2018 Session Revenue and Budget Outlook

Transcription

1 2018 Session Revenue and Budget Outlook Robert P. Vaughn, Director Anne E. Oman, Fiscal Analyst House Appropriations Committee November 14, 2017

2 1 Snapshot of U.S, Economy The U.S. economy is growing, but GDP growth is less than half the rate it was from 1992 to 2001, and 75% of the pace from 2002 through 2007 a new normal? The second estimate of second-quarter real GDP, growth (annualized) was revised up, from 2.6% to 3.1% the fastest pace in more than two years The advance estimate of third-quarter growth was 3.0% IHS Markit s forecast is 2.2% this year, followed by 2.5% in CY 2018 Economic activity in the manufacturing sector expanded in September, and the overall economy grew for the 100th consecutive month The current unemployment rate is 4.1% The 12-month average payroll gain of 167,000 indicates that job growth remains solid Consumers are spending, supported by gains in employment, income, stock prices, and home values Holiday outlook calls for sales growth of 4.1% The housing market is in a mid-business-cycle slump. Housing starts have flattened this year, and the third-quarter level was down from a year earlier; both new and existing home sales have dropped for two straight quarters. The weakness has many causes, including labor shortages, tight credit to developers, and slow household formation growth among young adults

3 After Emerging from the Recession, the US Economy Grew Only 2% Per Year through 2015 But 2017 Is Looking Stronger % Average % Average Recession 3.6% Average Recession Percent Annual GDP Growth Recession

4 GDP Grew 3.0% in Q3 For the Year GDP Stands At 2.4% The increase in real GDP in the second and third quarters reflected increases in consumer spending, business investment, exports and federal government spending The sectors which realized the greatest increases in consumer spending in the third quarter were motor vehicles, health care, financial services and insurance, food services, and accommodations Economists expect 3 rd quarter GDP to be negatively impacted by the significant hurricanes Personal income and real disposable income both increased in the third quarter compared to last year, but increased at a lower rate than what was experienced in the second quarter

5 4 ISM, Consumer Sentiment, and a Look at National Employment

6 5 Index September ISM Manufacturing Report Series Index Sep Highest Since May 2004 Series Index Aug Percentage Point Change Direction Rate of Change Trend* (Months) PMI Growing Faster 13 New Orders Growing Faster 13 Production Growing Faster 13 Employment Growing Faster 12 Supplier Deliveries Slowing Faster 17 Inventories Growing Slower 2 Customers' Inventories Too Low Slower 3 Prices Increasing Faster 19 Backlog of Orders Growing Faster 8 New Export Orders Growing Faster 19 Imports Growing Slower 8 OVERALL ECONOMY Growing Faster 100 Manufacturing Sector Growing Faster 13

7 6 Consumer Sentiment Is Up, Buoyed By a Strong Job Market

8 7 While the U.S. Unemployment Rate Has Dropped, So Has the Workforce Participation Rate 11.0 Percent Unemployment Rate 67.0 Percent Labor Force Participation Rate Source: Bureau of Labor Statistics

9 8 Percent Unemployed, Employed Part-Time for Economic Reasons, & Marginally Attached, Are Back To Pre- Recession Levels %

10 Employment Share of Prime Working Age (25-54) Employed is Still 1.7% Below Pre-Recession Levels, But Has Been Improving Over The Last 12 Months % %

11 10 Quit Rate Is Back To the Pre-Recession Levels The quit rate is a useful measure of how much confidence workers feel and how many opportunities they have to switch to a more attractive job In the private sector, the percentage of working-age Americans who voluntarily left their job stood at 2.1% in August, back at it s pre-recession levels A higher voluntary quit rate is considered a positive for the jobs market Leisure and Hospitality and Professional and Business Services have the highest quit rate Percent %

12 11 Job Openings Are At an All Time High In Thousands 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 A high number of job openings is a mix of good and bad news The good: Employers are hiring. When the Great Recession was at its worst in 2009, job openings fell to 2.2 million, an all-time low The bad: The gain in job openings underscores the need for workers in an economy that s continuing to expand. At the same time, the pool of qualified Americans is shrinking and making some positions tougher to fill, one reason economists expect the monthly pace of hiring will eventually cool Greatest number of job openings in Professional and Business Services and Health Care South region of the country has the greatest openings Will spur employers to pay more to attract workers

