1. Outlook for State Financing of Virginia K-12 Public Education
Virginia Association of School Superintendents
Fiscal Analytics, Ltd.
December 13/15, 2016

2. Re-Cap of 2016-18 GF Budget Situation
Funded $605.6 mil. Rainy Day Fund deposit in FY 17 from FY 15 surplus -- increasing RDF balance to $841 mil.
Provided $173 mil. in FY 16 and $91 million in to fund increased contribution rates to 100 percent, 2 years ahead of schedule to shore up VRS retirement funds.
Unwound other actions to address prior budget shortfalls, such as increasing threshold for dealer accelerated sales tax payment from $2.5m to $25m. Left $265 mil. unspent carryforward to FY 17.
Unfortunately, FY 16 ended with a $279 mil. revenue deficit. August interim forecast reduced revenue growth and left with a projected $1.5 bil. est. shortfall.
Governor’s plan to address FY 17 shortfall includes $392 mil. RDF drawdown, removal of $125 mil. in contingent salary increases, and use of agency and NGF balances and extra literary and lottery revenues. Only relatively small operational reductions needed.
Use of one-time savings for FY 17, and new unbudgeted spending needs such as Medicaid and CSA, will make balancing FY 18 harder. House and Senate Money Committee staff currently forecast approx. $600 million funding shortfall in FY 18, assuming additional $225 mil. RDF drawdown and $221 mil. contingent salary removal.
Revenues will be re-forecast before final revised budget is adopted and could provide some relief given current trends. Money Committees currently expect about $200 mil. in additional revenue growth, leaving approx. $400 mil. unresolved shortfall. 2

3. GF Revenue Growth is Lower than Past
Fiscal Years
Avg. Annual GF Growth*
5.9%
5.7%
-5.0%
4.1%
2017 Interim Forecast
1.7%
2018 Interim Forecast
3.6%
* Does not include GF transfers 3 3 3

4. After 4 Months, GF Revenue Collection Growth Better Than Forecast
GF Revenue Sources
4 Mo. Collections
FY 2017 Forecast
Individual Income Tax (70% of GF)
4.1%
1.8%
Withholding
4.3%
3.0%
Non-Withholding
-0.2%
-1.2%
Refunds
-4.0%
4.0%
Sales Tax (18% of GF)*
0.2%
2.6%
Corporate Income Tax (4% of GF)
5.1%
-3.0%
Total GF
3.5%
1.7%
* Adjusted for the accelerated sales tax program in June 4 4 4

5. 5 5

6. Income Tax Non-Withholding Revenues Are More Volatile, Amplifying Economic Changes and Making Revenue Forecasting Difficult
Non-withholding
Withholding
Note: Non-W % of total GF revenues: 15.4% in FY 14; 17.1% in FY 15, 17.0% in FY 16 6 6 6 6 6 6 6 6

7. Theories for Recent Slowing Virginia Revenue Growth
“Business and professional services” jobs are showing slower wage gains.
More retiring workers replaced with lower paid jobs and younger workers.
More lower paid administrative positions.
Decline in labor force participation – retiring “baby boomers”
Continuing slowdown in defense spending particularly hurts Virginia. DoD Virginia contracts declined 30% from
U.S.
Defense
Spending (CBO Data)
$ Bil.
Change
FFY 2011
678
FFY 2012
651 -
4.0%
FFY 2013
608
6.6%
FFY 2014
578
4.9%
FFY 2015
563
2.8%
FFY 2016
564 7

