by Bob Zahradnik

The 2001 legislative session in Virginia was marked by efforts to revise the Fiscal Year 2001 – 2002 budget in light of declining revenue growth and increasing expenditure needs. The difficulties of budget reform were exacerbated by political pressure to continue implementing an expensive reduction in car taxes, and the state was ultimately unable to enact mid–biennium adjustments to the budget.

A legislative analysis released prior to the 2001 session showed revenue growth falling below projections while the need for expenditures in Medicaid and other areas exceeded appropriations. These problems combined to create a budget gap that would ultimately amount to $690 million. Virginia is also currently in the process of implementing a $1.2 billion phased–in reduction of its car tax. The reduction includes a “trigger” provision that was designed to delay implementation if revenues grow slower than estimates. The report of slower revenue growth meant that the car tax cut might have to be delayed. In light of these issues, Governor James Gilmore released a revised FY 2001 – 2002 budget in December 2000.

In order to balance the budget, continue the car tax cut, and fund $140 million in new spending, the governor's proposal included budget gimmicks, budget cuts, a plan to finance capital projects with debt instead of cash, and additional revenue sources.

The primary budget gimmick was designed to keep the car tax cut on track by including $460 million in revenue from the proposed sale of the state's stream of future tobacco settlement receipts — a process called “securitization” — in the revenue estimate used to determine whether or not the phase–in of the car tax would continue. The governor's securitization plan was rejected by budget writers in both the House and Senate once the session began, but by that time the effect of including the securitization plan in the revenue estimate had already occurred; the next phase of the car tax cut was triggered on January 1, 2001.

By contrast to the continuation of the car tax cut, a previously enacted phased–in reduction in the sales tax on food was halted because of the fiscal gap, despite the fact that it was far less expensive than the car tax cut and concentrated relatively more tax relief on lower–income taxpayers.

The Virginia House and Senate were ultimately unable to agree on a revised budget proposal. Differences centered around continuation of the car tax cut, with the House pushing for full implementation while the Senate argued to scale back the cut due to the economic slowdown. Both the regular legislative session and a special emergency session concluded without a budget agreement.

As a result, the state was forced to continue operating under the original budget containing the $690 million budget gap, which consisted of a $420 million revenue shortfall and $270 million of projected overspending on mandatory programs. No additional discretionary spending, such as pay raises for state employees and teachers, was enacted.

The governor then released a budget–balancing plan that addressed only the $420 million revenue shortfall; the plan did not include actions to address the $270 million in overspending. The governor's plan included $500 million in budget cuts ($80 million more than needed), over half of which affect agencies that provide critical services in the areas of affordable housing, community development, the environment and public safety. The additional car tax cut, at a cost of $300 million per year, was not changed. Because no new budget was enacted, the governor's plan was implemented.

A recent analysis indicates that Virginia's fiscal problems may not be confined to the current biennium. A study released by the business group Virginia Forward in 1999 projected annual budget deficits as high as $3.5 billion by 2006. A recent update to the analysis raised that amount to $4.3 billion.

Clearly, the fiscal challenges that were not met in 2001 may continue in Virginia for years to come.

Many thanks to Bob and the Center for Budget and Public Policy. For more information, contact Bob at (202) 408-1080 or send e-mail to zahradnik@center.cbpp.org.