Giesen Perspective

The Giesen Perspective – HOORAH! A BUDGET (or is it only part of one?)

DATE: Monday, June 26, 2006

THE GENERAL ASSEMBLY’S BUDGET

Finally, after two tough weeks of almost around the clock cussing, fussing, negotiating, exchanging letters, expounding their positions to the media, and even occasionally speaking to each other, the eleven conferees reached a “handshake agreement” on the 2006-2008 Virginia Appropriations Act late Friday evening, June 16^th. The two staffs of the money committees then worked all week end to put the agreed upon items into the “half sheets.” Each amendment to the Introduced Budget (in this case HB 5002, Patroned by Delegate Vince Callahan, Chairman of the House Appropriations Committee) is stated in official “budget terminology.” For each amended item of the Budget the dollar action for each year, the page and line of the budget that is amended, and the explanation for the item are all noted. The compilation of these “half sheets” then becomes the “Joint Conference Committee Report on House Bill 5002—2006 Special Session 1.”

By Monday, June 19 this 379 page document was completed and enough copies printed for the Senate to meet. At the last “pro forma” session of both houses (Tuesday, June 13^th) recesses had been taken until 3pm on the 19^th for the Senate and noon on the 20^th for the House. All of us following the process have experienced a number of occasions in the past six weeks where full sessions were planned and then twenty-four hours before changed to “pro forma” sessions. So most of us held our collective breaths from Tuesday until Friday evening!

The Senate Finance Committee met Monday morning (the 19th) to give a briefing to all the members. While the Senators worked from a copy of the full report, we observers from the public tried to follow the details using only spread sheets showing comparisons of the House and Senate amendments and then the Conference decisions. When you recognize all of the item numbers refer back to the original introduced budget, another 500 plus page document, you can imagine how difficult this becomes when the presenters (staff members with an intimate knowledge of their particular portion of the budget) are breezing along, and at this stage of the process, most of the senators were not asking detail questions. So if you have wondered why there isn’t more immediate, definitive information on the budget forthcoming from Richmond, this might help explain it. You can also understand why members have to have confidence in their colleagues who serve on this and other conference committees. A lot of the voting in the General Assembly is done with a huge faith in your fellow members.

The Senators did have faith in their conferees and adopted the conference report on a 36-0 recorded vote during their full session Monday afternoon.

The Delegates returned to Richmond on Tuesday in reasonably good numbers (93 out of the 100 members were present and accounted for, while the other seven were all reported “out of their seats on pressing personal business!”). Without an official briefing from the Appropriations Committee, the members apparently heard about the agreement in their respective caucuses. However it happened, the vote to approve the conference report was a strong 91-2. From the very brief debate on the floor, it appeared to me most members were just glad there had been an agreement and wanted to “get it done and go home!”

Now it’s the Governor’s turn to put the finishing touches on the budget. Gosh, he has until this Wednesday, the 28^th. That’s a full week to review the 379 pages of amendments, compare them to the introduced budget which his predecessor presented and to his own budget amendments from the “regular session of the G.A.” Now let’s see how long ago was that? It must have been over 100 days ago although it seems like at least a year ago. So the legislature took 160 days to get an agreement while the Governor gets 7 days to review their work. Considering the staff of people he has, that seems fair, doesn’t it?

There will be a few amendments from his Excellency, of that you can be assured. The balance left by the agreement is only $4,500,000. Already the Governor’s staff has discovered a miscalculation to the tune of $7,500,000 in one of the revenue figures. Of course, it is a shortfall, not an overage. So there may be some action at the Wednesday session of the First Special Session-2006.

REFLECTIONS ON THE AGREEMENT

First, presuming the Governor doesn’t stir up too many controversial issues between now and Wednesday, there will be a new budget in place come the beginning of fiscal year 2007 (FY 07). That does happen this Saturday, you know. So there will be no Constitutional Crisis. The Attorney General (AG), who issued an informal opinion that the Governor would not have the authority to continue to fund the State’s agencies without a GA-passed budget, will not be tempted to take this Governor to court if. This will keep the Governor from the arduous task of hiring private counsel to defend himself. The political rhetoric between the Administration, the GA, the AG, the Lt. Governor, the heads of the Democrat and Republican Parties, and all of the media, may actually be avoided.

Secondly, all of the state employees who were beginning to get a little antsy can now relax for a few more months. Well, at least most of them can relax for a few months, until the ’07 session of the GA. Now, of course, those serving in the transportation agencies of the government may only be able to take a deep breath since the budget isn’t quite complete for their purposes and there will be 2006 Special Session 2 (or maybe an extension of 2006 Special Session 1). When will this be? The Leadership and the Governor are still talking and so far as I know, no decision has been reached.