8. The State Has Also Reduced Its GF Tax Base by $2 Bil.
Enacted/Amended
FY 2016
Car Tax Reimbursement
1997, 2003
($950)
Impose lower 2.5% Sales Tax on Food
2004
($556)
Age Subtraction (net of 2004 means testing)
1994 and 2004
($292)
Low Income Tax Relief, increase filing thresholds, exemptions, etc.
2000, 2004, and 2007
($203)
1/3 Insurance Premiums to Transportation
2007
($150)
Estate Tax Repeal
2009
($140)
0.1% sales tax diversion to transportation
2013
($101)
Land Preservation Tax Credit
2003
($100)
Historic Rehab Tax Credit
1999
($76)
Corp. double weighting sales and single sales factor
1999, 2009
($74)
Sales tax exemption for data centers
2010/2011
($51)
Sales tax exemption for non-prescription drugs
1990
($39)
Subtraction for military wages and unemployment benefits
($37)
Coalfield Employment Tax Credits
2000
($34)
All Other Tax Reductions Since 1999
($121)
State GF Tax Reductions since 1994
($2,924)
Add 1/2 percent sales tax on non-food items
$500
Recordation Tax Increase (net of 3 cents to transp.)
2004/2007
$150
Tobacco Tax Increase (Va Health Care Fund)
$146
Close 2 Corp. Tax Loopholes/Eliminate ST Exem for Pub. Svc. Co.
$143
Sales Tax Presence in Virginia Amazon
2012
$22
Sales tax on satellite TV equipment
2014
$10
State Tax Increases since 1994
$971
Net Annual State Tax Changes
($1,953)
Source: Senate Finance Committee Retreat, Revenue Outlook, Nov. 19 , 2015 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8

9. Governor’s Plan to Balance FY 2017
Strategies to Address Shortfall
FY 2017 Savings ($Mil.)
Remove Pay Increases ($49.0 mil. for teacher pay)
$125.1
Transfers from Rainy Day Fund
$392.3
Revert FY 2016 Unexpended Balances
$66.8
Restore Accelerated Sales Tax on Dealers
$35.1
Draw Down FY 17 Balance Forward to FY 18
$70.0
Use Additional Lottery Funds for K-12
$41.8
Capture Reduced Sales Tax Revenue Est. for K-12 School-Age Pop. Distribution
$12.0
Use Additional Literary Funds for Teacher Retirement
$25.0
Transfer VRS Payments and other NGF from Higher Ed
$28.8
Other Agency Savings and NGF Transfers
$73.0
Total Saving Strategies
$875.1

10. Identified “Mandatory” 2016-18 Budget Increases ($ Mil.)
SFC
HAC
Medicaid Utilization & Inflation
$280.6
$255.1
Child Services Act
$58.7
DSS Mandated Reinvestment in Child Welfare Services
$5.5
DBHDS - Special Hospital Costs at MH State Facilities
$3.9
Involuntary Civil Commitment
$0.6
Direct Inmate Health Care
$29.9
DOC: Impact of FLSA Overtime Rule
$2.6
Additional IT Costs/Backfill HAVA Funds
$3.0
$2.8
Employee Health Insurance Premium Adj.
$9.9
Mandatory Statutory Budget Pressures
$382.1
$369.0 10 10

11. Current 2016-18 Budget Outlook Summary
Including House and Senate Projections
FY 2017
FY 2018
Biennium
August Revenue Shortfall
$861.4
$654.3
$1,515.7
Governor's Saving's Plan
-$875.2
$56.2
-$819.0
Additional Potential Rainy Day Fund
-$225.0
Additional Salary Contingency
-$221.3
House Additional Mandatory/Statutory Spending
$119.6
$249.4
$369.0
Senate Additional Mandatory/Statutory Spending
$126.8
$255.3
$382.1
House Net Remaining Shortfall
$105.8
$513.6
$619.4
Senate Net Remaining Shortfall
$113.0
$519.5
$632.5
House Additional Est. Revenues
$114.4
$111.8
$226.2
Senate Additional Est. Revenues
$219.4
$5.2
$224.6
Net Shortfall House
-$8.6
$401.8
$393.2
Net Shortfall Senate
-$106.4
$514.3
$407.9 11

