Category Archives: Budgets

Enjoy It While It Lasts

Woo hoo! Tax cuts and spending increases — it doesn’t get any better than this. The United States is about to enjoy its biggest fiscal stimulus since Barack Obama’s American Recovery and Reinvestment Act of 2009. All this spending and tax cutting is going to feel great for the next couple of years — especially here in Virginia, which could be the single biggest beneficiary in the country of the budget deal’s $165 billion boost to Pentagon spending over the next two years. Who needs Amazon when you’ve got the federal government with its limitless credit card?

Let’s enjoy the booming economy while it lasts. But let’s not fool ourselves either. When Virginia’s GDP suddenly perks up and revenues start surging, let’s not pretend that we have somehow “turned the corner” and are experiencing a “new normal.” It would be a huge mistake to see the fiscal stimulus as anything more than superficial prosperity purchased largely through the massive accumulation of federal debt. (I’ll give corporate tax restructuring and deregulation credit for being more than passing phenomena, but much of the economic euphoria will come from old-fashion deficit spending.)

Unfortunately, if something is too good to be true… it’s probably not true. Inflation, which has been quiescent for a decade, is now surpassing 2% annually. When you cut taxes, increase spending, and tighten monetary policy in the face of increasing inflation while the private-sector economy is booming, you get higher interest rates.

Higher interest rates will do two things. They will dampen the economy, acting as a regulator on growth. And they will increase the cost of borrowing for the world’s largest debtor, Uncle Sam, with $20 trillion in national debt. As new debt is financed and old debt rolls over, each 1% increase in interest rates eventually will add $200 billion a year to federal spending. We could find that a strong economy is actually worse for the deficit and national debt than a weak economy!

Since I wrote “Boomergeddon” almost eight years ago, the United States has squandered its opportunity to get its fiscal house in order. The problem, as I outlined back then, is that Democrats refuse to cut domestic spending, Republicans refuse to cut defense spending, and Republicans talk about cutting entitlements but are too scared to act because Democrats would crucify them. As we’ve seen in the latest budget deal, nothing about that political logic has changed.

Meanwhile, the Medicare Hospital trust fund is scheduled to run out be depleted in eleven years, and the Social Security trust fund is scheduled to run out in sixteen years. In 2019 when the Medicare trust fund runs out and Congress looks for ways to maintain benefits, the U.S. budget will be running annual deficits of about $1.5 trillion a year — and that’s according to a June 2017 forecast that doesn’t reflect the recent tax cuts and spending hikes, and assumes no big recessions between now and then. Faced with the prospect of putting Medicare and Social Security on a pay-as-you-go basis or dramatically raising payroll taxes, the U.S. will be facing the greatest fiscal crisis since the Great Depression. This political armageddon — or, as I call it, Boomergeddon — is only a decade away.

Oblivious to all this, the General Assembly is perilously close to agreeing to expand the Medicaid program in Virginia predicated upon federal promises to pay for 90% of the expansion — and even then the state is committing itself to adding roughly $300 million to its biennial budget. The Republicans’ insistence upon restricting the program to adults who are working or seeking work is nothing more than a face-saving device that will not alter the underlying fiscal dynamics. Ten years from now, when Uncle Sam is dealing with an exploding Medicare system, Virginia’s retired state employees, local employees, and teachers will be depleting the Virginia Retirement System. The VRS’s $20 billion in unfunded liabilities are, for reasons I have explained previously, likely to get get bigger, not smaller. At some point between now and ten years from now, we’ll also have to acknowledge that the Washington Metro isn’t the only component of the state’s transportation infrastructure facing a multibillion-dollar unfunded maintenance backlog.

Sadly, human nature being what it is, Virginia state and local governments will interpret the Trump boom as the sign of enduring prosperity, not an unsustainable spurt, and elected officials will crank up borrowing to pay for the endless list of “unmet needs,” which never seems to shrink in good times or bad.

I don’t know why I bother sounding the alarm. No one’s going to listen. Nothing’s going to change. But I can always hope, when it comes time to dissect the greatest social and economic tragedy in nearly a century, maybe someone will remember that someone saw it coming.

The GOP’s Hail Mary Pass

House Speaker Paul Ryan savors his biggest legislative victory.

