In shadow of 'fiscal cliff,' Virginia must spend cautiously -gov

Mon Dec 17, 2012 4:04pm EST

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* Governor wants $50 million for rainy day fund

* Also seeks funds to help local governments

By Lisa Lambert

WASHINGTON, Dec 17 (Reuters) - Virginia's governor suggested on Monday making small changes to the state's biennial budget, asking the legislature to bump up spending only slightly due to risks posed by the federal government's "fiscal cliff."

"While the economy has expanded for 13 consecutive quarters, the pace of the expansion has been quite modest and slower than traditional recoveries," Gov. Bob McDonnell told legislators. "We cannot predict what new tax policies or spending cuts a federal plan will contain, and if it will even be agreed upon before our nation goes over the cliff in 14 days."

At the start of 2013, a series of federal tax increases and spending cuts are slated to begin. President Barack Obama and House of Representatives Speaker John Boehner are negotiating ways to avoid the so-called "fiscal cliff," which economists warn will push the country back into recession.

But as prospects for a comprehensive solution dim, many states are worrying about how they will manage a cold plunge of austerity accompanied by a potential spending drop from consumers and businesses coping with higher tax bills.

A handful of states that rely on the U.S. government for jobs and contracts are particularly concerned about the spending cuts - Virginia perhaps most of all. The state is home to many federal employees as well as military installations.

Virginia foresees taking in $219.6 million more in general fund revenues from balances, transfers and taxes than originally budgeted for the current 2012-2014 biennium, Finance Secretary Ric Brown said.

Over that two-year period, the state now expects $34.39 billion in total general fund revenues, compared to the $34.17 billion in its initial forecast.

Virginia passes biennial budgets that it adjusts during the two years through amendments.

In the current fiscal year alone, revenues are now expected to increase 3.6 percent from last year to $16.42 billion, according to Brown's office. They were originally budgeted to rise only 2.9 percent.

The governor suggested putting part of the small windfall, $50 million, into the rainy day fund.

That suggestion and other measures McDonnell proposed "provide us with a little flexibility in 2014 if we face adverse federal actions coming out of Washington," Brown told a conference call with reporters, adding the state is relying on highly conservative economic and revenue outlooks.

By almost any metric, Virginia is in better shape than other states, with its 10.7 percent poverty rate below the national 14.3 percent and its median household income of $63,302 above the national median of $52,762.

In October, its unemployment rate was 5.7 percent, well below the U.S. jobless rate and also its 6.2 percent rate a year before. According to a recent report from the National Association of State Budget Officers and the National Governors Association, Virginia's workforce has grown over the last three years and its collections of sales and income taxes have consistently beat forecasts each of those years as well.

Nonetheless, rating agencies have pointed to Virginia's federal dependency as a possible shortcoming.

Fitch Ratings, which gives Virginia its highest general obligation rating of "AAA," recently noted that "some reductions in government sector employment over the next few years are a risk as the federal government contracts."

Struggling to recover from the 2007-09 recession, many states have hacked away at local aid. McDonnell, on the other hand, suggested sending Virginia's local governments an extra $45 million. He would like to add $2.1 million to the salaries of public attorneys, and spend $7.5 million to help offset the local effects of closing military bases as well.

He is also asking to dedicate $64.4 million toward state employee health insurance. Healthcare costs, especially for the Medicaid insurance program for the poor, are rising fast and threatening to swamp their budgets. According to last week's report from NASBO and NGA, Virginia is spending $298.8 million more on Medicaid this fiscal year than last.

The Republican governor is also seeking funds to help with water improvement, asking the legislature for $200 million for water quality bond projects for places such as Richmond. And he would like to increase education spending for all levels, including putting $3.9 million into university operations.

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