Gov. McAuliffe’s addressed the Joint General Assembly money committees on Dec. 16

December 16, 2016

Chairman Norment, Chairman Hanger, Chairman Jones, Chairman Ware – thank you for inviting me to join you and your committees today so that I can lay out the amendments I am proposing to the Commonwealth’s budget for the remainder of this biennium.

I would also like to thank Lieutenant Governor Northam and Attorney General Herring for joining us and for their outstanding leadership.

It is great to be joined by so many members of my cabinet this morning, and I know we all want to thank the 128,000 state employees work tirelessly to make Virginia the best place to live on the globe.

The First Lady of Virginia is also with us today. Dorothy has thrown herself fully into the cause of connecting more Virginians, particularly our children, with healthy meals. And the results are clear. Working with the funding that you helped pass, Dorothy and her team have produced a 5 million meal increase in the Commonwealth’s school breakfast program – helping students in every corner of Virginia start their day with the healthy nutrition they need to learn.

Let us also take this opportunity to thank the men and women in uniform who are serving and sacrificing to keep our country, our Commonwealth and our communities safe.

The budget I will present to you this morning is the product of many hundreds of hours of meetings with the outstanding staff at Finance and Planning and Budget, with stakeholders and community leaders and with members of the General Assembly.

It is also the product of the work that we have done together leading up to this point – both on this particular budget and on our Commonwealth’s greater economic and policy fronts. There are some difficult decisions before us, but there are also a good number of opportunities – and those would not be possible were it not for the significant progress we have made together over the past three years.

Despite the challenging fiscal terrain we have faced at times, it is worth remembering the important strides Virginia’s economy has made since we began our work together in 2014.
When I gave my first speech to the General Assembly, Virginia’s unemployment rate was 5.4 percent. Today it is down to 4.2 percent—a full 1.2 percent lower and well below the national rate. We now have the second lowest unemployment rate of any major state in America. Our Commonwealth has created 182,100 net new jobs and we have attracted a record $14.22 billion dollars in capital investment from job creators in every corner of the globe.

Those economic strides fit into a vision for our future that you’ve heard me call “Building a new Virginia economy.”  We’ve worked hard to attract new businesses and investments here to our Commonwealth from sectors that will diversify our economy and reduce Virginia’s reliance on economic activity that stems from federal spending. I am proud of the significant progress we have made creating jobs in sectors like cyber security, bioscience, data analytics, advanced manufacturing, clean energy and many others.

And as we travel the globe and work to attract new companies to Virginia, we have also increased the Commonwealth’s focus on opening new markets for Virginia products and services.

The General Assembly has been a valuable partner in supporting our efforts to expand investment and international trade here in Virginia. And I am proud that we have worked together on equally important items that have laid a foundation for economic growth for years to come.

As you have heard me say, the challenge we face as a Commonwealth is not a lack of high paying jobs.

In fact, a new report from Burning Glass Technologies states that Virginia has 36,000 jobs open today in the cyber sector alone. The average starting pay for those jobs is $88,000 a year. That represents $3.15 billion in lost potential wages, and more than $157 million in income tax revenue.

And those revenue figures don’t even include the 149,000 jobs we have open in the tech field as a whole.

We need skilled and trained workers to fill these positions, and for that we need to build an education system that prepares our students to succeed in a 21st century economy.

And so, one year ago, I stood in this very room and announced that the biennial budget would include an increase of more than $1 billion for public education – bringing state support for our schools to its highest level in Virginia history.

This funding and other policy changes we have made together will help us prepare the next generation of Virginia students to fill the jobs of today and to create the jobs of tomorrow. They also contribute to an economic infrastructure that will help grow and diversify Virginia’s economy now and for years to come.

Another key component of that infrastructure, our Commonwealth’s transportation system, represents an additional area of significant bipartisan agreement and accomplishment between our two branches of government.

When we began our work together, our transportation governance system was broken.

