Virginia State Budget Surplus

I want a new governor and a new third-tier local newspaper...

The Washington Examiner reports that Virginia is going to have a budget surplus, due to increased tax revenue and spending cuts. The extra revenue is due to strong performance of the economy (Northern Virginia leading the pack, I'm guessing). That at least is a good sign.

But the spending cuts are obviously troubling - this is nothing to celebrate. Another source of the surplus is the deferment of some pension contributions:

"The commonwealth also will defer $620 million in payments toward the Virginia Retirement System, the state's $50 billion employee retirement fund, in fiscal 2011 and 2012 -- a deferment to be paid back over 10 years at a 7.5 percent interest rate. The state deferred nearly $140 million in VRS payments in the fourth quarter of 2010."

On its own this is fine. We've talked about corporate liquidity preference and household liquidity preference - a pension fund or any other sort of fund is kind of like public liquidity preference. More contributions to such a fund is not what the Virginia economy needs right now. But Virginia governors are restricted to one term, thanks to our salutary Jeffersonian suspicion of an entrenched elite. That means that future governors are going to have to find the money to pay for this. Economically, it's the right move - but historically and politically I can see how it would further paint McDonnell as being more responsible relative to other governors than he really is. We should have put the savings from the retirement deferral into something else, like higher education.

We have a very strong credit rating in Virginia. We don't need to be running budget surpluses in the biggest depression since the Great Depression. We've got strong fundamentals in this state, Virginia historically weathers recessions better than most states. Northern Virginia benefits tremendously from the Washington D.C. economy, which is doing fine right now due to all the federal activity. I'm not particularly worried about our prospects, but this certainly doesn't help. It's more of a public investment problem than a macroeconomic problem. McDonnell is balancing the budget on the back of Virginia public education, at all levels - which is something we can't afford to let atrophy. It's going to hurt our long-term growth prospects.