Virginia’s GF Budget Outlook

James J. Regimbal Jr.Fiscal Analytics, Ltd.

July 2011

22

The Economy is Slowly Recovering• Virginia employment is strengthening, but still below its 2008 peak.

Unemployment still high at 6.3%, but 3% below national average.

• Tax receipts recovering after 2 years of negative revenue growth, and second year of revenues exceeding forecast (FY 11 by $311 mil.) - but revenues still only a little above 5 years ago.

- Revenue forecasts for FY 12 should also be increased.

• State appropriations will finally grow again, but first priority in the 2012-14 budget will be filling recession-caused holes, i.e., Rainy Day and VRS trust funds.

- Where will restoring state aid for locally-delivered programs be on the priority list?

3

June 07 June 08 June 09 June 10 June 113,860,000

3,880,000

3,900,000

3,920,000

3,940,000

3,960,000

3,980,000

4,000,000

Virginia Employment

June 07 June 08 June 09 June 10 June 110.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

U.S. and Virginia Unemployment

VAU.S.

44

State Tax Receipts Are Recovering

Dec-0

5

Feb-

06

Apr-0

6

Jun-

06

Aug-0

6

Oct-06

Dec-0

6

Feb-

07

Apr-0

7

Jun-

07

Aug-0

7

Oct-07

Dec-0

7

Feb-

08

Apr-0

8

Jun-

08

Aug-0

8

Oct-08

Dec-0

8

Feb-

09

Apr-0

9

Jun-

09

Aug-0

9

Oct-09

Dec-0

9

Feb-

10

Apr-1

0

Jun-

10

Aug-1

0

Oct-10

Dec-1

0

Feb-

11

Apr-1

1

Jun-

11(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

Growth in Individual Income Tax Withholding 12 Mo. Moving Avg (% Growth)

% Growth

5* Individual income and sales taxes make up 86% of GF. Does not include GF transfers and balances.

Will FY 2012 Revenues Exceed FY 2008 Peak?

Re-forecast

surplus

?

2005 2006 2007 2008 2009 2010 2011 2012$12,500

$13,000

$13,500

$14,000

$14,500

$15,000

$15,500

$16,000

General Fund Revenues (FY $ Mil.)

Higher FY 2011 Revenue Base Means FY 2012 Could Also be Significantly Higher than Currently Forecast

6

FY 11 Forecast Variance

($ mil.)% Above Forecast

Individual Income Tax:

Withholding $60.2 0.7%

Tax Dues/ Estimated Payments 110.2 5.8%

Refunds 27.2 1.4%

Sales Tax 43.5 1.4%

Corporate Income 55.6 6.9%

Wills, Suits, Deeds 18.0 6.2%

Total FY 2011 Surplus $ 311.0 2.1%

7

Revenues Now Available for Additional Local Aid in 2010-12 Biennium

7

Proposed Allocation of $311 Million Revenue Surplus

Mil. $

Rainy Day Fund 146.6 Traditional, but not required until FY 13Water Quality Fund 32.2 Required per §10.1-2128 Code of VA Transportation Share of Accelerated Sales Tax 23.0 Discretionary per Item 3-5.08Unemployment Trust Fund Interest on Fed. 8.9 Required Contingency per Item 115.E.2BRAC Obligation 7.5 Required Contingency per Item 96.20. J.5Supplemental Sheriff Office Funding 7.4 Required Contingency per Item 67.20. P

Tornado Relief 4.3 Governor Proposed

Subtotal 229.9

Remaining Surplus 81.1

Plus Additional Agency Savings and Balances ?

Additional VRS Contributions ? Governor Proposed (amt. unknown)

Elimination of $60 Mil. ATL Reduction 60.0 VML/VACO Proposed

888

107 localities responding to VML/VACO survey FY2010 to budgeted FY2011: -1.2%

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

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Little to No Growth in Local Revenues Likely For FY 2012

Fiscal Year

9999

Local Government Reduced Employees

Average Monthly Government Employment in VA

Fiscal Year Local State Federal

2007 370,067 153,175 156,308

2008 377,008 153,217 157,367

2009 382,300 153,517 163,142

2010 369,858 154,242 171,108

2011 371,083 156,217 173,525

Source: VEC Current Employment Statistics (CES); Compiled by Fiscal Analytics, Ltd.

