1. 2012-14 State Funding Issues Virginia School Board Association James J. Regimbal Jr. Fiscal Analytics, Ltd January 30, 2012

2. 2 Can Other Revenue Sources* Continue to Increasingly Pay State Costs? 2 NGF * Federal funding, higher education tuition & fees, fees for services

3. 3 State Aid is Falling For Localities 3 Source: APA Comparative Reports on Local Revenues and Expenditures, Fiscal Years 2000-2010

4. 444 State Local Aid Programs Continuing to Decline Major State GF Aid for Locally-Administered Programs FY 2009 FY 2010 FY 2011 FY 2012 (i) FY 2013 (i) FY 2014 (i) GF Direct Aid to K-12$5,607.6$4,769.8$4,713.3$4,912.8$5,132.3$5,175.7 Health and Human Services$888.4$878.7$816.8$850.5$844.9$810.9 Public Safety$734.3$556.8$686.0$667.7$679.2$679.9 HB 599 (Aid-to-Police)$197.3$180.8$178.7$172.4 Constitutional Officers$155.3$142.2$144.2$143.8 Car Tax$950.0 Aid-to-Locality Reduction($50.0) ($60.0) ($50.0)($45.0) Total Local GF Aid$8,285.6$7,247.5$7,250.3$7,503.8$7,700.2$7,715.3 Total GF Appropriations$15,943.0$14,787.2$15,457.4$16,556.9$17,178.4$17,365.2 % Local GF Aid52.0%49.0%46.9%45.3%44.8%44.4%

5. 555 While Local Revenues Continue to Suffer 5 Source: 1990-2010, Auditor of Public Accounts FY 11 & 12 estimates from VML/VACO Fiscal Survey

6. 66 Proposed Change in FY 2013 State GF Appropriations 6 FY 2013Change From FY 12 Legislative and Executive Dept's$95.7$0.1 Judicial Dept.$417.4$9.3 Compensation Board$608.1$9.6 Treasury Board GF Debt Service$624.0$51.8 Other Admin., Finance (w/o debt), & Tech$198.0-$7.1 Rainy Day Fund$132.7 Car Tax Reimbursement$950.0$0.0 Commerce and Trade$195.1$26.5 Agr., Nat. Res.$186.5$51.8 K-12 Direct Aid (incl. teacher retire)$5,132.3$219.5 Higher & Other Education$1,781.8$107.2 DMAS (Medicaid)$3,634.0$240.1 Other HHS$1,430.9$12.8 Public Safety (incl. Veterans /HS)$1,706.7$46.7 Transportation *$45.0-$91.2 Central Appr.$40.2-$21.5 Capital$0.0-$8.9 Total GF Expenditures$17,178.4$779.3 * Does not include $53 million in GF sales tax transferred to highway maintenance as NGF

7. 77 Little New K-12 GF Spending in Introduced Budget Above FY 2012 Base* 7 FY 2013FY 2014 Update Teacher Retirement Contribution Rates$170.9$171.5 All Other Spending Proposals**$9.6$52.1 Net New K-12 Spending Above Chapter 890 Base$180.5$223.6 * FY 12 “Base” funding annualizes part-year and removes one-time funding, such as $87.7 mil. appropriated for supplemental support. ** Does not include $28 mil. per year in Executive Amendments, primarily K-3 class size and early reading initiative funding.

