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Virginia faces potential budget shortfall of $1 billion

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Though Virginia has finished two consecutive years in the black, the state faces a potential budget gap of $600 million to $1 billion over the next two years, the Senate Finance Committee learned Thursday.

About $1.6 billion available to meet mandatory or priority items won't be enough to keep pace with increased needs for items such as Medicaid and education, committee staff told legislators at the committee's annual retreat in Fairfax.

"You've lost a lot of flexibility," committee staff Director Betsey Daley told senators and senators-elect gathered at the Mason Inn Conference Center and Hotel. "We've got a lot of uncertainty. ... The fundamental thing wrong with the economy is the fact that people can't find a job."

The gloomy forecast was marginally better than a House Appropriations Committee projection released earlier in the week, which pegged the gap at $885 million to $1.5 billion. The ranges reflect different options legislators have to fund the pension system for state employees and teachers.

Still, the General Assembly will face difficult decisions in the coming legislative session that could be compounded based on results from deficit reduction talks under way on Capitol Hill.

"The biggest unknown is the federal deficit reduction hanging out there and what it might mean," Ms. Daley said.

The 12-member Hill supercommittee is tasked with finding $1.2 trillion through some combination of spending cuts and revenue increases by Nov. 23. Should Congress fail to act, automatic cuts of $1.2 trillion over 10 years would kick in in 2013. Half of the cuts would be to defense, a significant driver of Virginia's economy.

Senate Finance Chairman Charles J. Colgan, Manassas Democrat, said the one certainty amid the uncertain economy is the federal government is paring back.

"While we don't know the exact prescription and dosage, we do know that the medicine is coming," he said.

Still, a potential gap in the Virginia budget pales in comparison to the $6.4 billion shortfalls the state faced in the last biennium, and $4.5 billion in the current one.

"The numbers are certainly better than they have been the last three, four years," said Sen. J. Chapman "Chap" Petersen, Fairfax Democrat. He also said his biggest concern now is that potential federal downsizing will create a "ripple effects for years to come."

The state's economy is growing, Mr. Petersen said, but temporary infusions like federal stimulus money are evaporating.

About half of the actions taken to address the larger $6.4 billion shortfall were one-time measures, such as $2 billion in federal stimulus dollars. And the General Assembly deferred $620 million in contributions to the Virginia Retirement System to balance the current budget, an amount that the state is now repaying with interest.

Regardless of the exact dollar amount, the message Thursday was clear: There will likely be pain, and tough choices, ahead. Unlike the federal government, Virginia is required by law to pass a balanced budget.

"As always, I'm sure we'll find ways to resolve all the various issues," Mr. Petersen said.

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