Virginia has $1.1B in unused reserve funds. Some say the rainy day is here.

By: - August 21, 2020 12:02 am
A storm passes over the Capitol. (Ned Oliver/Virginia Mercury - Sept. 11, 2018)

A storm passes over the Capitol. (Ned Oliver/Virginia Mercury – Sept. 11, 2018)

When he presented his pandemic-era budget proposal to the General Assembly this week, Gov Ralph Northam said that, just as it is in family budgeting, “cash is king.” In other words, a year of crisis and financial uncertainty is no time to start spending on new things.

As legislators began their special session, Northam detailed all the ways the state has tried to help Virginia families weather the COVID-19 pandemic, including the $3.1 billion in federal CARES Act money the state is deploying, much of it going directly to local governments to help their communities.

But he said plainly his administration is taking a conservative approach to the state’s finances, choosing to forgo Democratic priorities like tuition-free community college, teacher pay raises and expanded health care access until there’s a clearer picture of how bad the health and economic crises might get and when they might end. So far, the state has avoided major layoffs or cuts to essential services, he said, and the goal is to keep it that way.

Until the General Assembly reconvenes in January for its regular session, he said, it’s critical for policymakers to “preserve our financial options.”

But some progressive groups and Democratic legislators feel a cautious approach misses the moment in a pandemic that’s fallen differently on the rich and the poor. With many working-class Virginians struggling to pay their bills, stay healthy and keep their homes, they say, the state should be using every resource at its disposal to help. 

That includes dipping into the roughly $1.1 billion the state has in reserves, the so-called rainy day money meant as a fallback in a downturn.

“It’s called a rainy day fund for a reason. It’s pouring,” said Del. Sally Hudson, D-Charlottesville, a labor economist and assistant professor at the University of Virginia. “At some point we have to accept that D.C. is not coming to our rescue and step into a world where states start doing more for their people.”

Hudson filed a budget amendment Thursday that proposes to use $2 million over two years to fix up the state’s beleaguered unemployment system that has left many people unable to get a prompt response when seeking financial assistance. She’s suggesting the creation of a small digital team tasked with “improving the efficiency and user experience of processing unemployment insurance claims.”

Hudson said the state could also take a bolder approach to tax reform rather than accepting whatever revenues come in.

“I think it’s important to remember at a time when so many people are hurting, there have been winners from the COVID crisis,” Hudson said. “Online retailers. Multi-state corporations. And it’s important to make sure that a share of that revenue comes back to Virginia.”

Technically, the reserves are in two separate pots: the revenue reserve fund and the revenue stabilization fund, colloquially known as the rainy day fund. Legislators wouldn’t have access to all $1.1 billion due to restrictions on when and how that money can be accessed. But some seem willing to explore the possibilities.

“We have some very pressing needs, especially in human services and most especially in mental health services. So we may need to go into some of our reserve fund,” said Sen. Janet Howell, D-Arlington, who chairs the Senate Finance and Appropriations Committee.

The state is projecting a $2.7 billion shortfall for the two-year budget cycle that started July 1, but that number will change depending on how the pandemic plays out.

At a House Appropriations Committee budget briefing Wednesday, Chairman Luke Torian, D-Prince William, asked staff for a quick explanation of how legislators could access reserve funds.

“That may be one of the questions that we’ll get,” Torian said.

Del. Vivian Watts, D-Fairfax, who chairs the House Finance Committee, said she doesn’t support using reserves for the special session budget, largely due to the possible impact on the state’s AAA bond rating, which allows the state to borrow money at lower interest rates.

She pointed out that Virginia’s reserves — when measured as a percentage of general fund expenditures — are “not that extraordinary.” In fact, they’re about average at 7 percent, according to the National Association of State Budget Officers.

“The expectation is that the first thing that you do is scrub your spending,” Watts said. “Once you’ve done that, then and only then can you make a better judgement of what your honest budget needs are.”

In an interview, Finance Secretary Aubrey Layne said the administration didn’t consider using rainy-day funds, because no one knows “it won’t pour harder later.”

“We didn’t entertain it and don’t think it’s an appropriate thing to be entertaining now,” Layne said.

The Northam administration is proposing some new spending, but it’s mostly one-time expenditures that the state won’t have to fund year after year. His plan calls for $88 million to promote affordable housing and prevent evictions, $15 million to support historically black colleges and universities; $2.6 million for criminal justice reform measures, $2 million for pre-paid postage on absentee ballot return envelopes and $1.1 million for the planned removal of the state-owned Robert E. Lee statue in Richmond.

