by James A. Bacon

There’s good news on the state budget front. Governor Bob McDonnell announced yesterday that thanks to a spike in May collections, General Fund revenues have grown 6.0% through May, ahead of the 3.6% forecast growth. The fiscal year ends in June.

While advising caution, McDonnell said, “At this moment, it does appear Virginia is on track to meet, and exceed, budget projections, and to post a fourth-straight revenue surplus.”

McDonnell deserves credit for cautious budgeting. His stewardship of the General Fund may prove to be his greatest accomplishment as governor. But it’s premature to break out the confetti. Virginia’s fiscal challenges are hardly over. Much of this year’s revenue surge resulted from a one-time influx of income tax revenue as  investors shifted income to 2012 in order to beat the higher federal tax rates that went into effect in 2013. Sales tax revenues, by contrast, have increased far more modestly.

That’s why it’s a bit discouraging to hear this kind of self-congratulatory, press-release boilerplate from the governor, which implies that Virginia is on some kind of fiscal roll:

Revenue is up; unemployment is down. This is more good news for Virginia’s economy. Over the past three years we’ve seen our state unemployment rate fall to 5.2 percent; the lowest mark in Virginia in 4 ½ years. During that time over 171,000 net new jobs have been created in the Commonwealth during that period; 151,000 of those jobs are in the private-sector. Put simply: more Virginians are working, and that increase in employment is reflected in the growth in state revenue collections.

True, more Virginians are working. According to a June 13 report by Secretary of Finance Richard D. Brown, payroll employment rose 1.1% year from April 2012 50 April 2013. But that 1.1% increase in employment doesn’t come close to explaining the 7.7% increase in individual income taxes through May. Rising wages may account for another two or three percentage points, but the rest is likely tax-avoidance behavior. Next year will not look as good.

On the other hand, the 6.0% increase in Virginia’s General Fund revenues from all sources so far this year handsomely exceeds the national average for the 50 states, which the National Governors Associations pegs at 4.2%. A modest amount of back-patting may be in order.

But a new report, “The Fiscal Survey of States,” projects general fund revenue growth for all states to slow to 2.8% next fiscal year. Meanwhile, federal funding for state budgets remains problematic — a theme I explored in the previous blog post. States the NGA:

Federal funds flowing to states declined for many programs in accordance with sequestration, the automatic across-the-board federal budget cuts that went into effect on March 1, 2013. Although most major federal grant programs that provide funds to states, such as Medicaid, are exempt from the automatic budget cuts, the lower caps on federal spending in place for federal fiscal year 2014 and beyond could significantly impact a number of state grant programs; in most instances, states will not have the resources to compensate for fewer federal dollars.

It looks like a whole lot of ugly going forward. There is no magic money tree to make life easier on the General Assembly. Let us be thankful for a healthy close to Fiscal 2013 and prepare ourselves for a tougher 2014.