By Amanda Iacone
Virginia Statehouse News

 

RICHMOND — Even as Gov. Bob McDonnell announced a $311 million year-end cash balance, Wall Street put the state on notice that its credit-rating could be downgraded because of the potential for a federal budget collapse.

State officials learned Tuesday that Moody’s, a credit rating agency, put Virginia and four other states on a watch list. Virginia was included because of its heavy reliance on federal funding, the number of federal employees who live in the state and the lingering debate in Washington, D.C., over the nation’s debt, McDonnell said at an afternoon news conference on the state’s own finances.

 

“We’re furious,” McDonnell said. “If they don’t (get a deal) not only will it be embarrassing, but it will create an international financial crisis, and Virginia and our four sister states are going be the first ones to be a victim.”

 

Virginia has had a triple-A credit rating since the 1930s and has only been on a watch list three times during the past 20 years, he said. A credit rating determines whether a government is credit worthy, which can affect the interest rates governments pay.

Republican and Democrat legislators visited New York credit agencies in January ahead of debates over whether Virginia should borrow $3 billion for road, bridge and transit projects. The lawmakers were told the state is doing fine and borrowing that money will not hurt the state’s credit rating, McDonnell said.

 

“It’s a national embarrassment to the United States of America to get two weeks from defaulting on its obligations,” he said. “It is a source of great alarm and consternation for us in Virginia as I imagine, it is for the other four governors.”

 

In 2010, the state received $7 billion from the federal government, which is about 15 percent of the state’s total budget, said .

 

Much of that money is tied to the defense industry, but the state also receives transportation, education and Medicaid dollars.

 

The credit-rating news only reaffirmed the unstable and unpredictable nature of the state’s finances as all states continue to struggle with decreasing revenue since the Wall Street meltdown in 2008.

 

Although the state ended the year in the black, it still has unpaid loans and an underfunded pension system.

 

“It’s good news,” McDonnell said of the cash balance, which he called a surplus. “But we still have a long way to go before I can tell you that we are out of the woods when it comes to meeting our short- and long-term obligations.”

 

The $311 million stems from additional revenue the state collected above forecasted estimates.

 

Revenue grew 5.8 percent above fiscal year 2010 revenue collections — the first time in several years that revenue increased compared to the prior year. Revenue was expected to grow 3.5 percent.

 

Much of the increased revenue came from income tax withholdings. Sales tax revenue also increased compared to 2010 even though it was expected to decline, said Secretary of Finance Ric Brown.

 

“If people are buying more and consuming more, that means they are feeling better about the economy. If people are paying more income taxes, it means they are earning more or (are) back to work,” McDonnell said. “These two drivers of this revenue surplus are indicative of the fact that we’ve got a recovering economy in our state.”

 

The total cash balance won’t be available until late August when state agency spending numbers are finalized. The cash balance, what state officials called a surplus, is expected to increase, however, Brown said.

 

The final balance could meet or exceed last year’s $403 million surplus, most of which came from agency savings. Agencies saved $175 million during fiscal 2010, and $80 million of that went to a one-time bonus for state employees.

 

The Legislature did not allow the governor to provide similar bonuses in order to save money in fiscal 2011.

 

McDonnell touted his work to cut billions from the state’s budget, as revenue plummeted in the wake of the banking crisis. He said although he cut spending, he invested in transportation, higher education and economic development and jobs, all without raising taxes.

 

Still the state revenue is below 2007 revenue, and it still has debts to pay, McDonnell said.

 

And much of the current cash balance will go to repay those debts including the state’s ailing pension system, which is $17.6 billion short of its total liabilities.

 

State statute dictates how much of cash balance can be used, so the state will add $146.6 million to the rainy day fund and put $32.2 million in the water quality fund.

 

Another $8.9 million will pay the interest on a federal loan the state took to provide unemployment checks to out-of-work Virginians.

 

But the governor also has directed that the $4.3 million bill the state incurred from April’s tornadoes be paid from the cash balance.

 

The money will help the localities and state agencies that responded to the tornadoes pay for personal assistance to families and cover overtime costs, Brown said.

 

The cash balance also means the state can spend $7.5 million to buy land around the Naval Air Station Oceana, which the state agreed to do under the Base Realignment and Closure obligations.

 

And the state will provide $7.4 million in supplement funding to localities for sheriff’s officers.

 

Of any remaining money, two-thirds will go to the state’s transportation trust fund, as required by statute. And the leftover third will go into the pension fund.

 

McDonnell pledged to take additional proposals to the General Assembly in January that would make long-term changes to the state’s retirement system to close that $17.6 billion funding gap.