McDonnell's expected $78 billion budget to define his legacy

More than a spending blueprint for the next two years, Gov. Bob McDonnell's proposed Virginia budget — a hard-times plan masked in a happy face — will be the fiscal foundation of his legacy.

"This is the time when he has the best opportunity to send the clearest signal about his priorities and how he wants to be remembered as governor," said political analyst Robert D. Holsworth, who has followed government and campaigns here for three decades.

Approaching the halfway point of a nonrenewable four-year term, McDonnell on Monday rolls out the only full, biennial budget of his administration. He does so at the presumed peak of his powers, having raised and spent more than $4 million to tip the General Assembly back to Republican control in last month's elections.

"This governor's position of strength will trump any other matter," said retiring Sen. William C. Wampler Jr., R-Bristol. "At the end of the day, the governor has elected a lot of new members and has the respect of a lot of retiring members."

Balanced with further spending cuts — that could mean more layoffs — and again shunning new taxes, the budget reflects continued economic uncertainty and will support policies in place beyond the close of McDonnell's term in January 2014. It will be a political statement, too, a contrast with federal fiscal follies and another signal to a national audience of McDonnell's availability for the vice presidency.

The budget will be a behemoth, possibly exceeding $78 billion. Its size belies its frailties: a shortfall estimated by legislators at $1 billion and the ever-spiraling cash demands of Medicaid, which provides health care for the poor, and a highway program that got a partial, multibillion-dollar fix earlier this year.

Also, the state-worker pension fund must be stabilized, having been weakened by gyrating markets and politicians' failure to fully finance it while using it as a bank. At McDonnell's urging, lawmakers steered $620 million from the Virginia Retirement System to help close an earlier $2 billion hole in the recession-battered budget he inherited from Gov. Timothy M. Kaine, a Democrat.

Though McDonnell is now promising a $2.2 billion patch for the pension fund, an additional $100 million for colleges and universities, and an even-heftier slice of sale-tax revenues for roads, he is doing so largely by harvesting cash from other programs through spending reductions that in some cases reach 6 percent.

Even a salary sweetener for state workers — $77 million in one-time bonuses that would be paid next December — depends on their ability to scrape together at least twice that in savings.

"All of the one-trick ponies have already performed and the spending cuts that will occur will be painful, particularly at the local level," said Wampler, who was in line to become chairman of the powerful Senate Finance Committee.

Out-of-power Democrats, struggling for a message that resonates with voters, are warning as much.

Sen. A. Donald McEachin, D-Richmond, chairman of the Senate Democratic Caucus, said in a written statement that McDonnell's pension-fund proposal will be costly for already-strapped localities, compelling them to find — perhaps through spending cuts — an additional $1 billion for worker retirements.

"To use an overused expression, it is an unfunded mandate," said McEachin, who also is leading a so-far unsuccessful effort in the courts to force Republicans to share power in the evenly divided Virginia Senate, as the two parties did when the chamber tied the first time in 1996.

Looming over the budget are such wildcards as deep reductions in federal spending in 2013, triggered by the failure of the congressional supercommittee to reach a deal on shrinking the deficit. The cuts could hit hard spending long-protected by Washington: government-services contracts that fueled the growth of Northern Virginia and defense appropriations for military-rich Hampton Roads.

This, along with McDonnell's decision to close a prison in Mecklenburg County because Pennsylvania is withdrawing 1,000 inmates housed by Virginia, could lend further urgency to his already-aggressive economic-development program. As a candidate and governor, McDonnell has emphasized job creation.

Over tea-party complaints of corporate cronyism, the legislature has given McDonnell a free hand to offer millions of dollars in taxpayer-financed incentives to businesses to locate in Virginia. The General Assembly expected to endorse his recommendation to set aside $30 million as an initial cushion against revenue losses linked to deficit reduction.

That move is designed to reassure credit agencies considering lowering Virginia's triple-A bond rating — the highest possible — because of its dependence on federal largesse, which accounts for about a quarter of the state's economy.

"One of the themes you'll see … is that we try to keep some ready cash for flexibility," said Richard D. "Ric" Brown, secretary of finance.

The General Assembly session that opens Jan. 11 also marks the beginning of the downhill side of McDonnell's term.

It is a point at which lawmakers — particularly Republican delegates — begin distancing themselves from him, positioning to defend their seats on a 2013 ticket led by someone else.

That candidate will be selected in what could be an explosive nominating fight. Attorney General Ken Cuccinelli, heartthrob of the conservative grass roots, is challenging Lt. Gov. Bill Bolling, McDonnell's heir apparent.

The early thrust-and-parry of the Cuccinelli-Bolling contest could emerge as a subtheme in the budget debate, with both angling for the upper hand.

"That remains an ongoing distraction," said Holsworth, the political commentator. "Republicans will begin to choose sides. This is something McDonnell would have preferred not to deal with."