Monday, July 21, 2008

Mark Obenshain: "Governor may have made a million dollar mistake"

[Sen. Mark Obenshain, the Republican representative for Harrisonburg and surrounding areas, is not surprised at Democrat Governor Tim Kaine's financial mistake concerning overly optimistic revenue forecasts. In his Obenshain Report sent out today, he takes the governor to task.]

By Sen. Mark Obenshain

The Governor just announced that he made a little mistake - possibly a billion dollar mistake. I hate to say I told you so, but...

Back in March, I warned that the Governor's revenue forecasts were wildly optimistic. On Thursday, Gov. Kaine's Secretary of Finance belatedly came around to my position, writing that "declining employment levels, slower income growth, lower consumer confidence, and the continued downward trends in the housing market drove shortfalls in withholding, sales, and recordation taxes."

I argued in the Obenshain Report four months ago that the Governor's official budget projections were "based on unjustified optimism," but this should have been obvious to any interested observer. In March, I pointed out that the budget projections presumed that Virginia's tax collections would grow at a rate of 2.2% in 2009 and then at the stunning rate of 6.8% in 2010. Even when they were first revealed, the Governor's estimates appeared to have been pulled out of thin air.

Why are these projections important? The Governor used them in establishing his spending levels for the Commonwealth's budget for the next two years. His Secretary of Finance and his administration told the General Assembly that it should rely on these projections in adopting a budget. Of course, if the projections are high, Virginia will face a budget shortfall - or a deficit. Consequently, it is critical that the process for establishing these projections be reliable and insulated from "politics." In this task, the Administration seems to have failed.

This year, we have experienced an anemic 1.3% rate of growth, and unfortunately, our economic decline has yet to bottom out. The Commonwealth is now in the unenviable position of having appropriated far more money than we really have, which will undoubtedly cause significant strain at all levels of state government. Unfortunately, this may translate into budget cuts and hardship for working families across Virginia.

In my view, state government has three fundamental priorities: transportation, education, and law enforcement. The temptation is great to "expand" these priorities and to open the public purse to fund unnecessary programs and non-essential services. The result has been the passage of budgets that fund the Virginia Sports Hall of Fame or the Wolf Trap Center for the Performing Arts, while failing to fully fund transportation or adequately address teacher salaries.

Sadly, we adopted a budget this year that increased state spending by $4.86 billion over two years, but it failed to include money for necessary maintenance on I-81 or other transportation infrastructure in the Commonwealth. In our own families, we start to cut costs when finances are tight. We eliminate some expenses entirely and look for cost savings in others. Above all, we set priorities.

I would prefer to close on a more optimistic note, but the reality is that Virginia's economy will not grow at nearly seven percent next year, the amount necessary to avoid a revenue shortfall. We continue to outperform national averages by a significant margin, but this is not enough to ward off the effects of the current economic downturn. Some chose to ignore reality, putting new spending programs above fiscal sanity. We now face the prospect of a substantial revenue shortfall for 2009. The Governor and the General Assembly will face a tough choice in deciding how to address this challenge - do we raise taxes or do we prioritize and live within our means.

This kind of fiscal blunder would mean little in Washington, where the government printing presses work overtime and a balanced budget is a pipe dream. In Virginia, however, it has the potential to cause real problems. With Governor Kaine receiving prominent mention in the Obama vice-presidential sweepstakes, he better hope he is going to be judged by Washington standards and not Virginia standards.

The rest of us need to hope that Washington standards are not becoming Virginia standards.

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