13 12 Virginia s FY 2017 Economic Performance

14 13 Since Fiscal Year 2016, Virginia s Job Growth Has Been On Par With the Nation In the Great Recession, Virginia s job losses were not as severe as the nation s -- Virginia s loss equaled about 5.0% of total employment versus 6.3% nationally Initially after the recession, Virginia s economy out-performed the U.S. From May 2011 through June 2015, Virginia s rate of job growth has been below the U.S. by 0.8% Since Fiscal Year 2016, Virginia s job growth has averaged 1.7%, on par with the Nation Percent Growth Year Over-Year Through the first quarter of Fiscal year 2018, job growth has averaged 1.37%, consistent with the forecast Since the trough of the recession through the end of FY 2017, Virginia s employment has expanded by 356,400 jobs U.S Virginia

15 Virginia Payroll Job Change: Private Sector The Great Recession and Recovery To July 2017 (Private Sector Totals, Not by Industry) 14 (ranked by change) NoVA Hampton Roads Richmond Roanoke Kingsport-Bristol Lynchburg Charlottesville Harrisonburg Winchester Blacksburg Staunton Peak to Trough Trough to July Sources: U.S. Bureau of Labor Statistics (Not Seasonally Adjusted), The Stephen S. Fuller Institute at the Schar School, GMU

16 15 Percent Unemployed, Employed Part-Time for Economic Reasons, & Marginally Attached, Are Back to Pre-Recession Levels %

17 16 Virginia s Unemployment Rate Ranks 14 th Lowest In The Nation %

18 17 Employment Situation Has Been Improving, Moving Closer To Pre-Recession Levels Percent: Total Unemployed, Plus Marginally Attached, Plus Part-time Percent Unemployed 15 Weeks or Longer % % % 8.3% % %

19 18 Is There a Disconnect between Job Growth and Payroll Withholding? Withholding taxes represents 63% of total general fund tax collections Job growth and average wages and salaries serve as the proxy for withholding FY 2017 forecast called for job growth of 1.5% and average wage and salaries growth of 2.5% FY 2017 withholding forecasted at 3.6% growth, but grew 5.2% It appears several factors are influencing actual collections versus the forecast for payroll withholding: Richmond and Northern Virginia accounted for 75% of the job growth in FY 17 42% in NoVa, 33% in Richmond MSA Growth in Professional and Business Services, which have among the highest weekly wages, accounted for 37% of the job growth, 57% of those jobs were in NoVa Represented 51% of job growth in Northern Virginia Average wages in NoVa are nearly 29% greater than the statewide average

20 19 Northern Virginia and Richmond Accounted for 74% of Total Jobs In FY 2017 Jobs In Thousands NoVa Richmond Hampton Roads Roanoke Charlottesville

21 20 Virginia s Employment Growth of 1.5% Was On Par With The Nation But Job Growth By Region Varied Percent Year over Year July % 2.5% 2.6% 2.6% 2.6% 2.3% 2.0% 2.0% 1.5% 1.5% 1.5% 1.0% 0.8% 0.5% 0.0% -0.5% -1.0% -0.4% Virginia Blacksburg Charlottesville Lynchburg Northern Va. Richmond MSA Roanoke MSA Hampton Roads MSA Winchester MSA

22 21 Growth in Virginia s Employment Was Led by Professional and Business Services Sector Percent Year-over-Year July % 2.0% 2.4% 1.8% 3.4% 3.1% 2.6% 0.6% 0.4% 0.2% 0.0% -2.0% -2.5% -4.0% -6.0% -8.0% Logging & Mining Construction Manufacturing Trade, Trans & Utilities -7.0% Information Fin. Activities Professional & Bus. Serv Ed. & Health Leisure & Hosp Government

23 Professional and Business Services Accounted for 37% of Total New Jobs in FY 2017 Jobs in Thousands Construction Manufacturing Leisure & Hospitality Professional & Bus Serv Education a& Health Trade, Trans & Utilities Finance -2.5

24 23 Professional and Business Services Sector Equals 18% of Total Jobs, But Accounts for 28% of Jobs in Northern Virginia and Accounted for Half of Job Gains (Percent Growth June 2016 July 2017) Virginia - Total PBS - Va. PBS - Nova

25 24 Average Wage Rates In Northern Virginia Are 29% Greater Than The Statewide Average NoVa Private $1,365 All Private $1,056 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600

26 25 Average Weekly Wages Have Been Rising Average weekly wages for private industry have increased approximately 9.0% since fiscal year 2014, average about 2.8% per year $ $ $ $ Average Weekly Wages $898.4 $929.3 $951.1 The strongest average wage growth has been in Professional and Business Services $ $ $ $874.6 $

27 Average Weekly Wages For Professional and Business Services (PBS) has Risen 16% Since Fiscal Year ,500 1,450 1,400 1,350 1,300 1,250 1,200 1,150 1,