U.S. Route 460 and the Midtown-Downtown Tunnel deal had exposed significant weaknesses in the Commonwealth’s approach to public-private partnerships. The Port of Virginia had been put up for sale, and was losing money on every container it handled, generating millions in deficits every year. The MARS Spaceport at Wallops Island was operating without insurance and losing money on every launch. And our transportation project selection process was defined more by political priorities than the Commonwealth’s best economic and quality of life interests.

When we took office, Secretary Layne and our team took immediate action to cancel the 460 project, buy down the tolls on the Midtown Tunnel and institute reforms to our P3 process that will better protect taxpayer dollars in the future.

Working with many of you in this room we established the Smartscale process so that transportation projects are now subject to a data-driven prioritization rather than the whims and preferences of politicians.

We worked with the new leadership at the Port of Virginia to return it to profitability and followed that success with a record investment in the Port and the signing of a new lease at the Virginia International Gateway. These steps guaranteed that our Commonwealth will be among the world leaders in exports and international trade. And in fact, just last week, I announced that October and November 2016 saw the highest volume for any two months in the Port’s history. Through the first 10 months of this year, the Port of Virginia’s import volume grew faster than any other port in the nation.

After a high profile accident, we secured operating insurance for the MARS Spaceport, and restructured its contract with Orbital ATK, thereby ensuring the future of this important economic asset.

We successfully competed for a $165 million federal grant that will allow us to build the $1.4 billion Atlantic Gateway project to further expand road and passenger rail capacity along the I-95 corridor.

And, we moved forward at full speed to initiate projects to unlock road corridors that are essential to Virginia’s economic growth and the quality of life of the families we serve. We announced new lanes on I-64, extended HOT Lanes on I-95 and 395, and a comprehensive project to Transform I-66 inside and outside the beltway.

Earlier this fall, Virginia selected a private partner to complete the outside-the-beltway portion of the I-66 project, and the benefits of the work we have done together on transportation reform came fully into view.

After an initial VDOT estimate indicated that Virginia would have to put $1 billion on the table to attract a private partner, we went back to the drawing board. We determined that VDOT would manage the project itself, unless a private company came forward with a proposal that beat our price.

While some said that no companies would bid, we ran a robust competition for this project. After analyzing the bids, we announced a deal that will not require a single dollar of taxpayer investment and will require the winning vendor to build new HOT Lanes, spend $800 million on mass transit in the corridor, and invest another $350 million in additional improvements that will reduce congestion. The consortium will also cut Virginia taxpayers a $500 million check on the front end of the agreement that we can spend to further reduce congestion and stimulate our economy.

By reforming our system and using the full leverage our Commonwealth possesses on projects of this magnitude, we negotiated a deal that saves taxpayers $2.5 billion and is serving as a national model for these types of projects.

These are just a few of the bipartisan victories we have achieved through our work together over the past three years. They prove that when we work together, we create jobs. We improve the quality of life in communities from Abingdon to Arlington. And we create new sources of revenue for the Commonwealth to devote to further activities that will advance our economic prospects.

Despite our successes, there have been moments during our work together when we’ve had to make difficult budget choices. As Virginia has been buffeted by the forces of sequestration and federal defense cuts, we have worked together to keep our budget balanced and to maintain investments in the functions of government that are essential to growing an economy and keeping our citizens healthy and safe.

Over the past three years we have certainly had the types of disagreements that are expected between branches of government that are controlled by different political parties. But when it comes to the state budget, we have worked together effectively and amicably. For that, I thank you sincerely. As I prepare to outline the decisions we have made for the current and upcoming fiscal years, I am ready as ever to work with you to pass a strong final product that reflects the priorities that we share.

I will begin with the economic and revenue decisions we started with.

In fiscal year 2016, total general fund revenues increased by 1.7 percent but fell short of our official forecast of 3.2 percent growth by $268.9 million.  Almost the entire shortfall in fiscal year 2016 was due to the underperformance of withholding and sales tax collections, the two revenue sources most closely tied to current economic conditions. 

This situation was an oddity because Virginia’s employment growth, which had five straight years of around one percent growth, posted its strongest gain in 11 years in fiscal year 2016.  Virginia even out-paced US employment growth last year.

