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With state flush, Northam proposes 10% raise for state workers, $1B boost for VRS, $500M for school modernization

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Gov. Ralph Northam is dealing from a flush hand in his last two-year budget, with proposals to give state and other public employees a 10% raise, pay off $1 billion in unfunded pension liabilities, and contribute $500 million toward repairing or replacing outdated public school buildings.

Northam, in his last budget address to the General Assembly money committees before leaving office next month, said Thursday that he’s leaving the state in great financial shape, with $13.4 billion in additional revenues expected to flow to the state over three years, despite a COVID-19 pandemic that threatened Virginia’s financial health.

“I am confident that the state is stronger and more forward-looking than it was when I took office four years ago,” he told members of the Senate Finance and Appropriations and the House Appropriations committees gathered in a socially distanced setting at the Pocahontas Building in Richmond.

In a bipartisan gesture, Northam invited Gov.-elect Glenn Youngkin and Lt. Gov.-elect Winsome Sears to attend the annual budget presentation. Youngkin, a Republican who defeated former Gov. Terry McAuliffe in November, sat beside the governor as he spoke.

“I invited the incoming administration today because once the campaign is over, we should all work together to help Virginia succeed,” the outgoing Democratic governor said.

Youngkin, speaking to reporters after the presentation, called the invitation “a reflection of the cooperative outlook he has exhibited and we have appreciated.”

Northam and his staff also contrasted the smooth transition with the continuing refusal of former President Donald Trump and his Republican allies to accept the election of President Joe Biden a year ago.

“Our elections are always well-run, they are free and fair, and they are the hallmark of our democracy,” the governor said.

Northam expressed pride in his management of the COVID-19 pandemic, in which he said Virginia has ranked in the top 10 among states for vaccinations, with more than 87% of adults receiving at least one dose of vaccine. But he also spoke of the terrible toll the pandemic had taken on Virginians, with more than 15,000 dead from the disease in 21 months, including Sen. Ben Chafin, R-Russell, and 20 to 40 people dying each day.

Northam also reminded legislators of his first major victory as governor — passage of Medicaid expansion in 2018 after six years of Republican opposition. “Imagine if those 600,000 [people enrolled in Medicaid expansion] had gone through the pandemic with no health care!” he said.

Business ranking

The outgoing governor also brought up another early success — winning the coveted bid for Amazon’s East Coast headquarters, with a $2.5 billion investment and at least 25,000 new, high-paying jobs at the site in Arlington County.

He included $42.5 million in each year of the budget to fulfill the state’s promised incentive for new jobs — after they are created and begin to generate income tax revenue.

Northam also turned to Youngkin in reminding the next governor that Virginia had been named “best state for business” by CNBC for three years (actually twice, with no ranking awarded in 2020 because of the pandemic).

“I also expect Virginia to be best state for business for the fourth year in a row,” he said to the governor-elect. “No pressure.”

Youngkin, a former equity fund executive, said later that Virginia isn’t doing enough to compete with North Carolina and other states for business and jobs, no matter what CNBC says.

“This isn’t about rankings — it’s about results,” he said.

Northam said the results speak for themselves in the proposed new budget, with $1.1 billion in new spending in the current fiscal year that ends June 30 and $10.5 billion in the next two fiscal years. After subtracting savings, primarily in Medicaid, the state’s net operating costs would fall by almost $76 million in the first year and rise by $9.7 billion in the next two years.

Northam already has announced most of the new initiatives he proposes in the $158 billion two-year budget, led by a $2.4 billion increase in direct aid for K-12 public education, including a 10% raise for teachers over two years.

Pay raises

On Thursday, he unveiled a proposal to give the same increase to state and state-supported local employees, such as sheriff’s deputies and workers in local and regional behavioral health organizations. The proposed raises would cost $750 million for teachers and $807 million for other public employees over two years.

Youngkin said of the proposed raises “the principle is absolutely correct,” although he contended (and Northam aides strongly disagreed) that the state had done too little to raise pay for teachers and law enforcement, particularly, over two Democratic administrations.

Behavioral health

Northam also is targeting major spending increases for behavioral health care, including pay raises for direct care providers in state mental hospitals and other behavioral health facilities, which are overcrowded and understaffed. He also would pay for raises with $68 million in unspent federal emergency aid.

Those raises are part of a proposed $560 million behavioral health package that would fully fund the STEP-VA program for delivering community services, such as crisis care and permanent supportive housing, to keep people out of institutions.

It would expand community services to treat people for addiction, raise behavioral health standards and increase mental health counseling in prisons and jails.

