A dispute over Medicaid expansion will bring Virginia lawmakers back to the capital in Richmond to finish work on the biennial budget.

A seven-day special session starts April 11, during which the General Assembly will work to end the disagreement that prevented it from passing a state budget during its regular session.

Gov. Ralph Northam, a Democrat who took office in January, has pre-filed a $116 billion general fund budget for 2019 and 2020 that is similar to what his predecessor, Gov. Terry McAuliffe, proposed before leaving office.

Virginia Gov. Ralph Northam at a bill signing on March 8, 2018.
“Virginians have waited long enough for a balanced budget that expands health care access," said Gov. Ralph Northam. Virginia governor's office

Northam, a pediatric doctor, wants to expand Medicaid’s health insurance coverage offered in the Affordable Care Act to nearly 400,000 Virginians.

Under the ACA and Northam’s plan, the federal government would pay 90% of the cost while the state would pay the remaining 10% by taxing hospitals.

McAuliffe, a Democrat who also sought expansion while he was in office, couldn’t achieve that goal because the General Assembly led by Republicans in both chambers opposed it.

But when lawmakers ended this year’s regular session on March 10 without agreeing on a spending plan for the upcoming biennium one thing was different than in past years.

The House supported expanding Medicaid with work requirements. The Senate did not support Medicaid expansion.

A Democratic surge in the 2017 election brought the GOP down to 51 seats out of 100 in the Assembly from 66 -- a majority they retained only after their candidate won a drawing to decide the tied race for a Newport News district. Seats in the Republican-controlled Senate, elected every four years, were not up in 2017.

“Virginians have waited long enough for a balanced budget that expands health care access and invests in economic opportunity through education, workforce training, mental health and addiction services, and better pay for public servants,” Northam said.

Although the House supports reforms to the Medicaid program that would accompany any expansion of coverage, Northam called for expanding health care “in the simplest and least restrictive way possible.”

Northam also has another goal for the upcoming special session: shoring up reserves.

The governor has said he plans to introduce a budget amendment that would require revenue collections above those that are forecast to be invested in a revenue reserve fund to shield the state against unexpected shortfalls.

“By including this amendment we can maintain a fiscally conservative budget and send a message to Virginians and to the ratings agencies that this budget will invest wisely while also preparing for unexpected downturns,” he said.

A recent trend of structural budget imbalance and low reserves are the main reasons S&P Global Ratings said it maintains a negative outlook on the state’s AAA rating.

Virginia state capitol grounds in Richmond
Virginia lawmakers meet in special session to continue work on the state budget starting April 11 at the capital in Richmond. Virginia General Assembly

The projected ending stabilization reserve fund balance is $281.7 million or 1.39% of expected expenditures in fiscal 2018, according to S&P analyst Carol H. Spain.

“In our view, Virginia's structural imbalance and low reserve levels are out of step with AAA-rated peers,” Spain said in a comment after the regular session ended with an impasse and without a budget.

A budget stalemates can strain state credit quality, Spain said, but in Virginia’s case the protracted standoff does not currently pressure its rating further.

“There is ample time before the beginning of the next fiscal year to resolve budget disagreements,” she said, adding that a simple majority vote is required to pass a budget, which increases the likelihood that lawmakers will adopt one by July 1.

Although the stalemate relates to proposals that would expand Medicaid, Spain said that is not viewed as a factor that would affect the state’s rating as long as the biennial budget is structurally balanced.

There are potential federal changes to Medicaid funding that could pose a credit risk across the sector, she said.

“As the assembly heads into its special session, we will be watching to see if its next biennial budget is not only on time, but also demonstrates sustainable, structural balance,” said Spain.

Northam’s proposal to the General Assembly calls for determining on Nov. 1 of each year the certified tax revenue from the most recent fiscal year and allocating 15% to the revenue stabilization fund, according to the budget bill filed for the session.

For the revenue cash reserve, his budget allocates $50 million in 2019 and $220.7 million in 2020 to mitigate any potential revenue or transfer shortfalls that could arise during the biennium that would otherwise require appropriation reductions to essential core services.

The special session will take place while Virginia prepares to issue $187.8 million of revenue bonds through the Virginia Public Building Authority.

Fitch Ratings assigned its AA-plus rating and stable outlook to the bonds, which are expected to price competitively on April 17.

The deal will be structured as $170.14 million of tax exempt public facilities revenue bonds and $17.7 million of taxable bonds.

Bond proceeds will be used to finance construction and capital projects for various public facilities, including regional and local jail and juvenile detention facility projects that have been legislatively approved, according to Fitch analyst Eric Kim.

The VPBA bond rating is based on access to legislative appropriations for debt service, and is rated one notch below the state’s AAA issuer-default rating.

Kim said Virginia’s rating reflects solid fiscal resources, a conservative approach to financial operations, and “exceptional financial flexibility.”

“Continuing a trend of somewhat volatile recent revenue performance, the commonwealth saw strong growth in revenues in fiscal 2017 following a weak fiscal 2016,” Kim said. “Fiscal 2017 ended with 3.6% year-over-year growth in general fund revenues.

Fiscal 2018 general revenue collections through February indicate the state is exceeding revenue estimates.

While rating the VPBA deal, Kim also commented on the upcoming special legislative session saying that $400 million separates the House and Senate on the budget. The amount represents savings related to Medicaid expansion.

“Fitch anticipates the commonwealth will resolve these differences and enact a budget consistent with Virginia's track record of conservative financial management while preserving the state's robust fiscal flexibility,” Kim said.

Moody's Investors Service assigns its Aaa rating and stable outlook to the state’s general obligation bonds.

The Virginia Public Building Authority had $2.7 billion of outstanding long-term debt as of June 30, 2017, according to filings on the Municipal Securities Rulemaking Board’s EMMA filing system.

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