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August 15, 2014
Chairman Stosch, Chairman Colgan, Chairman Jones, Chairman Ware, Members of the General Assembly, ladies and gentlemen: Good morning.
And to my wife, First Lady Dorothy McAuliffe, Attorney General Mark Herring and members of my cabinet, thank you for being here today.
This is the time of the year when a Governor appears before you to report on the finances of the Commonwealth for the recently completed fiscal year and to discuss other issues of importance. There is much to talk about.
I want to first thank members of the General Assembly from both sides of the aisle for working closely with my administration to find common ground on so many issues important to our constituents.
We have worked hard over the past seven months to move Virginia forward, but there is much more work to be done.
Just months ago in my first joint address to the General Assembly, I spoke about the essence of the Virginia way.
Virginians have a way of coming together to work problems out – putting people and good public policy above politics.
My administration has strived over the past months to work with the General Assembly to put this into practice, and we have had many successes.
Together we worked to take politics out of the decision making process for our transportation priorities, created the Hampton Roads Transportation Accountability Commission, and eliminated the EZ pass maintenance fee.
Together we reformed the Standards of Learning, and made significant progress towards transforming our workforce development system.
Together we took a major step forward in fixing an inadequate mental health system and implementing reforms to cut costs in our Medicaid program.
Together we improved the lives of veterans and their families by providing unemployment insurance and training opportunities to spouses, and worked with the business community on the importance of hiring our veterans.
And most importantly, together we brought jobs to Virginia and kept our esteemed title as the Best State for Business.
These past 7 months have been busy and full of successes. Together we have proven that Richmond is still a place where things get done, and where leaders come together around what is best for the people we serve.
There is no question that we face major challenges, and that we have our policy disagreements, but I am confident that we can work together to protect our core priorities and lay a foundation for a new, stronger Virginia economy.
I think everyone here is aware by now that Virginia suffered an unanticipated and significant revenue shortfall in the last fiscal year. No one in this room should be shocked by what I am going to say.
This past fiscal year marks the first time that general fund revenues have declined in the Commonwealth other than in a national recession.
While traditionally Virginia’s economy parallels or outpaces the national economy, we are now seeing that as the national economy begins to grow, our economy is suffering disproportionately due to federal government spending cuts.
As you know, Virginia is the number one recipient of Department of Defense dollars. That is a boon to our economy when they are spending, but when they are cutting Virginia takes the brunt of the hit.
In 2011 through 2013, sequestration reduced military contracts in Virginia by about 20 percent, or $9 billion.
A 2013 analysis by Dr. Stephen Fuller of George Mason University projected a loss of 154,000 jobs in Virginia, about four percent of the Commonwealth’s labor force, due to sequestration. Most of these job losses have occurred in the private sector.
The new jobs we are creating cannot compensate for the high-paying federal government-related jobs that we have lost over the past three years, especially in Northern Virginia and Hampton Roads.
During the last fiscal year, US payroll employment grew 1.7 percent as the national economy continued to recover.
However, employment in Virginia, which had been growing at a slow rate of around one percent since early 2011, weakened even further, and we finished our last fiscal year with just 0.4 percent growth.
As you would expect, that disturbing trend in employment growth has impacted Virginia’s revenue picture dramatically.
As a direct result of the deep cuts in federal spending, Virginia’s general fund revenue collections have been abnormally sluggish, particularly considering that nationally we are well into theexpansionary phase of this economic cycle.
Federal spending is a substantial generator of state tax revenues. According to the recent study completed by JLARC, between 18 and 30 percent, or between 2.7 and 4.6 billion dollars of Virginia general fund revenue comes directly from federal spending.
The loss of jobs and revenue in Virginia as a result of federal fiscal policy presents a profound challenge for our Commonwealth.
Here are the detailed statistics:
Total general fund revenues and transfers declined $437.8 million, or 0.9 percent in last fiscal year, falling short of the official forecast which was for 1.6 percent growth.
All major sources of revenue except for the insurance premiums tax and individual income tax refunds contributed to the deficit; however, collections of individual non-withholding accounted for most of the shortfall.
