Virginia Gov. Terry McAuliffe (D) told members of the General Assembly on Friday that the state faces a $1.2-billion revenue shortfall over the next two-year budget cycle, and announced preliminary steps to close the gap.

McAuliffe said proposed pay raises for state workers and teachers would be cut back by $125.1 million in fiscal year 2017.

He also said the General Assembly could dip into the state’s rainy-day fund and apply $378.2 million from those reserves to further close the revenue gap.

“Combined, these two actions could address more than half of our immediate problem in the first year of the biennium,” McAuliffe said. “Nevertheless, we cannot assume that the remainder of the fiscal fix will be easy or cheap. We must prepare ourselves for tough decisions ahead.”

McAuliffe said the shortfall is due in part to a “changing employment mix in Virginia.”

“Recent job gains have been in lower-paying job classifications,” he said. “Baby boomers are retiring, leaving behind a younger workforce that is still building up seniority.”

McAuliffe also said the rise in the number of temporary workers shows that businesses are still uncertain about the nation’s economic outlook.

“Unlike in the past, when solid job growth resulted in significant revenue gains, fiscal year 2016’s revenue growth resembled what we typically experience in tougher economic times.”

The Governor said state general-fund revenues grew 1.7 percent in fiscal year 2016, far below the 3.2-percent forecast.

“Almost all of the shortfall was due to poor performance of withholding and sales tax collections, the two revenue sources most closely tied to current economic conditions,” he said.

McAuliffe said the state needs to invest more in workforce training and economic development, both of which he said would lead to more higher-paying jobs and greater tax revenues.

Senator Mark Obenshain (R-Harrisonburg), said on Twitter that McAuliffe could demonstrate his desire to have a more-educated workforce by “embracing charter schools.”

Obenshain also said that after an “eight-year war on coal, declining revenue from energy companies can’t surprise anyone.”

According to the Federal Reserve Bank of Richmond’s August snapshot of Virginia’s economy, the state has seen a 5.68-percent year-over-year decline in logging and mining jobs, and a 2.27-percent decline in manufacturing employment.

The report showed year-over-year gains of 4.31 percent in education and health services employment and 3.5 percent in professional and business services jobs.

Virginia’s largest employment sector is government, which the Federal Reserve says employs 710,000 people, a year-over-year decline of 0.27 percent.

McAuliffe also said legislators could

“soften this budget shortfall significantly” if they approved Medicaid expansion, a proposal the General Assembly has defeated in each of McAuliffe’s first three years in office — forfeiting the federal funding that would come with expansion. 

“It’s disappointing to me to think about the $7.95 billion in federal funds that the Commonwealth has forfeited since the start of Medicaid expansion,” McAuliffe said.

“But there are still billions of dollars available to us every year moving forward, if we work together on an efficient and sensible solution to our health-care and budgetary needs.”

Delegate Greg Habeeb (R-Salem) said on Twitter that McAuliffe’s Medicaid proposal showed he

“still doesn’t have a clue what it takes to be Governor of Virginia.”

Paul Blair, state affairs manager for Americans for Tax Reform, told AMI Newswire that McAuliffe should look to the south for lessons in how to balance the state budget through economic growth.

“Governor McAuliffe should make the short trip to Raleigh, North Carolina to ask lawmakers there how they cut taxes by more than $4 billion,” Blair said. “They’re experiencing a $425-million surplus,” without expanded Medicaid.

North Carolina and Virginia are among 19 states that have not expanded the federal-state program that provides health-care coverage to the poor.

Blair also said one thing North Carolina has done that Virginia has not is cut taxes.

“The Tar Heel State is enjoying significant economic growth and investment as a result of far lower corporate tax rates and, as of next year, even lower income tax rates than Virginia,” Blair said.

McAuliffe said he would revisit the state’s revenue needs in October, once he and his economic advisors have a firm grasp on required actions for fiscal year 2017, and will tackle remaining issues with the 2018 budget year at that time.

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