RICHMOND —Gov. Terry McAuliffe (D) on Friday announced a $2.4 billion projected budget shortfall that he largely blamed on cuts in defense spending mandated by sequestration — a situation, he said, that will force the state to rethink how it generates tax income.
In a speech to a joint committee of House and Senate lawmakers, McAuliffe painted a dour picture of the state’s finances. He said some $882 million must be cut from planned spending, in addition to $1.55 billion that has already been trimmed, in order to offset the three-year projected shortfall. He did not specify where the cuts would be made but said his administration will propose reductions later this year.
In the long term, McAuliffe said, the state must make a fundamental shift — from a reliance on federal spending, which has made it particularly vulnerable to cuts in Washington, to a diversified approach to revenue and job growth.
“It is obvious that the economy of the past — where we could simply take the economic benefits of the Department of Defense for granted — is over,” he said. “We need to move past this reliance — and build a new entrepreneurial, innovative and dynamic economy.”
Virginia is among the first states to attribute the loss of thousands of jobs and billions in revenue to sequestration, the mandatory across-the-board spending cuts that took effect in 2013 as part of an earlier impasse over the federal budget.
While sequestration may have faded from the general public’s memory, the pain is real for states like Virginia, said Scott Lilly, a budget expert at the Center for American Progress. The cuts cost the state lucrative private contracts, especially in Northern Virginia, home of the Pentagon, and in the heavily military Hampton Roads area.
“Virginia is always going to get hit a lot harder,” Lilly said. “In West Virginia, probably, you couldn’t measure it with an electron microscope. But you just go through all of the contractors from Reston and all the way down to Tidewater — this is where America’s defense industry is concentrated.”
McAuliffe said sequestration reduced military contracts in Virginia by about 20 percent, or $9 billion, from 2011 through 2013. He cited an analysis by Stephen Fuller, a George Mason University economist, that projected a loss of 154,000 jobs in Virginia, which is about 4 percent of the state’s workers.
In an interview, Fuller said sequestration compounded a problem that started in 2011 when defense agencies stopped renewing many contracts, a change that he said has had dire consequences for not only the commonwealth but the entire region.
“It’s like we were spoiled,” Fuller said. “It’s going to take [McAuliffe’s] whole term, and probably the next governor’s term, to turn this thing around. The whole rest of the country is ahead of us.”
Based on earlier shortfall estimates, the state has already cut $707 million from the rainy day fund and $843 million in new spending. McAuliffe has not cut money for education, mental health, domestic violence and state pensions. But faced with a $882 million budget hole, he said Friday that nothing is off the table, including layoffs.
“Anyone who wants to ‘slash’ spending in Washington is putting Virginia’s economy at risk,” said U.S. Rep. Gerry Connolly (D-Va.), who opposed the across-the-board spending reductions. He urged Congressional Republicans “to make spending cuts with a scalpel, rather than with blunt tools like sequestration.”
In a rare display of bipartisan consensus, McAuliffe was flanked during his speech by House Appropriations Chairman S. Chris Jones (R-Suffolk), Senate Finance Committee co-chairman Charles J. Colgan Sr. (D-Prince William) and Senate Finance Committee co-chairman Walter A. Stosch (R-Henrico). The officials would not provide details about how they would try to pare down an already austere budget.
While the projected revenue gap is significant, lawmakers said the state has dug itself out of deeper holes in the past. Former governor Robert F. McDonnell faced a $3 billion shortfall during his term, and Mark Warner, who was governor from 2002 to 2006 and is now a U.S. senator, faced a $6 billion shortfall.
Still, McAuliffe said this past fiscal year marks the first time outside a national recession that general fund revenues have declined in Virginia. State revenues fell about $438 million, or 0.9 percent, a stark reversal of the predicted 1.6 percent growth.
U.S. payroll employment grew 1.7 percent in the last fiscal year, compared with 0.4 percent in Virginia.
McAuliffe said the shortfall started with the “fiscal cliff” standoff of 2012, when high-wire negotiations in Congress over the debt ceiling led nervous investors to cash out stocks and see a one-time spike in their capital gains tax. Like many other states, Virginia enjoyed the surplus tax revenue last year but this year is feeling the pinch.
House Republicans, who have spent much of the year fighting with McAuliffe over his campaign promise to expand Medicaid through the Affordable Care Act, said the grim budget news reinforced their belief that the state should not count on federal funding for health care or any other programs.
“It really makes our argument for us,” said House Majority Leader M. Kirkland Cox (R-Colonial Heights).
But McAuliffe dismissed the comparison as “apples to oranges.”
Jenna Portnoy covers Virginia politics for The Washington Post.