1. State Economic and Budget Trends Impact on Local Governments Fiscal Analytics, Ltd. September, 2014

2. 2 U.S. recessions

3. 2014-16 Budget Now Requires an Additional $882 Million in Cuts In FY 14, VA GF revenue declined for the first time without a U.S. recession (-1.6 percent, or $439 mil. below official forecast). -Non-withholding income tax payments were the primary reason for the missed forecast. Final payments were $342 million below previous tax year. Withholding grew 2.3%. -Sales and corporate income taxes fell 4.8% and 4.9%. -Lower FY 14 GF revenue base carries over into 2014-16. Additional GF reduction of $882 million forecast ($346 m in FY 15 and $536 m in FY 16) beyond the $1.55 billion shortfall anticipated in the June 23 adopted 2014-16 budget. Total GF growth lowered to 2.7%/yr. -Re-forecast of GF revenues further reduces payroll withholding growth expectations from 4.5 percent to 2.7 percent in FY 15. -Non-withholding forecast capped at 15 percent of total GF revenue collections. 3

4. 4444 4 Despite 5 Years of U.S. Economic Recovery, Federal Cutbacks Are Hurting Virginia’s Economic Recovery In 2010, federal spending ($137 B total; $58B DoD) contributed approximately one-third of Virginia’s gross state product ($424 B). -VA ranked #2 in total per capita federal spending and #1 in per capita DoD spending in 2010. From CY 2000-10 federal spending in VA grew 107% versus 60% in total Virginia’s gross state product. In federal fiscal year 2013, federal spending* grew only 0.7 percent, with military spending declining 7.2 percent. Thru July FFY 2014, total spending* increased 0.4% with defense spending declining 5.8 percent. Chmura Economics recently reported the DoD spent a total of $41.4 billion on direct operations and contracts in Virginia in 2013, down from $54.8 billion in 2012. * Not including interest on debt and GSE payments.

5. Virginia Payroll Employment Growth 5 Source: Bureau of Labor Statistics/Haver Analytics

6. 66 Virginia Has a Much Higher Percentage of Professional and Business Service Jobs Than the Nation Source: Bureau of Labor Statistics/Haver Analytics 6

7. 7 Federal Cutbacks Have Resulted in Low Job Growth in High-Paying Jobs Percent Change in Employment from a Year Ago, NSA Source: Bureau of Labor Statistics/Haver Analytics

8. 8 Virginia’s Replacement of High Paying With Low Paying Jobs Helps Explain Slow Growth in Wages and Tax Revenues Health, Leisure, and Hospitality Professional and Business Services

9. 99 High Paying Business and Professional Jobs Generate Significant Tax Revenue 9 3rd Q 2013 Avg. Weekly Wage Management of Companies and Enterprises$1,860 Professional, Scientific, and Technical Servi$1,785 Information$1,491 Finance and Insurance$1,402 Wholesale Trade$1,366 Utilities$1,359 Public Administration$1,343 Mining, Quarrying, and Oil and Gas Extraction$1,213 Manufacturing$1,034 Transportation and Warehousing$934 Construction$924 Real Estate and Rental and Leasing$893 Health Care and Social Assistance$878 Educational Services$820 Other Services (except Public Administration)$728 Unclassified establishments$726 Administrative, Support and Waste Manageme$699 Agriculture, Forestry, Fishing and Hunting$542 Retail Trade$509 Arts, Entertainment, and Recreation$426 Accommodation and Food Services$332

10. 10 Virginia Wages and Salary Growth Significantly Below U.S. Source: Bureau of Economic Analysis/Haver Analytics