Separately, Northam proposes to spend $675 million to expand access to Medicaid waiver slots for community services to people with developmental and intellectual disabilities, while raising reimbursement rates to the organizations that provide those services for the first time in more than five years.

“We want to make sure we have quality caregivers in the communities to deliver services to these vulnerable populations,” Secretary of Finance Joe Flores said in an advance budget briefing on Wednesday.

The proposed budget also includes up to $1 million for the Department of Behavioral Health and Developmental Services to hire a consultant to conduct a comprehensive study of the behavioral health system next year to identify other gaps to fix.

Youngkin commended Northam for including pay raises for behavioral health staff and putting more money into fixing the fragmented, overburdened public system, which he said will be a priority of his administration.

“We’re in a state of crisis,” he said.

Building state reserves

Northam is proposing a number of large one-time investments with an eye toward the future. For example, he wants to make a $564 million deposit in the cash reserve fund in the first year and a $1.1 billion deposit in the constitutional “rainy day” fund in the second that would boost total state reserves to more than $3.8 billion by mid-2024, or almost 17% of general fund revenues.

The proposal includes language to override a constitutional provision that limits total reserve funds to 15% of general fund revenues, or about $300 million less than he wants to put aside.

Northam reminded legislators that when he took office in 2018 — with both chambers of the General Assembly under Republican control — Virginia’s coveted AAA bond rating was on a negative watch by national rating agencies, with less than 2% of revenues in reserve.

Northam also wants to lower long-term liabilities for teacher and state employee retirement funds by making a one-time deposit of $924 million and maintaining current state contribution rates to the pension funds, which would reduce future liabilities by more than $271 million.

He proposes to pay for updated costs in Medicaid by $821 million in the next two years and in K-12 education by almost $332 million, while spending an additional $354.5 million to “hold harmless” local school divisions from the effects of the pandemic, including lower student enrollment and $268 million to school divisions, including Richmond, with high percentages of low-income, at-risk students.

School buildings

The governor also proposes a $500 million contribution to help local school divisions repair or replace school buildings, a multibillion-dollar problem in a state in which more than half of public school buildings are more than 50 years old.

A legislative commission also is expected to recommend establishment of a separate fund for school modernization, as well as measures to make grants and low-cost loans more readily available to school divisions to pay for capital projects.

Northam noted that construction and repair of school buildings traditionally has been the responsibility of local governments, not the state.

“While I understand the reasoning for that, when we have the resources to help, we should,” he said, prompting an ovation.

Northam proposes to make $2.8 billion in one-time cash payments for capital projects to replace bonded debt and save the state money on interest payments. The proposed spending also would cover more than $300 million in increased costs for current projects, including the construction of a new Central State Hospital near Petersburg, because of inflation and higher wages.

Federal funds

The governor also has more than $1 billion in federal aid remaining from the $4.3 billion that Virginia received under the American Rescue Plan Act, which Biden signed in March. He proposes to spend about $690 million of those remaining funds and save about $424 million as a further hedge against a resurgence of COVID-19.

He wants to spend $165 million to help Richmond and two other cities end pollution of rivers with raw sewage from antiquated combined-sewer systems that overflow during heavy rains. He proposes to add $100 million to Rebuild VA to help businesses recover some of their losses during the pandemic, or about half of what they had sought in additional aid.

Tax cuts

Finally, Northam is proposing $2.1 billion in tax cuts and other savings. He had already rolled out a package with some similarity to proposals that Youngkin had put at the center of his gubernatorial campaign. Northam is proposing one-time refunds of $250 for individuals and $500 for couples; eliminating the state’s share of the sales tax on groceries; and ending the accelerated collection of sales taxes for large retailers.

The governor also has focused on low-income wage earners by proposing to make up to 15% of the federal earned income tax credit refundable for income-eligible families.

“We need to make sure that’s focused on the people who need it the most,” he said.

Youngkin said Northam had “clearly listened to Virginians” who voted in November for the Republican’s pledge to lower taxes and offer one-time refunds.

However, Youngkin said the governor’s response to the need for tax relief “is understated in the budget” and pledged to go further with larger rebates, doubling the standard deduction for state income taxes and exempting up to $40,000 in military pension benefits, both of which Northam did not address in his budget.

The governor, speaking to reporters after his presentation, said, “Not all tax cuts are created equal.”

Northam also proposed a major boost to small businesses on Thursday with an estimated $195 million in tax savings for those that received forgivable federal or state emergency loans during the pandemic.

The loans are tax-exempt after they are converted to grants, but businesses could deduct no more than $100,000 of their costs from state income taxes this year. Northam proposes to remove the cap to fully conform with the federal provisions of federal emergency relief packages.


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