1. Forecasting the Financial Future for Virginia’s Localities James J. Regimbal Jr. Virginia Association of Counties November 2010

2. 2 “Bear” Case for Economy Debt bubble has shifted from private to public sector. Waning federal stimulus, potentially rising federal taxes, increasing protectionism & regulation Anemic job growth with low consumer confidence Deflation risk Slow real estate recovery

3. 3 “Bull” Case for Economy Strong growth in emerging economies Surging commodity prices suggesting strong global growth and trade Low borrowing costs with credit markets on the mend Steep yield curve predicting growth & no double-dip Healthy corporate profits, high productivity, and record high corporate cash Personal income and spending trending higher Consumers continue to save and reduce debt burdens Leading indicators again moving up Tame inflation

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5. 5 Economic Growth Critical For State GF Revenues 5 FY 2010 $ Mil.% of Total Individual Income Tax$9,088.360.6% Sales Tax (incl. 0.25% sales tax transfer)$3,291.922.0% Corporate Income Tax$806.55.5% All Other General Fund Revenues$1,242.26.6% Other GF Transfers$357.82.5% Lottery Proceeds (NGF)$430.22.9% Total General Fund + Lottery Proceeds$15,216.9100.0%

6. FA Estimated Additional General Funds Available for Appropriation ($ Mil.) 6 FY 2010 (a)GrowthFY 2011 (e)GrowthFY 2012 (e)Growth Individual Income$9,088.3-4.1%$9,630.06.0%$10,210.06.0% Sales Taxes$3,082.56.2%$2,930.0-4.9%$3,033.03.5% Corporate Income$806.524.4%$792.8-1.7%$838.45.8% All Other GF$1,242.3-3.1%$1,322.26.4%$1,354.02.4% Total GF Revenues$14,219.6-0.7%$14,675.03.2%$15,435.45.2% GF Transfers$567.239.5%$425.5-25.0%$459.17.9% Total General Fund$14,786.70.4%$15,100.52.1%$15,894.55.3% Official GF Available14,558.2$14,997.91.4%$15,748.05.0% Additional GF$228.5$102.6$146.5

7. 7 Budget Issues for 2011 Session Don’t anticipate significant budget restorations. FA anticipates about $350 million in new GF revenue/balances for biennium, assuming no policy changes. -Only about $100 mil. available from FY 2010 $228 mil. revenue surplus -- most already committed to employee bonus, WQIF, transportation. -Latest FMAP extension for Medicaid fell short by about $150 million -- pressure to undo contingent appropriation cuts and make providers whole. -Other budget “holes” include $150 million for public safety, higher education and increased Medicaid utilization. -$249 million in federal “Jobs” bill education funding to local schools could potentially be used to offset state GF appropriations and directed to other priorities. Election and re-districting year will make for “interesting” session. -Proposals from economic development/job creation commission include corporate tax rate, BPOL, M&T changes, etc. -Impacts from Government Reform Commission and ABC privatization proposal?

8. 8 Counties Depend on Real Property Taxes Source: Auditor of Public Accounts Comparative Report of Revenues and Expenditures 8

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10. Virginia Existing Home Prices May Have Bottomed in 2010.1Q … Median Sales Price of Existing Single-Family Homes for Metropolitan Areas (Thousands $) Metropolitan Area2007200820092010.I2010.II p U.S.$217.9$196.6$172.1$166.4$176.9 South 178.8 169.4 155.0 142.6 155.5 Richmond, VA 233.7 223.5 N/A 199.6 Hampton Roads Metro 226.8 220.0 210.0 195.0 210.0 Washington D.C. Metro 430.8 343.4 308.6 292.6 331.6 *All areas are metropolitan statistical areas (MSA) as defined by the US Office of Management and Budget as of 2004. They include the named central city and surrounding areas. N/A Not Available p Preliminary ©2010 National Association of REALTORS® 10

11. … Commercial Real Estate Still Declining 11 Virginia Commercial Real Estate Activity - 2010 1st Q2nd Q Sales Volume Compared with Previous Quarter-10%-14% Sales Volume Compared with Previous Year-12%-15% Sales Prices Compared with Previous Quarter-1%-11% Sales Prices Compared with Previous Year-12%-16% Volume of New Construction Compared with Previous Quarter-10%-4% Leasing Activity Compared with Previous Quarter-1%-11% Rental Rates Compared with Previous Quarter-7%-11% ©2010 National Association of REALTORS® Commercial Real Estate QUARTERLY MARKET SURVEY, June and September 2010

