McDonnell says Virginia is among few state heading towards budget surplus

While touring Asia to drum up business for Virginia, Gov. Bob McDonnell boasted about the Old Dominion’s prudent state government.

"We’re headed towards another surplus this year, unlike most states," McDonnell said in a Skype interview from Beijing with NBC 12 reporter Ryan Nobles.  

After years of budget cutting in Richmond and other state capitols, is Virginia really among an elite group of states in the black?

We decided to find out.

Like many states, Virginia has cut spending in recent years. McDonnell and his predecessor, Tim Kaine, worked with legislators to overcome about $6 billion in budget shortfalls. Virginia, like just about every state, is required to have a balanced budget.

About $2.34 billion of the shortfall was mended through budget cuts. The rest of the shortfall was closed with federal stimulus money, transfers from the state’s "rainy day" fund and other one-time bookkeeping maneuvers, including the deferment of $850 million in contributions to the state retirement system. In addition, the state required businesses to pay one month of sales tax revenue early.

Virginia’s fiscal year runs from July 1 through June 30. Last summer, McDonnell announced the state closed the 2010 budget with a $403 million surplus. About $175 million came from lower-than-expected spending by stage agencies. The rest came from tax revenues that were higher than projected.

So with one month left in the 2011 fiscal year, is another surplus on its way?

Finance Secretary Ric Brown estimated that state tax revenues in fiscal 2011 would be 3.5 percent higher than the prior year. But through 10 months, receipts have actually climbed by 4.5 percent. That extra money, if it holds, would yield  a surplus in the state’s $15.4 billion general fund which pays for education, health programs and public safety. The McDonnell administration has not publicly estimated of the amount of left-over money it expects.

But that doesn’t mean Virginia is back to full financial health. The 2010 surplus, even if supplemented by a 2011 windfall, is far smaller than the cuts made by Virginia during past years. And the $1.9 billion in federal stimulus money used by the state won’t be in future budgets. According to the National Conference of State Legislatures, Virginia’s general tax revenues peaked in at $17 billion in 2008 and probably won’t return to that pre-recession high until 2013.

So Virginia is indeed on track to post its second consecutive surplus. But the state will also need to make up deferred pension contributions in future budgets. Robert Vaughn, staff director of the House Appropriations Committee, said the pension retributions will be made over a number of years and won’t necessarily match the $850 million in contributions Virginia skipped during the recession.

What’s the story in other states?

Todd Haggerty, a fiscal policy analyst for the National Conference of State Legislatures, said most states expect 2011 revenue to climb from 2010. Despite the growth, he said all states except North Dakota are still below their peak revenue levels, which most reached in 2008.

A majority of states are not expected to return to peak revenues until 2014 or later, according to a study. Michigan does not anticipate hitting that mark before 2020 -- at least seven years after Virginia.

Haggerty pointed out that states try to match spending to revenue as closely as possible, and posting a surplus means those estimates were off. Still, he said, it is "better to be off towards a surplus rather than a deficit."

In March, the NCSL said 21 states were reporting that personal income taxes were coming in above estimates, while 17 more said the receipts were on target.

The National Association of State Budget Officers came up with similar numbers in a June 2 report. The group said that fiscal 2011 tax revenues are exceeding projections in 22 states, on target in 11 states, and below estimates in 17 states.   

That may sound like good news, but NASBO says there is more to these possible surpluses than meets the eye.

"While any surplus is a positive sign, such surpluses are more likely the result of cuts in spending from previous fiscal years as well as conservative revenue forecasts," the group said in its June report.

Let’s review our findings.

McDonnell said, "We’re heading towards a surplus this year, unlike most states."

With 10 months of revenue data in hand, Virginia is on track to post a surplus in the 2011 fiscal year. That would follow a surplus in 2010, but state revenue is still below pre-recession levels.

McDonnell seems correct that a minority of states are heading towards surpluses. The NCSL said in March that 21 states were reporting personal income tax revenues were exceeding projections. In June, NASBO reported that overall tax revenues were coming in over estimates in 22 states.

Even with a surplus, Virginia will be working for years to make up for contributions it withheld from the state pension fund to balance the budget during the recession. The state has also relied on federal stimulus dollars that will not be available in the future. So it’s reasonable to question whether the state is really in the black.

For that reason, we rate the governor’s statement Mostly True.

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