A COMPLETE BUDGET?

Prior to the start of the 2006 GA you, like all of us state government watchers, knew that in the 2006 Session transportation issues were going to be the primary concern of your Legislators. Most of us certainly anticipated the final 2006-2008 Appropriations Act would address this “crisis” in some form. All of the estimates by the budget experts indicated the various parts of our transportation system were being underfunded by at least $1 billion a year. From past Giesen Perspectives and your extensive seeing, hearing and watching the media, you are aware of the impasse between the House and Senate on how to fund the transportation needs.

So now our state is on the verge of adopting a biennial budget without addressing the “most important issue of the 2006 GA Session.” Do we accept this as a “complete budget?” Or would it be more accurate to say it only addresses part of the budgetary problems we have in the Commonwealth?

There is some money in this conference report for transportation. $339,000,000 is designated from the general fund “to be used to implement transportation legislation as may be adopted by the General Assembly by November 1, 2006. Such legislation shall include a separate enactment clause allocating these funds.” (Item 449.10 #1c of the Conference Report.)

Item 447 #2c of the Report requires the insurance premium tax revenues derived from automobile insurance premiums to be deposited into the Priority Transportation Fund to pay the debt service on the Federal Highway Revenue Anticipation Notes (FRANs) where the state has borrowed money in anticipation of future Federal Highway Funds being received. This debt service would normally be paid from the revenue designated by the Commonwealth Transportation Trust Fund rather than from a regular General Fund source. It is anticipated this will be continued in the future, so we can say for this biennium another $111.3 million the first year and $117.6 million the second year will be used for transportation purposes from the GF. Adding these together only puts the “new” money for transportation in this budget at $450.6 million the first year and $117.6 million the second year. With the House’s position on “no new taxes” it would appear there is still a considerable gap between the transportation needs and the new funds available to close the gap.

With this in mind it does appear we only have a part of a budget so far and after Wednesday the refrain maybe, “Here we go again!”

WHO WON?

Since the agreement reached last Friday by the Conferees, the rhetoric from the legislators has changed remarkably. The tone of their comments is much more amenable. There is not the confrontational aspect that we have heard in the week’s just past

“This is a very good product for the citizens of Virginia.”

“We have reached a compromise that gives everybody something.”

“This budget will keep the state moving ahead for the next two years in a sound, remarkable way.”

These are all approximate quotes from conferees last week.

The House claims a two-year budget has been passed without a tax increase and the Senate had to back down! (But what about transportation?)

The Senate wanted to put some GF planning money into the budget for future capital construction projects. The House objected as you couldn’t calculate what impact this planning might have on future budgets.

The Senate didn’t want to build any capital projects with bonded indebtedness while the GF was running a “surplus.” The House had a number of projects in its version of the budget funded with bonds.

This Capital Outlay area of the budget is a good example of how compromises are necessary in our system if you are going to reach an agreement. A sampling of GF planning money included in the Conference Report: $2.5 million for the Virginia School for the Deaf and Blind in Staunton; part of $9.5 million for the 8^th and 9^th Street Buildings in the Capitol Area; a partial funding of $1.8 million for W & M for the renovation or replacement of the Williamsburg Community Hospital; $7.5 million for three facilities in the Mental Health, Mental Retardation, and Substance Abuse Services area; and, $1.6 million to plan a Performing Arts Center at Old Dominion University.

Then, of course, if the Senate was absolutely firm in its position, there would be no construction projects where the funding was from bonds. Maybe the “other house” (as the Delegates designate the Senate) doesn’t mean “revenue bonds” (referred to as 9(c) bonds). These are bonds which are repaid from a dedicated source of revenue. Dormitory room fees for college students, for instance, help repay the bonds which finance the building of the dormitory. There is only $212,952,000 in this type of bonded buildings in the conference report. Then there are 52 different capital outlay projects authorized in this budget which will be funded through 9(d) bonds amounting to $506,502,000.

DIFFERENT KINDS OF DEBT FOR THE STATE

Here’s a little more explanation about these different types of bonds authorized in this budget.

The Virginia Constitution spells out the types of debt the state may incur in Article X, Section 9. Section (a) is “debts to meet emergencies and redeem previous debt obligations”; Section (b) is for the “general obligation debt for capital projects and sinking fund” and the public must approve this debt by referendum thereby allowing the unqualified “full faith and credit of the Commonwealth and the state’s triple A rating” to be behind the bonds; Section (c) allows the state to issue debt “for certain revenue-producing capital projects” where the debt is “secured by a pledge of net revenues derived from rates, fees, or other charges and the full faith and credit of the Commonwealth; and Section (d) is for “obligations incurred by the Commonwealth or any institution, agency, or authority thereof if the full faith and credit of the Commonwealth is not pledged or committed to the payment of such obligation.”

