The past year has brought about changes that greatly affect the outlook for government and politics in 2010 and more specifically the upcoming Virginia General Assembly session. In November, Republicans swept statewide elections and are set to take over the state’s top three posts. Governor-elect Bob McDonnell won in a landslide over Democrat Creigh Deeds, incumbent Bill Bolling held on to his role as Lieutenant Governor, and Sen. Ken Cuccinelli picked up a new job as the state’s Attorney General.

In addition, members of the Virginia House of Delegates were up for re-election and the Republican majority added six new party members to its roster. Republican leadership in the state’s top positions coupled with a significant majority in the House of Delegates will undoubtedly affect the dynamics of the upcoming legislative session and the ability of the Governor’s office to coordinate policy decisions with the legislature.

Following Governor-elect McDonnell’s lead, it is apparent that two themes will underscore much of the activity driving the 2010 General Assembly session: jobs and revenue. We have summarized some of the major issues for our clients to watch:

State Budget

The state budget continues to be a major issue with the Commonwealth facing an expected $3.5 billion or larger budget deficit. State collections have declined for an unprecedented 11 consecutive months. State agencies and programs have already endured serious cuts and more are on the way. Governor Kaine released his proposed budget for the 2010-12 biennium and executive amendments to the 2008-2010 biennial budget on Friday, Dec. 18, 2009. This introduced budget makes an additional $2.3 billion in cuts, on top of the more than $7 billion that was already trimmed from the budget in past years. These cuts are spread out across all the state agencies and include reductions to K-12 education, higher education, public safety, Medicaid (reduced waiver slots, reduced services and reduced payments), and state employee jobs and benefits.

Despite the new $2.3 billion in cuts, the introduced budget was not balanced on reductions alone. The Governor also proposed eliminating the $950 million annual payment to localities for car tax relief and replacing it with a one percent income tax surcharge that would go to local governments, generating $1.9 billion in new revenue. Governor-elect McDonnell and House GOP leadership have already panned the proposed tax increase as a “nonstarter”. Obviously, this proposal will cause some controversy during the upcoming legislative session. It is therefore very clear that any client currently receiving or depending on state-funded dollars will be at risk for cuts in this year’s budget cycle.

Transportation

Transportation will remain a key issue yet again this session with continued funding issues for projects and plans across the Commonwealth. Focus will be on new strategies for investing in, operating and maintaining transportation systems. Expect a reprisal of the constitutional amendment that would protect transportation funds from raids for other purposes. In his campaign, Governorelect McDonnell pledged to fund transportation from alternative sources. Many of those campaign proposals centered on additional bonds, increased toll facilities, privatizing ABC stores, off-shore drilling and exploration, investing a percentage of the port revenues, and tax credits for employers allowing teleworking.

Health Care

Health care reform dominates the national news, and all eyes are watching to see what impact the federal debate will have on Virginians. Health care providers and insurers will be interested in federal provisions as they apply to states, including the possibility of a federal health care exchange among states. The Medicaid program in Virginia will be a major issue of concern as it applies to both impending federal legislation and the state budget framework. Virginia’s Medicaid program costs are expected to grow by 11 percent in 2011 and 8 percent in 2012. To meet the budgetary requirements of the Medicaid program for the 2010-12 biennium, Virginia will need an additional $1.9 billion in state funds. Almost $1.6 billion of this amount is required just to backfill the loss of federal matching funds that were provided in 2009-2010. These serious gaps in funding will be of interest to all clients in the health care arena.

In addition, budget reductions to state-provided health care services and caps on medical malpractice insurance will continue to be major issues surrounding health care this year.

Privatization of Alcoholic Beverage Control Stores

One of the hot issues sure to ignite extensive debate is the proposal to privatize Alcoholic Beverage Control stores for a new state revenue stream. Virginia operates over 300 retail liquor stores throughout the Commonwealth but is one of only 18 states that does not permit the private retail sale of alcoholic beverages. Proponents contend that privatization will deliver considerable revenue from licensing and income and property taxes, as well as the savings incurred if the private sector assumes operating costs. Revenues generated from ABC stores are reported to be earmarked as a source for funding transportation infrastructure.

Jobs and Economic Development

Virginia’s unemployment rate continues to remain below that of the nation, but job loss is still a major issue for the state. McDonnell has already deemed two top posts - Lieutenant Governor and Secretary of Commerce & Trade - as designated job creators across the state. This emphasis will undoubtedly bring private sector opportunities to Virginia as the state looks for additional funding sources to jumpstart its economy and create jobs.

Expect increased pressure to proceed with off shore exploration and drilling of oil and natural gas off the coast of Virginia as a means of driving new jobs, and creating opportunities for capital investment and new tax revenue. Currently, leasing of exploration and development rights is scheduled to begin in 2011.

Public-Private Partnerships

The state’s landmark agreement with Northrop Grumman to streamline information technology infrastructure and resources among state agencies has proven less than ideal as a public-private partnership model. Currently mired in controversy, Virginia Information Technology Agency (VITA) has led many in the public and private sector to be wary of engaging in any high dollar or longterm partnerships. The legislature is expected to introduce legislation in response to VITA’s continuing dysfunction that may affect the future of public-private partnership agreements.

That being said, the state continues to look for opportunities to fund major projects and leverage the state’s resources. McDonnell has proposed recommending changes to the Public-Private Transportation Act to make it easier for private companies to navigate. Companies interested in partnering with the state to address transportation needs and infrastructure will want to have their eyes and ears on the 2010 legislative session and McDonnell’s legislative package.