Supercommittee Failure Puts State Jobs, Credit on the Line

By Peter Smith, Virginia Statehouse News Monday, November 28, 2011

ALEXANDRIA - Virginia lawmakers could call the day before Thanksgiving “Black Wednesday” as a federal debt committee's failure means the state must face a $500 billion cut in federal defense spending that could hurt jobs, revenue and its AAA credit rating.

The General Assembly and Gov. Bob McDonnell already face a potential $1 billion to $1.5 billion budget shortfall for the 2012-2014 budget, according to Senate and House Finance Committee estimates. The supercommittee's failure could further strain the tight budget.

“Nobody really knows what to expect,” Senate Finance Committee Chairman Chuck Colgan, D-Manassas, said. “This is going to make our job harder, because the cuts are not going to happen tomorrow — it’s going to happen by early 2013 — and that’s when we’ll know how this all affects Virginia.”

Analysts for the Senate Finance Committee told lawmakers at the committee’s recent retreat in Fairfax that Virginia stands to lose more than 70,000 jobs, reducing sales and income tax levels needed to fund the 2012-2014 budget. Federal grants and contracts also make up 26.1 percent, or $10.8 billion, of Virginia’s $41 billion in revenue for fiscal 2011. And no one knows which, if any, of these programs will be spared from the federal budget ax.

Virginia has weathered the Great Recession better than most states and the nation as a whole. The state has the 10th lowest unemployment rate at 6.5 percent, compared with 9 percent for the United States in October, according to the U.S. Bureau of Labor Statistics.

McDonnell, a Republican, said last Tuesday that the United States cannot support a $15 trillion debt, but he opposed the steep defense cuts.

“The day of reckoning is here, the bills are due, and we have got to find ways to reduce spending,” McDonnell said. “But we certainly cannot sacrifice the security of the United States in the process.”

The congressional “supercommittee” of six Republicans and six Democrats failed to find $1.2 trillion in cuts over the next 10 years by Wednesday's deadline as required by the Budget Control Act of 2011, or BCA. Now the BCA will trigger those cuts automatically, with 50 percent from defense spending and 50 percent from domestic spending. The BCA was created as a compromise to raise the federal debt ceiling in August.

Congress’s fight over the debt ceiling spooked markets in July and August, and wiped out $3 billion from Virginia’s $50 billion pension system, which is $19.9 billion underfunded, according to some estimates.

However, Matt Mitchell, an economist with the state’s Joint Advisory Board of Economists and senior fellow at George Mason University’s Mercatus Center, said Virginia’s pain from federal cuts “could be good in the long run.”

“No economy can be really healthy, if it’s dependent on one source,” he said. “Arizona, Florida and Nevada depended heavily on the housing sector, and looked great until the bubble burst. Virginia has a federal bubble, because it is just not sustainable.”

The credit rating agency Moody’s assigned Virginia a “negative outlook” on its AAA debt rating in August, when the United States seemed headed for a first-time national default on its $15 trillion debt. Moody’s cited Virginia’s connection to the federal economy as the reason.

A credit downgrade could make debt service even costlier than the $593 million price tag that state legislative analysts project for fiscal 2012. Debt service ate up $1.19 billion, or 3.7 percent, of the $32 billion in the 2010-2012 general fund operating budget.

Colgan said lawmakers, despite the challenges, will make ends meet, when they reconvene Jan. 11, but the difference will come from state agencies and programs, since Republicans oppose tax increases.

“We can balance the budget, but it’s going to be awfully tight,” he said.

McDonnell has ordered all state agencies with the exception of education and Medicaid to prepare for 2 to 6 percent budget cuts.