Virginia’s Budget Outlook

VACO Steering Committees

James J. Regimbal Jr.Fiscal Analytics, Ltd.November 13, 2011

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Where Are State Tax Receipts Headed?

3

Expect Economy to Continue Slow Growth

• Recent data suggest no double-dip recession.

- State income and sales tax collections indicate modest revenue growth for FY 12.

- GABE and GACRE likely to endorse conservative revenue forecasts. Expect 3-4% wage and salary growth forecasts for next several years. Sales tax growth rates should be similar. Non-withholding and corporate income growth somewhat higher.

• Expect de-leveraging to keep growth slow for years. Business has de-leveraged, consumers are reducing debt, and the federal government is realizing its fiscal dilemma.

- While federal spending accounts for about 30% of Virginia’s economy, it is unclear even if there are federal cutbacks

whether it would significantly impact Virginia.

4* Individual income and sales taxes make up 86% of GF. Does not include GF transfers and balances.

Out-Years Assume 4-5 Percent Revenue Growth

surplus

Re-forecast

5

State Pushing More Costs to Others

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GF avg. annual growth rate = 2.7%NGF avg. annual growth rate = 6.9%

NGF

GF

6

A Few Revenues Sources Dominate

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General Fund FY 11 ($ Mil.) Non-General Fund FY 11 ($ Mil.)

Individual Income Tax $9,944 Federal Trust $7,066

Sales Tax $3,216 Higher Ed Operating $6,898

Corporate Income Tax $822 Transportation (incl. Fed) $3,533

Recordation $292 Special & Dedicated $2,554

Insurance Premiums $282 Trust & Agency $1,915

All Other Revenues $688 Enterprise $1,146

ABC Profits $51 Bond Proceeds $560

Other Transfers $158 Lottery Profits $435

Debt Service $256

Total GF $15,453 Total NGF $24,362

State Budget Drivers% Change FY 2001 – FY 2010

7

Demographics: Inflation:

Children Health Insurance (SCHIP/FAMIS) Enrollees 106% CPI - Medical 42%

Medicaid Enrollees 45% CPI-All Urban 23%

Pop. Ages 65 and Over 23% State Employee Salary Avg. 22%

Higher Ed Enrollment 21% Revenue Base:

State-Responsible Inmates 12% Non-General Fund Revenues 103%

Total VA Population 11% Ind. Income Tax Withholding 47%

VA K-12 Enrollment 10% VA Wages & Salaries 41%

VA Employment 3% Taxable Sales 31%

Salaried State Employees -2% Total General Fund Revenues 28%

Ind. Income Tax Non- Withholding 6%Sources: JLARC Review of State Spending, December, 2010. Governor’s Advisory Council on Revenue Est., Dec. 2010

10 Year Change in 15 Largest Appropriations

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FY 2001 FY 2011 % Change % GF

Medical Assistance Services $3,053.7 $7,532.5 147% 37%

Direct Aid to Public Education $4,356.8 $6,248.4 43% 75%

Dept. of Transportation $2,840.7 $3,366.4 19% 1%

University of VA (incl. Medical) $1,151.8 $2,237.4 94% 6%

Dept. of Social Services $1,221.0 $1,918.9 57% 20%

VA Community College System $491.6 $1,410.8 187% 26%

Dept. of Corrections $824.0 $1,011.1 23% 92%

VA Employment Commission $411.6 $1,035.4 152% 0%

Virginia Tech $547.8 $1,003.7 83% 17%

Personal Property Tax Relief $572.4 $950.0 66% 100%

Dept. of Behavioral Health $756.9 $928.5 23% 58%

VCU $529.1 $943.5 78% 19%

George Mason $308.6 $747.9 142% 17%

Compensation Board $522.9 $624.8 19% 97%

Virginia Dept. of Health $420.8 $570.6 36% 27%

9

General Fund Tax Changes Have More Than Neutralized 2004 Tax Increase

Enacted/Amended 2010-12 ($ Mil.)

