Defending Against Republican Improvised Economic Devices

For three years we have heard that Virginia is enjoying budget surpluses. All the while, a series of gimmicks have been employed that will unravel during the years to come; some immediate, some long term. Terry McAuliffe would be well advised to determine baselines that provide context for funding obligations.

Ken Cuccinelli was right when he claimed that taxes would increase during a McAuliffe administration; what he failed to point out was that they also had consistently increased during the current administration and would under his own. The difference will be that Governor McDonnell was allowed to borrow against the future and underfund capital requirements, in effect levying the tax on his successors and generations to come. Cuccinelli would have done much more of the same. Such maneuvers by the coming McAuliffe administration will not be met with the deafening silence afforded the current administration.

Maintaining the Illusion of Surpluses
• The Virginia Retirement System (VRS) “loan” amortization, the legislatively mandated 20% annual contribution deficiency, and total unfunded pension obligations
• Education infrastructure maintenance, capitalization and re-capitalization underfunding
• Transportation infrastructure maintenance, capitalization and re-capitalization underfunding
• Positive growth of revenue streams; particularly from areas such as agricultural production where weather and markets are beyond the influence of state government but have had a good run

Terry McAuliffe should conduct an audit early on so that the inevitable future claims of fiscal malfeasance can be placed in context when the bills come due. This one must be much more honest than the audit by McDonnell’s team which made claims like turning up over $100 million that had been “mismanaged” by the Department of Transportation during the Kaine administration (conversely, McAuliffe should make certain that operating funds and reserves have not been drawn down). No, this audit should nail down underfunded and unfunded obligations that are currently, to a great extent, off the books. Some will come due during the next four years; some will continue to grow otherwise unacknowledged until they explode with consequences similar to the Detroit pension crisis.

Cutting state funding to balance the budget and relying on sun-setting federal funding to meet standing obligations has been the McDonnell way. Shifting obligations toward local jurisdictions then leaving them holding the bag when federal money is diminished would have been the Cuccinelli track. There are stark choices on the horizon. Chesterfield and Henrico have illustrated the wrestling match between obligations and revenue generation. Tuesday the people of Chesterfield decided to vote down a meals tax while a similar proposal passed in Henrico. While there is little stomach for higher taxes, local jurisdictions will either raise property or sales taxes or reduce services and/or fail to recapitalize and maintain infrastructure. Both options impose a “tax;” one is more existentially palatable because it doesn’t immediately manifest. Republican proposals to reduce corporate taxes would only exacerbate the problems local jurisdictions face; there will eventually be a bill payer and it is increasingly looking like local jurisdictions and their resident property owners.

The bottom line is that we really don’t know the state of the Commonwealth’s finances. The McDonnell administration has been given a free pass by default. The devil is in the details and these details are incomprehensibly complex when presented out of context, meaning it is easier to pass a well-crafted press release as news than make the effort to analyze and report fiscal chicanery. The condition of the VRS is most disconcerting but education funding is a close second. Transportation has been given a transfusion, but there hasn’t been time to assess the results. Frankly, Republicans were happy that McDonnell’s team appeared competent and Democrats never found a voice to challenge, or maybe didn’t understand, the Republican portrayal of a fiscal miracle.

McAuliffe’s should not be an exercise in finger pointing. It should be meant to strategically prevent fiscal surprises and the embarrassment of being caught unawares. Knowing the actual fiscal condition of the Commonwealth is something Virginians deserve and will go a long way toward clearing away obfuscation when difficult choices arise. As Mark Warner discovered when he became Governor, the bag you are left holding is chock full of surprises.