Speaking Tuesday to the powerful money committees of the General Assembly — the Senate Finance Committee and the House of Delegates Appropriations Committee, Gov. Ralph Northam gave a lay of the land to legislators as work is set to begin soon on the state’s new, two-year budget.
The commonwealth, he said, is in an enviable position, ending the fiscal year with $1.6 billion in reserves, $431 million of which will be going to taxpayers this fall in the form of one-time rebates of $110 for a single filer and $220 for couples filing jointly. The state economy is strong, with economic development announcements over the last 20 months representing billions of dollars in investments and thousands of jobs. Indeed, when tallied up, the value of the 378 economic development deals announced during the Northam administration is $20.3 billion in capital investment.
Most important to Northam is the fact that all regions of the state, especially those areas outside the so-called Golden Crescent from Tidewater to Richmond and Northern Virginia, have seen economic growth and development.
But there are ominous economic clouds gathering on the horizon Virginia budget writers, both in the Assembly and in the governor’s office, are eyeing warily, as Northam noted in his remarks.
Not the least of those is the ongoing trade war the Trump administration is waging with China. Both Washington and Beijing have slapped each other with ever-rising tariffs on products from key sectors of each other’s economy, with agriculture being one of the sectors of the U.S. economy China’s targeted.
That’s a problem for Virginia: According to a 2017 economic study, agriculture directly employed more than 54,000 people and contributed more than $3.8 billion to the state’s economy. Moreover, industries related to the Virginia agriculture sector created an additional 69,000 jobs. All told, the study’s authors at the Weldon Cooper Center for Public Service at the University of Virginia determined the agriculture and forestry sector accounted for 9.5 percent of the commonwealth’s annual gross domestic product.
So when Beijing, in retaliation for Washington’s tariffs, stops buying soybeans and corn from Virginia’s farmers or slows the purchase of timber products from the commonwealth, that could be a problem. The regions of the state where agriculture is the main economic driver — Central Virginia, Southside and Southwest — are the very regions that are the most economically vulnerable, even today more than 10 years after the end of the Great Recession. Indeed, Northam himself told legislators that acres of soybeans growing on his own farm on the Eastern Shore may just be left in the fields this year as there simply is no market for them now that China has shifted to other producers.
So what impact will this have on state budget writers in the coming months as they work on the spending plan to be unveiled in early December?
Already, as the Richmond Times-Dispatch reported last week, two sources that produce 80 percent of state revenues — payroll withholding and sales taxes — fell short of projected growth by $37 million in the last fiscal year. Projections for the new fiscal year are for faster growth, but right now, who knows. As Secretary of Finance Aubrey Layne said in an interview with the Times-Dispatch, “Unless our trends change, I would think it would be a far more conservative forecast going forward.”
At the very least, Layne is worried there could be a significant slowing of growth, both in Virginia and nationally, in the coming months, saying state economists are closely monitoring reams of data. In talking with the media, Layne even used the “R-word” — recession — saying one is “more likely than not” in the next 12 to 18 months.
There’s much at stake in the months ahead as budget writers prepare revenue models and weigh options. Mandatory spending increases in K-12 public education and Medicaid are coming, just as data is showing that revenue projected to grow by 3 percent is more likely to increase by 1.2 percent in the current spending plan.
Just last month, CNBC released its annual ranking of the best states for business, and the commonwealth regained the top spot, an honor it held several times prior to the onslaught of the Great Recession. The ranking was thanks in no small part to investments in education and workforce training, Gov. Northam told lawmakers. But with economic headwinds increasing, though, the challenge will be to not fall back.