VIRGINIA FINANCE SECRETARY Aubrey Layne offered an ominous forecast for commonwealth lawmakers this week — and its one that could thrust tough choices on the General Assembly and citizens alike in the coming months.
Speaking to the House Appropriations Committee and the Senate Finance Committee, Layne said that revenue growth had dipped and expenses in some key budget areas are rising. He predicted those trends will continue — and perhaps accelerate — as the national economy slows.
Layne, who served as transportation secretary under Gov. Terry McAuliffe, is effectively the commonwealth’s chief financial officer. In that capacity, he regularly informs the “money” committees — House appropriations and Senate finance — about revenue collection, state spending and trends for each so that lawmakers can react appropriately.
It’s unlikely that members receiving his report this week enjoyed what they heard.
According to reporting by the Daily Press, Layne said individual income taxes and sales taxes, which account for about 80% of state revenue collections, were growing at about 3.5% a year. That’s in a national economy that posted 2% growth in the second quarter this year.
While that is positive news, Layne reported that the predicted growth of major expenses outpaces that increase in revenue. Public education spending on grades K-12 education and health care (primarily Medicaid) represent about 75% of the state budget and have been growing at annual rates between 5-7%.
As Daily Press reporter Dave Ress summarized, “Income, that is, is growing by about $600 million a year. The flow of money out is growing by about $800 million to $1 billion a year.”
As anyone with a lick of financial know-how will tell you, spending more than you make is a good way to go broke. And while that’s not a risk for the commonwealth, it is not a sustainable way to run a government.
To quote Layne this week, “We have a math problem.”
Worse, there are worrisome signs in the national economy of a slowdown, trends that could well plunge the country into recession. The markets endured a turbulent August when investors were spooked by what’s called an “inverted yield curve,” in which long-term bond investments are less attractive than short-term bonds.
An economic slowdown would almost certainly arrest state revenue collection growth. But the main spending drivers — schools and health care — will continue to grow. That means the deficit Layne highlighted this week could balloon into a serious structural problem.
Now, Virginia is better prepared for a recession (should one occur) than it was a decade ago. As Gov. Ralph Northam told lawmakers last month, the commonwealth is on pace to have about 7% of general fund revenue in reserves by 2021.
But it is important to remember that state expenses have never really recovered from the 2008-09 recession. Richmond has pushed a greater share of the burden for public education, universities, transportation and other vital services elsewhere, foisting it on local governments and citizens.
A slowdown could see state government further abdicate its responsibility to pay for things that provide broad public benefit to the whole of the commonwealth. And that could happen despite smart budgeting that helped amass a substantial sum in reserves.
What’s more, there’s always a risk that the money squirreled away for a proverbial rainy day could well be needed for an actual rainy day — disaster recovery in the event of a hurricane or destructive flooding.
And lawmakers also heard this week from lottery officials, who said that revenue collections are well down thanks to unregulated gaming machines believed responsible for a $140 million drop in annual sales. That could mean a $40 million hit to public education funding.
It seems overly pessimistic to worry that Virginia, which recorded a whopping surplus in the last fiscal year, could be facing a looming fiscal crisis. It could well be that the economy stays strong and the commonwealth continues to thrive.
But Layne is an experienced and trustworthy figure in Richmond. If he’s concerned, so should we all be.
