State Funding Outlook for Locally-Administered Programs

James J. Regimbal Jr.Fiscal Analytics, Ltd

February 9, 2012

2

Increasing Reliance on Non-General Fund Revenues

2

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (i)

2014 (i)

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Change in State Operating Appropriations ($ Mil.)

GF

NGF*

* Federal funds, higher education tuition & fees, other fees, unemployment insurance taxes, institutional revenue, etc

3

State Aid is Falling For Localities

3Source: APA Comparative Reports on Local Revenues and Expenditures, Fiscal Years 2000-2010

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201026.0%

27.0%

28.0%

29.0%

30.0%

31.0%

32.0%

33.0%

34.0%

35.0%

36.0%

State Categorical Aid As % of Total Local Operating Expenditures

444

State Assistance % of GF for Locally-Administered Programs Continuing to Decline

FY 2009 FY 2010 FY 2011 FY 2012 (i) FY 2013 (i) FY 2014 (i)

GF Direct Aid to K-12 $5,607.6 $4,769.8 $4,713.3 $4,912.8 $5,132.3 $5,175.7

Health and Human Services $888.4 $878.7 $816.8 $850.5 $844.9 $810.9

Public Safety $734.3 $556.8 $686.0 $667.7 $679.2 $679.9

HB 599 (Aid-to-Police) $197.3 $180.8 $178.7 $172.4 $172.4 $172.4

Constitutional Officers $155.3 $142.2 $144.2 $143.8 $143.8 $143.8

Car Tax $950.0 $950.0 $950.0 $950.0 $950.0 $950.0

Aid-to-Locality Reduction ($50.0) ($50.0) ($60.0) ($60.0) ($50.0) ($45.0)

Total Local GF Aid $8,285.6 $7,247.5 $7,250.3 $7,503.8 $7,700.2 $7,715.3

Total GF Appropriations $15,943.0 $14,787.2 $15,457.4 $16,556.9 $17,178.4 $17,365.2

% Local GF Aid 52.0% 49.0% 46.9% 45.3% 44.8% 44.4%

555

While Local Revenues Continue to Suffer

5

Source: 1990-2010, Auditor of Public AccountsFY 11 & 12 estimates from VML/VACO 2011 Fiscal Survey

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 est.

2012 est.

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

% Increase in Total Local Revenues

Fiscal Year

6

Important to Keep a Mix of Local Revenues• Locals depend heavily on real estate taxes

Source: Auditor of Public Accounts Comparative Report of Revenues and Expenditures 6Note: BPOL is the Business, Professional and Occupational License Tax. M&T is the Machinery and Tools Tax

Real Property54%

Other Property Taxes11%

Charges for Services11%

Local Sales and Use6%

BPOL and M&T5%

Meals Tax2%

Consumer Utility2%

All Other Taxes4%

All Other Revenues5%

FY 2010 Local Revenue Sources - $16.5 bil.

777

Most Local Government Expenditures are Mandated or Regulated by the State

Source: Auditor of Public Accounts Comparative Report of Revenues and Expenditures

Education54%

Parks and Recreation3%

Community Development4%

General Government4%

Judicial Administration2%

Public Safety16%

Public Works6%

Health and Welfare11%

FY 2010 Local Government Operating Expenditures = $25.0 bil.

88

Proposed Change in FY 2013 State GF Appropriations

8

FY 2013 Change From FY 12Legislative and Executive Dept's $95.7 $0.1Judicial Dept. $417.4 $9.3Compensation Board $608.1 $9.6Treasury Board GF Debt Service $624.0 $51.8Other Admin., Finance (w/o debt), & Tech $198.0 -$7.1Rainy Day Fund $132.7 $132.7Car Tax Reimbursement $950.0 $0.0Commerce and Trade $195.1 $26.5Agr., Nat. Res. $186.5 $51.8K-12 Direct Aid (incl. teacher retire) $5,132.3 $219.5Higher & Other Education $1,781.8 $107.2DMAS (Medicaid) $3,634.0 $240.1Other HHS $1,430.9 $12.8Public Safety (incl. Veterans /HS) $1,706.7 $46.7Transportation * $45.0 -$91.2Central Appr. $40.2 -$21.5Capital $0.0 -$8.9

Total GF Expenditures $17,178.4 $779.3

* Does not include $54 million in GF sales tax transferred to highway maintenance as NGF

99

Little New K-12 GF Spending in Introduced Budget Above FY 2012 Base*

9

FY 2013 FY 2014

Update Teacher Retirement Contribution Rates $170.9 $171.5

All Other Spending Proposals** $9.6 $52.1

Net New K-12 Spending Above Chapter 890 Base $180.5 $223.6

* FY 12 “Base” funding annualizes part-year and removes one-time funding, such as $87.7 mil. appropriated for supplemental support.

** Does not include $28 mil. per year in Executive Amendments, primarily K-3 class size and early reading initiative funding.

10

Proposed 2012-14 K-12 Policy Changes Add to List of Recent SOQ Reductions*

• Eliminate Non-personal Inflation Update – ($109.0)

- Did not fund inflation in 2010-12 biennium either.