12. Possible Strategies to Address FY 2018 Shortfall ($ Mil.)
House
Senate
Sweep General Fund Capital Balances/Maintenance Reserve and Issue Debt
$150.0
Keep Accelerated Sales Tax $2.5 mil. for FY 18
$25.0
$27.0
Use carryforward balance in the VA Health Care Fund
$26.8
Transfer VA share of Volkswagon/Kia Settlement
$19.9
Reduce K-12 ADM and sales tax forecasts
$47.0
Require Higher-Ed to cover NGF share of VRS payback
$16.5
$41.3
Governor 7.5% Across-the-Board reductions
$79.1
$79.3
Higher Ed 7.5% reduction
$114.1
Eliminate HB 599 Increase
$5.2
Revisit all new discretionary spending in the budget ($522m) ??
Total Possible Strategies Identified by HAC/SFC Staff
$322.5
$308.7 12

13. Will New K-12 Funding for 2016-18 Be Cut?
Rebenchmarking provided about $400 million of the $850 mil. GF above base budget K-12 funding for the biennium.
$173.5 mil. GF to free up supplemental lottery per pupil allocations.
$134 mil. for state share of 2% teacher salary increases in Dec. 2016, contingent on available revenues.
$56.8 mil. to fund higher employer contribution rates for instructional retirement benefits (100% of the recommended VRS rates in FY % to 16.32%).
Note: The covered “teacher” VRS salary base will be approximately $7.9 bil. in FY 18. Localities are responsible for about 60% of that salary base. The additional 1.66% rate increase will cost localities about $80 mil.
$34.4 mil. to restore PD8 COCA for support positions at 10.6% in both years.
$14.2 mil. for additional at risk student funding based on numbers of free lunch students.
$10 mil. GF to decrease the Literary Fund transfer for teacher retirement.
$5.0 mil. for career and technical credentialing and equipment.
$4.6 mil. to expand VECF grants.
$2.9 mil. to increase VA Preschool Initiative per pupil from $6,000 to $6,125.
$2.1 mil. for grants for develop alternative teacher compensation systems.
Note: Expect additional FY 18 “technical” cuts in sales tax distributions and ADM counts. 13

14. Slow Revenues Combined With Growing Medicaid and Debt Service Are Squeezing Rest of State Budget

15. Medicaid Spending Forecast
Increasing by $255 Mil. in
Fiscal Years
Avg. Annual Growth
8.8%
6.2%
2016
9.3%
2017 Forecast
3.8%
2018 Forecast
2.9%
7.4%
4.1%
Major forecast spending changes were in:
Behavioral adult rehabilitation services and intensive in-home services for children
Medicare Part A, B and Part D premium increases
Medicaid fee-for-service expenditures 15 15 15 15 15 15 15 15 15

16. 16 16 16 16 16 16 16 16 16 16 16 16 16

17. GF State Aid to Localities Has Declined ($ Mil.)
FY 2009
FY 2014
FY 2016
FY 2017
FY 2018
Direct Aid to K-12
$5,607.6
$5,240.3
$5,527.0
$5,838.9
$6,131.9
K-12 % of Total GF Appropriations
35.2%
29.6%
28.9%
28.7%
30.2%
Health and Human Services
888.4
791.7
867.5
883.4
886.6
CSA
299.7
217.2
237.2
235.9
235.0
Community MH/MR Services (CSB’s)
249.4
269.3
318.0
331.1
335.4
Local Social Services Staff
117.4
115.3
114.4
117.5
Community Health Programs
117.6
107.2
115.1
117.8
Welfare Services and Programs
104.3
82.7
82.8
81.1
Public Safety
734.3
687.9
715.5
737.5
744.4
Local Sheriffs Offices
406.1
411.3
436.0
451.8
458.0
Local Police Depts HB 599
197.3
172.4
178.0
Local Jail Per diem
80.1
59.4
61.4
60.6
61.3
Assistance for Juvenile Justice
50.8
44.8
45.7
47.1
Constitutional Officers
155.3
145.8
152.5
157.5
158.3
Dept. of Accounts Transfers
49.3
49.5
49.6
Car Tax
950.0
Aid-to-Locality Reduction
(50.0) -
Total Local GF Aid
$8,334.9
$7,865.0
$8,262.0
$8,616.9
$8,920.8
Total GF Appropriations
$15,943.0
$17,705.2
$19,102.0
$20,349.5
$20,285.0
Local Aid % of Total GF
52.0%
44.1%
43.3%
42.3%
44.0% 17 17

