The Governor Addresses the Joint Money Committees
With a New Support Staff

TRADITION, TRADITION—Different in 2008?

Traditionally, the Governor of the Commonwealth reports to the so-called Joint Money Committees (The House of Delegates Appropriations Committee—HAC, the House of Delegates Finance Committee—HFC, and the Senate Finance Committee—SFC) in August to let all of the astute, business oriented, financially knowledgeable legislative members of these committees know how the “Best Run State in the Union” fared in the just passed fiscal year. Traditionally these addresses last 40 to 50 minutes with the recitation of lots of figures and calculations and with “pats on the back” for everyone in good years and moans for everyone in the bad years. On Monday, August 18, 2008 it was a different type of statement to the committee.

The legislators expected to hear just how bad of a situation the finances of the state really were. In fact, Delegate Lacey Putney, who chaired the Joint Committee Meeting in the absence of the SFC Chairman, Senator “Chuck” Colgan—who was in Texas where his son had suffered a heart attack over the weekend—introduced the Governor with the quip, “Governor, we’re very pleased to have you before the Joint Committee to bring us all of the ‘good news’.”

Unlike most of the past reports which many of the followers of events at the capitol have heard, the Governor had only four short paragraphs on “The Commonwealth’s Fiscal Performance in FY 2008” (the traditional purpose of this August address). These he covered about half way through his 16 minute speech.

Prior to those comments he noted his report was “…far more challenging than my previous reports.” He then reiterated the extents of the two cuts in revenue estimates made in his two and two/thirds years in office. He laid out how the National Economy is struggling and how this national downturn impacts Virginia. He concluded these early statements with two pertinent observations. One, “…growth prospects are slim in the near term…” and “…the federal deficit this year is likely to be the largest ever recorded.” (With those economic predictions would anyone want to be the Vice-presidential candidate on a National Ticket?)

Actually, in FY2008 the Commonwealth’s “Fiscal Performance” was better than many legislators and other fiscal “experts” thought it was going to be. In the revenue projections area (at least based on the projections made in February of this year) Virginia completed the fiscal year and the biennium with a $6.5 million “surplus.” This is very close estimating when you consider the general fund (GF) portion of the budget is now over $16 billion per year. You can figure that $6.5million is about four hundreds of one percent of $16.6 billion (actually its 0.0392 %, but who, outside of those in Beijing, would quibble over eight thousandths of a percentage point or of a second?). The Governor took some pride in informing the legislators this was “…the second most accurate estimate in the last twenty-five years.”

The Governor also assured the members of the money committees that “…Virginia isn’t alone in facing these fiscal challenges.” “While Virginia met its revenue projections for FY 2008,” he informed them, “20 states reported that they did not meet their official estimates. Only 8 states fell short of their revenue estimates in 2007…” and he added “(in FY 2005 and 2006) every state met or exceeded its revenue estimate”.

THE REAL MESSAGE OF THE GOVERNOR’S ADDRESS

The main emphasis of the Governor’s address was that the two major revenue sources for the state continue to lag the forecasts by substantial amounts. For the last four months of FY08 payroll withholding tax collections were behind those received in FY 07. This category of revenue finished the year 4.3% ahead of FY07, BUT almost a full percentage point behind the FY08 Revised Estimate made in February. This one source is almost 56% of the State’s GF receipts each year so a percent drop below estimated income is significant. Remember in the Secretary of Finance’s report in April this category was running 5.4% AHEAD of FY07 collections.

Sales and Use Tax Collections held relatively steady in the last four months of FY08 when compared to FY07 receipts, but still ended the fiscal year 0.7% below the forecasted increase of 1.6%. Revenue from those pennies you pay on your retail purchases amount to 19.1% of the Commonwealth’s GF revenue stream, so again a 0.7% decrease in this revenue creates a bit of a hole in the budget—in this case a twenty-one million dollar hole.

