Virginias Budget Outlook VACO Steering Committees James J

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

ec Fe 05 b. A 06 pr Ju 06 n. A 06 ug O 06 ct D 06 ec Fe 06 b. A 07 pr Ju 07 n A -07 ug O 07 ct D 07 ec Fe 07 b. A 08 pr Ju 08 n. A 08 ug O 08 ct D 08 ec Fe 08 b. A 09 pr Ju 09 n A -09 ug O 09 ct D 09 ec Fe 09 b. A 10 pr Ju 10 n. A 10 ug O 10 ct D 10 ec Fe 10 b. A 11 pr Ju 11 n A -11 ug -1 1 D Where Are State Tax Receipts Headed? Growth in Individual Income Tax Withholding 12 Mo. Moving Avg (% Growth) 9. 0 8. 0 7. 0 6. 0 5. 0 % Growth 4. 0 3. 0 2. 0 1. 0 0. 0 (1. 0) (2. 0) 2

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. 3

Out-Years Assume 4 -5 Percent Revenue Growth General Fund Revenues (FY $ Mil. ) $17, 500 $16, 500 $15, 500 Re-forecast surplus $14, 500 $13, 500 $12, 500 2005 2006 2007 2008 2009 2010 2011 2012 est 2013 est 2014 est * Individual income and sales taxes make up 86% of GF. Does not include GF transfers and balances. 4

State Pushing More Costs to Others $25, 000 Change in in State Appropriations ($ Mil. ) NGF $20, 000 $15, 000 GF $10, 000 $5, 000 $0 2001 2002 2003 2004 2005 2006 2007 Fiscal Year 2008 2009 2010 2011 2012 GF avg. annual growth rate = 2. 7% NGF avg. annual growth rate = 6. 9% 5

A Few Revenues Sources Dominate 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 Other Transfers Total GF $51 Bond Proceeds $560 $158 Lottery Profits $435 Debt Service $256 $15, 453 Total NGF $24, 362 6

State Budget Drivers % Change FY 2001 – FY 2010 Demographics: Children Health Insurance (SCHIP/FAMIS) Enrollees Inflation: 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% Taxable Sales 31% Total General Fund Revenues 28% VA Employment Salaried State Employees 3% -2% Ind. Income Tax Non- Withholding Sources: JLARC Review of State Spending, December, 2010. Governor’s Advisory Council on Revenue Est. , Dec. 2010 6% 7

10 Year Change in 15 Largest Appropriations 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% 8

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) 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) 1999 -2011 ($182) Low Income Tax Relief Other Tax Changes since 1999 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 9

GF Appropriations to Localities Decreased by $1 Billion From FY 2009 -11 FY 2009 FY 2010 FY 2011 FY 2012 $5, 607. 6 $4, 769. 8 $4, 713. 3 $4, 951. 8 $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 $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 $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 $45. 4 $46. 2 Constitutional Officers $155. 3 $142. 2 $144. 2 $143. 8 Car Tax $950. 0 Aid-to-Locality Reduction ($50. 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 GF Direct Aid to K-12 Health and Human Services Public Safety 10

State Funding for Locally-Administered Programs is Falling As Percent of GF FY 2009 FY 2010 FY 2011 FY 2012 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% 0. 9% Aid-to-Locality Reduction -0. 3% -0. 4% Total Local GF Aid 52. 0% 49. 0% 46. 9% 45. 3% Direct Aid to K-12 11

Most Local Government Expenditures are Mandated or Regulated by the State FY 2010 Local Government Expenditures = $25. 0 bil. Health and Welfare 11% Public Works 6% Public Safety 16% Education 54% Judicial Administration 2% General Government 4% Community Development Parks and Recreation 4% 3% Source: APA Comparative Report of Revenues and Expenditures 12

…But With Less State Funding 34. 0% State Categorical Aid As % of Total Local Expenditures 33. 0% 32. 0% 31. 0% 30. 0% 29. 0% 28. 0% 27. 0% 26. 0% 2000 2001 2002 2003 2004 2005 Source: APA Comparative Reports on Local Revenues and Expenditures 2006 2007 2008 2009 2010 13

…And Little Room to Maneuver From Local Revenue Sources FY 2010 Local Revenue Sources = $16. 5 bil. All Other Revenues 5% All Other Taxes 4% Consumer Utility 2% BPOL and M&T 5% Meals Tax 2% Local Sales and Use 6% Charges for Services 11% Real Property 54% Other Property Taxes 11% Source: Auditor of Public Accounts Comparative Report of Revenues and Expenditures Note: Communication sales taxes no longer considered local revenue – state appropriated 14

