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

2. 22 Where Are State Tax Receipts Headed?

3. 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. 4 * Individual income and sales taxes make up 86% of GF. Does not include GF transfers and balances. Out-Years Assume 4-5 Percent Revenue Growth surplus Re-forecast

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

6. 6 A Few Revenues Sources Dominate 6 General FundFY 11 ($ Mil.)Non-General FundFY 11 ($ Mil.) Individual Income Tax$9,944Federal Trust$7,066 Sales Tax$3,216Higher Ed Operating$6,898 Corporate Income Tax$822Transportation (incl. Fed)$3,533 Recordation$292Special & Dedicated$2,554 Insurance Premiums$282Trust & Agency$1,915 All Other Revenues$688Enterprise$1,146 ABC Profits$51Bond Proceeds$560 Other Transfers$158Lottery Profits$435 Debt Service$256 Total GF$15,453Total NGF$24,362

7. State Budget Drivers % Change FY 2001 – FY 2010 7 Demographics : Inflation : Children Health Insurance (SCHIP/FAMIS) Enrollees106%CPI - Medical42% Medicaid Enrollees45%CPI-All Urban23% Pop. Ages 65 and Over23%State Employee Salary Avg.22% Higher Ed Enrollment21% Revenue Base : State-Responsible Inmates12%Non-General Fund Revenues103% Total VA Population11%Ind. Income Tax Withholding47% VA K-12 Enrollment10%VA Wages & Salaries41% VA Employment3%Taxable Sales31% Salaried State Employees-2%Total General Fund Revenues28% Ind. Income Tax Non- Withholding6% 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 8 FY 2001FY 2011% Change% GF Medical Assistance Services$3,053.7$7,532.5147%37% Direct Aid to Public Education$4,356.8$6,248.443%75% Dept. of Transportation$2,840.7$3,366.419%1% University of VA (incl. Medical)$1,151.8$2,237.494%6% Dept. of Social Services$1,221.0$1,918.957%20% VA Community College System$491.6$1,410.8187%26% Dept. of Corrections$824.0$1,011.123%92% VA Employment Commission$411.6$1,035.4152%0% Virginia Tech$547.8$1,003.783%17% Personal Property Tax Relief$572.4$950.066%100% Dept. of Behavioral Health$756.9$928.523%58% VCU$529.1$943.578%19% George Mason$308.6$747.9142%17% Compensation Board$522.9$624.819%97% Virginia Dept. of Health$420.8$570.636%27%

9. 9 General Fund Tax Changes Have More Than Neutralized 2004 Tax Increase Enacted/Amended2010-12 ($ Mil.) Age Subtraction (net of means testing)1994/2004($555) Subtraction for UI/Military/Gov't Empl1999($73) Historic Rehab Tax Credit1999($92) Coalfield Employment Tax Credits2000($89) Low Income Tax Relief2000, 2004, and 2007($377) Land Preservation Tax Credit2003($275) 2004 Tax Reforms*2004$1,780 Elim. 2.5% Sales Tax on Food2004($437) Shift Insurance Premiums and Recordation from GF to Transportation2009($340) Estate Tax Repeal2009($280) Other Tax Changes since 19991999-2011($182) 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

10. 10 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 $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 $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

11. 11 State Funding for Locally-Administered Programs is Falling As Percent of GF FY 2009 FY 2010 FY 2011 FY 2012 Direct Aid to K-1235.2%32.3%30.5%29.9% Health and Human Services Aid5.6%5.9%5.3%5.1% Public Safety Aid4.6%3.8%4.4%4.0% Car Tax6.0%6.4%6.1%5.7% Constitutional Officers1.0% 0.9% Aid-to-Locality Reduction-0.3% -0.4% Total Local GF Aid52.0%49.0%46.9%45.3%

