Virginia’s Budget Meltdown

Virginia Gov. Ralph Northam’s (D) “timeout” on any new spending in the state’s recently approved budget is an admission of what’s long been obvious: The fiscal pain is just getting started.

How much pain and how long it lasts are unknown. There’s plenty of reason to believe Virginia, like the nation as a whole, is in or close to a recession. How bad might it get?

The Associated Press’s Alan Suderman reports on a memo from Northam chief of staff Clark Mercer that says a recession is on its way and state revenue will be worse than even the most pessimistic forecasts.

As dire as that sounds, things may be even worse than Mercer describes. In a study from the Federal Reserve Bank of Richmond, even the experts can’t say for sure when or where the economy will hit bottom. Their models aren’t designed to keep pace with the news flow:

One challenge for economic policymakers has been that public health data arrive at a much higher frequency than macroeconomic data outside of financial markets. As the pandemic evolved, it was not until March 26, well after the public health reports had taken over the headlines, that the full scale of the economic calamity became apparent in the data: the weekly release of unemployment claims data showed that new claims had skyrocketed to 3.3 million. According to the Department of Labor, the prior peak was 695,000 claims in October 1982. This was the first indication of the severity of the shock to labor supply and demand.

If the Fed is having a tough time keeping on top of the news, it’s little wonder Northam and Finance Secretary Aubrey Layne are reluctant to put solid dollar figures on the size of Virginia’s budget problems.

The most Layne can guess right now is a $2 billion revenue hole in the state’s finances over the next two years.

But that’s looking into the future. Virginia is likely going to have to address its spending levels for the remaining quarter of the current fiscal year, which expires June 30.

Yes, federal aid is on the way. But as lawmakers quickly discovered, that money doesn’t replace lost revenue and must be used for fighting the coronavirus. While Virginia Democrats hope Congress will loosen the restrictions a bit, that’s probably not going to happen in time to avoid the painful cuts Senate Finance Committee chair Janet Howell (D-Fairfax) said she wants to avoid.

If Virginia’s response to the Great Recession and the damage it inflicted on state finances is any guide, then spending cuts are unavoidable, and a number of Democratic priorities are going to suffer.

Barely a month into his term, then-Gov. Robert F. McDonnell (R) had to find a way to close a $2.2 billion budget gap without raising taxes (a pledge he would later break over transportation funding, but that’s another story).

Howell was among those sharply critical of McDonnell for dragging his heels on making changes to the budget. But he made them — and Democrats weren’t happy. McDonnell slashed education and social spending, cut the state’s contribution to its employee retirement plan, and much more.

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