Fortuitously for the administrations’ prognosticators the smaller revenue sources they forecasted on the low side. Some examples: corporation income taxes (4.31 % of the total) were 12.3 % ahead of forecast; all other revenues (3.27 % of the total—including fines, forfeitures, & fees, etc.) bested estimates by 4.9%; and the interest income on state investments (1.05% of the total) garnered 11.1% more dollars than expected (maybe our state is “the best managed state in the U.S). The net result of all these figures (can you tell yours truly was on the HAC for twenty years?) is the state finished FY08 with revenue being 0.1% ahead of the “official estimate” and “in the black” for the biennium by the already mentioned $6.5 million dollars—very close, and the administration does “get the cigar,” despite what some legislators may say.

The Governor used the weak performances by the two prime sources of GF revenue at the end of FY 2008 as the reason for “the reforecasting process to begin sooner than the traditional November and December timeframe.” He noted this process would not only focus on GF revenue but also needed to be extended into the transportation sector which is mainly funded through Non-General Fund (NGF) revenues. Governor Kaine supported this by stressing, “The Commonwealth Transportation Board recently reduced proposed six-year plan expenditures by $1.1 billion—reducing planned primary, secondary, and urban road construction by over 40%.”

He then announced, “…it would not be wise to wait until November to conduct the normal reforecasting of state revenues. Instead, I have instructed my Secretary of Finance and key state agencies to begin work now on an immediate revision of the general fund and the transportation revenue projections.” He clearly indicated his schedule was set to enable the administration to produce a revised revenue forecast by “the first part of October.”

This schedule only gives the administration six to eight weeks to get all the experts together, study all the data, visit industry leaders throughout the state, garner information from the Federal Government agencies, and make the tough decisions necessary when you are trying to forecast what is going to happen 20 to 22 months in the future.

Governor Kaine took a cautious approach to the “economic slowdown” debate and advised the legislators, “…it would not be wise to engage in guesswork at this point. We have a set process for making such estimates that involves getting the best expertise from academic economists, private sector leaders, House and Senate staff and legislative leaders. That consensus model is one reason why Virginia receives top marks for fiscal management.”

At the end of his talk, Governor Tim did indicate, “As always, your own ideas and input are very welcome.” In addition he noted, “I look forward to working with you and your legislative staff on these hard choices in the months ahead.” Despite these comments, many observers, me included, felt the Governor’s appeal for cooperation and help from the General Assembly members was rather weak and said without much enthusiasm or conviction.

One can just imagine how Governors Mills Godwin, John Dalton or Gerald Baliles, all with legislative experience, would have approached this important part of the address. In this kind of situation each of them would have had their requests for ideas, assistance, input and cooperation sprinkled throughout the speech and would have delivered each of these paragraphs with emphasis, emotion, and an expression of heart felt conviction. The impact on the legislators would have been much more telling than the lack of reaction by this group of members regardless of party.

THE NEW SECRETARY OF FINANCE GETS PRAISE AND DARTS

Richard “Ric” Brown has been in state government for 37 years. After five years with the former Division of State Planning and Community Affairs he became one of the initial Policy Analysts (on educational matters) in the newly created Dept. of Planning and Budget. He has been promoted over the years. He managed Budget Operations from 1987 to 1990 when he became Deputy Director for Budgeting. In 2001 then Governor Gilmore appointed him as Acting Director of the Department and subsequently Governors Warner and Kaine reappointed him Director. With Secretary Jody Wagner’s resignation, Kaine didn’t hesitate to name Ric Brown as Secretary of Finance, a position for which his previous training makes him imminently qualified.

His reputation with the legislators was evident by the respect shown him during the extensive questioning to which the members subjected him. Each delegate and senator began his/her first question by congratulating Ric on his promotion and indicating how pleased they were to have him in this position.

The questions leveled at Ric (really he was taking the darts and arrows for the Governor which is normal in these types of situations) concentrated on why was it going to take so long to get an estimate of the reduction of the revenue forecasts for FY09 and FY10. It appeared to many observers the members had their questions formed before the Governor spoke and expected him to propose the “normal process for reforecasting.” In the context of the Governor’s talk the wording of many of the questions about the need for “quick decisions” on the revenue so appropriate adjustments could be made in the budget didn’t make good sense.

On Ric Brown’s part he took each question and calmly and diplomatically re-explained the administrations position. “First we have to collect as much data as possible from as many ‘experts’ as we can so we can give you the most accurate forecast as possible,” he stated in these or other words on several occasions.