The primary reason for the slowdown in withholding receipts was that the loss of high-paying jobs due to sequestration, and retirements changed the employment mix towards more lower-paying jobs.

As you know, I was required to prepare a re-estimate of general fund revenues for the current and next biennia because fiscal year 2016 revenue collections fell short of the total budget estimate by over 1 percent.  As part of the revenue re-estimation process, JABE and GACRE met to review the situation.

The resulting interim forecast reduced revenue from that contained in Chapter 780 by $564.4 million in fiscal year 2017 and $632.7 million in fiscal year 2018 for a $1.2 billion reduction over the biennium. That, paired with the shortfall in fiscal year 2016 brought the full deficit for the three years to $1.5 billion.

During the annual fall forecasting process, both JABE and GACRE members met again.  They noted that revenue growth had improved since the Interim forecast was prepared.  Through November, year-to-date growth is now plus 5.4 percent.  However, both advisory groups felt that we must remain cautious given the level of uncertainty.  They recommended that we be conservative in revising the revenue forecast.  Their comments have been incorporated into the revenue estimate that serves as the basis for the budget amendments I put before you today.

The GACRE members were presented an economic forecast that demonstrated modest improvements in the U.S. economy, as well as Virginia job growth and personal income.

The resulting GACRE revenue forecast produced growth rates of 2.7 percent for fiscal year 2017 and 2.9 percent for fiscal year 2018.  In total, the biennial forecast, including transfers,  was increased to $38.73 billion for the 2016-18 biennium or $252.0 million above the interim forecast, leaving us with a total shortfall of $1.26 billion for the three-year period.

Although revenue growth for the first part of fiscal year 2017 is running ahead of this forecast, I decided it would be prudent to maintain a conservative posture and move forward with the GACRE forecast, particularly as the threat of sequestration continues to loom.

In addition to the GACRE forecast, I am recommending certain policy adjustments that will add $35.7 million in general fund revenues for 2017 and $102.9 million in general fund revenues in 2018.  Examples of these adjustments include the following:

First, I am proposing a tax amnesty program.

Since 1990, three amnesty programs have been administered, with the last being held in 2009.  Under this proposal, the Tax Commissioner would be granted the authority to administer an amnesty program during the 2018 fiscal year.  As in the two prior programs, penalties and half of the interest due would be waived for qualifying individuals and businesses who owe back taxes. This proposal is projected to generate $59.2 million for the general fund.

Second, a modification to the rollback of the accelerated sales tax.

The change I am proposing calls for the accelerated sales tax to be rolled back so that it only affects dealers with $2.5 million or more in taxable sales for accelerated payments due in June 2017 and dealers having $4 million or more taxable sales for accelerated payments to be made in June 2018.  Even with this modified rollback, 73 percent fewer businesses will be impacted by the AST than when the program was first implemented, and the proposal will produce $47.9 million in additional general fund revenues.

Third, a sales tax nexus.

Both as the Governor of Virginia and the Chair of the National Governors Association, I have asked leaders in Congress to address this issue by passing the Marketplace Fairness Act to make internet sales subject to the same state sales taxes imposed on sales at brick-and-mortar retailers. Virginia is currently missing out on the $250-300 million a year that we could collect under the Marketplace Fairness Act.

While we wait for congress to pass this commonsense bill, I will propose legislation to require out-of-state merchants using warehouses or fulfillment centers located in Virginia to register as dealers for the collection of sales tax on their sales into Virginia.  The majority of other states have already adopted this policy.  This proposal would generate new state and local revenue of $21 million, with $12.56 million going into our General Fund beginning in fiscal year 2018.

Finally, we will also continue certain limitations on Land Preservation Tax Credits. This proposal would generate $6.1 million in general fund revenues in fiscal year 2018 by continuing the current $20,000 limitation on the amount of Land Preservation Tax Credits that may be claimed on a tax return in tax year 2017.