Faced with a chronically slow-growth economy, expanding deficits, mounting federal debt, and a looming funding crisis for the U.S. welfare state, Republican congressmen are, to borrow a football metaphor, throwing a hail Mary pass into the end zone in the desperate hope of scoring a winning touchdown. They are gambling that tax cuts combined with President Trump’s deregulation agenda will boost economic growth from roughly 2% per year to 3% or more, reducing the tax burden for millions of Americans, creating new jobs, boosting wages, and bending the curve on long-term deficit projections.

Convinced that the tax cuts will prove to be a disaster for everyone but the rich, Democrats and the mainstream media have subjected the tax plan to relentless, unremitting attacks. Viewed in terms of static economic analysis, we are told, the tax cuts will inflate federal deficits by a cumulative $1.5 trillion over the next ten years. Suddenly, deficits matter!

Republicans respond that measures in the bill — accelerating write-offs for business investment, encouraging the repatriation of hundreds of billions of dollars in corporate profits to the U.S., and making the corporate tax rate more competitive internationally — will stimulate economic growth. Unlike the Democrats, I think that much will prove to be true. My question is: Will faster economic growth generate enough new tax revenue to offset that $1.5 trillion? Longer term, will it avert Boomergeddon?

Let’s dig into the numbers. The Congressional Budget Office’s current 10-year budget forecast assumes a modest 2.1% annual growth rate over the next ten years, a slight uptick from the trend established during the Obama years. But economic growth has accelerated to roughly 3% in the past couple of quarters, and the Trump administration’s deregulation + tax cuts strategy could nudge it even higher. Let us assume for purposes of discussion that, thanks to the tax cuts, the U.S. can grow the economy at a sustainable rate of 3.1% annually. What does an extra percentage point in economic growth get us in deficit fighting?

Well, the latest CBO federal revenue forecast for the next ten years is $43 trillion. A 1% boost in federal revenues will yield $430 billion, not nearly enough to close the $1.5 trillion gap. The analysis gets a bit more complicated because economic growth and higher incomes push Americans into higher tax brackets while a roaring stock market generates massive capital gains. So a 1% increase in economic growth could produce more than a 1% increase in federal revenue. Let’s go for the gusto and double the growth-to-revenue ratio, assuming that federal taxes increase actually increase by $86 billion per year over current projections. That’s still doesn’t close the ten-year $1.5 trillion gap.

Could the economy grow much faster than 3.1% over the decade ahead? I’m skeptical. First, Baby Boomers are retiring in droves, and the working-age population is stagnating. A growing labor force supports economic growth; a stagnant labor force undermines it. Second, the Federal Reserve Board, intent upon unwinding the monetary stimulus of the Obama years, will continue to raise interest rates. It goes without saying that higher interest rates are a damper to economic growth.

In summary, in my untutored opinion, I think that the U.S. will see modestly faster economic growth over the next few years. The Dems have predicted economic Armageddon. They won’t get it. The lives of millions of Americans will improve… in the short run. But Republicans are deluding themselves if they think modestly faster economic growth will reduce the nation’s long-term structural budget deficit. Entitlement spending is still running out of control, and the nation still faces a hideously painful fiscal reckoning. Our 20-year future still looks like Boomergeddon.

Northam Appoints Layne as Virginia CFO

Gov.-elect Ralph Northam (right) congratulates Aubrey Layne for his appointment as Secretary of Finance. (Photo credit: Richmond Times-Dispatch)

In an important signal of how he plants to govern, Governor-elect Ralph Northam announced yesterday his appointment of Transportation Secretary Aubrey Layne as his Secretary of Finance. Layne will replace Ric Brown, who is retiring after serving three consecutive governors in the office.

Layne, an administrator with a non-partisan, technocratic bent, works well with Democrats and Republicans alike. He served on the Commonwealth Transportation Board (CTB) during the McDonnell administration, and then was recruited by Governor Terry McAuliffe to oversee the commonwealth’s transportation agencies. According to Virginia Public Access Project data, he has contributed to Democrats, Republicans and independents over the years.

Layne made his mark as a pragmatic administrator willing to delve into the public policy thickets. He spent much of his first year as transportation secretary digging out of controversial public-private partnerships set up during the McDonnell administration while he had served on the CTB. He canceled the U.S. 460 tolled highway between Suffolk and Petersburg after it became clear that the project could not obtain a federal wetlands permit. He also reworked the terms of the multibillion-dollar Downtown-Midtown Tunnel project in Hampton Roads.

