Gov. Ralph Northam and Virginia lawmakers soon will begin work on a new two-year state budget with $1.6 billion banked in reserve, a revenue surplus swollen by federal tax law changes, and more than $431 million earmarked for return to state taxpayers.

Northam offered plenty of good news to the General Assembly money committees on Tuesday morning, with assurance that Virginia is better prepared to endure a potential slowing of the state economy while securing promises of record capital investments by businesses that want to move or expand their operations here.

"We start out this budget cycle in a good place, and we all can, and should, take credit for that," he told the Republican-controlled committees. "We have accomplished a great deal working together."

The governor touted a record $20.3 billion in planned capital investment by 378 economic development prospects in deals signed in the 20 months he's been in office.

"This historic investment means more jobs in communities across the commonwealth and more hard-working Virginians who can support themselves and their families - no matter who they are or where they live," he said in a separate statement.

Northam adopted a generally conciliatory tone in his first key speech to lawmakers from both parties since the blackface scandal erupted in February following disclosure of the photo in his 1984 medical school yearbook.

Northam reminded lawmakers that, thanks to investments in education and workforce training, Virginia was ranked the best state in the country for business by CNBC last month, which he called "one of my proudest days as governor."

However, he also warned lawmakers that Virginia's strong financial position now doesn't mean they will have a big surplus to spend in the budget he will propose in December.

Northam also cautioned that the next budget will include mandatory increases to update spending on K-12 education and Medicaid, as well as additional investments in behavioral health services to make them available uniformly across the state.

"As we go into this new budget cycle, we must be both cautious and strategic," he said.

This fall, the state will conduct an annual reassessment of its revenue outlook in the face of economic uncertainty heightened by a trade war with China that the governor said has hurt Virginia farmers and state agricultural exports.

State income tax revenues have little room to grow with a work force that's almost fully employed. "Our employers continue to add jobs," Northam said. "But because we are close to full employment, our job growth has slowed."

Two sources that produce 80 percent of state revenues - payroll withholding and sales taxes - came up almost $37 million short in the last fiscal year, but they are projected to grow at a faster rate this year than they increased in the last one.

"Unless our trends change, I would think it would be a more conservative forecast going forward," Secretary of Finance Aubrey Layne said in an interview.

Virginia finished the last fiscal year on June 30 with $797.7 million more in revenue than projected in the current budget, but most of the 7.2% increase represents additional state tax collections because of federal tax reforms, as well as one-time income gains that may not be sustainable.

The state is preparing to return $431 million to taxpayers who will receive one-time checks of $110 for individuals and $220 for couples sometime between Sept. 15 and Oct. 15, weeks before crucial elections to determine political control of a legislature in which Republicans have a narrow edge in both chambers.

An additional $25 million will be held in a "taxpayer relief fund" created this year in a deal between Republican budget leaders and the Democratic governor in response to the Tax Cuts and Jobs Act that President Donald Trump signed almost two years ago.

The federal law almost doubled the standard deduction for federal taxes, but state taxpayers saw their Virginia tax bill rise an average of $125 this year as many of them forfeited their ability to itemize deductions in order to claim the higher federal deduction.

The tax refunds promised by legislators and the governor come "pretty darn close to making everybody whole," said Layne, a certified public accountant.

At the same time, Virginia will boost its combined financial reserves to almost $1.6 billion by next July, with budgeted deposits of $73.6 million in the revenue stabilization or rainy day fund and $270.8 million it the state's cash reserve fund. An additional $47 million will be held in the Virginia Water Quality Improvement fund.

"We have maintained our triple-A bond rating, put more money in our reserves for a rainy day, and made smart investments in Virginia's long-term growth," Northam told legislators.

Virginia's coveted AAA bond rating had been in jeopardy after S&P Global Ratings, one of three national agencies that give the state the top grade for creditworthiness, downgraded the state's financial outlook from stable to negative in April, 2017, in the final year of then-Gov. Terry McAuliffe's term.

The state's reserves had dwindled to less than $282 million, or about 1.4 percent of Virginia's general fund budget revenues, but the rating agencies restored the stable outlook 14 months later after the General Assembly adopted a two year budget that expanded Medicaid with a new hospital tax to pay the state's share of the cost.

Virginia's financial reserves now represent about 7 percent of general fund revenues, with more than $1.65 billion expected to be deposited by mid-2021.

Northam said his goal remains to increase reserves to 8 percent of general fund revenues by the time his term ends at the beginning of 2022.

"I think the rating agencies are going to love this," Layne said.

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