Governor's fiscal legacy: cutbacks

Heading into the midpoint of his four-year term, Gov. Bob McDonnell is thinking about his legacy; in particular, how to pay for it. But that could be his legacy: not having any money.

The economic, fiscal and political chaos unfolding outside Virginia is taking its toll inside the state, auguring hard times for McDonnell at the worst possible time: when he is fashioning a full, two-year budget — due in December — that is his alone.

Some harbingers are obvious; others are overlooked because their impact may not be felt for months. And some are structural, part of the permanent cost — the permanently rising cost — of government.

Combined, they signal that McDonnell's budget for 2012-14, as a monument to him, will likely be a model of further retrenchment. Because of recession, he has already reduced the current budget by $6 billion through cuts and shuffles. Sleight of hand, including a $670 million raid on the public employee retirement fund, contributed to a $331 million surplus.

Even before this past week's market swoon fed fears of a double-dip and before Standard & Poor's' stunning dialback on federal credit, McDonnell, whose hostility to higher taxes is supposed to make Republicans friendlier to his presumed vice-presidential ambitions, faced a budgetary minefield:

• Rising unemployment: Joblessness is up to 6.3 percent in June from 5.9 percent in May. Declines in payroll mean shrinkage in withholding, signs of which surfaced in the June tax-collection report.

The unemployed — and those who fear joining them — spend less. That means sluggish consumer purchases and a decline in sales-tax collections. The revenue picture, in a word, is uncertain.

But will that be the watchword of McDonnell's economic advisers in their private sessions with him when, post-Labor Day, the budget-building process accelerates?

• Market collapse: Losses on Wall Street are tax shelters, cushions against gains. They drive down individual tax bills, potentially for several years because losses can be taken incrementally. Such dips surfaced in the closing months of the Democratic Kaine administration.

• Debt deal: It means cuts in handouts from Washington, though it's not clear how, where and when they will be made. Worse for Virginia is the prospect of automatic across-the-board, job-killing reductions, including $600 billion in the defense budget, if the super-committee can't reach terms.

• Credit-rating downgrade: Moody's has said Virginia and four other Aaa states could lose that sterling distinction — pushing up the risk for bondholders and the cost to taxpayers — because of their dependence on federal beneficence.

The liberal Commonwealth Institute for Fiscal Analysis, predicting an $800 million shortfall in the next biennium, estimates that nearly 45 percent of personal income in Virginia is linked to federal spending — salaries, pensions, contracts and grants.

• Transportation funding: Federal aid could be cut 30 percent, under a U.S. House Republican proposal backed by McDonnell. That plan could drive up the cost of a McDonnell initiative, $1.1 billion in road-construction bonds supported by anticipated federal aid.

Debt service, the minimum scheduled payments the state must make to bondholders to avoid default, would increase from 10 percent of expected federal revenue to more than 14 percent.

• Structural costs: A required recalculation in the state's minimum, per-pupil contribution to local schools is projected to cost $319 million over 2012-14. Another big bill — amount unknown — is a possible settlement with federal civil-rights watchdogs over improvements in mental-health care.

   

  Undetermined, too, are contributions to the Virginia Retirement System, the rising costs of which, McDonnell and the conservative Thomas Jefferson Institute for Public Policy say, can be controlled by switching from state government-managed to state worker-managed pensions. But will that instill in McDonnell and legislators the self-control to resist another grab at VRS?

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  Contact Jeff E. Schapiro at (804) 649-6814. His column appears Wednesday and Sunday. Watch his video column Thursday on Times-Dispatch.com. Follow him on Twitter.com/RTDSchapiro. Listen to his analysis 8:33 a.m. Friday on WCVE (88.9 FM).