McAuliffe falsely claims he inherited $2.4 billion debt left by GOP

Former Gov. Terry McAuliffe loves to talk about his financial stewardship.

"Five years ago, when I took office, our state was mired in debt - a $2.4 billion debt left over by Republicans," McAuliffe told about 1,800 fellow Democrats during a June 15 speech at the state party’s Blue Commonwealth Gala. "...We got the state humming again and we left office with the largest surplus in state history," he added.

He made similar statements about inheriting a $2.4 billion budget deficit during a Jan. 24 speech at the University of Virginia, Jan. 11 on WAMU radio, Dec. 30 on CNN, Nov. 12 and Sept. 26 on Bloomberg Television, and Sept. 18 to reporters in Des Moines, Iowa.

The claim has been part of McAuliffe’s pitch since shortly after he took office in 2014. We fact-checked it in 2015, wondering how he could have inherited a deficit from his predecessor, Republican Gov. Bob McDonnell, when the state constitution requires a balanced budget.

It’s a good time to examine the statement again. McAuliffe plans to be in the news. With Gov. Ralph Northam sidelined by his blackface scandal, McAuliffe is vowing to raise money and campaign for Democrats this fall when all 140 General Assembly seats will be on ballots and partisan control of both legislative chambers will be at stake.

The inheritance

Virginia has a two-year budget cycle that begins July 1 of every even year. Before the start of the first budget year, the legislature approves and the governor signs a biennial plan. After that, the governor and lawmakers negotiate budget amendments based on the needs and finances at the time. The state constitution requires that total expenditures not exceed revenues. 

McDonnell, in one of his last acts as governor, presented two budget bills to the General Assembly on Dec. 16, 2013.

The first bill put his finishing touches on the outgoing two-year budget, set to expire June 30, 2014. The proposal, called the "caboose budget," anticipated $35.4 billion in general fund revenues for the budget cycle and $34.9 billion in expenses.

The second bill was McDonnell’s proposal for the coming two-year budget, which began July 1, 2014. He anticipated $37.8 billion in general revenues and proposed $37.7 billion in spending.

In other words, when McAuliffe took office on Jan. 11, 2014, McDonnell left two balanced budget bills on his desk. So why does McAuliffe say he "inherited" a deficit?

Four years ago, we put that question to Brian Coy, who was McAuliffe’s communications chief. Coy noted that the economy slowed during the winter and spring of 2014, causing tax revenues to fall below expectations. The McDonnell administration "left behind a budget that had a forecast that was too optimistic for our financial situation," he said. "They supported a spending threshold that was too high."

Did that mean McDonnell should have seen the economic slowdown coming? "With the benefit of hindsight, some signs could have been detectable and some may have not," Coy said.

State budget analysts tied the slowdown to two factors:

•Tax cuts ushered in by former President George W. Bush expired in 2013, causing the  capital gains tax to rise. As a result, there was a surge of people cashing in capital assets before the higher rates took effect, followed by a lull after the levy went up. The lull caused a steep drop in non-paycheck tax receipts in Virginia in 2014.  

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•Federal spending cuts hurt Northern Virginia, the state’s economic engine.

McAuliffe sensed the problems shortly after taking office, but initially underestimated their severity. On Feb. 12, 2014, he cut the revenue estimate in the coming two-year budget McDonnell proposed by $140 million. "Although our underlying economic forecast has not changed," McAuliffe said, "it is clear that the current revenue receipts warrant attention."

The takeaway: One month into office, McAuliffe said McDonnell’s revenue estimate was $140 million high, but retained "the underlying economic forecast" McDonnell’s budget was built on.  

In May, the shortfall caved to an estimated $1.5 billion. The General Assembly and McAuliffe that month agreed to a new two-year budget going into effect July 1 and patched the revenue hole by cutting $800 million in spending and drawing $700 million from the state’s rainy day fund.

Seven months into his term, on Aug.15, 2014, McAuliffe estimated the shortfall at $2.4 billion and ordered additional cuts to keep the new two-year budget balanced. In a speech to the General Assembly’s money committees, the governor said that out of caution, his forecast was deliberately "pessimistic."

The surplus

McAuliffe’s usually adds that, under his watch, the shortfall was "turned" into the "largest surplus in Virginia history." Although that claim doesn't factor in our ruling in this fact-check, we'll offer footnotes on it. 

The record surplus claim stems from McAuliffe’s announcement in July 2015 that Virginia ended the first year of its biennial budget $550 million in the black.

The figure slightly outstrips the previous surplus high of $545 million for the budget year that ended in mid-2005, according to records going back to 1990.  When adjusted for inflation, the 2005 surplus still is the highest.

Some people hearing McAuliffe’s statement might conclude that Virginia’s budget made almost a $3 billion rebound in one year of McAuliffe’s term - from a $2.4 billion shortfall in 2014 to a $550 million surplus in 2015. That’s not the case.

McAuliffe overestimated the state’s economic problems in August 2014 when he adjusted the two-year budget to a "pessimistic" forecast of a $2.4 billion shortfall. That assumption turned out to be $550 million too high and produced the record surplus McAuliffe cites.

Our ruling

McAuliffe said, "Five years ago, when I took office, our state was mired in debt - a $2.4 billion debt left over by Republicans."

That’s just wrong. McAuliffe inherited balanced budget proposals from McDonnell in 2014 - as required by the state constitution. Perhaps, McDonnell should have seen approaching clouds and proposed a more conservative spending plan. But financial projections are tricky. When McAuliffe sensed an economic slowdown during his first weeks in office, he made a modest $140 million cut to McDonnell’s revenue forecast and said he was sticking with the "underlying economic forecast" predicating McDonnell’s budgets.

Six months later, McAuliffe was projecting a $2.4 billion shortfall.

McAuliffe is hardly the first governor to accuse his predecessor of leaving behind a financial mess. But evidence shows the brunt of the shortfall, though not McAuliffe’s fault, occurred during his watch.

No doubt, McAuliffe faced tough financial conditions. But he did not  inherit a $2.4 billion deficit from Republicans, as he’s been saying for years. We rate his statement False.