Capitol Square Diary
Inside The Budget Surplus Numbers
By Stephen J. Rossie

Square7 imageThe smiles of the General Assembly’s Republican majority and Democrat Governor Terry McAuliffe and officials in his administration over the recently announced $132 million budget surplus were the equal product of both relief and bravado. Each took credit for the extra money while at the same time taking a deep breath that no more cuts were needed to get to the legally required equilibrium of tax revenue and expenditures — especially relieved not to have to renege again on long promised pay raises for state employees and state police.

The governor said his efforts to diversify Virginia’s economy, especially from dwindling federal government spending in the commonwealth, generated the revenue. Republicans claimed their responsible stewardship of a weak revenue stream due to eight years of a weak economy made the grade. But in politics and government the next question presents itself before you can finish taking credit. In this case, what to do with the extra cash?

While $132 million may sound like a lot of money, the clearing of the flat line hurdle only came to pass from an end-of-fiscal-year flurry — a record for monthly revenue in June, the last month of the fiscal year — of $2.2 billion. Revenue in two recent budget cycles did not clear forecasts, requiring cuts in projected spending plans. In what seems like a case of fiscal Russian Roulette, Virginia’s budget is crafted by appropriating money the state projects will come in, not what it already has. Anything less requires a retroactive review aimed at cutting areas of the spending plan or a draw down on the "Rainy Day Fund” revenue fund.

Officially known as the Revenue Stabilization Fund, it receives its own appropriation each budget cycle. In some respects, then, we are paying ourselves and that money should cover any shortfall. By law, money from the fund can only be used in certain circumstances. In addition, the General Assembly recently adopted a new revenue reserve fund, which by law requires at least 50 percent of any surplus to be deposited in it. House Majority Leader Kirk Cox (R-Colonial Heights) and likely the next speaker, and House Appropriations Committee Chairman Chris Jones (R-Suffolk) want all $132 million deposited in the new fund to guard against continued economic uncertainty.

The two argue that such prudence will ensure Virginia’s coveted triple-A bond rating, the highest given by the three major credit rating agencies, which provides access to the lowest possible interest rates when borrowing is necessary. Virginia has maintained a triple-A rating for 70 years, the longest run of any state in the nation. One such rating agency, S&P Global Ratings, cautioned Virginia in April on its reliance in keeping the books balanced (in 2014 and 2016) by dipping into the Rainy Day Fund. While it maintained Virginia’s triple-A rating, it revised its outlook from stable to negative based on the slow rate of economic recovery compared to other states and what it believes is a continued reliance on unreliable federal government spending on defense and other programs from which Virginia traditionally benefits.

Last year, revenue projections fell short by $1.5 billion. This year’s surplus is in part due to a downward revised revenue forecast of a 2.9 percent increase in collections. The actual number came in around 3.6 percent. State income tax withholdings are the largest source of revenue for the state, accounting for about two-thirds of the general fund. That money grew by 5.2 percent compared to a forecast of 3.6 percent, a $182 million windfall. Corporate income taxes increased by 8.1 percent compared to a 3.8 percent forecast, for a $32 million increase.

However, there were areas of weakness. Sales taxes collections were 1 percent less than forecast, which resulted in a $29 million shortfall. Taxes on capital gains were $30 million less than forecast, and taxes on recordations, wills, deeds, insurance and lawsuits also fell below projections. The administration will provide the General Assembly’s three money committees full details of the final figures when McAuliffe briefs them in August.

 





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InBrief 21sep17

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