A surplus of caution

Virginia finished its last fiscal year with a budget surplus of $585 million, the result of conservative revenue forecasting and a state workforce savvy about doing more with less.

Gov. Bob McDonnell reported the good news Monday to the General Assembly’s money committees, the fourth consecutive year that he has been able to boast of a year-end surplus. For three consecutive years, general fund revenue growth has exceeded 5 percent. McDonnell cited that growth as “concrete evidence” that Virginia’s economy is bouncing back from the Great Recession.

The growth has helped McDonnell and legislators to make overdue investments in higher education, increase pay for state employees and teachers, and end a budget gimmick that forced localities to return a portion of their state aid to Richmond. It also has enabled the state to shore up its rainy day reserve fund to brace for the next recession.

The revenue recovery has not triggered a dramatic increase in state spending. Excluding deposits into the rainy day fund, general fund spending has increased by just 0.3 percent over the past six years. Even as Virginia was running a surplus, it was spending less money for public education on a per-pupil basis than in 2008.

Virginia’s dependence on federal spending and its own looming fiscal obligations should subdue any temptation lawmakers have to click their heels over Monday’s news.

Sequestration remains the biggest threat to Virginia’s economy, McDonnell said. The Pentagon has reduced furloughs for civilian defense employees, but a decline in federal contracting affected state income tax receipts in the final quarter of the fiscal year. And Congress’ penchant for temporary fixes provides no certainty as McDonnell’s administration prepares a new, two-year budget to be delivered in December.

McDonnell reminded lawmakers Monday that they face unavoidable costs in the upcoming biennium, including required payments to the Virginia Retirement System. The state will have to come up with an additional $320 million over the next two years to keep pace with a plan to fully fund its pension obligations. Early in McDonnell’s term, the state deferred $620 million in payments to help balance the budget.

McDonnell told lawmakers that the succession of surpluses is “remarkable when one considers the difficult economic conditions we worked through together.” With the challenges that loom on the horizon, that work must continue after McDonnell leaves the scene.

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