Forecasting the Financial Future for Virginia’s Localities

1. Forecasting the Financial Future for Virginia’s Localities James J. Regimbal Jr. Virginia Association of Counties November 2010

2. “Bear” Case for Economy • Debt bubble has shifted from private to public sector. • Waning federal stimulus, potentially rising federal taxes, increasing protectionism & regulation • Anemic job growth with low consumer confidence • Deflation risk • Slow real estate recovery

3. “Bull” Case for Economy • Strong growth in emerging economies • Surging commodity prices suggesting strong global growth and trade • Low borrowing costs with credit markets on the mend • Steep yield curve predicting growth & no double-dip • Healthy corporate profits, high productivity, and record high corporate cash • Personal income and spending trending higher • Consumers continue to save and reduce debt burdens • Leading indicators again moving up • Tame inflation

5. Economic Growth Critical For State GF Revenues 5

6. FA Estimated Additional General Funds Available for Appropriation ($ Mil.)

7. Budget Issues for 2011 Session • Don’t anticipate significant budget restorations. FA anticipates about $350 million in new GF revenue/balances for biennium, assuming no policy changes. - Only about $100 mil. available from FY 2010 $228 mil. revenue surplus -- most already committed to employee bonus, WQIF, transportation. - Latest FMAP extension for Medicaid fell short by about $150 million -- pressure to undo contingent appropriation cuts and make providers whole. - Other budget “holes” include $150 million for public safety, higher education and increased Medicaid utilization. • - $249 million in federal “Jobs” bill education funding to local schools could potentially be used to offset state GF appropriations and directed to other priorities. • Election and re-districting year will make for “interesting” session. - Proposals from economic development/job creation commission include corporate tax rate, BPOL, M&T changes, etc. - Impacts from Government Reform Commission and ABC privatization proposal?

8. Counties Depend on RealPropertyTaxes 8 Source: Auditor of Public Accounts Comparative Report of Revenues and Expenditures

10. Virginia Existing Home PricesMay Have Bottomed in 2010.1Q …

11. …Commercial Real Estate Still Declining

12. Property Tax Revenues Expected to Decline At Least Through FY 2011 Fiscal Year • Growth in Total RE Assessed Values (106 localities surveyed): • 2009 to 2010: -5.0% • Growth in Total RE Revenues (109 localities surveyed): • FY2009 to FY2010: 0.2% • FY2010 to budgeted FY2011: -2.8%

13. Fiscal Year • 107 localities responding to VML/VACO survey:  • FY2009 to FY2010: -3.6% • FY2010 to budgeted FY2011: -1.2%

14. State Sources Provided Only 21% of All County Revenues in FY 2009 Source: Auditor of Public Accounts Comparative Report

15. … But 42% of All FY 2009 County Revenues If 4 Northern Virginia Counties* Are Excluded * Counties of Arlington, Fairfax, Loudoun, Prince William

16. State GF Appropriations to Localities Has Decreased by $1 Billion Since FY 2009 (1) Does not include appropriated federal stimulus funds in FY 10 and FY 11.

17. …And Is Falling as a Percent of Total GF Appropriations

18. Existing Spending Pressures Will Limit State Aid to Localities for Foreseeable Future • Constitutional requirement to fill Rainy Day Fund. • - Requires deposit of half of growth above previous six-year average GF revenue growth. Expect $200-300 million/year in deposits in FY 2014-2017 to restore fund. • Continued 10% Medicaid growth rates (costs + utilization), plus new health care bill requirements in 2014 (additional Medicaid eligibility costs state $100’s of millions /yr). • VRS contributions for both teachers and state employees will have to be restored to actuarially sound levels. Plus, adopted budget calls for 10 year payback of prior cuts. Employer rates will significantly increase. • Continued growth in future biennia debt service requirements. • Other numerous pent-up demands for additional state agency funding, including growing VITA contractual demands. • No appetite for general fund tax increases and additional revenue pressures for transportation first.

19. Out-year RDF balances could rise even higher if constitutional amendment passes, increasing max. from 10-15% of major GF taxes

20. 2010-12 VRS Teacher Rates • May Triple in Future Biennia 2012-2014: “In setting the employer retirement contribution rates in subsequent biennia, the Board shall calculate a separate, supplemental employer contribution rate that will amortize the FY 2011 and 2012 contribution shortfalls over a 10-year period using the Board's assumed long-term rate of return. The Governor shall include funds to support payment of such Board-approved, supplemental employer contribution rates in the budget submitted to the General Assembly.” 20

21. FY 1999-09 Avg. Growth = 9%, FY 10 = 14.7% * DMAS forecasted - does not include Medicaid expenditures for MH&MR facilities and CSA

22. 22

23. VACO/VMLSurvey Results Indicate Localities Still Pessimistic 23

24. Survey Indicates Declining State Aid a Major Concern for Localities Total Concerns Expressed 353246

25. Local Government Budgets Reduced by 2.7% and School Budgets by 3.3% in FY 2011 * * 109 localities responding

26. There Have Been Large Shifts in Virginia Employment Over the Last 10 Years 26 Source: Virginia Employment Commission

27. Where Are Jobs Coming Back?

28. Local Government Job Losses by MSA Source: Virginia Employment Commission 28

29. Localities Should Plan On Tough Budgets for Foreseeable Future • Federal relief is waning. • Do not expect meaningful increases in state aid for several biennia. • While a double-dip recession is not likely, job growth and real estate recovery will likely be slow, therefore: - Slow increases in real estate assessments; - And slow growth in most other local taxes.