RICHMOND — Gov. Ralph Northam is imposing a hiring freeze on state agencies, but cautioning against layoffs as the state prepares for a recession triggered by the coronavirus pandemic.
Clark Mercer, the governor’s chief of staff, outlined the administration’s budget strategy in a four-page memorandum to agency heads Thursday that bluntly acknowledges, “we can expect to enter a recession soon.”
“The virus has brought us challenges we have not faced in generations,” Mercer said. “Events are unfolding quickly and require us to prepare for a new reality that is drastically different from what was certain just a few weeks ago.”
The abrupt downturn upends the review and revision of the two budgets the General Assembly adopted on March 12: one for the fiscal year ending June 30 and a $135 billion spending plan for the two-year cycle that begins July 1.
Mercer said the state expects “significantly less revenue” than the most pessimistic forecast Northam’s economic and revenue advisory councils considered last fall and reduced cash balances at the end of this fiscal year that will carry into the next two-year budget and require cuts in spending.
“Our intention is not to cut the budget in the short term, but decisions will depend on how much revenue comes in,” he said.
Secretary of Finance Aubrey Layne had warned in an interview Monday of a looming drop in state revenues this fiscal year and at least $1 billion less in each year of the next budget biennium. The state’s financial situation could get worse until the coronavirus pandemic is brought under control, he said.
Layne said the governor’s strategy is to match state spending to available revenues, which include federal emergency aid dollars and state income and sales taxes that form the general fund budget’s backbone. The numbers are too fuzzy now to inform a budget rewrite.
“When you’re in a fog, you don’t know where you are until the fog clears,” he said.
Virginia policymakers also are uncertain about how they can use federal funds available to the state and local governments through the CARES Act, which was adopted by Congress a week ago and quickly signed into law by President Donald Trump. Virginia is slated to receive $3.3 billion — $1.5 billion for local governments and $1.8 billion for state government relief — but the money apparently cannot replace state general funds to pay for services already included in the pending budget.
“The amount of money that is potentially available to Virginia would help a lot,” said Sen. George Barker, D-Fairfax, a member of the Senate Finance & Appropriations Committee who helped to negotiate the final budget agreement that the General Assembly adopted March 12.
“It’s not that they short-changed Virginia in money,” Barker said. “They just shortchanged how you can spend it.”
Northam and the National Governors Association have asked Treasury Secretary Steven Mnuchin for guidance in how state and local governments can use the $150 billion that the stimulus package includes for them nationwide. Layne said he had conferred with members of Virginia’s congressional delegation Thursday to seek more flexibility in how the state can use the money.
“We are pushing Treasury to issue guidance on how to implement the State and Local Relief Fund in a way that gives states and localities as much flexibility as possible,” said a spokesperson for U.S. Sen. Tim Kaine, D-Va., on Friday.
In the meantime, state agencies are going to have to take hard looks at which services in the pending budget they can afford and which they cannot.
“We have to rearrange our priorities now,” Northam said in a briefing on Friday.
Mercer’s memo informs agency heads that a hiring freeze “shall take effect immediately” for all classified and wage jobs not exempted as essential, but reminds them that layoffs “generate costs” under the Workforce Transition Act adopted in 1995 under then-Gov. George Allen as he attempted to cut the size of state government.
He directed agency heads to:
» eliminate discretionary spending in this fiscal year;
» prepare for potential budget cuts in the next two years; and
» reconsider funding for new initiatives and avoid new spending commitments.
Mercer advised agency heads to “be cautious” in discussing spending for new initiatives sought by local governments and advocacy groups.
“While no decisions have been made, we must be honest with these groups about the challenges we face and the effects they will have on the commonwealth’s spending capacity,” he said.
“It is better to know the risks now, than to gear-up new programs, learn that there’s no money, and then have to close them down.”