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12. 12 Calendar Year

13. 13 2014-16 Adopted GF Budget Anticipated Only $1.55 B Shortfall Additional 2014-16 Cuts of $346 M and $536 M Needed 2014 Session Adopted Budgets ($ Mil.) FY 2014 Budget FY 2015 FY 2016 FY 15 Change from FY 14 Legislative and Executive Dept's $103.2 $109.0 $107.2 $5.8 Judicial Dept. 425.2 436.4 435.5 11.2 Administration/Comp Board 654.1 675.7 679.1 21.6 Treasury Board GF Debt Service 608.5 682.5 724.0 74.0 Other Finance/Technology 171.9 179.4 181.2 7.5 Rainy Day Fund 339.6 243.2 - (96.4) Car Tax Reimbursement 950.0 - Commerce and Trade 183.3 166.5 179.1 (16.8) Agriculture / Nat. Resources 144.0 182.7 152.4 38.7 K-12 Education/Central Office 5,292.7 5,549.7 5,641.7 257.0 Higher & Other Education 1,782.1 1,858.0 1,858.8 76.0 DMAS Medicaid 3,519.8 3,877.1 4,043.1 357.3 Other Health & Human Services 1,541.5 1,649.2 1,620.9 107.7 Public Safety & Veterans/HS 1,699.0 1,792.0 1,799.8 93.0 Transportation 42.0 13.2 69.1 (28.9) Central Appropriations* 247.2 112.7 167.5 (134.5) Independent Agencies/Capital 1.2 1.4 1.2 0.2 Total GF Appropriations $17,705.3 $18,478.7 $18,610.6 $773.4 Available Balance to Spend 879.7 276.0 6.2 GF Resources** 16,954.1 18,484.1 18,616.4 Unspent Balance** 128.6 5.4 5.8 * Net of CA Reserve $480.0 $362.5 $842.5 ** Incl. prelim. revenue shortfalls ($350.0) ($600.0) ($1,550.0) and Rainy Day Fund drawdown $470.0 $ 237.5 $707.5

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15. 15 Includes GF, lottery profits, miscellaneous NGF, and state appropriated federal stimulus funds adjusted by the CPI

16. 16 Relative State Aid to Localities Still Declining in Adopted Budget 16 GF/Lottery State Funding for Localities 2008-102010-122012-142014-16 (a) Direct Aid to K-12$11,248.0$10,550.7$11,444.9$12,196.0 Health and Human Services$1,767.1$1,639.5$1,610.6$1,638.6 Public Safety$1,291.1$1,356.0$1,367.1$1,402.0 HB 599 Aid to Police$378.1$351.1$344.8 Constitutional Officers$297.5$288.0$289.3$304.9 Car Tax$1,900.0 Recordation/Rolling Stock/TVA$94.9$96.6$98.7 Aid-to-Locality Reduction($100.0)($120.0)($50.0)$0.0 Total Local Aid GF + Lottery$16,498.6$15,710.8$16,660.6$17,540.2 Total GF + Lottery Appropriations$31,600.8$32,922.6$35,861.4$38,124.3 Direct Aid to K-12 % of Total GF/Lottery35.6%32.0%31.9%32.0% Total Local Aid % of Total GF/Lottery52.2%47.7%46.5%46.0%

17. Long-Term Headwinds for Increasing State Support for Local-Administered Programs How will the Virginia economy replace the loss of high paying business and professional jobs? Will highly paid professionals transition to new industries? Medicaid program continuing to grow faster than GF revenues. Will VRS rates for teachers and state-supported employees continue to rise? Will recent good VRS investment returns help rate outlook? 2014-16 VRS teacher rates rose 24 percent from 11.66% to 14.5%. State continues to incur more GF debt service due to lack of a pay-as-you- go capital program. Lower revenues will impact new debt capacity. More general funds for transportation scheduled. 17

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19. 19 Without Tax Increases Local Revenues Will Not Offset State Funding Losses 19 Total Local Revenues Real Property

20. 20 Tough Choices Continued for Local Budgets in FY 2014 Source: Results from VML/VACO 2013 fiscal survey * 11 of 44 localities increased RE tax rates - 8 at rate greater than equalization * 44 localities responding to VML/VACO survey Top 3 FY 14 Local Budget Balancing Actions Delay or Cancel Capital or Equipment Purchases21 Increase tax rates or fees*14 Drawdown Reserves or Balances13 Other Targeted Budget Cuts13 Reduce Employee Benefits9 Eliminate Vacancies or Positions8 Salary or Hiring Freezes7 Renegotiate Debt6 One-time/Other5 K-12 Education Cuts5 Early Retirement Incentives3 Across-the-Board Budget Cuts1