Collections in this source were $401.1 million below the estimate. Final payments fell by 23.5 percent compared with the expectations for a flat amount of revenue.
These payments are historically tied to non-wage income sources – mainly the financial markets. Despite record breaking increases in the stock market, it appears that the uncertainty of the federal fiscal cliff in December 2012 and January 2013 shifted more realized capital gains from 2013 into2012 – compared to the budget projections.
Although most of the revenue shortfall is attributable to the drop in non-withholding, the slowing collections in payroll withholding and sales taxes illustrate our state economy’s disconnect with the US economy.
The federal government cutbacks impact jobs, income, and business and household spending. The government shutdown and the debt-ceiling discussions in the Fall of 2013 worsened this fiscal drag.
As stipulated by the Virginia Code, if the total of individual income, corporate income, and sales taxes collected for the fiscal year is 1.0 percent or more below the total amount in the official budget estimate for those taxes, the Governor shall prepare a re-estimate of general fund revenues for the current biennium and the next.
Initial fiscal year 2014 revenue collections exceeded this threshold.
The Code states that the Governor’s re-estimate of general fund revenues shall be based upon a “review by an advisory council of revenue estimates with respect to economic assumptions and the general economic climate of the Commonwealth.”
As part of the revenue re-estimation process, the Joint Advisory Board of Economists (JABE) met on July 9th to discuss two economic scenarios: the IHS Economics’ May standard and alternative pessimistic outlooks.
The nearly unanimous recommendation of the Board was that the economic forecast for the U.S. should be the May standard and Virginia should be somewhere between the standard and pessimistic outlooks.
JABE’s recommendations have been incorporated into a low growth economic forecast labeled as the JABE pessimistic forecast.
The Governor’s Advisory Council on Revenue Estimates (GACRE) met on August 1st to review the revenue forecast based on the JABE economic input.
After much discussion, the members advised further caution for the next two years, especially due to the sluggish job reports for Virginia and the large uncertainty relating to capital gains income.
The GACRE’s recommendation resulted in a further lowering of the 2015-2016 biennial revenue forecast toward a more pessimistic outlook.
Because of slower than expected growth in the Commonwealth, variables in the economic models for employment and income have been lowered in the interim forecast.
Originally, the official forecast for employment growth for fiscal year 2015 was placed at 1.5 percent, far above the last fiscal year’s actual growth of 0.4 percent.
The new forecast announced today has employment growth for fiscal year 2015 conservatively at 0.7 percent.
As for fiscal year 2016, the new forecast for employment growth is 1.4 percent, compared with the 1.7 percent in the original official forecast.
Wages and salaries are projected to grow 3.2 percent and 3.6 percent in fiscal years 2015 and 2016 respectively, compared with 4.0 percent and 4.2 percent in the official forecast.
The interim forecast reduces revenue from what was included in the Appropriation Act by $859.5 million in fiscal year 2015, as growth falls from 5.2 percent in the official forecast to now 2.7 percent.
The interim forecast also conservatively projects total revenue growth of 2.7 percent in fiscal year 2016 compared with 4.1 percent in the official forecast. This is a reduction of $1.1 billion.
When the changes in the interim revenue forecast are combined with the revenue shortfall carried over from fiscal year 2014 of $438 million, the total revenue shortfall for the three year period is nearly $2.4 billion.
The total shortfall breaks down to about $1.3 billion in the first year and $1.1 billion in the second year.
In anticipation of this pending shortfall, the General Assembly wisely created budgetary reserves totaling $846 million in the current Appropriation Act. And I thank them for that effort.
When these reserves are combined with an additional $705 million that could be withdrawn from the Revenue Stabilization Fund during the two year period, the total amount available to address the shortfall is about $1.55 billion.
Since the total shortfall in the new interim forecast is now projected to be $2.4 billion, there is a difference of $882 million between this new re-forecast and the other previously enacted reserves of $1.55 billion.
Of this amount, $346 million will have to be found in fiscal year 2015 and $536 million will be needed in fiscal year 2016.
This additional amount will have to be made up by re-prioritizing our goals, and taking supplemental budgetary actions.