8. 8 Proposed 2012-14 K-12 Policy Changes Add to List of Recent SOQ Reductions* Eliminate Non-personal Inflation Update – ($109.0) -Did not fund inflation in 2010-12 biennium either. Modify Federal Revenue Deduction Calculation for Federal Stimulus Funding – ($108.1) Eliminate Support Cost-of-Competing Adjustment – ($65.0) VPI: Use Kindergarten as a Proxy for 4 Year-olds – ($26.7) *Recent previous biennia reductions included: a funding cap on support positions, eliminating recognition of other SOQ support costs, increasing the federal deduct from 29% to 38% for support costs, changing funding assumptions for health care premiums, eliminating enrollment loss and support for construction, etc. (for further details see: http://hac.virginia.gov/committee/files/2010/11-16- 10/Public_Education_Update.pdfhttp://hac.virginia.gov/committee/files/2010/11-16- 10/Public_Education_Update.pdf

9. 99 Reasons the State Is Restoring Little to Core K-12 Program Funding 1.Revenues not growing as fast as usual coming out of a recession (under 5% revenue growth expected in 2012-14). Tax changes reducing revenues. Concern over potential impact of federal deficit reductions. 2.Rainy Day Fund must be restored – Half of any GF revenue growth above prior 6-yr. avg. (2% now) goes to RDF. 3.VRS contribution rates for teachers and state employees will be significantly increased. 4.Medicaid spending continues to grow faster than state revenues. 2014 impact of federal health care big unknown, but law as written would add up to 425,000 new Medicaid recipients. 5.Use of one-time revenues/savings/debt in recession have to be replaced with ongoing revenues just to keep current spending. 6.Increasing efforts to use general funds for transportation.

10. 10 Revenues Not Rebounding as Fast 10

11. 11 General Fund Tax Changes Have More Than Neutralized 2004 Tax Increase Enacted/Amended2012-14 ($ 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) Phase-in of 0.5% Sales Tax to Transportation2012 (Proposed)($110) Total($1,030) * 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

12. 12 Retirement Rates Set to Rise 12 Notes: Employer rates only and do not include 5% member contribution. Over the last 10 years ending June 30, 2011 VRS annual average total fund investment return has been 5.7%. 2011 & 2012 VRS Board Cert. RatesFY 2011 6/25/2011- 3/24/2012 3/25/2012- 6/24/2012 FY 2012-14 VRS Board Cert. Rates * Introduced Rates** State8.46%2.13%2.08%6.58%13.07%8.76% Teachers12.91%3.93%6.33% 16.77%11.66% * Assumes phase-in of 7.5% to 7% investment return, 2.5% COLA, and 30 year amortization ** Reflects 8.0% investment return

13. 13 Health Care Has Trumped Education

14. 14 K-12 Medicaid (DMAS)

15. 15 Non-Recurring Recession Revenues No Longer Available State Appropriated Federal Stimulus Funding - $2.8 billion Reduced VRS state employee and teacher retirement/OPEB benefit contributions - $850 mil. Rainy Day Fund Withdrawals- $783 mil. Replaced Capital Outlay Cash With Debt - $350 mil. Accelerated Sales Tax for Dealers - $227 mil. Captured NGF balances and interest earnings - $113 mil. Tax Amnesty - $102 mil. Eliminated Sales Tax Dealer Discount for Electronic Filers - $98 mil.

16. 16 Source: Senate Finance Committee Retreat, Nov. 2011

17. Governor’s Proposal Would Divert Significant General Funds to Transportation (HB 1248/SB 639) Phase-in of additional 0.25% sales tax to transportation - $53 million in FY 13 to $300+ million by FY 20. Dedicates one percent of general fund if growth is above five percent – potentially over $170 million/yr. Increases dedication of GF surplus from 67% to 75% (FY 2011 surplus yielded $67 mil.). Creates transportation improvement districts whereby projects are partially funded using growth in state general funds from that district. 17

18. Conclusion School division budgets will remain very tight for foreseeable future. – Localities already spend $3.2 billion per year above their required local effort. Governor provided very little new net funding for K-12 beyond increases for teacher retirement. -Local share for teacher retirement also increasing – straining school division budgets. Incentive and categorical funds, including executive amendments, were fully re-benchmarked (except Pre-K). -A positive response to the JLARC 3 rd grade reading study? 18

19. 19 Includes GF, lottery profits, miscellaneous NGF, and state appropriated federal stimulus funds