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Defying early expectations, Virginia is coming out of the pandemic flush with cash

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Capitol at sunrise

The sun rises over the Virginia Capitol. 

Fourteen months ago, Virginia policymakers dramatically curtailed their ambitions for the state budget, expecting the COVID-19 pandemic to bring havoc to the economy and, by extension, the tax dollars that fund the government.

As the world moves closer to normal, Virginia is flush with cash, with officials expecting a budget surplus that could exceed $1 billion dollars for the fiscal year that ends June 30. On top of that, the state is expected to get $4.3 billion in federal relief funds. Instead of looking for things to cut, the main item on the fiscal agenda this summer is figuring out what to do with all that money.

In a presentation to state senators this week, outgoing Virginia Finance Secretary Aubrey Layne said the state’s finances may be in better shape now than they were before the pandemic hit.

“All parts of our revenues that are generated by economic activity within the commonwealth are running well ahead of their projections,” Layne said.

More than 11,300 Virginians have died from COVID-19, and an estimated 150,000 lost jobs they have not returned to. Almost half of the state’s population has now been fully vaccinated, but the debate is just getting started over how Virginia should spend its windfall to exit the crisis as best it can.

The hit to the budget was minimized, Layne said in an interview, because most of the jobs lost in the pandemic were on the lower end of the wage scale. Those losses were offset by big employers like the federal government and tech companies adding higher-paying jobs that create more tax revenue. But the key factor, Layne said, was the roughly $78 billion in federal stimulus and relief funds that has flowed into Virginia’s economy through initiatives like the CARES Act and Paycheck Protection Program.

“This is the first downturn in modern history where personal spending and personal incomes went up,” Layne said.

The billions in federal aid coming to Virginia from the $1.9 trillion American Rescue Plan will be the main topic of a special General Assembly session in early August. With much of the state’s own budget surplus already spoken for under state law, the session will focus largely on what priorities should get top billing with the unallocated federal dollars.

Democratic leaders are still discussing details of how to proceed, but they released a joint set of priorities last month offering a broad look at their to-do list. Those include upgrading public health services, assistance to people struggling to afford housing and utility bills, shoring up the state’s beleaguered unemployment system and replenishing the Unemployment Trust Fund, helping small businesses, modernizing public schools and expanding broadband internet access to more Virginians.

“This is a unique opportunity to invest in Virginia’s long-term future,” Gov. Ralph Northam and Democratic General Assembly leaders said in a joint statement last month.

One group hoping to be near the front of the line is the Virginia Restaurant, Lodging & Travel Association, which represents the hard-hit hospitality industry.

The organization has asked for $184.7 million in relief for hotels and other lodging establishments, $36.7 million for restaurants, $10 million for attractions, $4.7 million for wedding venues and $2 million for campgrounds. The group has requested millions more go toward tourism promotion and training programs for hospitality workers.

Robert Melvin, director of government affairs for VRLTA, said he thinks policymakers agree that the hospitality industry is a top priority, partly because it was the sector hit hardest by COVID-19 shutdowns.

“For the past 14, 15 months, they haven’t had any revenue coming. Or hardly any,” Melvin said. “They have a lot of unpaid bills. They’re also trying to bring back staff. Liquidity is something they are struggling with right now.”

Throughout the pandemic, Republicans have accused Democrats of being slow to reopen schools and unconcerned about the hardships facing businesses impaired by government rules meant to slow the virus. Those themes appear likely to resurface at the special session.

“We’re working on a number of proposals for the upcoming special session, but they all have one thing in common: mitigating the damage done to students, families and businesses during the long and unjustified closures forced by Democrats,” said Garren Shipley, a spokesman for House Minority Leader Todd Gilbert, R-Shenandoah.

Senate Republicans have suggested using some of the aid money on “Back to Work” bonuses meant to nudge people getting boosted unemployment benefits back into the workforce. Their proposal called for one-time bonuses of $1,500, as long as the recipient keeps working at the job for a minimum of six weeks.

“With so many Virginia businesses experiencing workforce shortages and ‘Help Wanted’ signs seemingly everywhere, we need to replace supplemental federal unemployment payments with ‘back-to-work’ bonuses now,” said Senate Minority Leader Tommy Norment, R-James City, said in a press release.

A few weeks later, Northam announced a similar but more narrowly tailored “Return to Earn” program, with government-funded bonuses only available for incoming workers at small businesses less able to offer bonuses on their own.

Under Northam’s $3 million pilot plan, some businesses willing to fund bonuses themselves would be eligible for up to $500 in matching government funds, creating bonuses of up to $1,000 for each hire. Government-supported bonuses would only be available for workers hired to positions that pay at least $15 an hour, a rule meant to incentivize businesses struggling to find workers to offer better pay instead of relying on one-time bonuses to lure people back into low-paying jobs.

Aubrey Layne

Secretary of Finance Aubrey Layne

To address worker shortages in child care, an industry many Democrats see as crucial to the economic rebound, Northam’s plan exempts child care providers from the rule requiring businesses to put up their own bonus money.

Though the state is also expecting another windfall from its own taxpayers, the General Assembly has less flexibility to spend that money on new initiatives.

It’s not yet clear how big the surplus will be for the budget year nearing its conclusion, but Layne said it could come in above $1 billion. If it’s right around $1 billion, pre-existing rules on what happens to excess money would require almost half of that, about $461.5 million, to go into reserve funds and a fund for improving water quality in the Chesapeake Bay.

During his presentation to the Senate Finance Committee Tuesday, Layne noted that Virginia was one of just a few states to build its budget reserves during the pandemic. After being at risk of a credit downgrade a few years ago for low balances in its reserves, Layne said, the state could soon approach the legal limit for how much money it’s allowed to to build up for future contingencies.

Layne, who is departing his job as of July 1 for a role at Norfolk-based Sentara Healthcare, said those reserves will help Virginia adjust when the federal dollars go away and the economy sees a “reversion back to the mean.”

For now, he said, the challenge for lawmakers is figuring out how to make the most of the $4.3 billion.

“Hopefully we’ll use it on items that will be game-changers,” he said.

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