28 Professional, Scientific, and Technical Services Represents 70% of PBS Employment in NOVA 27 $2,500 $2,000 $1,500 $1,000 $500 $0 $2,199 $1,396 $1,056 NoVa PBS Statewide PBS Statewide Professional, Scientific and Technical Services Sector accounts for 20% of total employment in NOVA Average weekly wages are over 200% of the statewide average and over 57% of the average wage paid in the Professional Business Services sector Contributing to the increase in jobs has been an increase in federal procurement in the Washington region

29 Federal Procurement in the Washington Region, After Peaking in 2010, Procurement Spending Dropped For 3 Years, Before Increasing Again in 2014 ($s Billions) TOTAL = $1,305.1 Billion Source: US Census, Consolidated Federal Funds Report and USAspending.gov, The Stephen S. Fuller Institute at the Schar School, GMU

30 FY 2017 Revenue Performance 29

31 30 Looking Back: FY 2017 Revenue Performance FY 2017 GF collections rose 3.6%, ahead of the annual forecast of 2.9% growth. Annual growth remained above forecast levels each month of the year Excluding transfers, revenue collections exceeded the forecast by $134.1 million, a variance of 0.7% 14% Growth in Total General Fund Revenue Collections FY17 Monthly and Year-to-Date 12% 10% 8% 8.1% Forecast 2.9% 6% 4% 5.4% 4.0% 4.6% 4.5% 4.6% 3.6% 3.7% 3.6% 2% 3.7% 3.6% 3.5% 0% -2% -4% Monthly Year-to-Date Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Source: Virginia Department of Taxation

32 FY 2017 Revenue Performance 31 19,000 18,000 17,000 16,000 15,000 14,000 13,000 12,000 $15,767 $14,315 $14,220 Actual GF Revenue Collections $ in Millions 1.3% 5.4% -9.2% -0.7% Average growth since recession officially ended is 3.4% 5.8% $15,041 $15, % -1.6% $16,685 $16, % $17, % $18, % $18,695 11,000 10, Note: Figures include only GF revenues and excludes transfers. Source: Virginia Department of Taxation

33 FY 2018 YTD Revenue Performance 32

34 FY 2018 Performance Through October Chapter 836 assumed a GF growth rate of 3.6% in FY 2018 Because FY 2017 actual collections exceeded the revenue forecast by approximately $137 million, we can meet the budget forecast the actual revenue numbers with a growth rate of 2.7% The increase in the base against which FY 2018 growth is measured means we will have a forecast adjustment in a Caboose Bill absent any changes to the underlying economic assumptions Through the first third of the fiscal year, revenues have increased 4.9% and are exceeding the revised forecast by 2.2 percentage points Year-to-date strengths are in withholding and corporate income taxes Greatest weakness has been non-withholding tax collections Meeting the current forecast for FY 2018 requires growth of 1.7% in the remaining 8 months of the fiscal year 33

35 34 FY 2018 Year-to-Date Performance General Fund Revenue Forecast for Fiscal Year 2018 Source Growth Rates Assumed in Ch. 836 Forecast Growth Required to Meet Ch. 836 Revenue Forecast Actual Performance Through October Nov-June Required to Meet Forecast Withholding 3.3% 1.8% 4.0% 0.7% Nonwithholding 5.9% 7.0% (1.1%) 8.9% Refunds 5.2% 4.4% 3.8% 4.5% Net Individual 3.7% 2.6% 3.3% 2.3% Sales 1.9% 2.8% 4.5% 2.1% Corporate 5.8% 1.6% 51.7% (12.0%) Wills (Recordation) 2.3% 3.4% (1.0%) 6.0% Insurance 6.0% 7.0% % Total GF Revenues 3.4% 2.7% 4.9% 1.7% Source: Virginia Department of Taxation

36 35 Fall Reforecasting Process The Code-required Fall reforecasting process is currently underway Joint Advisory Board of Economists (JABE) met on October 11 to review the latest economic assumptions and revised methodologies Board includes economists from both private sector and academia; input from IHS Markit and Moody s Analytics Department of Taxation and Secretary of Finance develop a revised forecast based on input received Governor s Advisory Council on Revenue Estimates (GACRE) will meet November 20 Cross section of leaders from Virginia business and industry, General Assembly leadership Members react to forecast developed by Governor s staff and provide input on the proposed forecast and predicted economic climate Revisions to the Official forecast will be submitted with the Governor s proposed amendments to Chapter 836 and his out-going budget for the FY biennium Governor will present to Joint Money Committees on December 18

