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-Dispatch. It’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.

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8 responses to “McAuliffe: Build up Budgetary Reserves

  1. I disagree. The last thing on Earth I want is the Imperial Clown Show in Richmond acting as my stockbroker or investment adviser. This is the same crowd that “discovered” an extra $1b in previously unknown reserves at VDOT when Bob McDonnell first became governor, let UVA run up a $1b slush fund while allowing tuition to skyrocket and squandered the entire tobacco settlement fund on one Rube Goldberg idea after another. Now there’s the surplus fund which isn’t quite the rainy day fund which isn’t the UVA slush fund. Good Lord.

    If the Commonwealth of Virginia has over-taxed Virginians relative to legitimate spending needs the excess should either be immediately and irrevocably applied to an area of need (pension funds?) or rebated to the taxpayers.

    Leave a pile of unallocated cash within arm’s length of Virginia’s political class? Bacon, have you lost your mind? You might as well burn that money. At least we’d get some warmth from the resulting fire.

  2. Jim – I took advantage of the three old postings you linked and went back to the 2005 piece, Three Choices, which I thought I wrote but it had your byline. Hell, it was 12 years ago….but Rippert’s posting above indicates that 12 years later it is still true that announcing a big surplus would just get you grief, perhaps more grief than announcing a shortfall.

    There won’t be any pushback on stashing the money in reserves because there was very little in the basic report to get happy about. Only two revenue categories exceeded the very conservative (and previously reduced) projections. One was employee withholding (which is good) and the other was corporate income tax (which is always mercurial). The economy is not responding as in past rebounds, the federal level uncertainty adds another layer of concern, and you are dead right that several expense categories just continue to grow.

    • I don’t have a problem with the General Assembly spending the money. I understand that the state has underfunded pension funds. Great. Commit the surplus to getting the pension funds closer to fully funded. There are infrastructure improvement projects that are just below the “funding line”. Use the surplus to fund these infrastructure projects.

      The truth is that Virginia doesn’t really have a balanced budget no matter how much hot air is blown from Richmond. An underfunded pension plan is a liability whether our political class acknowledges that or not. Failing to put sufficient funds into pension plans to get them fully funded is the same thing as running a deficit. In other words, if you’re not adequately funding pension plans then you don’t have a balanced budget.

      One final problem with over-taxing, slush-funding and then using the slush funds to pay expense categories that “continue to grow” is that it masks the problem from the citizen – taxpayer – voters. Runaway spending always exhausts slush funds (see Social Security for an example). Using pre-stashed slush funds instead of raising taxes or cutting spending hides the problem. Once the problem becomes apparent it’s a crisis no time to think things through … just a clarion call to “raise taxes” “raise taxes” raise taxes”. Who can forget candidate Mark Warner’s promise not to raise taxes followed by a major tax hike as soon as he was governor. “The problem was worse than I thought” said the so-called entrepreneur.

      Commit the surplus to fund specific initiatives or rebate it.

  3. I was GOP caucus director when creating a “rainy day” revenue reserve fund was an issue, and it was a positive step that is still being applauded by the rating agencies. Obviously it can be overdone but right now, given the uncertain signals in DC, I’m happy to see the money parked there. The balance is not hidden if you know where to find it in the reports. But I do agree a budget is not balanced if there are – as former Senator Stosch was fond of saying – bills in the drawer.

    Here’s the background numbers from yesterday’s presentation.

    And gee, do you want the whole list of politicians who promised to not raise taxes and did? Can’t really pin that just on Warner. Who gets elected promising to raise taxes? 🙂 What we really need to do is examine how the tax code fits with the way the economy, and especially the retail world, is changing. But once again, the uncertainty about federal tax rules makes it that much hard to start any discussion in VA, since we are (and should remain) a conforming state.

    • As I recall, Governor Doug Wilder also faced tough economic times and was advised by the WaPo constantly and consistently to raise taxes. But Governor Wilder refused and worked his way through the tough times. I’ve always admired him for that approach.

      If Fairfax County wants to rename JEB Stuart HS for a black leader, I nominate Governor Wilder.

    • Better budget transparency would make it easier to see when a candidate is lying about not raising taxes.

      I have never agreed with the so-called Rainy Day Fund. It represents over-taxation of the citizens. As for the rating agencies … please. If the Great Recession didn’t prove how utterly corrupt and useless they are then I guess nothing will prove that.

      We’d have plenty of money to run the state if the General Assembly didn’t grant company-specific and industry-specific tax breaks without any expiration date. These tax breaks are the gifts that keep on giving. They are totally unmanaged. Nobody knows if they are meeting their original intent. JLARC produced the following damning report in 2012 …

      Read the Key Findings section. $12.5b in tax preferences per year. No idea whether the tax preferences have paid off or not. No time limit on the preferences.

      And these are the clowns you think should be managing excess taxes collected and held as a surplus?

      • Another data point. Earlier this summer I attended a McLean Citizens Association meeting with the Fairfax County Tax Administration Department to discuss the real estate assessment process. The current director used to work for the Virginia Department of Taxation. He advised us that, statewide, for every dollar that is taxed (all taxes state and local), 90 cents is not taxed. This would be income, real estate, personal property, etc. No one asked about sales taxes so I don’t know if this includes items that are not taxed, such as services.

  4. ” The governor and assembly budget leaders have mutual concerns about the decision by Standard & Poor’s to downgrade the state financial outlook in April from stable to negative because of uncertainty over federal spending and over-reliance on the Revenue Stabilization Fund, or rainy day fund, to help fill big revenue shortfalls in 2014 and again last year.

    “We’re very cognizant of S&P’s concerns,” House Appropriations Chairman S. Chris Jones, R-Suffolk, said Monday after the governor’s speech. “We’re on the same page as far as all excess revenue going into the revenue reserve fund.”

    DJ – this is the govt you do have… neutering them so they can’t govern at all is not a rational solution, guy

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