After putting out fires, Layne was heavily involved in rewriting legislation governing public-private partnerships. Then, under the framework of the new law, he implemented a partnership to upgrade the Interstate 66 transportation corridor in a process relatively free of angst and controversy. Also under Layne, the Virginia Department of Transportation implemented a scorecard for measuring and prioritizing proposed road and highway projects. The purpose of the scorecard was to base transportation investments on objective criteria relating to congestion, safety, the environment and economic development rather than politics.

One knotty issue eluded Layne’s technocratic touch: the Washington Metro. Severely under-funded over the years, the Metro commuter rail system needs $1.5 billion a year more over the next ten years to address maintenance backlogs and other issues that have led to deteriorating safety, on-time service and ridership. But Virginia shares power in the governing authority with Maryland, Washington, D.C., and the federal government, which gives the state limited leverage to effect reform.

Layne will have his hands full as finance secretary. While the short-term budget outlook has brightened this year and next, Virginia faces immense long-term challenges dealing with an ever-growing Medicaid budget, massive unfunded pension liabilities, intense clamoring for more money for K-12 schools, higher-ed, and mental health, among other priorities, and the continued unwinding of various gimmicks used to balance the budget in the last recession.

What’s more, if Northam pushes to expand Virginia’s Medicaid program under the authority of the Affordable Care Act, he undoubtedly will look to Layne to find the state’s 10% share to finance the expansion. Layne could be jumping from the frying pan into the fire.

Entitlements, Fiscal Limits and the Looming Age of Rage

Now that Democrats are close to parity with Republicans in the House of Delegates, there is renewed talk of Medicaid expansion in Virginia. Meanwhile, in Washington, President Trump and Republicans are pushing a tax-cut plan that would spur economic growth but, even with stronger growth, would increase deficits by $1.5 trillion over the next ten years. Nobody is talking about the $14.6 trillion national debt except as a cudgel against partisan foes. Even as Medicare, Disability, and Old Age and Survivors trust funds are projected to run out within a single generation, entitlement reform is not up for discussion.

Just a reminder… Here’s are U.S. budget deficits forecast by the Congressional Budget Office without counting proposed GOP tax cuts:

The “on-budget” deficit is what we conventionally think of the deficit. It does not include the draw-down of “off-budget” Medicare and Social Security trust funds. Data source: Congressional Budget Office.

Within eight years, the U.S. will be running $1 trillion-per-year deficits every year, pretty much forever. And the CBO forecast does not take into account the likelihood of a recession or two over the next ten years, in which case deficits will metastasize.

And here’s the off-budget forecast. Payouts for Medicare hospitalization, Social Security disability and Social Security old-age programs exceed tax revenues, but interest income on the assets will keep the respective trust funds in the black for the next couple of years. By 2020, however, the off-budget numbers shift  into deficit mode and plunge rapidly thereafter.

Barring major changes in U.S. spending programs or economic growth, here’s when the trust funds are expected to run out, according to Medicare and Social Security trust estimates:

  • 2028: Disability trust fund runs out of money.
  • 2029: Medicare hospitalization trust fund runs out of money.
  • 2035: Social Security trust fund runs out of money.

Back when the Simpson-Bowles commission tackled the deficit issue in 2010 — the last time Americans thought seriously about entitlement reform — the county had 25 years before keystone social safety net programs imploded. If Congress had acted then, it could have put the trust funds into fiscal balance with relatively minor tweaks (slightly higher payroll taxes, slightly reduced benefits, slightly older retirement ages) that had a large cumulative effect over many years. But a decade of delay will require more painful sacrifices, which means they likely never will be made.

If nothing gets done until the trust funds run out of money — what I call Boomergeddon — the programs will have to cut benefits to match revenues generated. We are only twelve years from massive dislocations to the Medicare program, and 17 years from disruptions to Social Security. Baby Boomers beware, your retirement will be a lot uglier than you realize.

As for those $1 trillion+ on-budget deficits every year, they put Virginia at special risk. Any Congressional effort to tame deficits without touching entitlements will require cuts to discretionary spending, the biggest pot of which is related to defense, intelligence and homeland security…. which happens to be Virginia’s biggest industry sector. Son of Sequester will subject the Virginia economy to chronic economic stress and fiscal pain. But instead of dealing with Virginia’s long-term structural issues, the next session of the General Assembly could well consume itself in a renewed debate over expanding Medicaid.

