by Dick Hall-Sizemore

In my almost 50 years of working around, and following, the General Assembly, I do not think I have ever seen the legislature take apart a governor’s budget bill to the extent that this General Assembly just demolished Gov. Youngkin’s budget.

The change that had the most impact was the jettisoning of the governor’s proposed tax package. Steve Haner has previously described the legislature’s actions (here and here). To summarize, the legislature rejected the governor’s proposed tax cuts, embraced his proposal to expand the sales tax to digital services, and went one step further by expanding the sales tax to cover digital services between companies.

The Governor’s proposal would have resulted in about $1 billion less in general fund revenue over the biennium. The move by the legislature was projected to increase general fund revenue by $1 billion over the biennium. That is a $2 billion swing in general fund revenue available for appropriation. And the Democrats in the majority on the budget committees of both houses were happy to use that extra money to spend on their priorities, primarily K-12. One only has to peruse the conference report to see a plethora of appropriation increases.

The additional tax revenue was not the only source of additional general fund dollars available for appropriation. In many of the cases in which the governor proposed increases in appropriations, the legislature either reduced the governor’s proposal or killed it altogether. In any case, they could use the appropriation freed up by their action for something else.

There is one striking example of this latter approach that must really gnaw at Gov. Youngkin. One of Youngkin’s top priorities during his election campaign was the expansion of charter schools. Because the state constitution vests the authority to operate public schools with local school boards, there was not much the governor could do. As an alternative, he turned to college partnership lab schools, which state law allows institutions of higher education to establish. At the governor’s urging, the 2022 General Assembly appropriated $100 million to  expand lab schools. In the introduced budget this year, the governor included another $60 million for lab schools. The General Assembly eliminated that $60 million appropriation. Furthermore, the budget committees discovered that in the almost two years since $100 million had been provided to expand lab schools, only about $15 million had been obligated to applicants. Therefore, they included language in the budget bill directing that the $85 million balance be transferred from the special fund in which it had been placed back to the general fund. Those two actions freed up another $145 million to be appropriated for other purposes and killed the governor’s initiative to expand the use of lab schools.

Here are two more examples of “repurposing” general fund appropriations proposed by the governor. Youngkin included an additional $200 million in his budget for the Virginia Business Ready Sites Program. The General Assembly cut $160 million out of that amount. After all, from FY  2022 to date in FY 2024, the administration had spent only $21.5 million from the fund and currently has about $79 million in cash in the fund. The governor proposed putting $25 million in general fund dollars into the Virginia Business Ready Sites Acquisition Fund. The General Assembly said no, it had other priorities for the use of that money.

The other big story regarding the budget, of course, is the rejection of Youngkin’s $1.5 billion proposal to create an authority to finance and oversee the construction of facilities to house the Washington pro basketball and hockey teams at Potomac Yards in Alexandria. It was widely believed that Youngkin saw this as his legacy project.

The House supported the project. The bill establishing the authority passed, 59-40. Twenty of the 59 votes in favor of the bill came from Democrats. There was bipartisan support and opposition to the authority. The House also included language in the “caboose” budget bill creating the authority.

In the Senate, Sen. Louise Lucas (D-Portsmouth), chair of the Finance and Appropriations Committee refused to bring up either the Senate or House bills creating the authority. In addition, the Senate Finance Committee stripped the sports authority language from its version of the budget bill. At the end of the session, the language in the House version of the caboose budget bill was in the hands of the budget conference committee. There was much speculation as to what the budget conferees would do. The owner of the Washington Wizards and Capitals met with Lucas late in the process to make his case for state financing of the arena. But Lucas was firm in her opposition and the remainder of the budget conferees went along with her. The arena project was dead as far as the General Assembly was concerned. In this case, the budget bill was remarkable for what it did not include.

The reason or reasons for the demise of the project are best known by insiders. However, there is enough public information available to lead to some tentative conclusions.

One first begins with Youngkin. Although a newcomer to politics and government in general, and to Virginia politics and government in particular, he chose to surround himself with advisers and cabinet officials that came from the world of high finance that he was familiar with, rather than people with a background in Virginia politics and government. He still seems not to understand the difference between politics and government. Responding to the legislature’s rejection of the arena project, he complained, “It befuddles me.”  Reporters Gregory Schneider and Laura Vozzella of The Washington Post summed it up by saying the governor had run up against a basic truth: “A governor is not a CEO.” Youngkin would also have done well if he had paid attention to the mantra espoused by the legendary late Sen. Hunter Andrews (D-Hampton): “The governor proposes; the legislature disposes.”

Youngkin has reportedly developed a good relationship with the Speaker of the House, Don Scott (D-Portsmouth). That cannot be said to be true with the Senate. Sen. Scott Surovell (D-Fairfax), the majority leader, complained, “He [Youngkin] needs to learn that this isn’t Carlyle, it’s not a corporation. We’re a coequal branch and if he wants us to work with him, he needs to learn how to compromise and have dialogue about issues that matter to both him and us, and not just only things that matter to him.”

