As state revenues continue to lag projections, Governor Terry McAuliffe announced yesterday his plan to balance the FY 2017 budget. The plan implements three main strategies: eliminating $125 million in budgeted pay increases for state employees, withdrawing $392 million from the revenue stabilization fund, and scraping together unspent fund balances and agency spending cuts to cover the rest.
“There will be no program cuts to public education, Medicaid for our families most in need, nor our core public safety services. We did not kick our budget problems to local governments by reducing payments to cities, counties or towns,” said McAuliffe in making the announcement yesterday. “These are obviously difficult decisions to make and there may be more to come, but I am confident that the progress and investments we are making today will put Virginia on course for strong growth well into the future.”
Overall, it’s a reasonable set of priorities, and (unless you’re a state employee) relatively painless. Republican legislators and the Democratic governor will quibble over details, but there shouldn’t be too much sturm and drang.
Next year is a different matter. As the Richmond Times-Dispatch reports, the following fiscal year is projected to have a $654 million revenue shortfall. McAuliffe says the state could free up $211 million a year now spent on mental health, inmate hospital care and uncompensated care subsidies to hospitals if the state expanded the Medicaid program as provided under the Affordable Care Act. Republicans have opposed expansion because the state eventually would be responsible for picking up 10% of the cost of the expansion, adding to long-term budget liabilities. That debate is sure to be contentious.
Broadly speaking, Virginia can take one of three approaches to dealing with the budget crunch. First, it can raise taxes. But there seems to be no political appetite for that at the moment (thankfully). Second, lawmakers can address budget shortfalls on an ad hoc basis year by year, drawing from the same limited range of options. But there is a limit to how long we can lurch from short-term expedient to short-term expedient before we run out of expedients.
Lawmakers must confront the reality that there is a long-term mismatch between spending and revenue. That mismatch would look even worse if we made realistic assumptions regarding Virginia’s under-funded pension liabilities, and yet worse if we acknowledged that the rate of economic growth (and the new revenue generated by that growth) most likely will slow in Virginia the years ahead, as it will nationally and globally. Factor in the likelihood of a recession eventually, and we can predict a crisis-level budgetary crack-up within the next couple of budget cycles.
There is a third path, and that is rethinking government from stem to stern. Is there a different way to fund and prioritize transportation spending? Is there a different way to ensure that Virginia school children receive the education they need? Is there a different way to deliver health care? Is there a different way to provide Virginians the college-level skills and training they need to compete in the marketplace? Is there a different way to organize our human settlement patterns to make them more tax-efficient? Is there a different way to approach economic development? Is there a different way to ensure public safety? Is there a different way to protect the environment?
Virginia is wedded to approaches that have evolved over decades, and we tweak them every year with incremental reforms. Incremental reforms won’t work much longer. Muddling through won’t work much longer.