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Virginia’s Budget Outlook VACO Steering Committees

Virginia’s Budget Outlook VACO Steering Committees. James J. Regimbal Jr. Fiscal Analytics, Ltd. November 13, 2011. Where Are State Tax Receipts Headed?. 2. Expect Economy to Continue Slow Growth. Recent data suggest no double-dip recession.

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Virginia’s Budget Outlook VACO Steering Committees

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  1. Virginia’s Budget OutlookVACO Steering Committees James J. Regimbal Jr. Fiscal Analytics, Ltd. November 13, 2011

  2. Where Are State Tax Receipts Headed? 2

  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. Out-Years Assume 4-5 Percent Revenue Growth Re-forecast surplus * Individual income and sales taxes make up 86% of GF. Does not include GF transfers and balances.

  5. State Pushing More Costs to Others NGF GF GF avg. annual growth rate = 2.7% NGF avg. annual growth rate = 6.9% 5

  6. A Few Revenues Sources Dominate 6

  7. State Budget Drivers% Change FY 2001 – FY 2010 Sources: JLARC Review of State Spending, December, 2010. Governor’s Advisory Council on Revenue Est., Dec. 2010

  8. 10 Year Change in 15 Largest Appropriations

  9. General Fund Tax Changes Have More Than Neutralized 2004 Tax Increase

  10. GF Appropriations to Localities Decreased by $1 Billion From FY 2009-11 10 10 10

  11. State Funding for Locally-Administered Programs is Falling As Percent of GF 11 11 11 11

  12. Most Local Government Expenditures are Mandated or Regulated by the State 12 12 Source: APA Comparative Report of Revenues and Expenditures

  13. …But With Less State Funding Source: APA Comparative Reports on Local Revenues and Expenditures

  14. …And Little Room to Maneuver From Local Revenue Sources Source: Auditor of Public Accounts Comparative Report of Revenues and Expenditures Note: Communication sales taxes no longer considered local revenue – state appropriated 14 14

  15. 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

  16. Locals Also See Little New State Aid From FY 2011 Surplus 16

  17. Reasons the state will have difficulty restoring cuts to core local programs • Revenues not growing as fast as usual coming out of a recession. • 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. 17

  18. * 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.

  19. Budget Savings Will Be Difficult To Find

  20. 2010-12 VRS Employer Rates Will Rise Sharply in Future Biennia Source: VRS Presentation to JLARC, July 11, 2011 21

  21. Source: VRS Presentation to JLARC, July 11, 2011

  22. Note: 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.

  23. Medicaid and State K-12 Aid Funding Levels are Converging

  24. Federal Stimulus Funding Helped Offset State GF Reductions 25 25 25

  25. … 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. 26 26

  26. 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.

  27. Real Property Tax Revenues Expected to Be Flat in FY 2012 Source: 1990-2010, Auditor of Public Accounts FY 11 & 12 estimates from VML/VACO Fiscal Survey 28

  28. Local Government Budgets Trying to Hold On Until Better Days Arrive * 83 localities responding to VML/VACO Survey 29

  29. More Localities Fear the Future* * Results from 2011 VML/VACO survey 30

  30. Biggest Locality Revenue Concerns 31

  31. Biggest Locality Expenditure Concerns 32

  32. 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?

  33. Conclusion • 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.

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