When asked by Steve Landes, (R) Augusta County, about the process which might make the forecasts more accurate than they were in February, Ric responded that it was his intention to contact many more people at the “ground level” to devise his projections. As an example he mentioned that he intended to meet with builders on their “home turf” to determine what they and others like them feel is the direction their industry will be taking in the next two years.

Legislators kept hammering on “we need to take action sooner than later!” and Ric kept responding we’re moving the schedule up by over six weeks and do not think it is prudent to move more quickly with such a serious problem.

Senator Walter Stosch, R Henrico County, did make a cogent point. First though, he did send a mild dart toward the Governor by reminding Secretary Brown that most of the Republican Senators had voted against the final version of the 2008-2010 Budget Bill because of their belief that the revenue estimates were too high and therefore the budget was unbalance Senator Stosch then took off his political hat and put on his accountant’s visor. He emphasized to Ric that it has been his experience as an invited member to both the Governor’s Advisory Board of Economists and the Governor’s Advisory Committee for Revenue Estimates that both of these groups, as important parts of the reforecasting process, concentrate in their deliberations on the economy and the expectations of business in the Commonwealth. Neither group, according to the Senator, takes into consideration “changes in tax policy developed at the state legislative of federal government level.”

Ric acknowledge that this was probably true and that he would make certain that attention would be given to these considerations before the final new forecasting is completed.

OFFICIAL REPUBLICAN REACTIONS

FIRST THE SPEAKER

Within a few minutes of the conclusion of the joint committee meeting, the Republican responses were on their various web-sites and were being e-mailed across the state. Isn’t modern technology wonderful? Speaker William Howell, R Stafford, issued a short statement and took a few “mild” jabs at the Governor—isn’t that what a legislative leader is suppose to do when the governor is from the other party?

His main emphasis was the fact that the news of a “reportedly” $1 billion state budget shortfall “due to inaccurate revenue forecasting by the Kaine administration and the national economic slowdown” is very disappointing. Note the administration has yet to verify the $1 billion shortfall figure. This has been stated by legislators and the media. In actuality, the estimates from various “experts” have ranged from $900 million to $1.5 billion. So maybe the $ 1.0 billion isn’t too far off. We shall see in about six weeks.

In the meantime, Speaker Howell has helped the Republicans to the “high” road by concluding his published statement with, “Crafting amendments to the existing 2008-2010 budget of the Commonwealth of Virginia is no easy task and one that requires prompt action. Although the Governor’s focus and attention may be divided, General Assembly Republicans stand ready to fulfill our constitutional obligations to the citizens of Virginia.”

SECOND, THE CHAIR OF THE HAC

The Chairman of the Appropriations Committee, Lacey Putney, (I) Bedford, was a bit more gentle with the Governor. He noted, “While I applaud the Governor for beginning the review process…Governor Kaine has no legal authority to withhold appropriations until a new revenue forecast has been given to the General Assembly, it is my hope that we will receive an updated revenue forecast from him within six weeks. We can ill-afford to wait much longer without taking corrective action to align our spending with anticipated revenues.”

THE NEED FOR THE GOVERNOR TO “REFORECAST”

The final section of the Appropriations Act allows the Governor to transfer funds between agencies or reduce agency expenditures by up to 15% ONCE A NEW REVENUE FORECAST INDICATES THE NECESSITY FOR SUCH ACTION. Reductions or transfers of a greater magnitude require action by the General Assembly.

Accusations by some Republican legislators that the Governor is playing politics and may hold up the process until after the November 4^th elections doesn’t seem to hold water. With the clear statement that the reforecasting process is on the fast track and should be complete by the first part of October the Governor has committed himself and would, in the opinion of many political academics, hurt his party more than help it if he reneges on this pledge.

So, look for the gray lining (it’s not going to be silver or gold and it’s not totally black) to appear on the Virginia skyline sometime the first week of October. There will be plenty of “leaks” before them, but watch out for their accuracy. This time you can bet the Governor will try his best to keep a tight lid on news until he is certain of his ground.