12. Property Tax Revenues Expected to Decline At Least Through FY 2011 Growth in Total RE Assessed Values (106 localities surveyed): 2009 to 2010: -5.0% Growth in Total RE Revenues (109 localities surveyed): FY2009 to FY2010: 0.2% FY2010 to budgeted FY2011: -2.8% 12 Fiscal Year

13. 13 107 localities responding to VML/VACO survey: FY2009 to FY2010:-3.6% FY2010 to budgeted FY2011:-1.2%

14. State Sources Provided Only 21% of All County Revenues in FY 2009 14 Source: Auditor of Public Accounts Comparative Report

15. 15 … But 42% of All FY 2009 County Revenues If 4 Northern Virginia Counties* Are Excluded * Counties of Arlington, Fairfax, Loudoun, Prince William

16. 16 State GF Appropriations to Localities Has Decreased by $1 Billion Since FY 2009 (1) Does not include appropriated federal stimulus funds in FY 10 and FY 11. FY 2009 FY 2010 FY 2011 FY 2012 Direct Aid to K-12$5,607.6$4,769.8$4,739.3$4,903.1 Health and Human Services 888.4 878.7 823.3 813.7 CSA 299.7 279.2 272.2 274.0 Community MH/MR Services 249.4 256.5 230.1 Local Social Services Staff 117.4 114.4 111.4 Community Health Programs 117.6 116.9 106.1 105.0 Welfare Services and Programs 104.3 108.7 100.5 93.2 Public Safety 734.3 556.8 671.6 642.7 Local Sheriffs Offices 406.1 257.1 399.9 387.4 Local Police Depts HB 599 197.3 180.8 178.7 160.0 Local Jail Per diem 80.1 68.1 47.6 49.9 Assistance for Juvenile Justice 50.8 45.4 Constitutional Officers 155.3 142.2 144.2 Car Tax 950.0 Aid-to-Locality Reduction (50.0) (60.0) Total Local GF Aid 8,285.6 7,247.5 7,268.4 7,393.7 Total GF Appropriations$15,943.0$14,787.2$15,377.0$16,021.1

17. 17 …And Is Falling as a Percent of Total GF Appropriations FY 2009 FY 2010 FY 2011 FY 2012 Direct Aid to K-1235.2%32.3%30.8%30.6% Health and Human Services Aid5.6%5.9%5.4%5.1% Public Safety Aid4.6%3.8%4.4%4.0% Car Tax6.0%6.4%6.2%5.9% Constitutional Officers1.0% 0.9% Aid-to-Locality Reduction-0.3% -0.4% Total Local GF Aid52.0%49.0%47.3%46.1%

18. Existing Spending Pressures Will Limit State Aid to Localities for Foreseeable Future Constitutional requirement to fill Rainy Day Fund. -Requires deposit of half of growth above previous six-year average GF revenue growth. Expect $200-300 million/year in deposits in FY 2014-2017 to restore fund. Continued 10% Medicaid growth rates (costs + utilization), plus new health care bill requirements in 2014 (additional Medicaid eligibility costs state $100’s of millions /yr). VRS contributions for both teachers and state employees will have to be restored to actuarially sound levels. Plus, adopted budget calls for 10 year payback of prior cuts. Employer rates will significantly increase. Continued growth in future biennia debt service requirements. Other numerous pent-up demands for additional state agency funding, including growing VITA contractual demands. No appetite for general fund tax increases and additional revenue pressures for transportation first. 18

19. 19 Out-year RDF balances could rise even higher if constitutional amendment passes, increasing max. from 10-15% of major GF taxes

20. 20 2010-12 VRS Teacher Rates May Triple in Future Biennia 2012-2014: “In setting the employer retirement contribution rates in subsequent biennia, the Board shall calculate a separate, supplemental employer contribution rate that will amortize the FY 2011 and 2012 contribution shortfalls over a 10-year period using the Board's assumed long-term rate of return. The Governor shall include funds to support payment of such Board-approved, supplemental employer contribution rates in the budget submitted to the General Assembly.”