37 36 Fiscal Year 2018 Outlook Revised FY 2018 forecast of economic variables that drive withholding tax collections revised slightly downward since last fall Majority of the economic variables that predict non-withholding collections have been revised upward Indicator of sales tax growth, personal income, has declined Because the magnitude of the updates are fairly modest, net adjustments to FY 2018 forecast largely will be driven by base adjustments (i.e. FY 2017 performance) and cash in the bank Percent Change Chapter 836 / Official Oct 2017 Standard Job Growth Avg Wage/ Salary Growth Jobs +Avg Wage/ Salary Growth Proprietor Income Growth Dividends, Int. & Rent Growth S&P 500 Prior CY Growth Total Personal Income Growth 1.0% 2.9% 3.9% 3.9% 6.3% 8.5% 4.2% 1.3% 2.2% 3.6% 5.0% 4.2% 15.7% 3.3%

38 YTD Performance and Adjustments to Withholding Tax Forecast Through October, withholding tax collections grew 4.0% compared to the economic forecast of 3.3% assumed in Chapter 836 Revised economic model predicts combined wage and job growth of 3.6% in FY 2018 Strong withholding collections in FY 2017 and above forecast growth through October support a modest upward adjustment to the forecast Combined economics and money in the bank tell us to expect FY 2018 withholding tax collection growth of 3.7% 37 Virginia Quarterly Withholding Growth 8.00% 6.00% 4.00% 4.4% 5.3% 4.1% 4.8% 6.7% 5.0% 4.0% 2.00% 0.00% -2.00% 0.3% -0.5% Q1, 2016 Q2, 2016 Q3, 2016 Q4, 2016 Q1, 2017 Q2, 2017 Q3, 2017 Q4, 2017 Q1, 2018

39 38 FY 2018: Other Forecast Adjustments Sales Tax: Official growth rate is 2.8% and YTD growth was 4.5% through October October was the strongest month to date and grew 5% on an adjusted basis National Retail Federation and IHS Markit forecast growth in holiday sales of about 4.0% Consumer expectations remain largely positive Based on money in the bank and the optimism for the holiday season, our estimate would revise the sales tax forecast upward to 3.6% Corporate: Most difficult source to predict because collections impacted by complex tax planning decisions made by large firms Through October, collections increased 51.7% compared to a forecast of 1.6% growth However, changes in conformity with federal law mean that refund season extended into November and December. Further attention can be paid to a potential adjustment in the Mid-Session reforecast but too soon to determine impacts Our estimate would put the forecast at 10% based on historical trends and reports of widespread corporate earnings in excess of forecasts Recordation: Through October, collections have fallen 1.0%, behind the forecast of 3.4% growth Potential impact of rising mortgage rates and long cycle during which rates have been low which is chilling the refinance market Anticipate flat sales but some continued slow growth based on price appreciation our estimate would maintain the underlying economic growth rate of 2.3%

40 YTD Performance and Adjustments to Non-withholding Tax Forecast 39 The official forecast assumed non-withholding growth of just under 6% in FY Because collections fell short of the FY 2017 forecast, a growth rate of 7.0% is now required to meet the revenue forecast Non-withholding collections fell 1.1% through October, meaning growth of 8.9% through remainder of the fiscal year would be required to meet the forecast Year-to-date S&P growth which is a major factor in final payments - has been around 18% so growth could be far more robust than last year Final payments make up approximately 40% of non-withholding tax collections However, continued uncertainty regarding federal tax policy changes could be hampering profit-taking in short run Based on the potential for stronger final payments, offset by low growth in year-todate estimated payments through September, our estimate of the growth rate would be in the 4.0% range The estimated payment due January 15 which requires the taxpayer to align for the final payment should provide a better insight into potential collections This source likely to be reassessed as part of the Mid-Session reforecast

41 40 HAC Estimate: FY 2018 Revised Forecast Based on money in the bank and updated economic variables, adjustments to the current year forecast expected to total $224.3 million, a collared growth rate of 3.8% Source ($ in millions) Forecast Growth $ in millions above Official Forecast HAC Revised Forecast Withholding 3.7% $231.6 $12,335.5 Nonwithholding 4.0% (90.6) 3,139.4 Refunds 5.2% (14.2) (1,957.8) Sales 3.6% ,478.0 Corporate 12.0% Recordation 2.3% Insurance 6.0% (3.4) All Other 1.0% (12.4) Total GF Revenue Growth 3.8% $224.3 $19,417.6 In addition to changes in GF revenues, updates to the Lottery forecast for both FY 2017 and 2018 will provide an additional $52.0 in available funding in FY 2018 compared to the Chapter 836 forecast of $546.0 million

