RICHMOND, Va. —Virginia ended the last fiscal year with a nearly $545 million surplus, and Gov. Bob McDonnell has asked the General Assembly to use part of it to establish a reserve fund to deal with fallout from the tumultuous federal budget situation.
In a speech to the legislature’s money committees last Thursday, McDonnell said the recent turmoil over raising the federal debt ceiling and the appointment of a congressional “Super Committee” to examine ways to curb U.S. government spending create great uncertainty for Virginia, which ranks second among states in per capita federal expenditures.
He said it is important to prepare now “for future actions of the federal government that we cannot control or accurately predict.”
To that end, he proposed allocating $30 million of the surplus to a new Federal Action Contingency Trust Fund, which would require General Assembly approval.
McDonnell said he would issue an executive order giving his jobs-creation commission authority to determine how to spend the money to ease the Virginia economy’s reliance on federal spending, particularly in the procurement and defense categories.
A number of federal contractors operate out of Washington’s Northern Virginia suburbs, and the Hampton Roads area is home to major military installations, including the U.S. Navy’s largest base.
McDonnell said the reserve fund would strengthen Virginia’s position with Wall Street after one of the three major bond-rating agencies, Standard & Poor’s, downgraded the United States’ credit rating for the first time in the wake of the debt ceiling crisis.
Another agency, Moody’s Investors Services, earlier this month affirmed Virginia’s treasured AAA bond rating but assigned the state a “negative outlook” because of its economic ties to the federal government.
The governor said the new reserve fund will show the bond-rating firms that Virginia “has ample cash reserves and is committed to taking all necessary actions to prepare for the necessary and inevitable downsizing of the federal government.”
McDonnell later acknowledged to reporters that $30 million is not much money in the context of a two-year, $80 billion budget, but he said it’s a start.
“I plan to do more on that as we go forward,” McDonnell said.
Initial reaction from lawmakers was favorable.
“I think that approach is sound and one I would embrace,” said Sen. R. Edward Houck, D-Spotsylvania.
Del. M. Kirkland Cox, R-Colonial Heights, said the move shows Virginia is taking the national economic situation and federal budget problems seriously.
“The bond-rating agencies are looking for that kind of liquidity,” Cox said.
McDonnell told the legislators that creation of a separate reserve fund is necessary because there are constitutional restrictions on how the state can spend its existing “rainy day fund.”
The rainy day fund can only be used to offset a revenue shortfall after a budget has been enacted, which means it is off limits during budget development.
To meet a constitutional mandate, $133 million of the surplus will be deposited into the rainy day fund, increasing its balance to nearly $441 million — the highest since fiscal year 2009. An additional $67 million will go to the state’s transportation fund, and $50 million to the Water Quality Improvement Fund.
McDonnell announced last month that the state surplus would be at least $311 million — the amount by which revenue collections exceeded expenditures for the fiscal year that ended June 30. The revised figure also includes $234 million in state agency savings and agency balances.
When the Republican governor first announced the year-end results in July, some Democrats criticized his characterization of extra revenue as a surplus because about $600 million in contributions to the state employees’ pension fund were held back to balance the budget.
McDonnell said Thursday that the deferral in fiscal year 2010 helped address a $4.2 billion budget shortfall that existed before the budget was enacted, so it played no role in the $311 million revenue surplus. The state is repaying the deferral at an accelerated rate, McDonnell said.
David Mills, executive director of the Democratic Party of Virginia, didn’t buy the governor’s explanation.
“No matter what he calls it, the balance he announced today isn’t enough to pay our outstanding bills to the Virginia retirement system and make the investments we need in education, public safety, mental health, and other services that create opportunity for working Virginia families,” he said in a statement.
The governor will appear before the legislative money committees again in December to outline his priorities for the next two-year budget.