UPDATE: $3.5 billion shortfall means local governments will feel the pinch

PORTSMOUTH—Local governments aren’t likely to escape the pain when the General Assembly attempts to eliminate an estimated $3.5 billion hole in the next two-year budget.

That estimate does not include the losses faced by local school districts to replace federal stimulus money that will dwindle next year and then disappear entirely in the second year of the budget.

With more than half the state budget going to local governments for public education and other mandated services, “we may not be able to leave off cutting [local aid] today as we have tried to do in the past,“ said Senate Finance Committee Chairman Charles J. Colgan, D-Prince William.

The Finance Committee opened a two-day retreat in Portsmouth yesterday at the Renaissance Hotel with more bad news from budget analysts, who predict a shortfall of almost $210 million in the current budget year in addition to the $1.3 billion in cuts already proposed by Gov. Timothy M. Kaine.

The estimate is lower than the additional shortfall projected earlier this week by the House Appropriations Committee, which pegged the gap at $250 million to $300 million.

Both estimates are based on a dour outlook for state revenue collections.

“Essentially, you’re operating this year’s budget on a 2005 revenue base,“ said Betsey Daley, committee staff director.

Daley projects a revenue shortfall of about $619 million for the 2010-2012 budget that Gov.-elect Bob McDonnell and the legislature will take up in January. In addition, she estimated about $2.9 billion in spending pressures, primarily on the Medicaid health-insurance program for poor and disabled Virginians.

The Medicaid shortfall includes about $1 billion in increased costs and about $800 million to replace federal stimulus money used this year to operate the program.

Making up the $3.5 billion gap over the next two years will require more than across-the-board reductions in state agency budgets, Daley said. The state already has exhausted most of its potential one-time savings in making up a $7 billion revenue shortfall in two years.

“Reductions in state aid programs to individuals or localities are likely,“ she said in her presentation.

Local government officials believe the forecast underestimates the problem they face, especially in funding public education from kindergarten through 12th grade. The $2.9 billion in new spending pressures does not include the loss of about $144 million in federal stimulus money next year that has been used for public education this year. In fiscal 2012, state and local governments face the loss of more than $400 million in stimulus funds that have filled their budget gaps this year.

Analysts for the Virginia Municipal League estimate that if the state cuts proportionately, local school divisions could get more than $500 million less for public education in the next year alone.

Currently, the state projects an increase of about $145 million to help localities meet the Standards of Quality for education. That amount is about $750 million less than originally forecast because of a state cap on funding for school support positions.

The state also estimates that schools would need an additional $287 million to pay for teacher retirement plans and other benefits under rates recommended last month by the Virginia Retirement System. However, the state may not fund the higher rates for teachers or the additional $56 million a year that would be required for state employee pension plans.

“My guess is you can’t afford to do the board-approved rates,“ Daley said.

Local officials say the state should relieve them of educational mandates if it doesn’t give them the money they need to meet them.

“That is state funding of state-mandated but locally delivered services,“ said Hanover School Superintendent Stewart D. Roberson.