Virginia Is for Lovers of Sound Budgets, Volcker Group Says

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Virginia is for lovers of sound state budgets. New Jersey, not so much.

Virginia’s fiscal practices got high marks in a report released Monday by the state budget research group set up by former Federal Reserve Chairman Paul Volcker, which is seeking to prod states to address their financial strains.

The Old Dominion adequately funds the annual contribution to its workers’ pension system, saves for retiree health-care bills and requires the governor and lawmakers to rely on the same forecast of how much revenue they’ll have to spend, according to the report from the Volcker Alliance’s Truth and Integrity in Government Finance Project. The Garden State does none of the above.

“Virginia has a long-standing and well-deserved reputation for strong budget practices that in large part reflects a budgetary process that is more administrative than political,” the report says.

The findings are in line with the states’ standing on Wall Street. Investors demand yields of about 3.38 percent on 30-year debt from Virginia, which has top ratings from Standard & Poor’s and Moody’s Investors Service. New Jersey, the second-lowest rated state after Illinois, pays almost a full percentage point more.

Volcker, 87, and former New York Lieutenant Governor Richard Ravitch, 81, who advised then-Governor Hugh Carey during New York City’s fiscal crisis, established the state budget task force in 2013 to draw attention to the gimmicks that states use to mask their financial condition.

Off Balance

While U.S. states are rebounding from the longest recession since the Great Depression, many still use sleight-of-hand to balance the books, according to the group. That includes shifting receipts and spending between years to paper over budget gaps, borrowing to pay bills and using one-time revenue to cover expenses that recur year after year, the report found.

“Despite economic recovery we have some very real problems in finance at the state and local level,” Volcker told reporters in New York.

Such pressure is prevalent in New Jersey, where budget practices under both Republican and Democratic administrations dating back to the 1990s have led to budget deficits and bond-rating downgrades. To balance budgets, the state has raided money intended for other programs for its general fund and relied on borrowing, the report said. Its optimistic revenue forecasts have forced it repeatedly to redraft the budget in the middle of the year, the report found.

Pension Shortfall

New Jersey’s unfunded pension liability is $83 billion, or more than $9,000 per resident.

Virginia limits the state’s borrowing to how much it has received in the last three years from income and sales taxes. It’s moved new employees to a new pension that combines smaller defined benefits with a 401(k)-style plan. Revenue forecasts are based on input from an advisory board of professional economists, business leaders and the executive and legislative branches.

Even Virginia has cut corners, the group said. The state allows for transferring costs from one fiscal year to the next and has drained about half of its reserve fund over the last three years.

(Updates with Volcker quote in eighth paragraph)
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