As Americans speak no evil, see no evil, and hear no evil, we hurtle toward an era of brutal fiscal limits, broken promises to millions of Americans, and polarization and rage that will surpass anything we see today.

Medicaid Reforms Could Save Tens of Millions

Massey Whorley, policy adviser to Governor McAuliffe

A new forecast of Virginia’s $10 billion Medicaid program supposes that the implementation of managed-care reforms will slow runaway costs, reducing growth in spending to 2.5% in the first year and 3.4% the second year, down from an 7.8% increase in the current fiscal year. While the program still will cost an additional $670.6 million over three years, that’s a lot less than it would have been, reports the Richmond Times-Dispatch.

The McAuliffe administration is expanding the number of people, primarily elderly and disabled, who will receive services through managed-care contracts with private insurers.

“A huge part of [the reduction] is the effect of reforms and the amount of money being moved from fee-for-service to managed care,” said McAuliffe policy adviser Massey S.J. Whorley. The number will swell from about 30,000 people under managed care to almost 200,000. Explains the T-D:

Fee-for-service has been the traditional way of reimbursing providers for services to Medicaid patients in an uncoordinated fashion. Managed care allows the state to shift the risks of serving patients to insurers who are paid a fixed amount per person, per month to coordinate their care. 

“The plans are taking a very substantial risk,” said Doug Gray, executive director of the Virginia Association of Health Plans, which includes five of the six companies that are providing managed care to more than 216,000 elderly and disabled Virginians. “These are very sick people who could have very high costs. The commonwealth has protected themselves from costs over and above the contract amount.”

The attraction for insurers is the potential to lower the cost of care and keep the difference, while saving the state money, but Gray cautioned against expecting an immediate windfall as the state expands managed care to riskier populations. “We are hopeful and optimistic there will be savings, but I wouldn’t want to be overly aggressive about promising,” he said.

House Appropriations Chairman S. Chris Jones, R-Suffolk, said the reforms are working, but he would hesitate to read too much into the initial forecast. “This is the right step to have taken. … There is no doubt the reforms are starting to have an impact.”

Bacon’s bottom line: Everybody cross your fingers and hope this works. Out-of-control Medicaid spending has soaked up a disproportionate share of new tax dollars generated by the state, forcing legislators to under-fund other critical priorities like K-12 schools and higher-ed. The shift to managed care may ease the fiscal pain for the next biennial budget.

How Medicaid Is Cannibalizing Virginia’s Budget

Source: JLARC

Three big trends are worth noting from the Joint Legislative Audit and Review Commission 2017 state spending update, a review of state spending over the previous 10 years.

First, General Fund spending has been constrained by limited revenue growth resulting from Virginia’s weak economy. The increase in spending has averaged 2.0% per year. Adjusted for inflation and population growth, General Fund spending actually declined 1% over the decade.

Second, the Medicaid program has crowded out spending for other priorities. Medicaid hogged 60% of all General Fund revenue growth over the decade. Medicaid’s share of the General Fund pie increased by 73%.

Third, the healthy growth in non-General Fund spending was driven in large part by tuition increases at Virginia’s colleges and universities. In other words, when faced by stagnant revenue and untouchable Medicaid spending increases, legislators cut what was cuttable. They reduced state support for higher education knowing that colleges and universities could fall back upon the expedient of raising tuition.

Cheerful thought of the day: As Virginia’s population ages, Medicaid spending will go one way — up — and it will continue to squeeze other spending categories. Here’s the spin that Republican legislators put on the JLARC report:

House Speaker William J. Howell, R-Stafford: “Once again, this annual report from JLARC shows that the increasing cost of Virginia’s current Medicaid program is crowding out needed funding for our public schools, colleges and universities, roads, and law enforcement officers. We consistently argued that Virginia can barely afford its existing Medicaid program, let alone the massive cost of expansion, and this report vindicates that position.”

Speaker-designee Kirk Cox, R-Colonial Heights: “It’s a simple proposition: if you cannot afford your mortgage payment, you don’t build a new addition to your house. Virginia’s current Medicaid program covers around 1 in every 8 Virginians, and as this report shows, the costs are staggering and continue to climb, despite ongoing reform efforts. It would be financially irresponsible to ask taxpayers to fund the massive expansion contemplated under the Affordable Care Act.”