The General Provisions of the Appropriations Act defines how I am to proceed in order to address a projected revenue shortfall from an enacted budget.
After an official reforecast of revenue and certification of the revenue shortfall to the General Assembly money committees, an action which I am taking today, I am to construct a detailed plan for how the Commonwealth will proceed to deal with the shortfall.
In doing so, I can withhold general fund allotments up to an aggregate of 15 percent (with some limitations). Within this limit, I can call for across-the-board budget cuts, targeted budget reductions, or a combination of both.
The immediate problem we face is the projected shortfall in fiscal year 2015 since the fiscal year is already underway.
The General Assembly can enact changes to fiscal year 2016 when it returns to its 2015 legislative session since that fiscal year will not begin until .
Thus, the urgent problem is really the additional shortfall of $346 million for fiscal year 2015.
My finance team and I will immediately begin to put together a plan to address this shortfall in a responsible way that protects our core priorities and economic assets.
I can assure you that my finance team will work closely with members and staff of the money committees as we move forward with our analysis.
I am optimistic that our effort will produce a plan of action coordinated between the Executive and Legislative branches that can be prepared as quickly as possible so that the citizens of Virginia will know what to expect from their state government in the current year’s budget.
After we have completed and reported a plan for the first year, we will continue to work on the remainder of the plan to balance the second year of the biennium.
These adjustments will be included in my amendments for your consideration to the 2015 General Assembly.
These actions will be released and presented to you when we meet again on to discuss my budgetary recommendations for the next legislative session.
Based on everything that has happened, it is obvious that the economy of the past – where we could simply take the economic benefits of the Department of Defense for granted – is over.
We need to move past this reliance --and build a new entrepreneurial, innovative and dynamic economy.
If Virginia is going to remain a leader in the global marketplace, we must renew our efforts to diversify our economy and refocus our attention to addressing the changes that are already taking place.
In short, we need to work together to Build a New Virginia Economy.
The challenges we face are real – but with every challenge comes opportunity.
If we agree, starting today, to work together and lay a foundation for a New Virginia Economy, we can make the difficult budget decisions while protecting the assets that make us competitive like public education, transportation and health care.
We can continue to use our natural strengths and targeted incentives to make Virginia the most attractive place in the world to locate and grow a business.
Together we stand at an economic crossroads, and the decisions we make over the coming months and years will determine whether we build a stronger and more resilient economy, or continue to allow external forces to determine the future of our Commonwealth.
We are off to a very good start. As of today, 65,559 more Virginians are working in the Commonwealth than were on the day I took the Oath of Office.
This is the 5th largest total increase in the nation. Virginia’s 5.3% unemployment rate is tied for the 3rd lowest rate east of the Mississippi River.
Also, since the beginning of my administration, we have closed 152 economic development deals in Virginia. These projects will generate about $4.1 billion in capital investment.
We have closed game-changing economic development deals in every region of the Commonwealth that will help diversify our state and local economies by recruiting new jobs and investment for Virginia workers, with many more in the pipeline.
We brought Tranlin Paper Company to Chesterfield, which will invest $2 billion and create 2,000 new jobs at a new advanced manufacturing facility -- the largest Chinese investment and job creation project in Virginia history.
That deal will also generate at least $50 million per year for agricultural producers from the sale of byproducts that can be used to make paper.
We closed a deal with the Corporate Executive Board to invest $150 million to consolidate its global headquarters in Arlington saving 1,200 existing jobs and creating 800 new jobs with an average salary of $120,000.
The U.S. Foreign Affairs Security Training Center at Fort Pickett will create hundreds of jobs in Nottoway County and hundreds of millions of dollars in investments.
And since I took office we have also brought projects to Augusta, Grayson, Isle of Wight and Carroll Counties, the cities of Danville, Martinsville and Hopewell and dozens of other localities across the Commonwealth.
And today I am pleased to announce that the Mayville Engineering Company will invest $10 million to expand its Virginia operations at a new manufacturing facility in Smyth County, creating 160 new Virginia jobs in the process.
My team and I are working constantly to open new markets for Virginia businesses and agriculture products, creating new jobs and expanding our Commonwealth’s economic strength across the globe.
