Associated Press

House Appropriations Committee Chairman Del. Lacey Putney congratulates chief of staff Robert Vaughan (left) after the budget passed Sunday.

Associated Press

Gov. Bob McDonnell, right, shakes the hand of Senate Majority Leader Richard Saslaw, D-Fairfax, as the legislators inform the governor that they were ready to adjourn at the Capitol in Richmond on Sunday.

General Assembly 2011

Among the major issues: The state's continuing efforts to provide services with fewer dollars and Gov. McDonnell's plan to privatize liquor stores. Session ends Feb. 26.

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• Va. Senate again votes to undo handgun purchase limits
• Va. House advances bill to restrict local taxing power

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RICHMOND -- Virginia's new two-year budget would slash funding for public schools and health care programs, reduce aid to localities and increase some fees to offset a $4.2 billion shortfall, reflecting a fiscal crisis Gov. Bob McDonnell described as "the most difficult period of time in modern Virginia history."

Both houses of the General Assembly passed the compromise spending bill late Sunday afternoon, about 16 hours after negotiators from the two chambers struck a deal on an austere budget that will have far-reaching effects on state and local services. The Republican-run House of Delegates passed the budget by a vote of 73-23. The vote in the Democratic-controlled Senate was 34-6.

"Sixty-one days ago we started this process knowing that the task that lay ahead was going to be tough," said Del. Lacey Putney, I-Bedford, the chairman of the House Appropriations Committee, in a brief presentation on the House floor.

McDonnell has 30 days to amend the legislation, which the General Assembly would consider at its April veto session.

The compromise budget cuts more deeply into public services than the two-year, $75 billion plan that former Gov. Tim Kaine introduced in December. Both houses rejected Kaine's plan to eliminate $950 million in annual car tax relief subsidies, and there was no support for Kaine's proposed income tax increase to generate revenue for localities.

"They decided early on in the session that they would not pass an income tax increase, they would not roll back the car tax," said McDonnell, who took office in January. "So the discussion was really about how do we manage government better? Where do we cut spending?"

The general fund portion of the budget -- which is largely supported by state income and sales taxes -- is $6 billion less than the spending plan lawmakers adopted two years ago.

Lawmakers took some steps to avert deeper cuts. They agreed to defer $620 million in contributions to the state pension system over the next two years and approved nearly $100 million in new fees, including a $2 increase in vehicle registration fees.

Sen. John Edwards, D-Roanoke, said lawmakers should have considered a moratorium on car tax relief payments to protect funding of essential services.

"We didn't do what we could have done and should have done," Edwards said.

But House Majority Leader Morgan Griffith, R-Salem, said the budget is one "we can all be OK with in light of the economic circumstances."

"Obviously, it's not great because we've had to do some heavy cutting," Griffith said.

The final package adds another $253 million in public school funding cuts to those Kaine proposed in December. The $5.5 billion the state would spend in direct aid to education next year is about $790 million less than it spent for the 2008-09 school year, the high-water mark for public school funding, said Robley Jones, a lobbyist for the Virginia Education Association.

The budget includes funds to compensate localities that are hurt by a change in the school funding formula known as the local composite index. The state would provide a full "hold harmless" payment next year and a 50 percent payment the following year.

The compromise budget also contains $360 million in additional cuts to health and human services programs. The reductions would have been worse had lawmakers not agreed to apply $370 million in discretionary federal medical assistance funds to mitigate cuts in provider reimbursements and programs that serve elderly, disabled and low-income populations. Hospitals already had anticipated that Medicaid payments would drop from 72 percent of the cost of providing care to 64 percent by 2012.

Mark Lawrence, a lobbyist for Carilion Clinic, said Sunday it is too soon to gauge the impact the cuts will have on the health system's jobs and services. But, he said, "We're going to have to make some provisions for those."

The budget reduces funding for sheriffs and prosecutors and freezes funding for judicial vacancies for the next two years. A circuit court vacancy created by the retirement of Judge Ray Grubbs, who sat in Montgomery and Floyd counties, won't be filled. The budget calls for no additional furloughs of state workers, though a one-day furlough for the current fiscal year remains in place.

State colleges would get to keep the $18.1 million in fees that Kaine proposed transferring to the general fund. Lawmakers reduced funding for tuition assistance grants that help Virginia college students at private schools. But they approved a provision that would make students at the new Virginia Tech Carilion School of Medicine eligible for the grants.

The budget also includes additional cuts of 5 percent for public libraries, 15 percent for the Virginia Commission for the Arts [comment on the Arts and Extras blog] and 15 percent for public broadcasting.