18. Actual
Inflation-
Adjusted 18

19. State Standards of Quality Do Not Reflect True Costs for Local K-12 Divisions
Only 68 percent of K-12 positions employed by local school divisions are recognized by the SOQ; The “linear weighted average” methodology underfunds 85% of teacher’s salaries (in 2/3 of school divisions); real-time costs not reflected in re-benchmarking.
- Just raising teacher salaries to the national average and funding prevailing support costs requires an additional $750 million GF/year.
Localities on average spend about double, or $3.6 bil. beyond state requirements to meet SOL and SOA requirements. All 134 local school divisions exceeded Required Local Effort (RLE) in FY 15.
Divisions up to 25% Above RLE 16
Divisions Exceeding 25% to 75% 50
Divisions Exceeding 76% to 100% 31
Divisions Exceeding 100% RLE 37
Source: 19 19 19 19 19 19 19 19 19

20. Virginia Board of Education Recommends
$600 Million in Standards of Quality Upgrades
First BOE recommended SOQ funding changes since the early 2000’s. Examined where local practices exceed state recognized staffing practices.
Statewide about 136,000 out of 200,000 K-12 positions are funded by the SOQ.
The Board of Education recommends the following changes to the SOQ:
Restoring the funding of support positions using prevailing practices rather than the 2009 enacted support position cap (1 support per 4.17 SOQ funded teachers).
A staffing ratio of 1 to 400 students for assistant principals.
One full-time principal in each elementary school. 12 percent of schools have under 299 students and are only provided funding for a part-time principal.
Staffing ratios for school counselors (1 to 250); school psychologists (1 to 1,000); school nurses (1 to 1,000); and school social workers (1 to 1,000). 20

21. Literary Fund Is Largely Used for Teacher Retirement
Sources & Uses of Literary Fund
FY 07
FY 08
FY 09
FY 10
FY 11
FY 12
FY 13
FY 14
FY 15
FY 16
FY 17
FY 18
Revenue Sources:
Loan Payments to Literary Fund and Interest
$42.8
$40.0
$38.7
$43.0
$33.2
$48.5
$40.6
$35.4
$21.8
$20.2
$19.2
All Other (1) *
$177.6
$190.0
$199.5
$202.0
$158.1
$160.3
$161.5
$160.6
$393.8
$324.9
$198.7
$192.8
TOTAL Revenue
$220.4
$230.0
$238.2
$240.7
$201.1
$193.5
$210.0
$201.2
$429.2
$346.7
$218.9
$212.0
Spending Allocations:
Teacher Retirement
$116.0
$124.9
$228.7
$195.0
$139.6
$130.1
$140.1
$144.4
$375.7
$165.2
$155.2
Tech Equipment Debt Service
$62.6
$63.6
$64.5
$65.3
$63.5
$62.7
$60.7
$60.1
$60.6
$62.5
$64.7
$68.1
School Security Debt Service
$1.3
$2.4
$3.7
$4.9
$6.2
Interest Rate Subsidy
$7.6
$16.4
$11.1
$3.1
$0.8
$2.1
$0.4
$0.7
$0.1
$1.2
$0.0
School Construction Loans**
$52.9
TOTAL Allocations
$186.2
$204.9
$304.3
$263.4
$203.9
$194.9
$206.5
$438.8
$285.6
$234.8
$229.5
* Incl. special one-time payment of $193 m in FY 15
** Loans may be made from available balances
1. Revenues come from criminal fines, fees and forfeitures, unclaimed and escheated property, unclaimed lottery winnings and repayments of prior Literary Fund loans. A principal balance of $80 million must be maintained in order for other Fund money to be used for teacher retirement fund. 21 21 21