We got the Chinese ban on Virginia poultry lifted after 7 years, which will result in about $25 to $30 million for Perdue alone, and could have similar results for our other five major poultry producers as well.
This is a huge boost in increased business for our Port.
And I am proud to report that Virginia is on pace to set yet another record for agriculture exports this year, bringing us one step closer to making the Commonwealth the East Coast Capital for Agricultural Exports.
I have embarked on trade missions to China and the United Kingdom, and economic development trips to Chicago and California.
And I have hosted productive discussions with leaders from Canada, Egypt, Ethiopia, France, Korea, Kuwait, Japan, Qatar, Singapore, Vietnam and others about how we can expand Virginia’s economic partnerships with countries around the globe.
I am proud of the work that we have done, and there is no question that my efforts have been strengthened by the work of so many in this room and those who came before us who helped make Virginia the global economic leader that it is today.
We are in a position of strength – but we have a responsibility to take the next steps forward in the face of the damaging defense cuts and economic headwinds in order to build this New Virginia Economy.
One of those important steps is shoring up our strong relationship with the United States military.
And so my goal is simple and straight-forward – we must be the most military-friendly state in the union.
Today, it’s no accident that Virginia is host to many commands and organizations that play an important role in the defense of our great nation.
The nature of Virginia’s strategic mid-Atlantic location is enhanced by our continuing focus on improving our infrastructure, our unmatched intellectual and technological capital, and a state-wide public educational system without peer.
Developing these advantages proved to be of great value to the Commonwealth in the past and sustaining them will be of even greater value and importance to us in the future.
It should be clear to all of us that the pressures on the Defense Department to reduce its overall infrastructure will only continue to grow.
Therefore, we must act decisively to ensure that we do all we can to protect Virginia’s bases and installations and withstand the increased scrutiny that is sure to come.
But at the same time, we must also broaden the base of our economy to attract new jobs and growth that are not as tied to congressional decision-making.
Right now, military spending is responsible for an enormous chunk of our Commonwealth’s economic activity.
But we have already seen the damage sequestration has done to our economy so far.
And the Secretary of Defense has indicated, if no changes are made by 2016, an additional $50 billion in defense cuts will have to be made.
We all know of Northern Virginia’s economic reliance on the Department of Defense, and in Hampton Roads, military spending accounts for 42% of the area’s Gross Regional Product.
If I have learned anything after more than 40 years in business, it’s that you don’t sit idly by when your largest customer cuts spending. You get out there and hustle to find new sources of revenue so that you can keep your business healthy.
That is why we must work together to build and maintain the best public infrastructure system anywhere in the world, so that we can attract the next generation of jobs in cybersecurity, biosciences, data analytics, aerospace and other industries that are building the economy of tomorrow.
Whether it’s the Pentagon, a Fortune 500 company or a small business, when decision makers start looking for a new location, they look at which state offers the best public schools, the strongest transportation networks, the highest quality health care, the safest communities, and the cleanest environment.
These are all enormous strengths for Virginia that contribute to the quality of life that our families enjoy. But if we are going to out compete 49 other states and Build a New Virginia Economy, we cannot afford to be complacent.
In transportation, we are moving forward with planned improvements to Interstates 64 and 66, the continued extension of the Silver Line to Dulles, and the soon-to-be-opened I-95 Express Lanes.
We have helped bring new passenger rail service to Lynchburg and Roanoke, and I am hopeful that we can work together to bring higher speed rail to the 95 corridor and expand multi-modal transportation options in urban areas like Arlington, Richmond, and Tidewater.
Shortly after I took office my team and I made a series of tough decisions about the Port of Virginia.
I am happy to report that the situation at the Port is improving, but we still have much work to do to make it the healthy and profitable economic asset it can be.
I remain committed to working with each of you to make Virginia a leader in the global energy economy. This Commonwealth has phenomenal energy assets and great opportunities to lead the way in offshore wind, natural gas and cleaner coal.
With our low energy costs and abundant resources, I know we can work together to make Virginia the manufacturing hub of the East Coast, creating jobs and making our economy more independent in the process.