Del. S. Chris Jones, R-Suffolk: “Even as we instituted major reforms aimed at bending the cost curve, and controlled spending growth in other areas of state government, Medicaid costs continue to increase dramatically. This growth eats into funding that could be used for our teachers, law enforcement officers, and hard working state employees.”

Bacon’s bottom line: Yeah, the Republican leaders are stingy bastards for not expanding Medicaid. But the alternative is worse. Latest news on the Boomergeddon front: The state of Illinois, which expanded its Medicaid program in 2013, incidentally, and now has to cover 10% of the expanded costs not funded by the federal government, has $16.5 billion in unpaid bills. The state also has $200 billion in total liabilities, including pension debt. Meanwhile, pundits are asking if debt-ridden Chicago will become the next Detroit. One good recession, and it will be.

To see what it’s like to operate a government bordering on insolvency, watch Puerto Rico flail as it tries to recover from Hurricane Maria. It’s not a pretty picture. It’s easy to be compassionate when you’re paying with other peoples’ money. When other peoples’ money runs out, everything goes all to hell.

Five Localities under Severe Fiscal Stress

Petersburg isn’t the only Virginia locality with serious fiscal problems, according to an analysis prepared by the Auditor of Public Accounts. But Auditor Martha S. Mavredes isn’t willing yet to publicly identify the other two cities and two counties that appear to be in bad shape, according to the Richmond Times-Dispatch.

The fiscal assessment, conducted at the request of the General Assembly, uses data filed in local governments’ Comprehensive Annual Financial Reports to develop ten financial ratios, including four that measure the health of the locality’s general fund. The scoring system establishes 16 as the minimum threshold for fiscal stability. Petersburg and another city, identified only as City A, scored below 5. Yet another city and two counties also scored below 16, while two localities, Hopewell and Manassas Park, have yet to submit financial data for 2016.

Mavredes made the presentation Monday in a meeting with a newly established joint legislative subcommittee on fiscal stress. She asked for time to notify the jurisdictions of their scores and to begin discussions to confirm that the financial assessments were accurate.

A major question was when the data should be made public. Sen. Emmett W. Hanger, Jr., subcommittee chair, said that it would be premature to identify localities before notifying them and verifying the numbers used to assess their condition. But others stressed the value of making the data public. “Knowing and not taking any affirmative actions is almost malfeasance,” said House Appropriations Chair S. Chris Jones, R-Suffolk, a former city mayor.

According to the T-D:

“City A” scored below the threshold the past three years, dropping to 4.25 last year.

“City B” dropped from a score just under 50 in 2014 to between 13 and 14 in each of the past two years.

“County A” shows “consistently low” scores, in the 6 to 8 range.

“County B” tumbled from a score of 21 in 2014 to just over 11 last year.

Two other counties showed steep declines over the three years surveyed, falling to just above and below the 16-point threshold.

Bacon’s bottom line: Mavredes is right to confirm the data before sparking a political turmoil. And she’s right to inform the localities of their low scores before informing the general public — they need an opportunity to get their act together before the bad news drops. On the other hand, Jones is certainly right to say that the sooner this data is made public the better. Localities should not be allowed to sweep their problems under the rug, allowing their situations to deteriorate even further.

One more point: I hope the Auditor of Public Accounts makes the scores available for all jurisdictions. The public should know whether their local government is in strong condition or on the financial edge. Everyone can benefit from the state’s analytical tools, not just localities in crisis.

Update: Tim Wise pointed me to the following chart included in materials submitted to the Joint Subcommittee on Local Government Fiscal Stress. These classifications, which are based on FY 2014 data, reflect revenue capacity, revenue effort and median household income.

Most of the severely stressed localities are cities — not just mill towns with an eroding economic base but a cluster of local governments — older cities, mostly — in Hampton Roads.

McAuliffe: Build up Budgetary Reserves

I have to agree with Governor Terry McAuliffe on this one: The General Assembly should put $121.5 million from the FY 2017 budget surplus into a newly created financial reserve. Moreover, I find his logic impeccable:

“Given the level of federal and economic uncertainty, I would suggest to each or you that any effort to build up liquidity and cash reserves is a wise course of action,” McAuliffe said while addressing General Assembly money committees yesterday.

Right on!