The major concern voiced by opponents of the arena deal had to do with bonds and how much taxpayers would be on the hook for. There are two basic types of bonds:

• General obligation (full faith and credit). This is the gold standard. The state would have a legal obligation to pay the principal and interest owed to the bondholders. This type of bond gets the highest rating. Virginia general obligation bonds are rated AAA. Before the state can issue general obligation bonds, voters must approve in a referendum.
• Revenue bonds. The revenue from the project supported by the bonds is used to pay the principal and interest owed to bondholders. There is no legal obligation for the state to make any payments. If the revenue is not sufficient to make the debt service payments, the bondholders are out of luck. That is what happened to some of the holders of the original bonds issued by the Chesapeake Bay Bridge and Tunnel Authority. Revenue bonds have a lower rating than general obligation bonds.

In addition to those two basic types, there is a hybrid, in-between variety, called “moral obligation” bonds. In effect, with these bonds the state is saying, “The revenue produced by the project financed by these bonds will, in all likelihood, be sufficient to cover the debt service on these bonds. If, for some reason, there is a shortfall in the revenue, the legislature is authorized to appropriate funds to make up the shortfall and we promise that it will do so. However, the state is under no legal obligation to cover the shortfall and if we fail to live up to our moral obligation, there will be no legal recourse for you.”

Bondholders like moral obligation bonds because they know the state is almost certain to come through in the case of a revenue shortfall because, if it did not, its credibility would be badly damaged. In addition, because moral obligation bonds are rated higher than revenue bonds, the interest rate paid is lower. The state likes moral obligation bonds because there is a high demand for them and, because there is frequently a difference of only a few basis points in the interest rate for moral obligation bonds compared to general obligation bonds, there is no advantage to be gained by going through a referendum to issue general obligation bonds. Here is an example of a bond offering that includes moral obligation bonds. Even if you do not want to plow through all the dense bond language, notice that the moral bond issuance piece is plainly labelled “Moral Obligation.”

The proposed Wizards and Capitals arena deal called for the authority to issue about $1.5 billion in moral obligation bonds. Several legislators expressed concern about the size of the deal, the lack of information provided by the administration, and the potential involvement of taxpayer money. Sen. Mamie Locke (D-Hampton) complained, “We’re talking about a lack of process, we’re talking about a lack of information, we’re talking about a rush [of] putting together a project that did not have to be rushed. There are all kinds of problems that were part of this whole thing.” Del. Mark Sickles (D-Fairfax) concurred, saying, “It’s not ready for prime time…. There’s questions about it .… The consensus bill has not been developed yet for the arena.”

Lucas frequently brought up her objection to making taxpayers potentially liable for some of the costs of the project. At one point she said she told the governor, “Governor, I’ve thought about the negative impact — to put the full faith and credit of the commonwealth behind a project that’s going to enrich billionaires was a bridge too far for me.” (Perhaps this is just a bit of heated rhetoric. The “full faith and credit of the commonwealth” was never an issue and, hopefully, Lucas knows the difference between general obligation bonds and moral obligation bonds.)

Lucas brought up another concern. Black Democrats are now in three key leadership positions: Speaker of the House and chairs of the two money committees. She said she was worried that, if the project failed, she and other Black leaders would “come out looking like we can’t manage well.”

Perhaps the Senate would have supported the proposal if the financing had been changed to revenue bonds instead of moral obligation. Surovell indicated that he may have been amenable to that, but, he said, “He [Youngkin] has stated that the financing is nonnegotiable and our priorities are nonnegotiable.”

Early in the session, it had been thought that the Democrats would use the governor’s desire for the deal as leverage to get his support on some of their priorities, such as increasing the minimum wage, legalizing the sale of marijuana, decreasing tolls in Hampton Roads, and more funding for Metro in Northern Virginia. As indicated in Surovell’s comment above and other comments, it does not appear that Youngkin was willing to deal as much as Democrats wanted. When asked about not getting those priorities, Lucas fell back on her version of another one of Hunter Andrews’s observations. His was “Governors come and go; legislatures are here forever.” Her version: “He’s here for another two years, I’m here for four.”

My Soapbox

I can’t help feeling that there were a couple of other factors involved in the defeat of the arena proposal. The Senate Democrats just don’t like Youngkin. After battling him for two years on the culture war front, they were able to hold their majority in the November election despite his campaigning hard against them. His openly campaigning for the presidential election during his first year in office and his comment during the session that “today’s progressive Democratic Party does not believe in — nor do they want — a strong America, an America with no rivals; they are content to concede, to compromise away, to abandon the very foundations that have made America exceptional” certainly did not help his case. In the end, they were not about to give him a big win on a project whose main beneficiary was a billionaire, especially if he was not willing to give them a lot of what they wanted.

As for Lucas, she seemed bent on establishing herself in the same mold as previous autocratic chairs of Senate Finance—Ed Willey of Richmond and Hunter Andrews. She obviously relished the spotlight and happily accepted Youngkin’s description of her as a “roadblock.” She even celebrated her role on social media. (See here.) Her expressed objections may have been genuine, but she also enjoyed being able to stick it to the governor.