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 15

Locals Also See Little New State Aid From FY 2011 Surplus Governor’s Proposal to Spend FY 2011 GF Surplus GF Revenues Unspent GF Appropriations Total FY 2011 GF Surplus Available: $ Mil. $310. 7 $170. 5 $481. 2 Spending Required in the Budget or in Legislation: Revenue Stabilization Fund 2/3 Remaining to TTF Water Quality Improvement Fund Accelerated Sales Tax to Transportation Unemployment Compensation Interest Oceana BRAC Contingency Appropriation Sheriff's Contingency Appropriation Total Required Spending $132. 7 $67. 2 $50. 3 $26. 0 $8. 9 $7. 5 $7. 4 $300. 0 Spending Proposed by Governor: Re-appropriated GF Operating Balances Proposed Federal Action Contingency Fund Proposed VRS Payment & Other Non-recurring Natural Disaster Reserve Treasury Loan Repay for Capitol Renovations Other Planned Reversions & Miscellaneous Total Proposed Expenditures $84. 4 $30. 0 $18. 7 $17. 3 $13. 1 $17. 7 $181. 2 16

Reasons the state will have difficulty restoring cuts to core local programs 1. 2. 3. 4. 5. 6. 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. VRS contributions for teachers and state employees will have to be restored to actuarially sound levels. Medicaid spending continues to grow faster than state revenues. 2014 impact of federal health care big unknown. Greater use of debt will increase servicing payments. Use of one-time revenues and savings in recession have to be replaced with ongoing revenues. 17

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 ($0) ($389) ($488) Difference * 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. 18

Budget Savings Will Be Difficult To Find 19

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2010 -12 VRS Employer Rates Will Rise Sharply in Future Biennia State Teachers 2011 & 2012 VRS Board Certified Rates FY 2011 6/25/20113/24/2012 3/25/20126/24/2012 2013 & 2014 VRS Board Certified Rates * 8. 46% 2. 13% 2. 08% 6. 58% 13. 07% 12. 91% 3. 93% 6. 33% 16. 77% Not including 5% member contribution * Phase-in of 7. 5% to 7% investment return, VRS Board meeting Oct. 20, 2011 Source: VRS Presentation to JLARC, July 11, 2011 21

120% VRS Funded Status of Teachers and State Employees 100% 80% Teachers 60% State Employees 40% 20% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: VRS Presentation to JLARC, July 11, 2011 22

Total DMAS Medicaid Expenditures in Virginia (Actual Avg Growth Rate 1999 -2011 = 10%) 8, 000 7, 000 6, 000 $ Mil. 5, 000 4, 000 3, 000 2, 000 1999 2000 2001 2002 2003 2004 2005 2006 Fiscal Year 2007 2008 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. 2009 2010 2011 23

Medicaid and State K-12 Aid Funding Levels are Converging 24

Federal Stimulus Funding Helped Offset State GF Reductions FY 2010 FY 2011 Medicaid Federal Stimulus $746 $714 K-12 Federal Stimulus $584 $123 $75 $202 Other Federal Stimulus $110 $0 Federal JAG (Sheriff's) $23 $0 Higher Ed Federal Stimulus One-time Federal "Edu. Jobs" Funding Total FY 2012 $250 $1, 538 $1, 289 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

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 locallyprovided 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 16. 0% Growth in Real Property Tax Revenues 14. 0% 12. 0% 10. 0% 8. 0% 6. 0% 4. 0% 2. 0% 0. 0% -2. 0% -4. 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 est. Fiscal Year Source: 1990 -2010, Auditor of Public Accounts FY 11 & 12 estimates from VML/VACO Fiscal Survey 28

Local Government Budgets Trying to Hold On Until Better Days Arrive * 83 localities responding to VML/VACO Survey In Top 3 FY 12 Budget Balancing Actions Delay or cancellation of capital outlay/infrastructure Draw down reserves Salary Freeze Increase tax rates Eliminate Vacant Positions and RIF Targeted cuts in other services and programs Delay of annual equip. replacement programs Fee increases Reducing staff health care benefits Targeted cuts in public education Hiring freeze Reduced contributions to civic/cultural Renegotiate debt 40 29 26 21 20 19 12 12 11 10 7 6 5 Replacing local general funds with special funds Across the board service cut Early retirement incentives Targeted cuts in public safety services Other 4 3 2 2 4 29

More Localities Fear the Future* Meet Financial Needs? Better Same Less Able FY 2012 Compared to FY 2011 23% 57% 20% FY 2013 Compared to FY 2012 4% 55% 36% FY 2012 Compared to FY 2011 25% 50% 25% FY 2013 Compared to FY 2012 3% 53% 38% FY 2012 Compared to FY 2011 22% 60% 18% FY 2013 Compared to FY 2012 5% 56% 36% All Localities (118) Cities (31) Counties (87) * Results from 2011 VML/VACO survey 30

Biggest Locality Revenue Concerns 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 31

Biggest Locality Expenditure Concerns 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 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. 34