The Commonwealth ran a $136.6 million budget surplus last fiscal year. After making mandatory deposits in special funds, such as one to help localities make water quality improvements, the state has $121. 5 million left over to do with as legislators please, reports the Richmond Times-DispatchIt’s not easy for a politician to resist spending the money, but McAuliffe’s instincts are absolutely correct.

The governor’s advice comes against a backdrop of increasing concern about Virginia’s ability to maintain its AAA bond rating. In April Standard and Poors downgraded the state’s financial outlook from stable to negative due to uncertainty over federal spending and the drawing down of the state’s Revenue Stabilization Fund to balance the budget the past two years. The legislators who created the so-called Rainy Day fund visualized tapping the reserve in years when revenues actually declined, not merely when they increased below expectations. The details are not clear from press accounts, but the new reserve apparently is distinct from the Rainy Day fund.

The governor is not likely to get any push-back from legislators. “We’re on the same page as far as all excess revenue going into the revenue reserve fund,” said House Appropriations Chairman Chris S. Jones, R-Suffolk, after the governor’s speech.

Virginia faces a future of chronic fiscal stress and economic uncertainty. Medicaid spending will continue to gobble an increasing share of state spending. The state does not meet its own standards for providing support to K-12 education, it has fallen behind in support for higher education, and it still faces massive unfunded pension liabilities. Meanwhile, the economy is stuck in slow-growth mode, providing little basis for thinking that a surge in tax revenue will bring in a miraculous gusher of cash.

Long-term, Virginia needs to re-think how it delivers and pays for core services such as transportation, infrastructure, health care, and education. There is no indication that either the governor or the legislature has ambitions to do more than tinker at the margins of institutional reform. Accordingly, the only alternative is to adopt an ultra-cautious approach to budgeting: Build up the rainy-day fund, add to the newly created financial reserve, accelerate payments to the Virginia Retirement System, and halt the budgetary gimmickry.

$150 Million a Year More for WMATA? Good Luck with That!

Source: Virginia Department of Rail and Public Transit. (Click for larger image.)

Downstate Virginia legislators are inclined to block increased capital funding for Washington’s dysfunctional heavy-rail commuter system unless the Washington Metropolitan Area Transit Authority (WMATA) undertakes serious structural reforms.

WMATA officials say they need about $15.5 billion for capital spending over the next 10 years to work through a massive backlog of deferred maintenance. Virginia’s state-government share would be about $150 million a year over and above the $200 million it allocates annually to operations and capital spending.

“I want value. I’m willing to deliver,” said state Sen. Mark Obenshain, R-Rockingham, in a meeting of the Senate Finance Committee yesterday, reports the Richmond Times-Dispatch. “But I want to see problems solved. And all too often when we talk about solving problems, the easy way to solve it is just throw more money at it. It’s a workplace problem; it’s an efficiency problem.”

Convincing constituents that giving Metro more money is a hard sell when in his district the Robert O. Norris Bridge “is literally falling into the river,” said Sen. Ryan T. McDougle, R-Hanover. “How is it that I can go to my people and say, ‘We’re going to spend money on an organization where we have no control from the state, we have no say so in the administration based on the board is put together? … There’s no way I can justify a vote to spend that kind of money for an entity that we have this little control over and is refusing to change how that structure is done.”

(For the record, the Robert O. Norris Bridge is not “literally” falling into the Rappahannock River. Transportation Secretary Aubrey Layne told the committee that the state does not even consider it to be structurally deficient.)

Ray LaHood, the former U.S. Transportation Secretary chosen by Governor Terry McAuliffe to review WMATA’s performance and governance, told the Finance Committee that he is trying to develop consensus around four areas: WMATA’s governance structure, its funding structure, its legacy labor costs, and maintenance.

The current management team has cut 1,000 of 1,300 WMATA workers, mostly nonunion employees and tightened ethics and nepotism policies. Also, said LaHood, “We’re going to try to fix the governance part so you feel you do have a voice. We can figure out how to fix your bridge and have a good transportation — Metro system — in Washington, D.C., that you can be proud of.”

Bacon’s bottom line: Obenshain and McDougle are absolutely right. Virginia should not fork over one red cent until WMATA can prove it won’t become a fiscal black hole. It appears that the new management team has taken some important steps with the nonunion workforce, but the real challenge will be extracting major concessions from the union. If it chooses to strike, the union can virtually shut down Washington, D.C. The only way — the only way — for Virginia legislators to stiffen management’s spine in a confrontation is to withhold that $150 million a year.