SOME SECTORS HAVE BEEN ALERTED

Last Wednesday (August 13) the Superintendent of Public Instruction, Bill Cannaday, talked to a meeting of school personnel in the Central Valley and gave them fair warning about up coming budget cuts. While not indicating the sky was falling, Dr. Cannaday did alert the local division superintendents that K-12 would not be exempt in this round of budget cuts. Having been a division superintendent it is clear the head state public educator understands the timing of developing local school budgets. There are a whole lot more options now than there will be in the spring for these systems to react and trim their budgets systematically.

One such local superintendent summed it up by noting this “forewarning” is so much better “…than in 1991 when then Governor Doug Wilder’s administration notified us of the cuts in the state aide to public education on April 30^th.”

Since personnel expenses make up such a large share of most school system budgets, it would certainly appear that either the teacher salary increases that the General Assembly put into the 2008-2010 budget will be in peril of the cutting scalpel or there be teacher layoffs in some of the local school divisions.

SPEAKING OF THE GOVERNOR AND HIS DIVIDED ATTENTION

This may be “old” news by the time you receive it, but here’s some perspective on Governor Kaine being the Vice-President nominee for the Democrat Party in this fall’s election. Despite his friendship with the projected Democrat nominee for President, does Kaine bring enough to the ticket to warrant his selection? Most political observers believe the Vice-Presidential candidate does not have any “coattails.” While the Democrat nominee would obviously like to carry Virginia and get its 13 electoral votes, the best bet to accomplish this is to make the Presidential Campaign and the U.S. Senate Campaign like one. By giving Mark Warner a prominent place as a speaker at the National Democrat Convention, the National Democrat Party has taken its first major step toward this goal.

Oh yes, Governor’s Kaine’s wife, when asked about the possibility of her husband being on the national ticket had a quick comeback, “I’m certainly not holding my breath!”

But since I’ve been asked and many may want to know let’s look at the situation if in fact Governor Kaine becomes the V.P. nominee and the Democrat ticked wins on Nov. 4.

Article V, Section 16 of the Constitution of Virginia deals with the “Succession to the office of Governor.” In the initial writing of this section it is obvious the Commission which initially drafted the 1972 Constitution and the General Assembly who produced the final draft in 1969, reapproved it in 1970 and submitted it the citizens of Virginia for their final approval in 1971 only envisioned a situation where the Governor was incapacitated for some reason. Thus the initial step has to be taken by the Governor to submit “to the President pro tempore of the Senate and the Speaker of the House of Delegates his written declaration that he is unable to discharge the powers and duties of his office and until he transmits to them a written declaration to the contrary, such powers and duties shall be discharged by the Lieutenant Governor as Acting Governor.”

The section implies later that if the Governor dies, is disqualified, or resigns then the Lt. Governor “shall become Governor.” That’s clean and easy. There is, however, no part of the section that says a person is “unable to discharge the powers and duties of his office” while he or she is running for a national office. The third paragraph of Section 16 does, however, say, “Whenever…a majority of the total membership of the General Assembly, transmit to the Clerk of the Senate and the Clerk of the House of Delegates their written declaration that the Governor is unable to discharge the powers and duties of his office, the Lieutenant Governor shall immediately assume the powers and duties of the office as Acting Governor.”

A majority of the members of the General Assembly are Republicans. If the nominee for V.P. happened to be our Governor and didn’t voluntarily resign while running for the office, do you suppose some, maybe all of the Republican legislators would decide that the rigors of a national campaign would make a person “…unable to discharge the powers and duties of his office…” No, of course not, no one would consider that to be the case in this day of instant communications, now would they? But if they did, by the time the Governor transmitted his “written declaration that no inability exists,..” and for the process to be completed, the election would be over and if he won, then the decent thing for the Governor to do would be to resign so he could prepare to be our Vice President, don’t you think?

All of this is speculation, of course, and not the way it would work in practice. If the Governor were to get the nomination, he would run, keep his administration running the state government, return to Virginia when needed, and if elected, resign and the Lieutenant Governor would become Governor for the unexpired portion of Governor Kaine’s term. In that case, Governor Bolling would be eligible to run for a full term in 2009.

This, by the way, is probably another reason the National Democrat Party will resist having Gov. Kaine on the ticket. They do not want another Republican Governor to take office and have a leg up on keeping the governorship in the Republican column in 2009.

Isn’t it fun to speculate on political possibilities?