Age Subtraction (net of means testing) 1994/2004 ($555)

Subtraction for UI/Military/Gov't Empl 1999 ($73)

Historic Rehab Tax Credit 1999 ($92)

Coalfield Employment Tax Credits 2000 ($89)

Low Income Tax Relief 2000, 2004, and 2007 ($377)

Land Preservation Tax Credit 2003 ($275)

2004 Tax Reforms* 2004 $1,780

Elim. 2.5% Sales Tax on Food 2004 ($437)

Shift Insurance Premiums and Recordation from GF to Transportation 2009 ($340)

Estate Tax Repeal 2009 ($280)

Other Tax Changes since 1999 1999-2011 ($182)

Total ($919)

* Includes cigarette tax increase dedicated to Health Care Fund

Sources: Senate Finance Committee Retreat, Revenue Outlook, Nov. 18 , 2010

Summary of Amendments to the 2010-2012 Budget, Money Committee Staff. May 2010

10101010

GF Appropriations to Localities Decreased by $1 Billion From FY 2009-11

FY 2009 FY 2010 FY 2011 FY 2012

GF Direct Aid to K-12 $5,607.6 $4,769.8 $4,713.3 $4,951.8

Health and Human Services $888.4 $878.7 $816.8 $850.5

CSA $299.7 $279.2 $271.2 $270.1

Community MH/MR Services $249.4 $256.5 $230.1 $269.0

Local Social Services Staff $117.4 $117.4 $114.4 $114.3

Community Health Programs $117.6 $116.9 $106.1 $109.3

Welfare Services and Programs $104.3 $108.7 $95.0 $87.8

Public Safety $734.3 $556.8 $686.0 $667.7

Local Sheriffs Offices $406.1 $257.1 $408.2 $399.2

Local Police Depts HB 599 $197.3 $180.8 $178.7 $172.4

Local/Regional Jail Per diem $80.1 $68.1 $53.7 $49.9

Assistance for Juvenile Justice $50.8 $50.8 $45.4 $46.2

Constitutional Officers $155.3 $142.2 $144.2 $143.8

Car Tax $950.0 $950.0 $950.0 $950.0

Aid-to-Locality Reduction ($50.0) ($50.0) ($60.0) ($60.0)

Total Local GF Aid $8,285.6 $7,247.5 $7,250.3 $7,503.8

Total GF Appropriations $15,943.0 $14,787.2 $15,457.4 $16,556.9

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State Funding for Locally-Administered Programs is Falling As Percent of GF

FY 2009 FY 2010 FY 2011 FY 2012

Direct Aid to K-12 35.2% 32.3% 30.5% 29.9%

Health and Human Services Aid 5.6% 5.9% 5.3% 5.1%

Public Safety Aid 4.6% 3.8% 4.4% 4.0%

Car Tax 6.0% 6.4% 6.1% 5.7%

Constitutional Officers 1.0% 1.0% 0.9% 0.9%

Aid-to-Locality Reduction -0.3% -0.3% -0.4% -0.4%

Total Local GF Aid 52.0% 49.0% 46.9% 45.3%

121212

Most Local Government Expenditures are Mandated or Regulated by the State

Source: APA Comparative Report of Revenues and Expenditures

…But With Less State Funding

13Source: APA Comparative Reports on Local Revenues and Expenditures

1414

…And Little Room to Maneuver From Local Revenue Sources

Source: Auditor of Public Accounts Comparative Report of Revenues and ExpendituresNote: Communication sales taxes no longer considered local revenue – state appropriated 14

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State Aid For Locally-Delivered Programs Was Not a Priority in the 2011 Session

• Out of $615 million in additional 2011 Session biennial GF revenues, locally-delivered programs received an increase of about $78 million - 13 percent of the additional funding. Other major priorities were:

- $90.0 million for Higher Education

- $94.2 million for Medicaid

- $67.0 million for Mental Health

- $64.0 million for Rainy Day Reserve

- $32.7 million for Transportation

- $55.3 million for VITA

- $41.7 million for VRS

- $23.6 million for Economic Development

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Locals Also See Little New State Aid From FY 2011 Surplus

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Governor’s Proposal to Spend FY 2011 GF Surplus

$ Mil.