22. FY 2018 Is the First Time in Many Years VRS Rates Will Be Fully Funded
Rates Needed
Rates reduced from changing investment returns and amortization years, delaying or making partial payments. Unfunded liabilities for teacher plan are about $21 billion or about 70 percent funded status.
Contributions Needed
Contributions Paid
Total Underfunding of VRS Teacher
Contributions from FY = $3.6B

23. More Difficult and Diverse Student Population to Educate
163,000 Special Ed Students (13% )
Changing Demographics – ESL increased 63% over last 10 years
Source: Virginia Dept. of Education 23 23

24. Source: Virginia Dept. of Education

25. The Achievement Gap Persists
Over 20 Percent of All Schools Not Fully Accredited ( )
Fully Accredited
1414
Conditionally Accredited (New) 9
Partially Accredited - Improving
123
Partially Accredited - Warned
215
Accreditation Denied 13
To Be Determined 49
SOL Pass Rates ( )
English
Math
Asian 91 93
White 86
Hispanic 71 72
Black 66 67
Economically Disadvantaged 69
Limited English Proficiency 61 25 25 25

26. Since Recession, Locality Resources Have Not Kept Pace with Inflation/Population Growth
FY FY 2015 VA Locality Revenue Growth
Locally-Generated
State Sources
All Revenue
Growth in Population/Inflation
All Localities
12.0%
6.6%
9.6%
16.8%
Note: Consumer Price Index from fiscal years = 10.6%
Note: Pr. Wm. increase in state aid from FY was almost entirely due to a 20% increase in students
and a 6 point reduction in the local composite index from to
Sources: Virginia Auditor of Public Accounts Comparative Revenue and Expenditure Reports,
U.S. Bureau of Labor Statistics 26 26 26 26 26 26

27. ? 27 27 27

28. Median Real Estate Tax Rates in Virginia Localities*
Even Slow Real Property Revenue Growth Has Required Sharply Rising Rates
Median Real Estate Tax Rates in Virginia Localities*
CY 2009
CY 2015
Change
Cities
0.90
1.06
0.16
Counties
0.55
0.65
0.10
Towns
0.18 -
* Nominal rates per $100 of assessed value. Source: Weldon Cooper Center, “Virginia Local Tax Rates”

29. Despite Local Fiscal Issues, the Burden of the State-Local Fiscal Partnership is on Localities
2012 JLARC Ranking
2015 JLARC Ranking
Per capita personal income 8 10
State and local taxes as a percentage of personal income 43 45
Per capita state taxes 34 36
Per capita local taxes 13 15
State Per Pupil Funding 35 41
State and Local Per Pupil Funding 17 26
Average Salary of Public School Teachers 28
Source: Virginia Compared to Other States, JLARC, 2012, 2015 Editions 29 29 29

30. Understanding the Local Composite Index
The Local Composite Index (LCI) determines the distribution of all state K-12 funding except the sales tax school age population distribution.
The LCI dates to the 1970’s and purports to measure a locality’s residents basic capacity or ability-to-pay for K-12 education versus other localities. It does not measure or compare the actual level of revenue generated by a locality.
The LCI computes the locality’s relative state share of three revenue capacity indicators – true market value of real estate (50% weighting), Virginia Adjusted Gross Income (40%), and taxable sales (10%). The capacity indicators are then divided by a localities’ relative state share of public school ADM (66.6%) and population (33.3%).
Finally, the calculation is multiplied by 0.45 to get the relative 45% local/55% state weighted average share of SOQ costs.
The result is the local composite index applied to the SOQ and other state education funding programs for local cost sharing purposes. The maximum LCI calculation is capped at 0.80.

