Gov. Ralph Northam will suspend all new spending in the pending two-year, $135 billion state budget and divert planned deposits in the state’s reserves to pay for essential services in the public health and economic crises caused by the coronavirus pandemic.
The budget strategy will give Northam and the General Assembly time to reassess the economic damage and outlook for future state revenues, as well as determine how much money the federal government will send to Virginia in emergency stimulus funding and how the state can spend the money.
“It’s kind of like a great timeout until we get a better idea of what the economy looks like,” said Clark Mercer, the governor’s chief of staff, in an interview on Monday to outline the budget plan.
The plan represents recognition of the stark new reality that confronts Virginia lawmakers less than a month after the assembly adopted a pair of budgets — one for the fiscal year ending June 30, another for the two years beginning July 1 — on the same day that Northam declared a public health emergency.
Since then, nonessential businesses have been ordered closed, large public gatherings prohibited and people urged to stay home unless they have no choice, as the governor and public health officials have struggled to slow the spread of the coronavirus.
Legislators return to Richmond on April 22 to take up the governor’s proposed amendments to legislation the assembly passed during the winter session.
With Northam’s proposed amendments to the budget due by Saturday night, his administration has been working on a plan that would preserve the political status quo and allow the assembly to act quickly on the budgets for the current fiscal year and the two years beginning July 1 when it reconvenes under the threat of contagion.
Democrats are trying to preserve historic legislative gains since taking control of the assembly for the first time in more than 20 years. Republicans are seeking a second look at measures they warn could further harm businesses trying to survive unprecedented restrictions to prevent the spread of the coronavirus.
“Everyone’s priorities are put on hold,” Mercer said. “We’re going to hold all new spending.”
New spending accounts for $1 billion in the first year of the budget and $1.1 billion in the second year, but the plan also would suspend about $700 million in discretionary spending on existing programs — for a total of nearly $3 billion in the $135 billion budget. But the governor is not proposing to cut new spending or reforecast future revenues.
“It’s kind of a freeze until we know what we’re doing,” said Del. Mark Sickles, D-Fairfax, vice chairman of the House Appropriations Committee, in an interview on Monday.
Northam will ask the assembly to approve an amendment to the budget that would allow the state to use about $600 million that had been planned for deposit in the state’s cash reserve fund for essential operations of government, including measures to fight the pandemic, deliver mandatory and constitutionally required public services, and keep the government running.
“We’re not starting from revenues because no one can predict them,” said Secretary of Finance Aubrey Layne, who led the effort to devise the budget strategy with administration officials and assembly leaders.
“We’re starting from what government has to do to serve its citizens and preserve the continuity of government,” Layne said.
Sen. Steve Newman, R-Lynchburg, had asked the Senate to wait on adopting the budget because of the looming economic consequences of the coronavirus pandemic.
“I thought the right thing to do is to pause and go back and get our best estimates,” Newman said in an interview on Monday. “I like that approach the best. I think we could have done it three weeks ago.”
Mercer said Newman and others urging a delay in adopting the budget were right that the virus would affect the spending plan, but he said, “Nobody had a clue — and still don’t have a clue — what the effect will be.”
Layne said the key to the strategy is the recognition that forecasting revenues in the current environment is impossible.
“I know I can control spending, but I can’t control revenues,” he said.
The budget, hailed by Democrats as the “most progressive in history” and reviled by many Republicans as burdensome of the state’s economy, includes about $32 million in new spending from the state’s general fund to support legislative initiatives that Northam is reviewing for action by midnight on Saturday.
The general fund, derived chiefly from taxes paid by individuals and businesses, mostly goes to such services as education, health and public safety.
Mercer estimated that the administration has 300 to 400 bills left to review, despite going through an average of 60 bills a day under escalating disruption, with most employees working from the safety of their homes.
“Even in a perfect environment, it was going to be difficult to do that,” he said.
The governor also has been resisting pressure from both sides to expand spending or curb new initiatives in the budget, or use the state’s combined $1.6 billion in reserves to pay for new spending in the budget the legislature adopted on March 12.
Had the state taken that approach only to face a drastic downturn in future revenues, “everybody was going to regret doing that,” Mercer said.
Instead, Northam will ask the reconvened assembly to allow use of the money that had been planned for reserve as cash for the state’s fundamental priorities. In the current fiscal year, which ends June 30, “our strategy is liquidity,” Layne said.
Northam also will propose a large block of amendments to restrict but not eliminate new spending proposed in the two-year budget.
“Every item in new spending will have language attached to it that instructs state agencies they don’t have authority to spend it,” Mercer said.
Politically, the strategy will allow the administration to control spending without picking winners and losers in the fight over budget priorities, Layne said. “The governor and his staff can’t spend it until the General Assembly takes future action.”
“Democrats have preserved everything they fought for,” he said. “If Republicans want to fight some more, they get another shot.”
Newman, a ranking Republican on the Senate Finance and Appropriations Committee, said the strategy’s success depends on the governor’s willingness to include the assembly on decisions over the ultimate spending priorities.
“The legislature needs to be involved as much as possible,” he said.