42 41 Caboose Bill Requests As part of the typical fall budget development process, agencies were asked to identify additional spending needs beyond those provided for in Chapter 836 Agency decision packages for the caboose bill focus on items that are mandatory in nature i.e. forecast changes or Code requirements and include few nice to do s that agencies view as priorities Known mandatory and high priority FY 2018 agency budget requests total $134.2 million GF. The largest requests are as follows: $86.7 million Medicaid forecast adjustment $16.8 million increased medical costs at DOC facilities $12.5 million for CSA forecast update $5.3 million to backfill additional VITA costs at DSS $3.8 million to backfill FY 2017 K-12 shortfall $3.5 million to offset decreased child support enforcement revenue $3.2 million to support contract increases at Lawrenceville Correction Center $2.3 million for foster care and adoption forecast update

43 42 Virginia s Revenue Outlook: Turning to the Biennium

44 Virginia s Revenue Outlook: Turning to the Biennium 43 Although job growth is anticipated to slow over the upcoming biennium, wage and income growth are expected to improve compared to the FY 2018 forecast assumptions Overall, anticipate continued modest economic growth, with the baseline forecast given a 65% probability Projected Economic Variables (National Forecast, adjusted for Virginia specific data) Percent Change Job Growth Avg Wage/ Salary Growth Jobs +Avg Wage/ Salary Growth Proprietor Income Growth Dividends, Int. & Rent Growth S&P 500 Prior CY Growth Total Personal Income Growth FY 2019 Post-JABE FY 2020 Post-JABE 1.0% 3.4% 4.4% -0.2% 5.3% 5.8% 4.3% 0.8% 3.1% 4.0% -3.7% 7.2% 3.5% 4.6% Source: Virginia Department of Taxation

45 44 Expected Withholding Tax Growth Rates Based on recent experience and the assumed economic variables driving the withholding tax forecast, assume continued growth in the 4.0% range in the FY biennium Proxies would produce growth rate expectations of around 4.0% in FY 2019 and 4.4% in FY 2020 However, concern that federal action could reduce employment growth in the highpaid Northern Virginia region, suggests a more conservative estimate of withholding tax growth of 3.8% in FY 2019 and 4.0% FY % 10.00% 8.00% 6.00% 4.00% Avg Growth FY % 7.2% 6.7% 7.2% Annual Growth in Withholding Tax Collections 6.4% 4.3% Avg Growth FY % 5.0% 4.2% Avg Growth FY % 5.3% 5.2% 2.7% 2.3% 2.00% 0.00% 2.3% 0.4% 2.1% 2.3% 2.4%

46 45 Expected Nonwithholding Tax Growth Rates Non-withholding taxes is one of the two volatile revenue sources and while only about 16% of total revenues, has accounted for about 50% of the forecast error over time Beginning in last biennium, policy of applying a collar to the forecast has been employed to mitigate this risk Roughly 45% of collections relate somehow to the stock market. With stock prices at an all-time high in 2017 and little profit taking having been seen, there is substantial upside potential to this forecast However, given the uncertainty of the timing of market shifts and federal tax policy changes which could impact these shifts suggest a forecast assumption of about 9.0% in FY 2019 and 6.0% in FY 2020 Percent Annual Percentage Change in Nonwithholding Tax Collections (10.0) (3.9) (1.7) (10.1) (20.0) (19.2) (19.2) (17.5) (30.0)

47 46 Sales Tax Continues to Underperform Forecast The proxy for sales tax collections - personal income growth has been a poor predictor of collections in recent years Current economic forecast is for total personal income to increase 4.3% in FY 2019, and 4.6% in FY 2020, but sales tax revenues have been growing far more slowly Not just a Virginia trend, but seen nationally The overall forecast error is not increasing But the model has made a pronounced shift towards overestimation 4.5% 3.5% 2.5% 1.5% 0.5% -0.5% -1.5% -2.5% -3.5% Annual Percent Error in Sales Tax Forecast Error trendline

48 47 Why Has Sales Tax Growth Been So Anemic? What are some of the contributing factors? Over half of all personal consumption expenditures now are directed to services This includes new services like mobile phones, internet access, online media access, etc. Also reflects demographic shifts Baby-boomer generation spending less on goods Millenials displaying delayed household formation, faced with high student loan debt and focus expenditures of untaxed goods Other policy decisions have excluded substantial components of retail sales from taxation: food, non-prescription drugs, data center exemptions Estimated Cost of Data Center Exemptions Fiscal Year $ in Millions $10.6 $19.0 $37.6 $58.8 $70.4 $74.5 $78.8 $80.7 Source: Virginia Department of Taxation. Note: FY 2018 estimate excludes announcements of new facilities or expansions made calendar year 2018.