With these additions and a few other policy and technical changes that will be covered later by Secretary Brown in his presentation, the December general fund revenue and transfer forecast I bring you today totals $38.92 billion for the 2016-18 biennium or a $451.5 million increase above the interim forecast.

The growth rates are 3.0 percent for fiscal year 2017 and 3.2 percent for fiscal year 2018.  In total, the actions I just described brought our revenue shortfall down from $1.2 billion to $784.9 million.

Consequently, I was required to take actions to reduce spending from the current budget and I have done so in the budget I present today.

In October, I announced across-the-board budget reductions for state agencies totaling $55 million in fiscal year 2017. I also announced $237 million of additional strategies, and a proposed transfer from the revenue stabilization fund to bring the current budget for fiscal year 2017 into balance.

The bottom line is that in order to cover the remaining shortfall and mandatory spending, significant budget savings are needed.  My team and I have identified a total of over $806 million in savings actions, including those that were previously identified in October.

Some of these savings come from continuing the savings announced in October into fiscal year 2018, some are from additional across-the-board reductions in agencies, and some are from targeted actions.

In summary, my budget includes the savings actions I have proposed, increased revenues from an improving economy, revenues from new policy initiatives, and permitted transfers from the revenue stabilization fund.  These actions will cover the shortfall and the new spending requirements.  The combination of these actions and new spending results in an unappropriated balance of over $16 million.

With our improving revenue picture, I am pleased to say that I was able to protect priority program areas like education, health and public safety.

My proposed budget amendments include no program reductions to K-12 education.  There are changes in public education spending but those are all formula driven based on enrollment changes or changes related to revenues dedicated to public education like sales tax, Lottery, and the Literary Fund.

I also was able to avoid any programmatic reductions in aid-to-locality funding to local governments.

And, while most executive branch agencies were required to submit savings plans equal to 7.5 percent of their respective general fund appropriations in fiscal year 2018, I exempted certain agencies from this requirement.

The State Police, Department of Corrections, Department of Juvenile Justice, and the Department of Behavioral Health and Developmental Services were not required to submit fiscal year 2018 savings plans.  While there may be some reductions in these agencies in fiscal year 2018, they represent the ongoing savings of actions that were proposed the current year.

For example, I am recommending the continued delay of opening the women’s correctional facility in Culpeper, but I did not require the Department of Corrections to submit additional reduction strategies beyond that.

In addition to these exemptions, I also decided not to accept a savings plan from the Department of Forensic Science so that they can continue their important public safety work.

Finally, in my October reduction plan, I accepted The Library of Virginia’s proposal to reduce its budget by $633,171 in fiscal year 2017, which translated into 15 potential layoffs – more than the rest of the state agencies combined.  With the improved revenue picture, I am pleased to say that I have recommended restoring $219,429 in fiscal year 2017.

This relief will give the Library options that could help avoid the planned layoffs.

And, I was able to protect safety net programs that help our most vulnerable citizens, like Meals on Wheels.

Finally, as you know, the institutions of higher education were exempted from fiscal year 2017 program reductions but were asked to prepare for reductions of 7.5 percent in fiscal year 2018.
As a result of an improving economy and other actions within the proposed budget, I am pleased to report that the proposed budget requires that the institutions only be reduced by 5.0 percent in fiscal year 2018 – a full 2.5 percent less than they were expecting.

That completes my summary of the savings and revenue actions that we have undertaken in this budget. I will now walk you through the investments we make.

A number of my budget amendments address mandatory spending items.  Some increase spending and some decrease spending due to changes in service populations, such as with enrollment in public education.

The top spending item is the state’s share of Medicaid costs.  The original forecast projected increased costs of $281 million for the biennium.  This increase reflects changes in the forecast only.  It is not due to any changes in policy.  Since the original forecast was released, final premium rates will allow us to reduce that cost by nearly $26 million for a revised total increase in the state’s cost of approximately $255 million.

In terms of technical revisions, the second largest mandatory expenditure after Medicaid is the additional cost of supporting the Children’s Services Act at nearly $86 million, largely driven by increased costs for education services.

Other more significant increases include funding for inmate medical costs and nursing homes.