21. Does Fall 2008 Budget Balancing Actions Provide Clues for Fall 2014? 21 FY 09 Budget Balancing Actions:Agency Reductions @ 7.5%: Revenue Stabilization Fund Withdrawal$400.0Improved business practices$100.0 Bond Existing GF Capital Projects$250.0Transfer of NGF operating balances$48.3 Literary Fund Balances$51.3Reduce or eliminate current services$31.7 Capture 2008 GF Balances$40.7Reduce personnel costs$27.2 Delay Salary Increases$44.7Supplant GF with NGF$18.2 K-12 Sales Tax Adjustment$20.7Reduce aid to localities$16.3 HB 599 Payment Adjustment$7.7Reduce discretionary expenses$13.4 Revert Excess in Tuition Moderation Fund$6.2 Reduce or eliminate aid to non-state agencies$11.1 Agency Reductions @ 7.5%$279.0Reversion of capital outlay balances$10.6 Total Balancing Actions$1,100.3Reduce or eliminate aid to individuals$1.6 Fee increases$0.4 GF revenue producing items$0.2 $279.0

22. Non-Recurring Budget Balancing Actions Enacted During the Great Recession $50 million per year “clawback” in aid-to-localities for the 2008-10 biennium and $60 million per year in the 2010-12 biennium. Replace cash for capital projects to debt - $350 mil. Accelerated Sales Tax Collections from July to June – $241.8 mil. Tax Amnesty Program - $102.1 mil. Transfer non-general fund balances to general fund - $83.3 mil. Temporarily adjust FY 10 Land Preservation Tax Credit - $50 mil. University of Virginia/Radford balances for debt - $48.9 mil. Revert capital/maintenance reserve balances - $41.1 mil. Replace Fire Programs Fund balance with credit line - $26.0 mil. Enhanced Tax Compliance $22.9 mil. Divert interest on non-general fund accounts - $17.7 mil. Sale of surplus property and helicopter - $6.6 mil. Eliminate sales tax dealer discount for electronic filers - $98.2 mil. 22

23. Retirement/Benefit Savings Actions Enacted During the Great Recession $87 mil. in FY 2010 by suspending employer retirement contributions for teachers and state employees in 4 th Q. $325 mil. in FY 2011 and $296 million in FY 2012 by using a lower than actuarial certified VRS rate for state employee and teacher retirement. $13 mil. in 4 th Q FY 2010 by suspending employer contributions for Group Life/Disability Insurance, and the Retiree Health Care Credit. $94.5 mil. from Group Life/Disability Insurance premium holiday in 2010-12 biennium. $20 mil. by recording employee retirement contributions in July instead of June 2010. $9.8 mil. from one day furlough of state employees in FY 2010. $70 mil. by reverting retiree health care credit balances. 23

24. Should the State Look at Its Tax Preferences? 24 Largest Virginia Tax Preferences Description of Largest Tax PreferencesCost Est. ($mil.) Sales Tax ExemptionsSee table next page Personal Property Tax Relief Act ("Car Tax")$950.0 Subtraction For Those Aged 65 or older and 62-64 (means tested)$284.9 Social Security and Railroad Retirement Subtraction$244.0 Estate Tax Elimination$140.0 Tax Credit for Families Below the Poverty Level$115.7 Tax Credit for Land Preservation (credits transferable)$100.0 Coalfield Employment and Production Incentive Tax Credits ($3/Ton)$59.4 Tax Credit for Historic Rehabilitation$59.2 Single Sales Factor for Corporate Income Tax$59.0 Child and Dependent Care Deduction$28.4 Coalfield Employment Enhancement Tax Credits$25.0 Subtraction for Unemployment Benefits$21.8 Virginia Education Savings Trust$17.9 Blind and Aged Personal Exemption$14.7 Deduction/Credit for Long Term Health Care Insurance$8.0 Subtraction for Military Wages -- Up to $15,000$7.8 Tax Credit for Motion Pictures and Media Equipment$7.5 Neighborhood Assistance Tax Credit$6.2 Subtraction of Disability Income$5.8 Major Business Facility Job Tax Credit$4.3 Tax Credit for Equity and Subordinated Debt Investments$2.1