On 9(c) bonded projects there must be a certification by the Governor that the revenue stream will support the repayment of the bonds and the projects must secure a two-thirds majority of both houses in a discrete piece of legislation. Typically the separate legislation is routinely passed by the legislature after the working drawings for the projects are completed, the certification has been received from the Governor, and the chairmen of the money committees have introduced the appropriate bills. So far this type of financing has only been used on higher education and transportation projects. Remember the Constitution states these bonds are backed by the “full faith and credit of the Commonwealth.” This means when the state floats bonds for these projects the bond rating entities will give the bonds our state’s AAA rating.

The 9(d) bonds, on the other hand, are frequently floated through the Virginia College Building Authority in what they call their Pooled Bond Program. These essentially are stand alone by the revenue generated from the project or sometimes by an item in the budget and are thus tax supported, but without an absolute assurance that next year’s budget will contain the repayment appropriation. Because of this “uncertainty” bond rating agencies have assigned a AA plus rating to these bonds. Because these bonds are not backed by the “full faith and credit of the Commonwealth” they do not go against the “debt of the state” when the total indebtedness of Virginia is calculated. Realistically, it is very doubtful that the Commonwealth would ever let any of these bonds go into default, so in the opinion of many they are really underwritten with a “moral obligation” of the state to repay them if or when necessary.

Another interesting part of the 9(d) bonds in this budget is the portion authorized for Mr. Jefferson’s University. $124,664,000 of the total is for UVA and its Medical School and its College at Wise. This University, because of its fund raising capabilities and its endowments, has the ability to float its own bonds with a AAA rating. It is the only higher education institution in Virginia with this status in the bond market. So it has the option to use its authority under the 9(d) Bonds to go to market through the state or on its own depending on the size of its current debt.

All of this background is to indicate “yes, Senators there are no bond funded projects in this budget which are directly supported by general fund tax dollars.” However, I would submit there are plenty of capital facilities authorized in HB 5002 for which Virginia citizens will be paying the debt either through higher education room and food fees; higher medical costs in the case of the teaching hospitals; through higher parking charges; more costly tickets to collegiate sporting events; and, higher activity fees for college students.

THE FUTURE

Transportation is still the unknown. So far as I can determine, the process hasn’t even been decided as to how the next phase of this debate will be structured. Several things are evident. Except for the GF money noted above as being set aside for transportation, the conferees spent all but $4.5 million of that “very large, $1.4 billion GF surplus” from the original estimated 2006-2008 revenue. The question now becomes, “Delegates how do we get to a $1 billion a year for transportation?” “And how do you respond to the Roanoke Times June 1 editorial statement, ‘Anyone who believes the current revenue surplus will materialize every year to meet that demand ($1 billion) should take another look at the cyclical nature of state revenue. Surpluses never last. Only dedicated funding will ensure that Virginia adequately addresses transportation for years to come.’?”

And to the other house, “Senators, can the state establish a ‘sustainable, dedicated source of revenue’ for transportation without a tax increase? If not what makes you think the position of the House will be any different in September or October than it was in May?”

You know, maybe they will all come to the conclusion tolls aren’t such a bad idea after all. Watch for a possible suggestion from former Governor Jerry Baliles on just such a plan in the near future.

POSSIBLE POLITICAL FALL OUT

In discussing the long drawn out budget negotiations with a former dedicated Republican supporter and a strong business person in the Valley a comment was made that makes me wonder how all of this is going to play out in the political arena. The comment, “After all of this mess, I’m ashamed to admit I’ve been a Republican!”

Maybe the participants have heard these kinds of comments and that is the reason for the more conciliatory statements being made at this stage of the game. It is lucky the state elections are not until next year. But how long are the voters’ memories? Could they last until November 2007?

Links to Previous Giesen Perspectives:

Arthur R. Giesen, Jr., fondly known as Pete, served in the Virginia House of Delegates for over 30 years. He represented the citizens of the Central Shenandoah Valley surviving four different district realignments. During his career he represented Augusta, Bath, Highland and part of Rockingham County and the Cities of Staunton and Waynesboro.

Following his career as an elected official, Pete assisted Lt. Governor John H. Hager as his Chief of Staff.

Pete now keeps an eye on Virginia government and assists many clients with his unique perspective on the workings of the Virginia General Assembly and its relationship with the other branches of state government.