And, funding is included in the budget to make the constitutionally-required deposit to the Revenue Stabilization Fund in fiscal year 2017.

After addressing mandatory spending needs, there still remained a few items that I felt must be addressed in order to continue the progress we are making toward the new Virginia economy.

First, I think we can all agree that our hard working state employees and state-supported local employees are not adequately compensated for the important work they do.

For state workers, our budget contains $42.2 million, for a 1.5 percent bonus in 2017.

I have included another $55.5 million for the state’s share of a 1.5 percent bonus for public school teachers, with no requirement of a local match.

In addition, I have included $13.8 million for the state’s share of a bonus payment equal to 1.5 percent of base pay for state-supported local employees, including constitutional officers, General Registrars and local election board employees, Community Service Board employees, local social services departments, and others.

Bonus payments will be effective December 1, 2017.

In addition, I have recommended $4 million in fiscal year 2018 to address salary compression at the Department of State Police.

I also recommend providing $8.7 million in fiscal year 2018 to address compression issues for Sheriff’s Offices and Regional Jails.

Another $3.9 million is recommended in fiscal year 2018 to support career development programs for all elected constitutional officers, and their employees, who pursue certification and accreditation programs.

$2.5 million is also provided in fiscal year 2018 for a compensation initiative for district court clerks and deputy clerks.

In total, these recommendations amount to $130.6 million for compensation.

Next, my proposed budget will include resources to deal with the immediate crisis facing our state’s mental health system and to put it on a path to serve Virginians better in the long-term.

As I announced earlier this week, this budget provides $8.2 million for “same day access” to screening and assessment services at 25 of our 40 Community Services Boards, which will allow Virginia to take the first step towards a comprehensive, statewide system of community treatment. The remaining CSBs will be funded in the next biennium.

We will also invest $7.4 million to increase capacity at state facilities that are pressed as a result of changes to our temporary detention order laws. To ensure the safety of staff and those being served at our facilities, we have included $2.1 million for necessary medication and to hire an additional 24 full-time security and direct care employees.

It is also critical to recognize and address the long-standing need to strengthen mental health services in jails. The amended budget builds upon our initial investment in this important priority last year with an additional $4.2 million in fiscal year 2018 to strengthen mental health screening and support services in local and regional jails.

Additionally, in November, in response to a growing number of fatal overdoses in our Commonwealth, the state health commissioner declared the opioid addiction crisis to be a Public Health Emergency. Last year we lost 806 fellow Virginians to opioid-related deaths, and this year that total is projected to exceed 1,000.

In the first half of 2016, drug-related fatalities increased by 35 percent, and emergency room visits for heroin overdoses in the first nine months of this year increased by 89 percent over the same time period in 2015.

To address this crisis, this budget includes a total of $5.3 million to increase access to opioid addiction treatment and to aid in preventing fatal overdoses.

These investments represent a beginning, but we must also invest in the future by strengthening our entire system of behavioral health services. To begin this transformation, we have included $4.5 million for a statewide assessment, gap analysis, and high-level design of our behavioral health delivery system.

In total, this budget includes over $31.7 million in new funds directed to expanding and improving mental health and substance-use disorder services.

The third area of need involves initiatives that foster the new Virginia economy by increasing our emphasis on jobs in high-growth industries.

My proposed budget includes $480,000 to continue state support of summer cyber camps, which promote cyber education and raise student awareness of career opportunities in the cyber security field.

We also provide an additional $1 million for the New Economy Workforce Credential Grant Program, to address an anticipated shortfall of funding in fiscal year 2017. More people than expected want to pursue credentials and certifications for high demand jobs – this is good news.
$1.1 million is included for the Department of Mines, Minerals and Energy to enhance our support of the solar industry in Virginia. We have seen significant expansion of Virginia’s solar industry over the past three years, expanding from 18 megawatts of total capacity when I took office to the 400 megawatts that have been announced during my administration. Since I took office, investment in clean energy in Virginia has grown from $500 million to $2 billion dollars—this funding will help continue that momentum.