25. 25 Largest Sales Tax Exemptions Cost Est. ($mil.) Services Exemptions$ Varies by Service Prescription Drugs$378.8 Partial Food for Home Consumption$346.2 Non-Profit Organizations$178.2 Advertising$84.8 Transportation Services$83.8 Residential Heating Fuels$41.9 Research & Development$28.9 NonPrescription Drugs$26.7 Railroad Common Carriers$20.1 School Lunches$12.0 Airline Common Carrier$10.1 Movie Theatre and Broadcaster Purchases$7.5 Churches$6.0 Donations of Tangible Goods to Non-Profits$5.5 Media Provider Equipment$5.2 Printed Materials for Out-of-State Distribution$5.0 School Supplies Holiday$4.1 Forestry Equipment$3.8 Pollution Control Equipment$3.8 Ships and Vessels$2.8 Durable medical Equipment$2.3 Hurricane Preparedness Sales Tax Holiday$2.2

26. Transportation Will Still Be a Challenge  In February, VDOT reported that the state revenue forecast for FY 2014 – 19 would be reduced by $796.0 million, mainly due to lower motor fuel prices than originally expected in HB 2313.  For the same period, VDOT forecasted a reduction of $123.0 million in federal and other sources.  For the FY 2015 – 20 improvement program, VDOT forecasted $491.0 million less than the previous six-year improvement program.  $55.0 million less in state and federal revenues  $436.0 million less in anticipated bond sales  The projections for the new six-year improvement program mean fewer construction dollars.  Elimination of funds for urban and secondary roads through the construction formula.  Transfers from the construction budget to maintenance is projected at $724.4 million for fiscal years 2015 – 2020. 26

27. 27 Public Transit Challenges  If Congress fails to pass the Marketplace Fairness Act (MFA) by January 1, 2015, then the motor fuel tax at the “rack” increases by 1.6% to make up the revenue loss.  However, the new increment would be used exclusively for road maintenance. Transit would have received a share of MFA revenue. Without MFA, DRPT expects $20.0 million less revenue for transit projects.  After the state bonds for transit are exhausted in FY 19, even with the HB 2313 revenues the state match for transit capital projects will drop to about 10.0 percent by FY 20. Dropping from $160.0 million in FY15 to less than $120.0 million in FY 2020 and to just over $60.0 million by FY 2023. 27

28. 28 Local Funding Will Continue to be Needed for Transportation System Local urban street maintenance expenditures exceeded state payments by 32% in FY 2012.* -Recent VDOT pavement condition survey found urban locality pavements in worse condition, despite spending a higher percent of funds on paving, than VDOT maintained roads. Including capital outlay expenditures, local unreimbursed expenditures for highways exceeded $366 million in FY 2012, not including toll revenue, and debt service for transportation bonds.* State revenue sharing increasing. $181 mil. for 212 projects allocated to 79 localities in FY 15. Local general funds subsidizing public transit include $265 million for operating assistance and $58 million for capital in FY 2013.** More special tax districts, such as commercial and industrial property in NVTD (up to 0.125 per $100) for transportation. 28 * FY 2012 Weldon Cooper Road, Street, and Highway Finance Survey ** Dept. of Rail and Public Transportation SYIP

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30. 30 Appendices

31. Virginia Housing Starts Stuck in Low Gear 31 Source: Bank of Tokyo-Mitsubishi UFJ/Haver Analytics 31

32. 32 …And VA Prices Growing Slower Than U.S. Avg. House Price Index—FHFA Source: Federal Housing Finance Agency/Haver Analytics

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34. Rainy Day Fund Withdrawals: Half of Budget Shortfall or Max. Half of RDF Balance 34 * Includes mandatory FY 15 deposit of $243.2 million from FY 13 revenues. RDF withdrawals in FY 15 and 16 of $470m and $235m expected.

35. 35 Virginia Is a Wealthy, Relatively Low Tax State, With Higher Reliance on Locality Taxes Source: Virginia Compared to Other States, JLARC, 2013 Edition State Rank Per capita personal income8 State and local taxes as a percentage of personal income43 Per capita state taxes32 Per capita local taxes14 Individual income taxes as a percentage of state and local tax revenue7 Per capita state and local debt outstanding28

36. 36 Virginia Spending Rankings Reflect Tax Policies State Rank State Per Pupil Funding Pre-K-1238 State and Local Per Pupil Funding21 Average Salary of Public School Teachers29 Per Capita Medicaid Expenditures46 In-State Tuition and Fees at Public 4-Year Institutions13 State Corrections Expenditures per Offender13 Source: Virginia Compared to Other States, JLARC, 2013 Edition

37. 37 Virginia Board of Education Recommended, But Unfunded, Changes to the SOQ 37