And as important as improving our transportation and energy infrastructure are to strengthening our economy, we must also work together to enhance our human capital as well.
As I have discussed with many of you here today, strengthening our workforce development system is one of our best opportunities to make Virginia more economically competitive.
This week, at the Virginia Community College System Chancellor’s Retreat, I signed Executive Order 23 establishing a new goal of awarding 50,000 workforce training credentials by the end of my term and doubling the number of Virginia veterans who are hired through the Virginia Values Veterans Initiative.
I am also setting a goal of getting 10,000 businesses to sign a Patriot Pledge in support of our active military personnel, our veterans, and their families!
I hope that this order will be a first step to strengthening our workforce development system, and that we will work together in the coming session and beyond to further ensure that every Virginian has the skills and training to compete in the economy of the future.
Another key element of strengthening our human capital is ensuring that every child has access to quality public education beginning before kindergarten.
This week I signed two Executive Orders creating a children’s cabinet and the Commonwealth Council on Childhood Success.
These two groups will develop a systemic approach to ensure that every Virginia child, from birth to adulthood, can maximize his or her potential in every corner of the Commonwealth.
And increasing our economic competitiveness also includes finding a way forward on an issue on which consensus has eluded us so far – expanding health care access to hundreds of thousands of Virginians.
We have had a long and difficult debate on closing the coverage gap.
However, in light of the dire revenue situation that I have just described, the desperate needs that exist all over the Commonwealth, and the real jobs and health care advantages that our competitor states are realizing from taking this funding, I remain hopeful that we can set politics aside and reach an agreement on this critical issue.
We have already paid this money in, and we should bring it home to cover people who need it.
And I agree with those in this room who are concerned about insulating Virginia from the risk that the federal government will change the terms of the deal.
That is why I am committed to tailoring a compromise that ends the program if the financial burden on Virginia becomes greater than what we were promised.
Recently I visited the Remote Area Medical Clinic in Wise County, where thousands of Virginians waited in the rain overnight for their only shot at seeing a doctor or dentist all year. Many of them were turned away.
If we channel the wisdom and expertise of the people in this room today, I know we can find a way to get our friends and neighbors the coverage they need, and bring the economic and fiscal benefits of doing so back to the Commonwealth.
As you know, by September 1st, I will receive a plan from the Secretary of Health and Human Resources on ways we can to our people.
I will then shortly announce the actions I will take to use the authority of my office to expand health care to Virginians.
And of course I look forward to your thoughtful work during your planned September special session, and I hope to work in partnership with each of you to find ways to provide additional health care to needy Virginians.
As all of you know, I am always ready to meet and find a productive way forward. My door is always open.
And so, as I conclude, I hope that my message here today is clear. We face real short-term and long-term challenges as a Commonwealth.
The budget shortfall we face will require a series of hard decisions that will test our ability to protect our core priorities and balance our budget.
The strengths that have buoyed our economy in the past are shrinking, creating a new imperative to diversify our economy.
I believe that this moment can be one for history, where those of us in this room decide to work together to Build a New Virginia economy and create the next generation of jobs for the families we serve.
We can weather the impact of federal cuts and the changing national economy and emerge stronger and more independent.
But that requires all of us to come together and build a path to that New Virginia Economy, starting today.
If we will work together to that end, the decisions we make will not be Democratic decisions or Republican decisions. The jobs we create will not be Democratic jobs or Republican jobs. They will be Virginia jobs.
If we work together to protect and strengthen our assets, there is not a state or country on the globe that can compete with Virginia.
In good times and bad, the Governor is the state’s top salesman, and I relish that role!
Give me the tools to attract businesses to the Commonwealth, and I will make sure that they come to each of your communities!
Mr. Chairmen and members of the General Assembly, on behalf of all the citizens of Virginia, I want to thank you in advance for your cooperation and efforts to lead Virginia toward a more independent and prosperous future.
And I know that we are all grateful to the hard working Virginia state employees, who will implement the decisions we make together and continue to make ours the best-run state in the nation.
I stand ready, without hesitation, to work together with you as we address the challenges ahead. Thank you and God bless this great Commonwealth!