Surplus GF Revenues $310.7

Unspent GF Appropriations $170.5

Total FY 2011 GF Surplus Available: $481.2

Spending Required in the Budget or in Legislation:

Revenue Stabilization Fund $132.7

2/3 Remaining to TTF $67.2

Water Quality Improvement Fund $50.3

Accelerated Sales Tax to Transportation $26.0 Unemployment Compensation Interest $8.9 Oceana BRAC Contingency Appropriation $7.5 Sheriff's Contingency Appropriation $7.4

Total Required Spending $300.0

Spending Proposed by Governor:

Re-appropriated GF Operating Balances $84.4

Proposed Federal Action Contingency Fund $30.0

Proposed VRS Payment & Other Non-recurring $18.7

Natural Disaster Reserve $17.3

Treasury Loan Repay for Capitol Renovations $13.1

Other Planned Reversions & Miscellaneous $17.7

Total Proposed Expenditures $181.2

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Reasons the state will have difficulty restoring cuts to core local programs

1. Revenues not growing as fast as usual coming out of a recession.

2. Rainy Day Fund must be restored – Constitutional change increased potential size of fund from 10% to 15% of GF.

3. VRS contributions for teachers and state employees will have to be restored to actuarially sound levels.

4. Medicaid spending continues to grow faster than state revenues. 2014 impact of federal health care big unknown.

5. Greater use of debt will increase servicing payments.

6. Use of one-time revenues and savings in recession have to be replaced with ongoing revenues.

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* Assumes GF revenue growth of 4.2% in FY 12, 4.5% in FY 13, and 4.9% in FY 14, not incl. transfers and balances.

General Fund Demands Likely Outstrip Available Resources For Next Biennium

Forecast GF Budget ($ mil.)

FY 2012 FY 2013 FY 2014

Revenues and Transfers, Balances * $16,781 $17,147 $17,566

Total Expenditures Demands $16,781 $17,536 $18,055

Difference ($0) ($389) ($488)

Budget Savings Will Be Difficult To Find

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Caboose Forecast GF DemandsFY 2011 FY 2012 FY 2012 FY 2013 FY 2014

Legislative and Executive Dept's 95 96 96 96 97

Judicial Dept. 406 406 406 415 420

Treasury Board GF Debt Service 542 583 580 600 625

Admin., Finance (w/o debt), & Tech 787 799 806 800 810

Rainy Day 114 114 133 200

Car Tax Reimbursement 950 950 950 950 950

Commerce and Trade 160 173 173 173 173

Agr., Nat. Res. 165 135 185 135 135

K-12 Direct Aid 4,713 4,952 4,952 5,248 5,275

Higher & Other Education 1,750 1,682 1,682 1,720 1,750

DMAS (Medicaid) 2,822 3,484 3,384 3,797 4,101

Other HHS 1,391 1,432 1,410 1,450 1,475

Public Safety 1,658 1,655 1,655 1,650 1,675

Transportation 46 69 162 69 69

Central Appropriations (29) 19 216 250 250

Capital - 9 9 50 50

Total Expenditures ($ Mil.) $15,457 $16,557 $16,781 $17,536 $18,055

2011 Session Budget

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21

2010-12 VRS Employer Rates Will Rise Sharply in Future Biennia

Source: VRS Presentation to JLARC, July 11, 2011

2011 & 2012 VRS Board

Certified Rates FY 20116/25/2011-3/24/2012

3/25/2012-6/24/2012

2013 & 2014 VRS Board

Certified Rates *

State 8.46% 2.13% 2.08% 6.58% 13.07%

Teachers 12.91% 3.93% 6.33% 6.33% 16.77%

Not including 5% member contribution* Phase-in of 7.5% to 7% investment return, VRS Board meeting Oct. 20, 2011

22Source: VRS Presentation to JLARC, July 11, 2011

23Note: Does not include CSA and MHMR facility reimbursements. FY 2011 includes the shifting of $262 million from FY 12 to capture higher federal FMAP match.

Medicaid and State K-12 Aid Funding Levels are Converging

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25252525

Federal Stimulus FundingHelped Offset State GF Reductions

FY 2010 FY 2011 FY 2012

Medicaid Federal Stimulus $746 $714

K-12 Federal Stimulus $584 $123

Higher Ed Federal Stimulus $75 $202

Other Federal Stimulus $110 $0

Federal JAG (Sheriff's) $23 $0

One-time Federal "EduJobs" Funding $250

Total $1,538 $1,289

262626

… Plus Other Non-Recurring Revenues Were Used to Offset Declining GF

• Rainy Day Fund - $783 mil.

• Reduce VRS state employee and teacher retirement/benefit contributions - $850 mil.

• Replacing Capital Outlay Cash With Debt - $350 mil.

• Accelerated Sales Tax for Dealers - $227 mil.

• Capture NGF balances and interest earnings - $113 mil.

• Tax Amnesty - $102 mil.

