RICHMOND, Va. (AP) — Even a short-term breach in the federal debt limit would rattle an already fragile state economy, Virginia finance staffers on Tuesday told lawmakers, who say that looming uncertainty is now the main reason no budget deal is imminent.

Since the politically divided General Assembly’s regular session ended in February without an agreement on adjustments to the two-year spending plan that became law last year, budget negotiators have been meeting sporadically to continue talks. But, at odds over how to best allocate a revenue surplus, they have continually pushed back the target for reaching a deal, citing concerns about instability in the banking sector, the possibility of a recession and, more recently, the debt limit standoff.

After the Senate Finance and Appropriations Committee heard Tuesday morning’s presentation about the risks of a potential debt limit breach, the panel’s co-chair George Barker said negotiators still believe the best course is to wait to see what transpires in Washington.

“What we have to do is to be confident that we are going to have the revenues to deal with what we’re going to spend, one one way or another,” he said in an interview.

Republican House Appropriations Committee Chairman Barry Knight is in agreement about keeping talks in a holding pattern contingent on the debt ceiling outcome, caucus spokesman Garren Shipley said.

In January, the U.S. government bumped up against its legal borrowing limit, and the Treasury Department began implementing “ extraordinary measures ” to avoid missing payments on its bills. The Treasury Department has warned the U.S. could default as soon as June 1 if there is no deal to raise the debt ceiling.

Talks on a path forward continued in Washington on Tuesday. Congressional Republicans want spending cuts in exchange for raising the debt ceiling. President Joe Biden and congressional Democrats argue the issues should not be linked.

Stephen Cummings, GOP Gov. Glenn Youngkin’s secretary of finance, warned lawmakers that Virginia has a “heightened level of exposure” to any potential default because of its disproportionately large number of federal government workers and contractors.

Tuesday’s presentation, prepared by finance committee staff, warned that a short breach, resolved within a week, would disrupt markets and consumer confidence and increase unemployment. A prolonged breach could trigger a downturn comparable to the 2008 financial crisis, the presentation said, citing a Moody’s Analytics analysis.

Cummings also presented the committee with April’s revenue report, which showed general fund collections declined compared with the same month in 2022 but that year-to-date collections have surpassed what was expected in a December forecast.

In a statement, Youngkin argued the snapshot supports his push for expanding on last year’s tax cuts while boosting spending on government services including mental health, the environment and education.

“There’s plenty of money flowing into the system to continue delivering results for Virginians,” he said.

Virginia operates on a two-year budget, with the plan initially adopted in even-numbered years and amended in odd-numbered years. During the regular session earlier this year, lawmakers in the GOP-controlled House of Delegates and Democrat-controlled Senate passed what they called a “skinny budget” with just a handful of adjustments after failing at the last minute to reach an agreement on the broader plan.

In addition to the governor’s tax policy and spending priorities, other policy matters ranging from potential casino siting language to public employee raises are also tied up in the budget deal.

Aubrey Layne, a former secretary of finance and secretary of transportation who advised the Youngkin administration during the governor’s first legislative session, said the lack of compromise leaves local governments and school districts who need to adopt their own budgets in the lurch.

He said he hoped lawmakers would come together and find a way to put the money to good use. No one expects to pay taxes to simply see the money “hoarded” at a time when the state already has robust reserves, he said.

No matter which side of the debate a person sits on — more spending or tax cuts — “it just seems crazy that we’ve got all these billions of dollars that need to be programmed,” he said.

Scott Brabrand, executive director of the Virginia Association of School Superintendents, said educators are frustrated by the delay.

“We must invest in education and mental health,” he said. “And we expect our leaders to make a deal that makes sure those investments happen.”

Barker, who said the budget conferees plan to meet again before June, indicated there’s been no change in Senate Democrats’ objections to the governor’s full package of proposed tax cuts, including a corporate tax cut reduction.

He didn’t directly answer a question about whether he sees a cutoff by which point the spending decisions could simply roll over into the next budget cycle, but he said he would “prefer to do what we can” this year.

Copyright 2023 by the Associated Press.  All Rights Reserved.

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