By BOB LEWIS
AP Political Writer

RICHMOND, Va. (AP) – The budget Gov. Bob McDonnell introduced Monday takes nearly $800 million largely from inflation adjustments for health care and school support programs and reassigns money to Virginia’s underfunded public pension plan, higher education and economic development.

The two-year state government spending blueprint prescribes no tax increases. Altogether, McDonnell’s budget for the 24 months beginning July 1, 2012, totals nearly $85 billion in combined appropriations, up from about $80.7 billion for the biennium that ends June 30.

Spending from general tax collections on core services such as public safety, public schools and health care increases from about $32 billion in the present budget to $34.5 billion, about the same as total general fund appropriations for 2007-08.

Non-general fund spending, largely from specific fees or taxes or federal money that flow to designated uses such as transportation with little if any legislative discretion, increases from nearly $48 billion in the current budget to about $50.3 billion. Much of it is federal money that pays for the 2010 health care act Congress passed in 2010 that Virginia and other states want the Supreme Court to declare unconstitutional.

McDonnell proposes the elimination of nearly $259 million in hospitalization inflation costs and more than $65 million in nursing home inflation adjustments from Virginia’s share of the federal-state Medicaid program.

Christopher S. Bailey of the Virginia Hospital and Healthcare Association said the state has refused for years to recognize increasing costs, and now pays only about 60 percent of costs hospitals incur from treating Medicaid patients, not its obligation to pay 78 percent. If it stands, McDonnell’s budget would allow hospitals less than 55 percent of costs under Medicaid, Bailey said, and because the federal government matches state actions, it has a compounding effect, Bailey said.

"We’ll will, of course, continue to treat patients, but for every dollar the state saves in this budget, it costs hospitals $2," Bailey said.

Yet Medicaid enrollment growth adds $650 million to McDonnell’s budget for the entitlement program that has grown by 80 percent since 2002 from about $1.6 billion then to $2.8 billion now and consumes about one-fifth of Virginia’s general fund.

Funding for public schools from kindergarten through high school would increase by $438 million over the budget’s two-year life span, most of it to meet revised costs for Virginia’s Standards of Quality, the minimum educational objectives under state law that dictate instructional staffing ratios, teacher salaries and other requirements.

Other areas in public education will take hits.

McDonnell is targeting nearly $110 million to cover inflation costs for public school non-classroom support services. He is also cutting $65 million the state had provided local school districts, particularly in northern Virginia, to help them retain administrative and support personnel who would be hired away by competing school systems. Cities and counties would have to generate the money locally or divert it from instructional programs even as McDonnell pushes educators to make classroom spending account for two-thirds of the budget.

Nor would the state replace a comparable amount of disappearing federal stimulus for schools. The last of the stimulus â(EURO)" which Congress adopted in 2009 to blunt the recession â(EURO)" expires this year.

The Republican governor is eliminating an $81 million projected increase to the Virginia Preschool Initiative, which is among Democratic former Gov. Tim Kaine’s most treasured legacies. Funding for the program will increase by about $5 million over the biennium, but McDonnell’s advisers said the program’s formula for the number of at-risk 4-year-olds wildly exceeded actual enrollment in the program.

McDonnell is renewing his bid to end state subsidies for public broadcasting, a cut of $7.2 million. His attempt a year ago to phase out state aid to what he and many Republicans consider a tax-supported frill was thwarted by Democrats in last winter’s budget negotiations. But November’s elections gave Republicans 20 of the state Senate’s 40 seats, and they expect to proclaim themselves a ruling majority next month thanks to Republican Lt. Gov. Bill Bolling, who breaks tie votes in the Senate.

The budget directs fewer than 300 layoffs. Most result from the recent announcement that the state will close Mecklenberg County prison because Pennsylvania is removing about 1,000 inmates it had paid Virginia $20 million a year to incarcerate there.

McDonnell has been unabashed about his intent to make this budget â(EURO)" the only one he will author and largely administer during the final half of his non-renewable four-year term â(EURO)" reflect his priorities by shifting state money from what he regards as lesser purposes.

Foremost among his priorities is an underfunded public employee retirement system would get a $2.2 billion boost as he announced last week, about half of it paid by city and county governments. He has not said whether he wants about 133 state employees who are part of the system to begin contributing to the pension system from their own paychecks.

Advocates for local governments and public schools applauded the effort to protect the pension fund for state and local government employees, but said the state is leaving an enormous burden for localities in funding their share of the employer’s contribution for teachers, who are local, not state, employees.

Also, the bulk of McDonnell’s funding for public schools comprises the state’s share of the employers’ VRS contribution for teachers, who are local government employees, and little goes to satisfy SOQ mandates, said James J. Regimbal, a fiscal analyst and adviser to the Virginia Municipal League.

"Yes, the teachers are local employees but that’s not telling the whole story because it’s the state that drives what the teachers’ retirement benefits are, it’s the state that sets the rules, not city councils or boards of supervisors or school boards," said Neal Menkes, VML’s director of fiscal policy.

Dan Timberlake, director of the Department of Planning and Budget, noted that the teacher retirement and compensation are an SOQ component. "These VRS costs are SOQ costs. They’re not separate," he said.

The budget conditions a 3 percent state employee performance bonus next December on agency savings of at least $160 million, but provides for no sustained increases in pay.

Another McDonnell priority, economic development, would gain more than $100 million. The bulk, nearly $62 million, would pay for commitments the state has made in recent years to entice new businesses to Virginia and retain existing ones. There’s $10 million to encourage a biosciences research consortium including the University of Virginia, Virginia Commonwealth University, the Eastern Virginia Medical School, George Mason University and Virginia Tech that would team with companies and private foundations. And the governor last week announced a $230 million boost in higher education funding intended to slow tuition increases.

Transportation, which got a one-time boost of about $4 billion a year ago from McDonnell, will take over a larger share of the existing state sales tax. The transportation allocation increases over eight years from 0.5 percent to 0.75 percent. The first phase, to 0.55 percent, yields an additional $110 million by mid-2014.

McDonnell’s budget anticipates moderate but sustained growth during that period, but it builds in a $50 million hedge against federal spending cuts that could especially harm a Virginia economy dependent on numerous military installations, an extensive civilian federal employee population in its sprawling Beltway suburbs and major corporate defense and governmental contractors that call Virginia home.

The state’s rainy day reserves, drained nearly dry two years ago, would get $300 million over the next two years, doubling its size to about $600 million â(EURO)" half of its value five years ago.

The budget provides an additional $30 million for community-based mental health care. For all but a few of the largest retailers, it ends the "accelerated sales tax" budget balancing gimmick that required them to submit an estimated early sales tax estimated payment, reducing state revenue by about $50 million.

WTOP’s Hank Silverberg was tweeting live from the governor’s presentation:

Related Stories:

• Budget puts new burdens on Va. cities, counties
• McDonnell budget targets health care cuts
• Budget may bring out McDonnell’s Grinch
• Judge turns aside Dems’ suit on GOP Va. Senate

Follow Hank Silverberg and WTOP on Twitter.

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Online:

Budget highlights state budget director’s Web site: http://1.usa.gov/uJcW0P

Track the 2012-14 budget bill: http://leg2.state.va.us/MoneyWeb.NSF/sb2012

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