31. There is an adjustment to the standard calculation for localities with non-resident income is above 3 percent of VAGI: 33 localities in have their LCI adjusted by removing non-resident income from VAGI.
Each localities’ LCI is used to determine the percentage of Standards of Quality and other K-12 program funding that will be borne by the state and the share that will be borne by the locality.
Except for sales tax distributions based on school-age population, state K-12 aid amounts are influenced by the LCI calculation. Therefore, about $5 billion in annual state aid to localities is influenced by the LCI.
The only changes adopted to the LCI since its inception has been adding one-third population to the denominator in the 1980’s and the non-resident adjustment to VAGI.
- Hold harmless funding was provided in FY 2011 to help mitigate the impact of large LCI changes for 95 school divisions.

35. Concerning the LCI Calculation
Common Complaints
Concerning the LCI Calculation
“Revenue effort” (or tax rate levels) necessary for locality to fund other needs not captured in LCI.
- Health & human service/poverty levels, public safety, infrastructure needs, etc. not captured in LCI.
VAGI can be skewed with “bar bell” distribution of income.
TVRE and VAGI influenced by cost-of-living.
Local land use decisions not reflected in TVRE.
Localities with smaller student populations relative to its overall population have a higher LCI.
- Those localities penalized twice by per pupil state SOQ payments, plus a higher LCI. 35

36. K-12 Funding Recommendations
Prioritize restoring state K-12 funding in the state budget.
- At least restore calculations of prevailing school division practices in the state SOQ to meet SOL and SOA mandates.
- Address low teacher salaries and turnover and provide incentives for attracting high quality teachers (esp. in hard to staff schools and subjects).
- Direct more funding to school construction, equipment and technology tools for 21stcentury teaching.
- Increase efforts to improve low-performing students, and provide more career and technical education options.
Modifying the LCI is a zero-sum game and politically difficult. Targeted changes, such as the current non-resident VAGI adjustment, or population density adjustment proposed by JLARC, may be possible if they do not increase other divisions’ LCI. A better solution would be to adopt a real foundation funding state model of school financing.
Examine existing state tax preferences and compare cost/benefits to enhancing K-12 funding.
Provide additional revenue options for localities.

37. Appendix: Current 2016 Adopted GF Budget ($M)
FY 16 Budget
FY 17 Budget
FY 18 Budget
Above FY 16
Budget X 2
Legislative and Executive
107.7
115.5
15.5
Judicial Dept.
456.0
484.5
485.2
57.7
Administration/Compensation Board
691.7
711.8
718.6
47.0
Treasury Board Debt Service
675.0
734.9
766.3
151.2
Other Finance/Technology
181.6
191.6
188.6
16.9
Rainy Day Fund -
605.6
0.0
Car Tax Reimbursement
950.0
Commerce and Trade
197.0
203.9
217.3
27.1
Agriculture / Nat. Resources
174.7
237.7
172.2
60.5
K-12 Education/Central Office
5,576.0
5,900.0
6,190.6
938.6
Higher & Other Education
1,865.5
2,046.7
2,081.1
396.8
DMAS Medicaid
4,159.5
4,280.4
4,405.1
366.5
Other Health & Human Services
1,682.6
1,772.7
1,780.7
188.2
Public Safety & Veterans/HS
1,837.5
1,921.8
1,949.4
196.2
Transportation
69.1
41.0
(56.2)
Central Appropriations
334.8
139.6
223.0
(307.0)
Independent Agencies/Capital
143.2
12.0
0.3
(274.1)
Total GF Appropriations
$19,102.0
$20,349.7
$20,284.9
2,430.6
GF Resources (Revenues + Transfers)
$19,119.3
$19,481.2
$20,230.3
Balances
$932.1
$946.2
-$0.5
Unreserved Balance
$265.3
$77.7
$22.6 37 37 37