And my recommendations also include $900,000 in fiscal year 2018 to initiate a new Virginia Veteran entrepreneurship grant program that will incentivize veterans to start new businesses. The program will provide mentoring and training to help veterans execute business plans, and grow and sustain their businesses.

As some of you may have heard, we have just finished a pretty big election here in Virginia. While I think we can all agree that Election Day ran smoothly, we know that Virginia’s elections technology is in need of upgrades. I am recommending $1 million dollars in the second year for the Department of Elections to modernize the VERIS system, which supports a number of critical functions including voter registration and election results reporting.

It is our duty to ensure that our sons and daughters in the military also have the opportunity to vote. To support this, $570,000 in the second year is provided to continue efforts to ensure that military and other overseas voters receive their absentee ballot online, through a secure and accessible website.

The Department of Elections has provided this online service for localities since 2012, through the Department of Defense’s Federal Voting Assistance Program, funding for which ended in October.

After a year in which we have experienced far too many workplace deaths, this budget also includes funding to keep Virginians safe on the job. I’m targeting an additional $1.5 million to allow the Department of Labor and Industry to increase the number of Compliance Safety and Health Officer positions, who enforce occupational safety and health laws and regulations.

These funds will also expand the Voluntary Protection Program, increasing the number of partner agencies and businesses who participate. The funding will also expand the department’s on-site consultations and training for small businesses, helping them identify and correct occupational hazards, and reduce or eliminate occupational injuries, illnesses and fatalities.

And finally, I want to make sure you are aware of the approach we have taken to health care in this budget. As you know, I stand resolute in my belief that we must bring our own taxpayer dollars back home from Washington to expand Virginia’s Medicaid program.  As of today, we have forfeited $7.9 billion.

Closing the coverage gap would honor our moral responsibility to help the 400,000 Virginians for whom we have already paid to receive health care. I have included Medicaid expansion in one form or another in every budget I have submitted to you, because the Affordable Care Act is the law of our nation and nearly 3 dozen of our competitor states are reaping benefits that we have so far left on the table.

That being said, I recognize that we currently face a great deal of uncertainty at the national level as a result of the recent election.

Consequently, as we wait for this uncertainty to be resolved, I have taken the fiscally prudent path. The budget before you does not assume a Medicaid expansion, but gives the Governor authority to expand if an enhanced federal match is the policy of our nation after October 1, 2017.

While I could have included an additional $213 million in general fund savings by assuming a straight expansion of Medicaid, I recognize that we should not budget those savings until we have greater certainty about the future of the Affordable Care Act.

Some have argued that the ACA will be repealed outright and that 20 million people will lose their coverage as a result.

I maintain that when the partisan rhetoric subsides, we will still have some form of enhanced Medicaid coverage, even if it is wrapped in a new package.

With this language, if the ACA is repealed or Medicaid expansion is removed from the law, nothing will change in Virginia.

However, if President Trump and a Republican congress do affirm the policy of Medicaid expansion in some form, the language I am presenting will give the Governor the authority to act quickly to bring our taxpayer dollars back to offer lifesaving care to Virginians who need it.
The spending plan I am submitting for your consideration is balanced, fiscally conservative and in-keeping with our Commonwealth’s long tradition of financial prudence. It closes our revenue shortfall while investing in strategic priorities that will contribute to our ongoing economic growth.

This budget also reflects the approach that I will bring into the upcoming legislative session. I promise to continue the substantive work we have undertaken together to build a stronger new Virginia economy.

It is my goal to spend every day of the 2017 session cementing the progress we have made together on many issues, and finding solutions to challenges that still deserve our attention.
I am sure we will have our disagreements, but I hope it has become clear by now that I am ready to work with you to make life better for the people we were elected to serve.

My top priority is building a new Virginia economy that offers every family the opportunity to thrive. That is at the heart of every proposal I make to you and will continue to guide the work of my administration until our final day.

I want to thank each of you for your service to Virginia and wish you a happy holiday season. May God bless you and may God bless our great Commonwealth of Virginia.