his budget on dour revenue projections; it assumes revenue growth of 1.7 percent in the budget’s first year and 4.2 percent in the second.

McDonnell taps a fund set up to help cushion the blow caused by defense cuts, the Federal Action Contingency Trust, for one of the more unusual items inside the 511-page budget bill: $1.6 million for Virginia Tech to research and develop drones, a project intended to benefit the state’s aviation sector.

The state’s rainy-day fund, set aside for emergencies, will top $1 billion by the time the 2014-16 budget ends in June 2016.

McDonnell rolled $537 million from the current budget into the new one and found $261 million in “targeted savings.” He saves $35 million by not adjusting Medicaid payments to private hospitals for inflation. He saves $9 million by withholding inflation adjustments from teaching hospitals and cutting $15 million in indigent-care payments to them.

“That’s a concern,” said Katharine M. Webb, senior vice president of the Virginia Hospital & Healthcare Association.

The bulk of the $583 million boost in K-12 education is in the form of direct aid to local schools. Sen. Janet D. Howell (D-Fairfax) said that most of that is to pay for increases in enrollment and salaries and that she did not consider that “new money.”

McDonnell makes some cuts to education, withholding inflation adjustments for non-personnel expenses. He saves $48 million by reclaiming funds for underutilized pre-kindergarten programs.

“Hold the Champagne,” read the headline on the blog of the Commonwealth Institute for Fiscal Analysis, which advocates for programs serving low- and moderate-income Virginians. “By eliminating funding for the rising costs of ‘nonpersonal services’ — a fancy term for things like textbooks and utilities in Virginia schools — the governor saves over $76 million at the expense of our students.”

McDonnell also saves $21 million by cutting “cost of competing” funds for school support staff, money used to attract employees in Northern Virginia’s high-dollar job market. He did not cut those salary adjustments for teachers.

The budget does not call for any broad layoffs but eliminates some vacant positions, he said.

It does not call for expansion of Medicaid under the 2010 federal health-care law, the top priority for Gov.-elect Terry McAuliffe (D). McDonnell nevertheless included language that would sunset any expansion in June 2016 — a move that some expansion-minded legislators saw as an opening but that others viewed as an added defense against broadening the health-care program for the poor.

McDonnell presented his budget at a morning meeting of the legislature’s joint money committees in a Capitol Square conference room. His appearance marked one of his last milestones before ceding the office Jan. 11 to McAuliffe.

A quirk of Virginia’s budget cycle calls on the outgoing governor to leave a spending plan for his successor. The new governor and the General Assembly may go on to radically amend the spending plan, but they use it as their starting point.

McAuliffe issued a statement praising certain aspects of the proposal, including investments in mental health, higher education and the retirement system. His spokesman declined to comment on sunsetting any Medicaid expansion, a proposal that caught many by surprise.

McDonnell’s plan would increase Medicaid spending by $674 million, but only to keep pace with inflation and enrollment under current eligibility criteria. Under the Affordable Care Act, eligibility would be greatly expanded. The federal government has promised to pay the full cost — $2 billion a year in Virginia — for the first three years and 90 percent after that. McDonnell and some other Republicans doubt Washington can afford that.

Asked if the sunset provision was a “poison pill” for Medicaid expansion, McDonnell said it was a way to get legislators to scrutinize the program.

House Majority Leader M. Kirkland Cox (R-Colonial Heights) and Del. S. Chris Jones (R-Suffolk), the next chairman of the House Appropriations Committee, viewed the provision as an extra firewall against expansion. But Howell, who supports expansion, saw the sunset provision as a way to assure skeptics that the state could pull out if Washington reneges.

The governor added $38 million to improve mental-health services, $31 million for water-quality improvements and $9.5 million to reduce homelessness. He includes $6.5 million to study dredging in Norfolk Harbor and the Elizabeth River channel, which could help them accommodate the super-size container ships that will go through an expanded Panama Canal.