49 48 Why Has Sales Tax Growth Been So Anemic? Even within expenditures for goods, ever increasing share is for non-taxed goods Growth in the TTF portion of sales tax which still includes food has grown an average 0.9% faster each year over the last 10 years than the GF portion which excludes food sales Continued high growth in untaxed internet sales Trend will inhibit long-term revenue growth although as the most income-tax dependent state in nation, Virginia has been partially shielded 2nd quarter nd quarter nd quarter nd quarter nd quarter nd quarter nd quarter nd quarter 2007 E-Commerce as a Percentage of Total U.S. Retail Sales E-Commerce sales grew 16.2% on a year-over-year quarterly basis and compared to growth of 4.1% for all retail sales 2nd quarter nd quarter nd quarter nd quarter nd quarter nd quarter nd quarter nd quarter nd quarter nd quarter

50 Anticipate Continued Modest Growth in Major Sources for FY 2019 and FY 2020 ($ in Millions) HAC FY 2019 FY 2019 Growth HAC FY 2020 FY 2020 Growth Withholding $12, % $13, % Nonwithholding $3, % $3, % Refunds ($2,036.1) 4.0% ($2,115.5) 3.9% Net Individual $14, % $14, %. Sales $3, % $3, % Corporate $ % $ % Recordation $ % $ % Insurance $ % $ % Total Major Sources $19, % $19, % 49 Transfers & Other Revenue $1, % $1, % Total GF Resources $20, % $21, % Note: Growth rates calculated exclusive of Tax Amnesty collections assumed in FY 2018

51 50 Budget Outlook: FY Biennium

52 51 What is our base budget? Budget Outlook: FY Biennium What are the known budget drivers? Does our projected revenue growth fully support these drivers? How can we hedge against the higher than average potential for revenue volatility?

53 52 FY Base Budget The base budget equals the FY 2018 GF operating appropriations, adjusted to remove one-time spending and savings, and annualizing partial year costs Base budget does not include spending increases driven by state or federal law, or increases in high priority or discretionary spending Major base adjustments for the FY biennium include annualizing the costs of: The FY 2018 salary adjustments Changes in VRS, OPEB and health insurance costs Changes in adopted VITA and other internal service fund (Cardinal, PMIS) rates The largest one-time item removed from the base is the $35.0 million dedicated in FY 2018 to the cash reserve Total net base adjustments equal about $47.0 million each year below expenditures in Chapter 836

54 53 Adjusted Base Budget for FY (GF Dollars in Millions) Chapter 836 (FY 2018 GF Appropriation) FY 2019 FY 2020 $20,354.6 $20,354.6 DPB Base Budget Adjustments (net results from removal of one-time spending, annualization of costs, adjustments for benefit changes) HAC Identified Adjustments (removal of additional one-time spending and restoration of onetime savings) -$31.9 -$31.8 -$14.9 -$14.9 HAC Estimated Base Budget* $20,307.8 $20,307.9 *Excludes impact of any additional on-going spending included in the Caboose Bill.

55 54 Range of Resources Available for Budget Drivers $ s in millions FY 2019 FY 2020 Biennium FY 2018 Carry Forward $165.5 $165.5 Estimated Transfers $607.0 $621.2 $1,228.2 Increased Lottery Forecast $40.0 $40.0 $80.0 HAC Revenue Forecast $20,057.4 $20,759.1 $40,816.5 Total GF Resources $20,869.9 $21,420.3 $42,292.2 HAC Base Budget $20,307.8 $20,307.9 $40,615.7 Net Resources Above Base Budget (including transfers) $562.1 $1,112.4 $1,674.5

56 55 Agency Budget Requests As part of the annual budget development process, agencies are asked to submit decision packages outlining their budget requests for the next biennium In October, agencies submitted preliminary general fund budget requests totaling $1.1 billion in FY 2019, and $1.3 billion in FY 2020 This includes caseload adjustments, unavoidable cost increases, technical adjustments, information technology requests and other spending for new or expanded initiatives Not limited to mandatory spending includes agency wishes Requests more disbursed than they have been in recent years top 25 requests make up just over half of the total Preliminary K-12 rebenchmarking at $500 million for the biennium is largest submission Second is request for a combined total of $392 million from Social Services to backfill the potential loss of federal grants for programs that have not been reauthorized These amounts exclude items like the Medicaid forecast, final adjustments to SOQ rebenchmarking based on enrollment updates, and state employee health insurance and other benefit costs

57 56 Agency GF Budget Requests by Secretariat Amount Requested GF 2019 GF 2020 Judicial $4,121,392 $2,922,322 Administration $37,660,532 $39,006,980 Agriculture and Forestry $4,963,890 $4,456,890 Commerce and Trade $76,576,373 $73,215,140 Education (K-12 & Higher Ed) $386,420,060 $458,475,762 Finance $5,434,876 $4,648,787 HHR $380,775,651 $515,922,136 Natural Resources $34,824,605 $10,131,266 Public Safety $176,318,998 $162,269,982 Technology $3,616,588 $4,096,352 Veterans/Defense Affairs $2,046,912 $14,692,666 Independent Agencies $135,137 $30,000 Grand Total $1,121,621,842 $1,307,807,043 Note: Table excludes the major cost drives like the Medicaid forecast, and retirement and health insurance rate adjustments

