Virginia eyeing budget challenges

“We will be prudent, and I do believe that will leave some upside for the next administration, which I think is appropriate,” said Youngkin. “The scenarios that were being discussed at both the House and the Senate retreats were overly negative from a revenue standpoint.”

Bloomberg News

The commonwealth of Virginia has been spared some of the financial havoc raining down from federal job cuts in Washington, D.C., but a budget forecast from the statehouse points to the possibility of new credits.

“Since 2020 General Assembly has appropriated $5.1 billion in general fund cash for capital. Due to resource restraints, bonds may need to be considered as the primary sources for any capital expenditures for this year,” according to a budget outlook prepared by the House Appropriations Committee. It rolls in the effects of federal job cuts and the Trump administration’s signature tax policy legislation, referred to in the report as “H.R. 1.”

The state’s credit is currently rated triple-A by the major rating agencies.

The finely detailed, 58-page report presents a mixed-bag of financial data including downside risk analysis.

“Virginia’s reliance on federal spending to support both public- and private-sector jobs as well as our trade orientation (Port of Virginia) make the commonwealth more likely than the nation overall to experience a contraction,” said the committee.

Virginia operates on two-year spending plans adopted in even numbered years. Current Governor Republican Glenn Youngkin will submit the final budget of his term in mid-December and is downplaying pessimistic projections.

“We will be prudent and I do believe that will leave some upside for the next administration, which I think is appropriate,” said Youngkin. “The scenarios that were being discussed at both the House and the Senate retreats were overly negative from a revenue standpoint.”

H.R. 1, also known as the One Big Beautiful Bill Act shifts Medicaid payments from the federal government to the states.

Combined with changes to the Supplemental Nutrition Assistance Program, the committee projects a $440 million hit to the commonwealth.

OBBBA also raised the cap on state and local tax deductions to $40,000 from $10,000, which the committee believes will take another big bite out of state revenues.

The committee projects losses of $51.3 million in 2026, $39.4 million in 2027 and $13.4 million in 2028.

States maintain the right to not conform to federal tax policy by de-coupling, a process that normally requires legislative action.

Virginia subscribes to “rolling conformity,” but also leaves an escape clause by way of “fixed date conformity.”

The clause means that “action by the General Assembly is required to move forward the date by which we conform to most provisions of the federal tax code.”

Virginia is also sitting on two healthy reserve funds with about $1.5 billion that could be tapped without going below statutory limits.

Solving future budget shortages will fall to the state’s newly elected Democratic governor, Abigail Spanberger who takes office in mid-January.