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

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

14. 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

15. 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. 16 Locals Also See Little New State Aid From FY 2011 Surplus 16 Governor’s Proposal to Spend FY 2011 GF Surplus $ Mil. Surplus GF Revenues$310.7 Unspent GF Appropriations$170.5 Total FY 2011 GF Surplus Available:$481.2 Spending Required in the Budget or in Legislation: Revenue Stabilization Fund$132.7 2/3 Remaining to TTF$67.2 Water Quality Improvement Fund$50.3 Accelerated Sales Tax to Transportation$26.0 Unemployment Compensation Interest$8.9 Oceana BRAC Contingency Appropriation$7.5 Sheriff's Contingency Appropriation$7.4 Total Required Spending$300.0 Spending Proposed by Governor: Re-appropriated GF Operating Balances$84.4 Proposed Federal Action Contingency Fund$30.0 Proposed VRS Payment & Other Non-recurring$18.7 Natural Disaster Reserve$17.3 Treasury Loan Repay for Capitol Renovations$13.1 Other Planned Reversions & Miscellaneous$17.7 Total Proposed Expenditures$181.2

17. 17 Reasons the state will have difficulty restoring cuts to core local programs 1.Revenues not growing as fast as usual coming out of a recession. 2.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.

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

19. Budget Savings Will Be Difficult To Find 19

20. 20

21. 21 2010-12 VRS Employer Rates Will Rise Sharply in Future Biennia Source: VRS Presentation to JLARC, July 11, 2011 2011 & 2012 VRS Board Certified RatesFY 2011 6/25/2011- 3/24/2012 3/25/2012- 6/24/2012 2013 & 2014 VRS Board Certified Rates * State8.46%2.13%2.08%6.58%13.07% Teachers12.91%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

22. 22 Source: VRS Presentation to JLARC, July 11, 2011

23. 23 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.

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

25. 25 Federal Stimulus Funding Helped Offset State GF Reductions FY 2010FY 2011FY 2012 Medicaid Federal Stimulus$746$714 K-12 Federal Stimulus$584$123 Higher Ed Federal Stimulus$75$202 Other Federal Stimulus$110$0 Federal JAG (Sheriff's)$23$0 One-time Federal "EduJobs" Funding$250 Total$1,538$1,289

26. 26 … 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.

27. 27 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.

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

29. 29 Local Government Budgets Trying to Hold On Until Better Days Arrive In Top 3 FY 12 Budget Balancing Actions Delay or cancellation of capital outlay/infrastructure40 Draw down reserves29 Salary Freeze26 Increase tax rates21 Eliminate Vacant Positions and RIF20 Targeted cuts in other services and programs19 Delay of annual equip. replacement programs12 Fee increases12 Reducing staff health care benefits11 Targeted cuts in public education10 Hiring freeze7 Reduced contributions to civic/cultural6 Renegotiate debt5 Replacing local general funds with special funds4 Across the board service cut3 Early retirement incentives2 Targeted cuts in public safety services2 Other4 * 83 localities responding to VML/VACO Survey

30. 30 More Localities Fear the Future* 30 Meet Financial Needs?BetterSameLess Able All Localities (118) FY 2012 Compared to FY 201123%57%20% FY 2013 Compared to FY 20124%55%36% Cities (31) FY 2012 Compared to FY 201125%50%25% FY 2013 Compared to FY 20123%53%38% Counties (87) FY 2012 Compared to FY 201122%60%18% FY 2013 Compared to FY 20125%56%36% * Results from 2011 VML/VACO survey

31. 31 Biggest Locality Revenue Concerns 31 121 Localities Responding to 2011 VML/VACO Survey # Citing Reductions in state funding62 Lack of local revenue growth/real estate assessment reductions55 Loss of federal funding (CDBG, federal grants)15 Shifting of state responsibilities to localities6 State actions that impede local revenue collection8 Concerns about overall economic growth12 Lack of new debt capacity2

32. 32 Biggest Locality Expenditure Concerns 32 121 Localities Responding - 2011 VML/VACO Survey # Citing Deferred capital outlay/infrastructure/maintenance needs34 Rising costs of personnel benefits and retirement costs34 Need to increase employee compensation28 Demands for education funding25 New and unfunded mandate expenditures, such as LODA, schools24 Public safety expenditure needs12 Increasing costs for utilities, replacing equipment, service demands, etc.11 Environmental/storm/waste water mandate costs4 Increased CSA expenses3 State cost shift for secondary road maintenance1 State cost shifts for local constitutional officers1

33. 33 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?

34. Conclusion 34 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.