58 Major Mandatory Spending Items by Secretariat General Fund $ FY 2019 FY 2020 Health and Human Resources DMAS Medicaid Forecast of Utilization and Inflation $199,450,674 $384,421,932 DMAS/DBHDS - DOJ 825 add l ID/DD Waiver Slots, Rental Subsidies, Crisis Services $19,430,652 $39,343,195 CSA Fund Expenditure Growth $13,162,854 26,983,852 DMAS/DBHDS Complete CSB Same Day Access to Services $7,200,000 $7,200,000 VCBR Expand Temporary Capacity at Central State Hospital $5,167,511 $9,100,001 DSS Federally required reinvestment in child welfare services $5,248,991 $5,248,991 DBHDS Operational support for additional 56 Beds at Western State $1,350,341 $6,218,047 DSS Required COLA Rate Increase for foster care and adoptions $4,282,565 $6,139,125 Public Education Direct Aid - K-12 Rebenchmarking for the FY Biennium $255,717,670 $300,562,985 Finance Tax: Adjust VITA Funding $1,307,500 $1,307,500 Treasury Board Debt Service (preliminary estinmates) $15,000,000 $20,000,000 57

59 Major Mandatory Spending Items by Secretariat General Fund $ FY 2019 FY 2020 Public Safety DOC: Increases in offender medical costs $20,289,672 $25,231,335 DVS: Startup funding for new veterans care centers $826,412 $12,721,666 Compensation Board: 1:1,500 ratio for law enforcement officers $6,222,444 $7,454,784 HB 599 funding increase (FY 18 = $177,964,014) $4,627,064 $9,374,432 Compensation Board: Increase in jail per diem payments $461,180 $1,478,196 Commerce and Trade Econ. Development Incentive Payments Commitments $17,079,210 $14,207,900 Fund VEDP reform legislation mandates $1,018,234 $987,734 Cost Related to CIT Relocation $2,027,760 $861,884 Administration State Employee Health Insurance $35,000,000 $85,000,000 Department of Elections: HAVA backfill $3,544,278 $3,544,278 GRAND TOTAL: $618,415,012 $967,387,837 58

60 Major High Priority Spending Items by Secretariat Agency / Program Expenditure Description FY 2019 FY 2020 Health and Human Resources DMAS - Increase personal care rates to 70% of benchmark rates $20,591,133 $21,613,340 DBHDS - Community discharge & diversion funds for census at state facilities $4,900,000 $9,800,000 DMAS - Increase personal care rates to cover required electronic visit verification $5,413,631 $5,610,482 DBHDS Add critical positions at MH hospitals due to census increase $5,768,206 $6,188,041 DSS Restore VITA Reductions $5,343,172 $5,343,172 DBHDS - Address compensation issues at state facilities $4,797,461 $4,797,461 DMAS - Increase Cost Cover VA Call Center and Medicaid Eligibility Determinations $3,750,000 $1,125,000 DBHDS - Growth in the Early Intervention Program - Part C $2,500,000 $3,500,000 DBHDS Transitional housing for Not Guilty by Reason of Insanity Acquittees $2,000,000 $2,000,000 VDH - Increase Staff in the Office of the Chief Medical Examiner $1,472,900 $1,472,900 Public Education DOE - Provide Funding for Restraint and Seclusion Regulation Implementation $16,910,968 $355,000 DOE - New - IT Modernization and Next Generation Data Services $4,355,000 $6,975,000 DOE - New IT Online Mgmt of Education Grant Awards (OMEGA) Replacement $600,000 $300,000 DOE - New - IT Application to Automate the Licensure Approval Process $552,500 $552,500 DOE - Office of Student Services Supplant Federal with State Funding $1,825,923 $1,825,923 DOE - Additional Funding for Algebra Readiness Diagnostic Test $608,221 $608,221 DOE - Funding to Address Teacher Shortages $277,320 $277,320 DOE New FTEs to Support Critical Fiscal Functions in the Agency $273,029 $273,029 DOE - New 1.0 FTE for Graphic Designer Position $103,582 $103,582 DOE - Professional Development Practices - Educator Discipline $208,384 $208,384 DOE - School Performance Report Card (old School Quality Profiles) $150,000 $150,000 DOE - Support for VDOE Staff for On-Site Professional Development $80,000 $80,000 DOE - Restoration of VPI On-site Review and Technical Assistance $50,000 $50,000 59