• Eliminate Sales Tax Dealer Discount for Electronic Filers - $98 mil.

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Localities Should Plan On Tough Budgets for Foreseeable Future

• Local revenues are growing very little, if at all.- Real estate will be the last to recover from recession.

• Federal relief efforts are ending. • VRS certified teacher rates rise from 6.33% in

FY 12 to 16.77% in FY 13. Local rates expected to rise 3-4%.

• Meaningful increases in state aid for locally-provided services will be hard to come by for rest of this and at least the next biennium.

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Real Property Tax Revenues Expected to Be Flat in FY 2012

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Source: 1990-2010, Auditor of Public AccountsFY 11 & 12 estimates from VML/VACO Fiscal Survey

2929

Local Government Budgets Trying to Hold On Until Better Days Arrive

In Top 3 FY 12 Budget Balancing Actions

Delay or cancellation of capital outlay/infrastructure 40Draw down reserves 29Salary Freeze 26Increase tax rates 21Eliminate Vacant Positions and RIF 20Targeted cuts in other services and programs 19Delay of annual equip. replacement programs 12Fee increases 12Reducing staff health care benefits 11Targeted cuts in public education 10Hiring freeze 7Reduced contributions to civic/cultural 6Renegotiate debt 5

Replacing local general funds with special funds 4Across the board service cut 3Early retirement incentives 2Targeted cuts in public safety services 2Other 4

* 83 localities responding to VML/VACO Survey

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More Localities Fear the Future*

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Meet Financial Needs? Better Same Less Able

All Localities (118)

FY 2012 Compared to FY 2011 23% 57% 20%

FY 2013 Compared to FY 2012 4% 55% 36%

Cities (31)

FY 2012 Compared to FY 2011 25% 50% 25%

FY 2013 Compared to FY 2012 3% 53% 38%

Counties (87)

FY 2012 Compared to FY 2011 22% 60% 18%

FY 2013 Compared to FY 2012 5% 56% 36%

* Results from 2011 VML/VACO survey

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Biggest Locality Revenue Concerns

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121 Localities Responding to 2011 VML/VACO Survey

# Citing

Reductions in state funding 62

Lack of local revenue growth/real estate assessment reductions 55

Loss of federal funding (CDBG, federal grants) 15

Shifting of state responsibilities to localities 6

State actions that impede local revenue collection 8

Concerns about overall economic growth 12

Lack of new debt capacity 2

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Biggest Locality Expenditure Concerns

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121 Localities Responding - 2011 VML/VACO Survey # Citing

Deferred capital outlay/infrastructure/maintenance needs 34

Rising costs of personnel benefits and retirement costs 34

Need to increase employee compensation 28

Demands for education funding 25

New and unfunded mandate expenditures, such as LODA, schools 24

Public safety expenditure needs 12

Increasing costs for utilities, replacing equipment, service demands, etc. 11

Environmental/storm/waste water mandate costs 4

Increased CSA expenses 3

State cost shift for secondary road maintenance 1

State cost shifts for local constitutional officers 1

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2012 Session Fiscal Policy Issues • K-12 preliminary DOE re-benchmarking policies not yet

endorsed by Governor.

• Removal of $60 million aid-to-local reduction?

• Will Aid-to-Police funding (HB 599) increase with GF?

• Will CSA expenditures continue down trend?

- $32 mil. less expenditures in FY 11 than appropriated.

• Will devolution changes be proposed for transportation maintenance funding?

• Will General Assembly make BPOL/M&T tax changes?

Conclusion

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• State increasingly relies on sources other than state taxes to fund programs (federal revenue, local funding, higher ed tuition & fees).

- State has reduced its own tax base.

• It will be more difficult to use these alternative funding sources in the future, due to federal deficit reduction efforts, the ongoing housing crisis, and increasingly unaffordable college costs.

• GF spending demands -- esp. Medicaid and VRS -- will outstrip GF revenue growth, putting pressure on state funding for locally-administered programs.

- Health care law expected to increase Medicaid eligible's by 400,000.

• Need to replenish Rainy Day Fund will reduce GF availability for programs.

• With modest economic growth expected, localities should plan for little restoration of state support.

- Governor’s request for 2%, 4%, and 6% agency budget reduction plans, and his Task Force for Local Government Mandate Review

reflect this reality.

• Reducing local revenue authority, or cutting funding to locals for transportation should be resisted.