Forecasting the Financial Future for VFC Localities

1. Forecasting the Financial Future for VFC Localities James J. Regimbal Jr. Virginia First Cities Coalition November 2010

2. Source: Auditor of Public Accounts Comparative Report – FY 2009

3. Source: Auditor of Public Accounts Comparative Report

4. 8 Localities Experienced Further Deterioration in FY 11 Budgeted General Fund Revenues 4

5. VFC Used Numerous Budget Balancing Strategies for FY 11 5 5

6. … VFC Budget Balancing Actions, Continued 6 6

7. 7

8. Local Governments Are Reducing Their Workforce Federal State Local FY 07 FY 08 FY 09 FY 10 8

9. Source: Virginia Employment Commission Labor Market Information 9

10. State Budget Issues for 2011 Session • Don’t anticipate significant local aid budget restorations, even though FA anticipates about $300-350 million in new GF revenue/balances for 2010-12. • - About $250 mil. from revised revenue forecast and about $50-100 mil. available from FY 2010 agency year-end balances. • - Budget “needs” include $100-200 million for increased Medicaid utilization, and $200-300 mil. in public safety, higher education, and other health and human service needs. Gov also favors add’l discretionary economic development program funding. • - Latest FMAP extension for Medicaid fell short by about $137 million -- pressure to undo contingent appropriation cuts and make providers whole. • - $249 million in federal “Jobs” bill education funding to local schools could potentially be used to offset state GF appropriations which could be directed to other priorities (e.g., Medicaid, VRS teacher contributions). • 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? 10

11. 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.

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

13. State GF Budget Cuts (K-12, HB 599, Comp. Board) Note: Includes federal ARRA, but not “Jobs” K-12 funding

14. 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.

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

16. 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.” 16

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

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19. VFC Localities Should Plan On Tough Budgets for Foreseeable Future • Federal relief efforts are ending. • Meaningful increases in state aid will be hard to come by for at least several biennia. • While a double-dip recession is not likely, job growth and a real estate recovery will likely be slow, therefore: - Slow increases in real estate assessments; - And slow growth in most other local taxes. - VFC cannot afford reductions in local revenue authority (e.g., BPOL and M&T).