Return to Virginia Business - January 2002

Reality check
Budget woes and a bad economy shift legislative priorities

by Page Boinest Melton

Philip Odeen has little patience for hand wringing over Virginia's growing fiscal anemia. After all, he sees it as an opportunity - and a chance to speed the state's healthy recovery. The TRW Inc. executive who heads the 16-group Coalition for Virginia's Future believes these bitter recession days - and the pressing spending demands to finance schools, roads and security enhancement - will set the stage for a tip-to-toe financial makeover of the Old Dominion. Not clear yet is whether the resulting overhaul will be cosmetic - concealing flaws with fiscal eye shadow - or as dramatic in look and structure as a full face lift.

Rather than dwelling on Virginia's immediate $1 billion-plus budget deficit, Odeen envisions a wave of future-building steps such as trimming expenses, reordering priorities and making state investments. The biggest move, he says, is chucking the easy-money attitudes that arose when boom times in the 1990s effortlessly kept state coffers overflowing. "Virginians have been told everything is great," says Odeen. His business coalition plans on providing reality checks for the upcoming 2002 General Assembly session. "We want to help them understand the seriousness of the problem."

Odeen and his business colleagues have plenty of company these days, ranging from freshmen delegates who are conservative Republicans to veteran lawmakers, not to mention Gov.-elect Mark Warner, a Democrat who fashioned a winning campaign by clamoring for new fiscal responsibility. Talk is all abuzz about auditing state books, altering the tax structure and instituting new funding mechanisms.

The bad news of recession may be good news for Warner since it plays to his entrepreneurial flair. Expectations are that he will use his term to reinvent state government. His strategy: Reach out to the Republicans who dominate the General Assembly so they will let him tap his business background and come up with creative solutions to stem budget deficits and overhaul the state's tax structure. "The defining issue of the Warner governorship will be financial management," says Mary Washington College political scientist Stephen Farnsworth. "Projections are that we may have financial difficulties well into Warner's term and dealing with that may well be suited to Warner's strengths."

Yet Warner & Co. must act quickly. As soon as Warner drops his hand from taking the oath of office, he and legislators face a painful chore. They must square spending from a more optimistic state budget with a precipitous decline in revenues. Outgoing Gov. Jim Gilmore did initiate reductions, including delaying his signature campaign promise to phase out the car tax, but Warner and lawmakers will suggest their own diet. "We should take the hit all at once," says Republican Sen. John Chichester of Stafford, chairman of the Senate Finance Committee, who confronted fellow GOPer Gilmore in a bruising battle over the budget last year. This season, says Chichester, budget cuts won't be for the faint of heart. He suggests "not a fingernail file, but a hatchet" approach to state spending reductions.

Even if Virginia hacks its way out of the current budget shortfall, forecasts put the 2003-2004 fiscal years at a $2 billion deficit. That means Warner likely will spend the balance of his four-year term tackling Virginia's tax structure, shoring up state books and reviewing how state agencies operate. Doing so is a burden or opportunity, depending on one's take. Look for Warner to inject more business guidance and public-private partnerships into basic government services, with "creative" approaches to traditional government services. He cites as one model his Virginia Health Care Foundation, which paired state help with private contributions to provide health care to 250,000 people and loans to medical providers in underserved areas. Warner also is choosing to drop the partisan posture of past governors, a political reality as much as recognition that financial problems require all hands. Facing a near veto-proof bloc of Republican House members who have the votes to set their own agenda, Warner is working to inoculate his governorship by playing to majority Republicans, seeking advice from some and offering goodies such as key administration jobs to others.

It may be cold comfort, but when it comes to the financial picture and its stark choices, Virginia has plenty of company. At least 44 states are reporting revenues below earlier estimates and more than a half-dozen opted for special legislative sessions to consider new taxes and dramatic spending cuts. While state budget outlooks are staggered nationwide, the problems are the same: strained unemployment funds due to layoffs, declining tax revenues, escalating Medicaid and social service expenses and surging school enrollments.

The usual solutions are fairly predictable, says Arturo Perez, senior financial analyst with the National Conference of State Legislatures. First, freeze or reduce spending, which Gilmore started, and Warner and legislators will escalate this session. Second, tap reserve funds: Virginia can raid up to half the state's $900 million "rainy day" fund. "If that doesn't bring the budget into balance, then the talk of tax increases comes into play," says Perez. "Tax increases are the last resort."