21. 21 FY 1999-09 Avg. Growth = 9%, FY 10 = 14.7% * DMAS forecasted - does not include Medicaid expenditures for MH&MR facilities and CSA

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23. 23 VACO/VML Survey Results Indicate Localities Still Pessimistic 23

24. 24 Survey Indicates Declining State Aid a Major Concern for Localities Localities Citing Concern:2009 Total2010 Total Declining personal property assessments335 Declining real property values and taxes4833 Declining sales taxes1915 Other taxes and local revenue declining7815 Declining economic conditions4510 Declining state aid7273 Declining state aid to Education1116 Declining state aid to CSA /Social Services15 Declining state aid to Comp Board314 State mandates913 Elimination of stimulus funds135 Declining federal funds08 Maintain level of services32 Elimination of 599 Funds20 Other1611 Total Concerns Expressed 353 246

25. 25 Local Government Budgets Reduced by 2.7% and School Budgets by 3.3% in FY 2011 * In Top 3 Budget Balancing Actions Delay or cancellation of capital outlay/infrastructure40 Personnel layoffs- RIF33 Increase tax rates29 Targeted cuts in other services and programs27 Draw down reserves26 Targeted cuts in public education25 Hiring freeze18 Across the board service cut16 Renegotiate debt13 Delay of annual equip. replacement programs12 Reduced contributions to civic/cultural11 Reducing staff health care benefits10 Fee increases7 Replacing local general funds with special funds6 Salary or wage reductions6 Early retirement incentives5 Targeted cuts in public safety services5 Personnel furloughs3 Other16 * 109 localities responding

26. 26 There Have Been Large Shifts in Virginia Employment Over the Last 10 Years Source: Virginia Employment Commission June 2000 Employment June 2010 Employment Change % Change Total Nonfarm3,557,4003,674,400117,0003.3% Natural Resources and Mining11,5009,700(1,800)-15.7% Construction214,600182,600(32,000)-14.9% Manufacturing364,900231,800(133,100)-36.5% Trade, Transportation, and Utilities648,100623,300(24,800)-3.8% Information120,00074,700(45,300)-37.8% Finance180,700178,300(2,400)-1.3% Professional and Business Services575,200643,40068,20011.9% Educational and Health Services330,700460,000129,30039.1% Leisure and Hospitality317,700366,90049,20015.5% Other Services162,200197,70035,50021.9% Government632,000706,00074,00011.7% Federal158,700180,60021,90013.8% State139,400149,50010,1007.2% Local333,900375,90042,00012.6%

27. 27 Where Are Jobs Coming Back? June 2009 Employment June 2010 Employment Change 1 Year % Change Total Nonfarm3,678,0003,674,400(3,600)-0.1% Natural Resources and Mining10,1009,700(400)-4.0% Construction192,100182,600(9,500)-4.9% Manufacturing238,300231,800(6,500)-2.7% Trade, Transportation, Utilities625,200623,300(1,900)-0.3% Information81,80074,700(7,100)-8.7% Finance181,800178,300(3,500)-1.9% Professional and Business Services639,300643,4004,1000.6% Educational and Health Services450,700460,0009,3002.1% Leisure and Hospitality364,000366,9002,9000.8% Other Services188,400197,7009,3004.9% Government706,300706,000(300)0.0% Federal166,200180,60014,4008.7% State148,600149,5009000.6% Local391,500375,900(15,600)-4.0%

28. 28 Local Government Job Losses by MSA 28 MSA Region June 2009 - June 2010 Job Changes Northern Virginia (5,700) Hampton Roads (4,800) Richmond (3,600) Roanoke-Blacksburg (800) Charlottesville (500) Danville (200) Harrisonburg (100) Lynchburg 200 Source: Virginia Employment Commission

29. 29 Localities Should Plan On Tough Budgets for Foreseeable Future Federal relief is waning. Do not expect meaningful increases in state aid for several biennia. While a double-dip recession is not likely, job growth and real estate recovery will likely be slow, therefore: -Slow increases in real estate assessments; -And slow growth in most other local taxes.