When the General Assembly adjourned, policymakers noted that they had put the reserve funds on track to grow to a record $2 billion. Instead of sticking with the plan to sock more money away, Layne said, the state redirected some of those funds to get through the crisis.

At the start of the pandemic, state revenue forecasters predicted a shortfall of up to $1 billion for the budget year that ended June 30 due to steep tax declines expected in the fourth quarter. The actual number wasn’t so grim, with the state finishing around $230 million below budgeted expectations, but still up 2 percent from the previous year.

“When revenues are increasing, that is not a time to be taking additional monies out of reserves,” Layne said.

Despite spiking unemployment claims, the state didn’t see a severe drop in withholding revenue, the income tax money employers deduct from workers’ paychecks and send to the state. While the federal Paycheck Protection Program helped Virginia avoid some job losses, officials say that trend is also explained by the fact that most of the people who lost jobs were in lower-paid positions, meaning their taxes didn’t make up a huge chunk of state revenues.

“That includes its own host of problems related to the increasing disparity of income among different categories of Virginians,” legislative budget analyst Anne E. Oman told House members Wednesday. “But from the state revenue perspective, that means you didn’t lose as much money as you would’ve otherwise.”

One area of concern for legislators is K-12 education, which has been thrown into disarray by the coronavirus crisis. With most school districts starting the year with virtual classes, the Northam administration has proposed $85 million to expand broadband Internet access to underserved areas. But because that funding would be used to build out infrastructure, it won’t have an immediate impact on students trying to learn this fall.

At the House budget briefing, Del. Delores McQuinn, D-Richmond, suggested that expanding broadband to rural areas won’t help kids in cities who don’t have Internet access at home.

“Is anyone talking about how do we provide for kids, particularly the urban communities, to make sure there are Wi-Fi connections so kids are given the opportunity to actually do virtual education?,” McQuinn asked.

Oman said the issue has come up in talks with the Northam administration, but there’s nothing specific in the budget aimed at that problem.

Republicans — who often took credit for the state’s fiscal conservatism when they controlled the General Assembly — are also focusing on K-12 education, filing numerous proposals to give parents alternative options if they aren’t happy with their local public schools.

Del. Kirk Cox, R-Colonial Heights, a likely candidate for governor in 2021, has proposed using $100 million in federal CARES money to establish a fund that could reimburse parents for things like computers, Internet access, tutoring or homeschooling pods set up by groups of families.

Cox, a former teacher who served one term as House speaker before the GOP lost its majority, said it would be a “real mistake” to use reserve funds now. Some items in the governor’s budget, he said, seem “unnecessary,” including the $2 million for postage to help people mail their ballots.

“I do think you can be creative with some of the existing funds you have,” Cox said.

Left-leaning groups want the state to get creative with all of its resources.

The Commonwealth Institute for Fiscal Analysis, a nonprofit that tracks the state budget with a particular eye toward impacts on lower-income Virginians, recently issued a report saying policymakers risk “undoing much of the important progress toward a more equitable Virginia” made by the General Assembly earlier this year.

“Now is not the time for austerity,” Ashley Kenneth, the group’s senior vice president for policy and legislative affairs, said in an interview. “Now is the time for us to invest in programs and services that will directly impact families.”

Policies the group wants to see in the budget include hazard pay and PPE for essential workers employed by the state or working state-funded jobs, restored TANF assistance for low-income, two-parent households that was frozen earlier this year, stronger investment in education, restored Medicaid funding for dental care and assistance for new mothers aimed at reducing racial disparities in maternal mortality and restored funding that was going to be used to loosen a rule requiring legal immigrants to work in the U.S. for 10 years before becoming eligible for Medicaid.

Progress Virginia, a progressive advocacy group, said in a statement the budget “could do more to support hardworking families in these unprecedented times.”

 “If a raging pandemic, massive unemployment, closing businesses, closed schools, and police brutality don’t add up to a rainy day,” said Progress Virginia Executive Director Anna Scholl, “what will?”

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Graham Moomaw
Graham Moomaw

A veteran Virginia politics reporter, Graham grew up in Hillsville and Lynchburg, graduating from James Madison University and earning a master's degree in journalism from the University of Maryland. Before joining the Mercury in 2019, he spent six years at the Richmond Times-Dispatch, most of that time covering the governor's office, the General Assembly and state politics. He also covered city hall and politics at The Daily Progress in Charlottesville. Contact him at [email protected]