Are we there yet? That's the most critical question for many legislators, even though raising taxes is a huge bug-a-boo in Virginia. Yet a growing consensus of business executives and legislators in Northern Virginia and Hampton Roads believes that selective tax increases may be needed and inevitable to pay for congestion-easing road improvements. While most aren't behind a general tax increase, they are rallying behind more targeted plans, including locally approved tax increases or user fees. Delegate Jack Rollison, a Woodbridge Republican who has led the charge for a Northern Virginia transportation referendum, argues that the budget shortfall and road projects must be considered as a package. "I think one will point to the other," says Rollison. "As we look at the shortfall in the budget and in transportation, we will be forced to look at alternatives."

Rollison, whose carefully crafted transportation package died in partisan and regional wrangling last session, sees a landscape more conducive for a solution this year. Warner isn't expected to oppose a referendum if it passes, and the debate is expanding beyond Northern Virginia's needs. Newport News Sen. Marty Williams, a Republican, is leading Hampton Roads legislators in both parties who want a transportation-financing plan to pay for specific local projects. "There's greater regional cooperation," says Rollison. "It's a marriage of necessity."

While transportation gets the most attention because it was one of the few defining issues of the 2001 governor's race, lawmakers also are under crushing pressure to spend more on K-12 public education and colleges and universities. A legislative audit panel says Virginia is underfunding K-12 education to the tune of $500 million a year. Last year's freeze on spending knocked out state salary increases for teachers, state employees and faculty. Local governments undertook teacher pay raises on their own last year and will be strapped this year to manage additional school expenses. "Education funding has been at the top of our list for many years," says Betty Long, who lobbies for the Virginia Municipal League. "We hope to see a commitment to address these issues - recognizing the funds to do it immediately may not be there but wanting the commitment to do it when they are."

Others are using the budget debate to float alternative financing options. The funding shortfall that prompted Gilmore to freeze campus construction projects last year jolted Virginia's colleges and universities into action, arguing for funding to compete with states like North Carolina. This year, Fairfax Delegate Vince Callahan, chairman of the House Appropriations Committee, wants to follow the North Carolina model and back a major bond package to help pay for campus construction. Last month, Gilmore backed away from his freeze, proposing nearly $1 billion in bonds for colleges and universities similar to Callahan's plan. Some legislators are suggesting statewide legislation that would allow any locality to raise its local sales tax for education. Still other camps want to twin transportation and education in local referendum proposals. Senate Minority Leader Richard Saslaw, a Democrat from Fairfax, helped derail last year's transportation-only referendum by insisting that half of the Northern Virginia increase pay for schools. His position hasn't changed. "In my district, I want education and transportation on the ballot."

A slowing economy also prompts scrutiny of every government program from economic development to social spending. Business leaders, worried how quickly the state's unemployment fund is being tapped to pay benefits to laid off workers, want job retention and help with work force training. Warner plans a strike force to tackle the state's toughest economic development needs, such as Southside's collapse from textile and apparel plant closures. The call on social services is so intense that Virginia's Medicaid and Quality of Care programs - safety nets for the poor - are well in the red and may need an overhaul.

At the same time, Virginia is under pressure to beef up public safety and health systems to better respond to incidents like the Sept. 11 terrorist attacks. A state commission has a $1 billion wish list of initiatives. Dr. William A. Hazel Jr., president of the influential Medical Society of Virginia and a Herndon orthopedic surgeon, tried to offer medical help immediately after the Pentagon attack and encountered a near-blackout in communications. "I've been concerned for several years that our public health system is like the transportation system: it's functioning, but there is no extra capacity."

Despite building pressure from regional legislators and much of the business community, it's unclear if the General Assembly can agree on a transportation funding package this session, much less resolve spending for schools and other priorities. Budget deliberations may be all-consuming and even Odeen worries that the session will be too short to reach a solution. "It's going to be hard for this year," he says. "Realistically, it may take a year or so to educate and get the priorities in place and for Mark to pull his team together." Then there's the anti-tax drumbeat: some new members of the House of Delegates, including those representing Northern Virginia localities, campaigned against higher taxes in any form. Though he won't have much influence as a freshman delegate, Republican Scott Lingamfelter of Prince William reflects conservative sentiment in viewing the budget deficit as time to audit the books and reduce government altogether. "It's no secret that Virginia's budget has gone up considerably in four years," he says. "There are some efficiencies we can embrace - eliminate redundancies, bring more of state government on-line."

Managing a hodgepodge of views on how best to allocate state resources will be the first chance for Virginia's new and veteran leaders to turn the troubled times into an opportunity. Restructuring government and paying for longer-range needs in schools and transportation projects provides the opportunity for an encore budget performance. "Some politicians," says political scientist Farnsworth, "really rise to the challenge." Warner and Virginia's legislature have a 60-day session to show what they're made of.