State Aid For Locally-Delivered Programs Was Not a Priority in the 2011 Session

• Out of $615 million in additional biennial GF revenues, locally-delivered programs received an increase of about $78 million, or only about 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

10

11

2011 Session Change in State Aid to Locals

FY 11 FY 12 TotalSheriffs' Funding $8.3 $14.3 $22.6Jail Per Diems 6.1 - 6.1 New Jail Staff - 1.3 1.3 Enterprise Zones - 3.5 3.5 Industrial Sites - 3.0 3.0 Brownfields - 1.0 1.0 Direct Aid to Public Ed (26.0) 48.7 22.7 WQIF - Urban Stormwater 5.1 - 5.1 Soil & Water Districts - 1.0 1.0 Aid to Local Police (HB 599) - 12.4 12.4 CSA (1.0) (3.9) (4.9)Community MH Services - 1.9 1.9 Auxiliary Grants (0.5) (0.5) (1.0)Local DSS Support - 2.9 2.9

Grand Totals -$8.0 $85.6 $77.6

121212

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

FY 2009 FY 2010 FY 2011 FY 2012

GF Direct Aid to K-12 $5,607.6 $4,769.8 $4,713.3 $4,951.8

Health and Human Services $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 $117.4 $114.4 $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

Public Safety $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 $50.8 $45.4 $46.2

Constitutional Officers $155.3 $142.2 $144.2 $143.8

Car Tax $950.0 $950.0 $950.0 $950.0

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

13131313

…And Direct Aid to Localities For K-12 Is Falling Below 30 Percent of the State GF

FY 2009 FY 2010 FY 2011 FY 2012

Direct Aid to K-12 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% 1.0% 0.9% 0.9%

Aid-to-Locality Reduction -0.3% -0.3% -0.4% -0.4%

Total Local GF Aid 52.0% 49.0% 46.9% 45.3%

14

5 reasons the state will have difficulty restoring cuts in core programs

1. Payments to the Rainy Day Fund ($200-300 mil. per year) – Constitutional change will increase the number of years deposits have to be made.

2. VRS contributions for teachers and state employees will have to be restored to actuarially sound levels.

3. Medicaid spending continues to grow faster than state revenues.

4. Debt service payments will increase.

5. One-time revenues and savings in this biennium have to be replaced.

15

16

2010-12 VRS Employer Rates Will Rise Sharply in Future Biennia

2011 & 2012 VRS Board Certified Rates FY 2011

6/25/2011-3/24/2012

3/25/2011-6/24/2012

State 8.46% 2.13% 2.08% 6.58%

Teachers 12.91% 3.93% 6.33% 6.33%

SPORS 25.56% 7.76% 7.73% 21.16%

VaLORS 15.93% 5.12% 5.07% 13.09%

Judges 46.79% 28.81% 28.65% 42.58%

Not including 5% member contribution

Actual rates assume 8% investment return

Source: VRS Presentation to JLARC, July 11, 2011

17

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150%

20%

40%

60%

80%

100%

120%

VRS Funded Status of Teachers and State Employees

TeachersState Employees

Source: VRS Presentation to JLARC, July 11, 2011

18DMAS forecasted - does not include Medicaid expenditures for CHIP, MH&MR facilities and CSA

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

1000

2000

3000

4000

5000

6000

7000

8000

Total DMAS Medicaid Expenditures in Virginia(Actual Avg Growth Rate 1999-2010 = 10%)

Fiscal Year

$ Mil.

Official Consensus Forecast

Medicaid and State K-12 Aid Funding Levels are Converging

19

FY 2009 FY 2010 FY2011 FY 20120.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%Percent of Total GF Appropriations

K-12 Direct Aid

DMAS (Medicaid)

20

Localities Should Plan On Tough Budgets for Foreseeable Future

• Local revenues are not growing.- Real estate will be the last to recover from recession.

• Federal relief efforts are ending. • VRS teacher rates will rise.• 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.

- K-12 re-benchmarking will likely be negligible, unless federal stimulus funds are included, with the base year data from FY 2010.

- However, hard to justify $60 million ATL reduction with $311 mil. FY 2011 revenue surplus.

2121

Temporary Funding Policies Helped Mitigate State K-12 Funding Reductions

FY 2010 FY 2011 FY 2012

One-time Federal ARRA Stimulus $584.2 $122.9

One-time Federal "EduJobs" Funding $249.5

Estimated Value of One-time Local VRS Teacher Savings * $346.1 $281.2

* FY 12 local savings reduced by approx. $83 mil. if Governor’s 2% VRS rate increase is adopted

2222

Recent Policy Changes Reduce K-12 Funding

• Established a funding cap of 1 support position per 4 instructional positions.• Enacted a federal revenue deduct of 38% to eliminate so-called double-counting of

funding for support positions.• Adopted additional support function reductions.

- Include $0 in division LWA for non-personnel support

- Extend school bus replacement cycle from 12 to 15 years

- Eliminate staff travel, leases/rentals, and facilities from recognized non-personnel support funding

• Changed funding for health care premiums to reflect actual participation rates (but not actual premiums paid).

• Eliminated annual/sick leave payments for personnel who terminate employment, capital outlay replacement and a “miscellaneous” category.

• Eliminated non-personnel inflation increases.• Supplanted GF with lottery funds for savings such as:

- Transfers remedial summer school, ESL, and 2/3 of textbook funding to lottery.

- Eliminates enrollment loss and add’l support for construction and operating costs.

- Limits participation in the K-3 Class Size Reduction Program to schools with free lunch higher than 30 percent.