• Modify Federal Revenue Deduction Calculation for Federal Stimulus Funding – ($108.1)

• Eliminate Support Cost-of-Competing Adjustment – ($65.0)

• VPI: Use Kindergarten as a Proxy for 4 Year-olds – ($26.7)

* Recent previous biennia reductions included: a funding cap on support positions, eliminating recognition of other SOQ support costs, increasing the federal deduct from 29% to 38% for support costs, changing funding assumptions for health care premiums, eliminating enrollment loss and support for construction, etc. (for further details see: http://hac.virginia.gov/committee/files/2010/11-16-10/Public_Education_Update.pdf

1111Includes GF, lottery profits, miscellaneous NGF, and state appropriated federal stimulus funds

2009 2010 2011 2012 2013 2014$4,000

$4,200

$4,400

$4,600

$4,800

$5,000

$5,200

$5,400

$5,274

$5,000

$4,513$4,569

$4,719 $4,730

State Per Pupil Funding Projections

Fiscal Year

1212

Reasons the State Is Restoring Little to Core Local-Aid Program Funding

1. Revenues not growing as fast as usual coming out of a recession (under 5% revenue growth expected in 2012-14). Tax changes reducing revenues. Concern over potential impact of federal deficit reductions.

2. Rainy Day Fund must be restored – Half of any GF revenue growth above prior 6-yr. avg. (2% now) goes to RDF.

3. VRS contribution rates for teachers and state employees will be significantly increased.

4. Medicaid spending continues to grow faster than state revenues. 2014 impact of federal health care big unknown, but law as written would add up to 425,000 new Medicaid recipients.

5. Use of one-time revenues/savings/debt in recession have to be replaced with ongoing revenues just to keep current spending.

- Debt only capital program has long-term consequences.

6. Increasing efforts to use general funds for transportation.

13

Revenues Not Rebounding as Fast

13

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

intro

2013

intro

2014

intro

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Growth in General Fund Tax Revenues

141414

General Fund Tax Changes Have More Than Neutralized 2004 Tax Increase

Enacted/Amended 2012-14 ($ 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)Phase-in of 0.5% Sales Tax to Transportation 2012 (Proposed) ($110)

Total ($1,030)

* 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

15

Retirement Rates Will Rise

15

Notes: Employer rates only and do not include 5% member contribution. Over the last 10 years ending June 30, 2011 VRS annual average total fund investment return has been 5.7%.

2011 & 2012 VRS Board Cert. Rates FY 2011

6/25/2011-3/24/2012

3/25/2012-6/24/2012

FY 2012-14 FY 2012-14

VRS Board Cert. Rates *

Introduced Rates**

State 8.46% 2.13% 2.08% 6.58% 13.07% 8.76%

Teachers 12.91% 3.93% 6.33% 6.33% 16.77% 11.66%

* Assumes phase-in of 7.5% to 7% investment return, 2.5% COLA, and 30 year amortization

** Reflects 8.0% investment return

1616

Health Care Has Trumped Education

Medicaid Debt Service

Corrections K-12 Higher Ed CSA($1,500.0)

($1,000.0)

($500.0)

$0.0

$500.0

$1,000.0

$1,500.0

$2,000.0

$2,500.0

$3,000.0

$2,423.5

$529.0

$47.3

($1,110.6)

($371.1)

($2.5)

2006-08 Budget Compared to 2012-14 Introduced Budget

(Change in Appropriated GF Mil. $)

17

2009 2010 2011 2012 2013 20140.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

K-12 and Medicaid Funding are Converging(% of Total GF Spending)

K-12

Medicaid (DMAS)

18181818

Non-Recurring Recession Revenues No Longer Available

• State Appropriated Federal Stimulus Funding - $2.8 billion• Reduced VRS state employee and teacher retirement/OPEB

benefit contributions - $850 mil.• Rainy Day Fund Withdrawals- $783 mil. • Replaced Capital Outlay Cash With Debt - $350 mil.• Accelerated Sales Tax for Dealers - $227 mil.• Captured NGF balances and interest earnings - $113 mil. • Tax Amnesty - $102 mil.• Eliminated Sales Tax Dealer Discount for Electronic Filers -

$98 mil.

19

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$0

$100

$200

$300

$400

$500

$600

$700

$28$43

$65$91

$105$126

$138

$167$185

$200$222

$234$223

$247$236

$284

$321

$387

$434

$479

$542

$593

$624

$658

GF Debt Service Increasing Rapidly ($ Mil.)

Source: Senate Finance Committee Retreat, Nov. 2011

20

Governor’s Transportation Proposal Would Divert Significant General Funds

(HB 1248/SB 639)

• Phase-in of additional 0.25% sales tax to transportation: $54 mil. in FY 13 increasing to $300+ mil. by FY 20.

• Dedicates one percent of general fund if growth is above five percent – potentially over $170 mil./yr.

• Increases dedication of GF surplus from 67% to 75% (FY 2011 surplus yielded $67 mil.).

• Creates transportation improvement districts whereby projects are partially funded using growth in state general funds from that district.

21

Conclusion• State policymakers do not seem to understand the fiscal condition of

localities when they propose:

- Using GF to help solve transportation needs.

- Proposing reductions in local revenue sources - such as exempting new equipment for 3 years for M&T tax purposes.

- Increasing locality costs of providing services through a constitutional amendment on eminent domain.

• Little restoration of state aid proposed for 2012-14 and continued depressed real estate assessments mean local budgets will remain under pressure for foreseeable future.

- Little new K-12 funding proposed, except for retirement system, even though localities already spend $3.2 billion per year above their

required local effort.

- Local share of teacher retirement costs could increase $350 m per year – further straining school division budgets.