Even if WMATA delivers needed reforms, pumping another $150 million a year into the authority would aggravate an already lopsided distribution of rail and transit revenues.

As can be seen in the Virginia Department of Rail and Public Transit’s fiscal 2017 budget atop this post, DRPT hands out a total of $437 million a year in grants to cover operational expenses and capital spending for rail, buses and handicapped transportation around the state. Of that amount, $303 million already goes to Northern Virginia. Adding another $150 million a year to that sum would favor Northern Virginia even more lopsidedly — boosting its share from 69% of the DRPT budget to 77%.

Where would the money come from? Shifting money from inside the DRPT budget would eviscerate non-WMATA programs, most of them downstate. Most likely the money would have to come from road & highway spending. Virginia Department of Transportation funds allocated to construction spending in fiscal 2017 amount to about $802 million. Taking the WMATA money from roads & highways would reduce construction spending by 19%. Not just one year, but for 10 years.

Even Northern Virginia lawmakers might balk at that.

Standard & Poor’s Rains on Candidate Parades

Standard & Poor's "negative" rating on Virginia's AAA bonds could squelch candidates' plans for spending sprees and tax cuts.

Standard & Poor’s “negative” rating on Virginia’s AAA bonds could squelch candidates’ plans for spending sprees and tax cuts.

When you run for governor in Virginia, you have to make promises, and when you make promises, the only ones that cut through the media clutter are vows to cut taxes or launch expansive new spending programs.

Thus, this year, Republican candidate Ed Gillespie has rolled out a plan to cut taxes by $1.25 billion (assuming tax-revenue forecasts allow it), Democrat Ralph Northam proposes to eliminate the sales tax on groceries at a cost of $500 million, Republic Corey Stewart pledges to abolish the income tax entirely, and Democrat Tom Perriello has touted spending proposals that would jack up spending by $1 billion. Republican Frank Wagner wants to ramp up transportation spending, but he at least proposes a gasoline tax increase to pay for it.

Amidst all these promises, Standard & Poor’s Global Ratings has issued a sobering warning. While the firm affirmed Virginia’s AAA bond rating, it has dialed back its outlook from “stable” to “negative,” writes Jeff Schapiro in the Richmond Times-Dispatch.

Schapiro paraphrases Secretary of Finance Ric Brown as saying:

S&P is worried about two things, both of which are inextricably bound: the cash cushion the state maintains against a reversal in the economy and doubts about Trump-era federal spending, which would significantly increase defense spending — and Virginia’s nagging dependence on D.C.

S&P cited the big withdrawal — about $600 million — from the so-called rainy day fund that Gov. Terry McAuliffe, a Democrat, and the legislature used to help close a $1.5 billion hole in the budget attributed to sequestration.

With a balance in the emergency account of only $281 million, the credit agency views “this as a low level of reserves relative to similarly rated peers and a situation which could weaken the commonwealth’s ability to respond to economic and financial downturns in the future,” said Brown.

Concern about the draw-down of the rainy day fund is easy enough to understand. Less comprehensible is S&P’s worries about the Trump budget, which includes a proposed $50 billion in increased defense spending. The budget may or may not be good for the nation (we can debate that another time), but it would be unquestionably good for Northern Virginia’s and Hampton Roads’ defense-heavy economies.

Whatever… S&P has its reasons. And state legislators are paying attention. When Schapiro asked Chris Jones, R-Suffolk, chairman of the House Appropriations Committee, if tax cuts and spending hikes are justified, he replied: “From my perspective, I have an obligation to the commonwealth to have a structurally balanced budget that is conservative and prudent.” In other words, Jones is extremely cautious regarding any big spending and tax-cutting plans.

Update: In a statement released today, Gillespie is using Standard & Poor’s announcement to double down on his tax plan. He regards his 10% across-the-board cut to state income tax rates as part of the tonic — along with changes to education and workforce training, regulatory reform and a new approach to economic development — needed to “spark the natural, organic economic growth our Commonwealth needs.”

I still like Gillespie’s tax plan, but spending pressure from Medicaid, K-12 schools, higher-ed, mental health and other sources is not abating. The news from S&P reduces Virginia’s margin for error.