Virginia’s Budget Fiasco

The news that there will be a budget shortfall should be no surprise. It was predictable and may be the real reason Republicans are pitching such a hissy over Medicaid: they need a smokescreen for their complicity in the McDonnell subterfuge. But it may be worse than at first blush.

Just a couple of weeks ago, the Wall Street Journal provided pessimistic reports regarding state and local government projected revenues from personal income taxes. This was followed by a column by Richard Ravitch that outlined an indictment of fiscal malfeasance across the country. Almost every example he provided should send a chill down our spines. It was as though he was focused on the McDonnell years in our state but there are cases in our local jurisdictions where you find the trail toward insolvency too. Unfortunately, Democrats are not squeaky clean.

Sounding the alarm, Ravitch asks aloud whether the current woes are cyclical or structural. Are they tied to the financial collapse of 2008 or are they the result of legislation that fails to safeguard sound fiscal practice?

Ravitch outlines the common practice of making contributions to employee pension funds that are insufficient to meet contractual and/or constitutional guarantees…”sometimes contributions are not made at all for years at a time.” Everyone involved has an incentive to keep contributions low because the alternative is risk underfunding or face layoffs and/or benefit reductions.

The first and most apparent manifestation of trouble in Virginia is in the Virginia Retirement System. McDonnell and his comrades crafted a complicated fraud on Virginians and our employees. He even claimed that he had resolved the issue of unfunded obligations. That is a lie that will return to haunt.

“Some payments to pension funds are made with promissory notes rather than cash…borrowing to cover operating deficits.” – Ravitch

If state employees had adequate representation, by that meaning a union, the issue might had been adequately addressed. Instead, McDonnell was able to write a ten year mortgage that will never be adequately repaid while continuing to pile up unfunded obligations for the system. Yes, eventually there was another lie perpetrated concerning employee contributions that established a basis for claiming resolution; this single malfeasance may be enough to eventually bankrupt the state, but it pales in comparison with inadequately funding Medicaid which is the largest obligation in almost every state.  

Another trick of the trade was successfully blocked in the case of the Alcoholic Beverage Commission stores: sell assets and treat proceeds as operating revenues; in essence, “selling off the family silver.” There was every indication that Bob would have happily let the Port Authority go too and these instances combined with the Star Scientific case should drive citizens to demand that the money be followed whenever a “deal” is crafted by any politician. Any.

• 2009 – Arizona sold its capitol building for > $700 million
• 2008 – Chicago leased its parking meters for nearly $1.2 billion
• 1991 – NY sold Attica prison to itself for $200 million through a bond issuance costing far more in interest over the long run

How do those examples relate to us? Look at the deal to privatize US 460 and the tunnel tolls in Hampton Roads. Oh that “business savvy” Republican Administration.

We have starved the very underpinning of future growth through drastic underinvestment in physical and human infrastructure. Despite claims to the contrary, our roads, bridges, schools, ports, and children are neglected. Our children’s ability to compete has been diminished. I will admit that that last is a complicated, shared responsibility and that many parents have failed their children too, but government must hold up its end of the bargain if there is to be any opportunity at all.

“We are unhappy with the results of education, then pay more for it.” – Ravitch

The solution offered by Republicans and many blue dog Democrats is always the same: harmful service cuts that only accelerate the downward spiral of the economy and our values. We stand on the verge of failing to fund promises to creditors, public employees, and beneficiaries of essential public services. At greatest risk are children and the elderly with insufficient income. This will manifest in Medicaid obligations where another wildcard is present. There is a move afoot in Congress to raise the minimum eligibility age for Medicare from 65 to 67. That shifts what is currently a federal entitlement to a state funded entitlement.

It is absolutely criminal that the Republican led House of Delegates refuses to deal with reality. They are responsible for the budget crisis and are no reliable source for advice on Medicaid.

There may be other unintended consequences of federal fiscal policy changes that may follow this fall’s elections. There already is no mechanism to measure unintended consequences of policy and budgeting changes in Washington and no incentive for a more “conservative” Congress to even care. Right now, funded or unfunded mandates aside, Washington provides 30% of the states’ annual revenues. You can easily predict this from a Congress led by Republicans: revenue sharing down; unintentional (or maybe intentional too)  unfunded mandates up…a whole lot.

Now I understand that it is the fashion of the Virginia General Assembly members, particularly Republicans and specifically tea baggers, to focus on national hot button issues rather than the welfare of the Commonwealth, but it is time to come home before the chickens roost. There are three things that should be ironed out immediately or whatever results in the current budget battle will be meaningless:

• Define balanced budget providing guidance for what constitutes revenues (not bond proceeds or sales of capital assets) and expenses (all of them based upon reasonable, reliable actuarial data)
• Require recurring expenses to be matched by current revenues (to be defined)…period, plain and simple
• Institute a responsible system of accrual accounting that specifically reflects unfunded liabilities

And finally, realize this: revenues during these past six or so years cannot be relied upon for extrapolation. The financial crisis created an anomaly that must be recognized. First, a whole lot of people bailed out of retirement plans to cover expenses resulting from job loss and/or capital losses. That created reportable personal income that will never be duplicated in this generation. Next, the financial crises resulted, in the long run, some of the largest personal capital gains in history as the market recovered from the devastation created by our banks in cooperation with our politicians (deregulation, etc.). Much of those gains have been taken and reported as income already. Barring unexpected inflation or deflation, that line will be rather flat in comparison for maybe another decade (everything is relative). I should add that revenues for agriculture are also at risk this season. The winter wheat crop in Virginia is down 7% and you can expect that the late freeze damaged some of the fruit and other produce. There are other shoes to drop.

Oh, and my answer to Ravitch’s question whether the revenue shortfalls are cyclical or structural? In Virginia, the cyclical issues are greatly diminished by our proximity to DC and the military presence, they are there, but not our greatest challenge. The structural issues are significant and self-inflicted. We need to quit drinking the Kool Aid and deal with the root causes. Or we will end up no better than Detroit.

Finally…good luck dealing with those dishonest brokers on the other side of the aisle and cowards on your side, Governor McAuliffe.