Recovering tax revenues opens door to state employee, teacher raises

2/3/2015 –

It’s a wonder what a few months and the collection of unexpected revenue will do for the state budget.

After cutting more than $2 billion in revenue from the two-year spending document since May, state budget officials are seeing some light from gains in collections of payroll withholding and corporate income taxes in December and so far this month.

That’s why the House Appropriations Committee is preparing to propose pay raises for state employees, teachers, and state-supported workers such as college faculty, sheriff’s departments, commonwealth’s attorneys, and other constitutional offices at the local level, as first reported by the Richmond Times-Dispatch.

The committee plans to pay for the estimated $130 million cost of the compensation package primarily by raising its forecast of withholding income tax revenues — roughly 60 percent of the revenues that fund the budget — to the same growth rate on which the Joint Board of Economists agreed in July.

Payroll withholding is “a very steady, predictable source of revenue,” House Appropriations Chairman S. Chris Jones, R-Suffolk, said in a speech Thursday on the House floor.

That is unlike non-withholding income taxes — the estimated payments that many self-employed professionals and investors make on their income, including capital gains from stocks. The budget introduced more than a year ago by then-Gov. Bob McDonnell greatly overestimated collections of non-withholding taxes, which fell by more than $400 million in the last fiscal year and triggered a constitutionally required revenue re-forecast.

The General Assembly and Gov. Terry McAuliffe already had cut $1.55 billion in the budget adopted in late June, but the new forecast released in August forced them back to the chopping block and raised the total projected shortfall to $2.4 billion.

One big reason for the revision was the growth rate for withholding taxes on which McDonnell had based his budget. The budget predicted a 4.3 percent gain, even though withholding had grown just 2.1 percent the previous year and ended the past fiscal year at 2.3 percent.

The board of economists, on which Appropriations Director Robert P. Vaughn sits, decided to lower the forecast by a percentage point, to 3.3 percent. The Governor’s Advisory Council on Revenue Estimates, on which Jones sits, took a more conservative approach and lowered the projection to 2.8 percent.

All of this meant less money for McAuliffe and lawmakers to spend in the current and next fiscal year. In September, they agreed on a plan for cutting an additional $600 million while leaving a hole of roughly $300 million to fill for the fiscal year that begins July 1. McAuliffe proposed a package of budget amendments in December to balance the budget with the expected revenues.

His amendments did not include money to raise salaries for state employees, including state police, who had lost about $12 million in cuts that included its fund for trooper overtime. They complained publicly, and McAuliffe asked lawmakers at the end of his State of the Commonwealth speech to find money for state employee raises without cutting his priorities. He made the same pitch on a radio show Wednesday.

Leaders of the House Appropriations and Senate Finance committees have met a half-dozen times since before the assembly convened Jan. 14 to talk about budget priorities.

What emerged was a House compensation package that Jones outlined for delegates in his floor speech the next day: a 1 percent raise for state employees; a 1 to 2 percent raise for state-supported employees; a 1 to 2 percent raise for teachers; and money to address salary compression for state employees with at least five years of service whose pay lags that of new hires, including an extra per-year sum for state police. The committee also intends to restore the $4 million in trooper overtime pay.

Jones offered a few more glimpses at the committee’s plan, which would eliminate a series of fee increases proposed by the governor; protect state funding for K-12 and higher education from cuts; buy slots for in-state students at public colleges and universities; and protect a tax credit for use of Virginia coal that McAuliffe proposed to reduce as ineffective.

He said half of all additional revenue must deposited into the depleted rainy day fund, and the plan also anticipates using cash instead of bonds to complete capital renovations at colleges and universities.

Jones again promised a plan “I think many can embrace” to provide care to people with serious mental illness who now are getting medical and behavioral health treatment under a plan McAuliffe launched unilaterally this month with surplus revenues in the state health care fund. House Republicans are irked by the governor’s decision not to ask their permission before enrolling people for benefits.

The governor’s office offered a low-key response to the House plan. “We’re in the same place on pay raises,” communications director Brian Coy said.

However, Coy said the budget also must protect money for the new health care plan — which has enrolled 80 people and received 1,122 applications — and additional spending for economic development, which also may be a target for legislators.

The administration is not ready to release revised revenue estimates.

Jones offered no apologies to the House for supporting a pessimistic outlook on tax revenues last summer.

“My philosophy always has been, it’s easier if you have additional revenue than if you have to make additional cuts,” he said.

By MICHAEL MARTZ Richmond Times-Dispatch