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The Big Pickle

How did a prosperous state like Virginia get into this money mess? And will local governments get stuck with the check?

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Ginny always knew tomorrow would be better.

She was making good money. But next year she'd make more. She contributed to her retirement fund each year, although not as much as she needed to. Next year she'd catch up.

Year after year, she was right. Every year was better than the last. Until 2009, when it wasn't.

Even then, Ginny didn't panic. She cut back on expenses. She took money out of savings. She borrowed. She got a fat federal stimulus check, which helped for a while.

Nevertheless, 2010 was worse than 2009. 2011 got a little better, but Ginny still couldn't catch up. Now it's 2012, and her bank account is overdrawn. She's scratching her head, wondering where the money's going to come from this time.

Ginny is the state you live in, Virginia. And the money's probably going to come from your county or city.

The Commonwealth of Virginia's budget is more than $40 billion per year. If it were a corporation, it would rank in the Fortune 500 with Intel and Chrysler. It now faces some serious shortfalls: between $600 million and $1.5 billion in the next two years, depending on whom you listen to.

It's easy to blame the economy. But that's not the only reason the budget's a mess, says Neal Menkes, director of fiscal policy for the Virginia Municipal League.

First, the state has skimped on its employees' retirement for decades. The state has fully paid its annual contribution to the Virginia Retirement System only four times since 1992, and not once since 2001, Menkes says. Now the VRS has a $19 billion shortfall.

Second, almost every major tax policy change the state has made since 1994 has reduced revenue. These include the estate-tax repeal in 2009, the elimination of the 2.5-percent sales tax on food in 2004, and a series of low-income tax relief measures. The only changes that brought in more money were Gov. Warner's budget-balancing tax increases in 2004. The cumulative effect of these changes has been a hard punch to the budget — $847 million in the 2010-2012 cycle we're in, Menkes calculates.

In the proposed 2008-2010 budget, the state managed to come up with an extra $6.4 billion to make ends meet. Trouble is, about half of that came from one-time actions, such as taking $783 million from the rainy-day fund. "They vacuumed out cash that was there for capital projects and substituted debt dollars," Menkes says. The state did the same thing in 2010.

Federal stimulus money was "substantial and critical for balancing the budget," Menkes says. "But after this year, it's kaput."

What happens now?

Even a modest economic upturn won't be able to balance the state budget, Menkes says. So the buck's getting passed to Virginia's counties and cities.

Local governments, which are still hurting from the collapse of real-estate values, depend heavily on state money. About half of the state's general fund — $15.7 billion — goes to localities, mostly for public education, car-tax relief, mental-health services and public safety.

If the past is any guide, Menkes says, local governments are in trouble. While the actual amount the state spends has fluctuated in recent years, the percent of the general fund spent on local aid is steadily declining, from 52 percent in 2009 to 44.4 percent in 2014 (in McDonnell's proposed budget.) "It's slipping and sliding," Menkes says.

This means counties and cities will have to cut back. Henrico County, for example, received just under $8 million from the state for its police department in fiscal year 2012 — roughly the same amount as in 2005. Gov. Bob McDonnell's proposed budget would freeze this public-safety money for all localities for two more years. In fiscal year 2014, Henrico will receive $19.3 million less in aid for schools compared with 2009 — even though it now has about 700 more children.

The suburban Richmond county long has been admired for its shining fiscal condition. Now it's staring at a $53 million budget shortfall.

Menkes doesn't believe local aid will be restored anytime soon, even if the economy kicks into second gear. That's because the state has more pressing places to spend its money: replenishing the rainy day fund, meeting its retirement obligations and paying for a horde of new Medicaid recipients because of the new federal health-care law.

At a meeting Jan. 10, Menkes urges the five members of the Henrico Board of Supervisors to lean hard on legislators to save local aid. When Supervisor Pat O'Bannon asks what the county should do about the shortfall in retirement money, Menkes tells her there's nothing to do but "phase in the pain. … It's ugly no matter how you look at it." S

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