61 Major High Priority Spending Items by Secretariat Agency / Program Expenditure Description FY 2019 FY 2020 Higher Education Targeted Higher Ed Operating Support $10,000,000 $10,000,000 Targeted Undergraduate Financial Aid $6,700,000 $11,800,000 O & M for New Facilities $4,500,000 $4,500,000 Va Tuition Assistance Grant 0 $3,500,000 2-Year Transfer Grant $300,000 $800,000 Virtual Library of Virginia $1,900,000 $1,200,000 Finance Tax: Replace taxpayer correspondence system $1,095,020 $676,404 Public Safety State Police: Computerized criminal history system $4,100,000 $4,100,000 DOC: Funding for probationer opioid treatment diversion program $1,026,996 $1,026,996 Forensic Science: Increase Staffing for Controlled Substances Testing $595,000 $600,000 Commerce and Trade Fort Monroe: Funding to support additional land transferred $3,201,784 $3,201,784 DHCD: Match for National Disaster Resilience Grant via Rise $2,500,000 $2,500,000 Increased Funding for GO Virginia $12,825,000 $14,825,000 Housing Trust Fund $4,500,000 $4,500,000 Broadband Initiative $7,000,000 $7,000,000 Ag and Natural Resources Reforestation of Timberlands Match Increase $112,900 $112,900 Land Preservation Funding $10,000,000 $10,000,000 Continue Funding Newly Opened/Partially Opened State Parks $758,492 $789,696 GRAND TOTAL: $153,646,622 $154,342,135 60

62 Overview of Rebenchmarking: Preliminary Costs for the FY Biennium Susan L. Hogge

63 62 Overview of the Rebenchmarking Process Rebenchmarking is the process that updates the state s costs of the Direct Aid programs for the new biennium and is based on a look back of local expenses for the prior two year period The updates are technical in nature and do not involve changes in any existing policies or current funding methodologies, other than those previously approved by General Assembly action Since 90% of state Direct Aid funding is budgeted for SOQ program accounts, SOQ funding is most impacted by the process; but Lottery, Incentive and Categorical funded accounts are also effected Because rebenchmarking updates the total funding public education, the state and local costs are revised to reflect the changes On a statewide basis, the average cost sharing split is about 55% state and 45% local The actual split of total costs for each individual school division is based on their Local Composite Index (LCI)

64 63 The Big Picture Process SOQ funding is primarily driven by the instructional staffing standards in the Code of Virginia, ( :1-10), and the salary and fringe benefit costs for the required positions Basic Aid also includes funding for support positions and nonpersonal support costs on a statewide prevailing average basis Largest components of the SOQ funding formula include: Major Data Elements Updated Each Biennium 1) Preliminary Enrollment Projections for Sept membership, March ADM, ESL, Remedial Summer School student totals 2) Special Education December 1 Child Counts 3) Career & Technical Education Course Student Enrollments 4) Head Start Enrollment (used in PreK formula) 5) SOL Test Scores (used in SOQ Prevention, Intervention & Remediation formula) 6) Student Eligibility Percentage for Free Lunch 7) Federal Revenues (used for deduct from support costs) 8) Support Position Cap Ratio Major Data Elements Updated Each Year 1) Enrollment projections are updated to reflect actual Sept membership, March ADM, ESL, Remedial Summer School student totals 2) Lottery Revenue Forecast Estimates 3) Sales Tax Revenue Forecast Projections 4) Reimbursement Account Projections (ie Adult Educ; SPED: Regional Tuition, Homebound, & Jails; Breakfast & Lunch programs; Foster Care; ISEAP) 5) Inflation Factors (typically constant for 2-years) 6) VRS Fringe Benefit Rates (typically constant for 2-years) 9) Funded Salaries 10) Local Composite Index

65 64 $ in Millions Starting Rebenchmarking The adopted FY 2018 Direct Aid budget serves as the base year and the starting point for calculating rebenchmarking costs in the new biennial budget for FY 2019 & FY 2020 FY 2018 total budget (Chapter 836) equaled $7.6 billion: $6,761.6 million - State funds $6,030.0 GF, $546.5 Lottery, $181.8 Literary, $3.3 Commonwealth Transportation & Special $887.1 million - Federal funds In September, DOE reported to the BOE that the state s share of the preliminary rebenchmarking costs totaled $491.8 million $600 $500 $400 $300 $200 $100 $0 History of Preliminary Rebenchmarking Costs $138.6 $78.9 $59.7 $318.7 $173.1 $185.2 $209.1 $145.6 $165.4 $178.8 $256.8 $ First Yr $350.6 Second Yr $387.9 $491.8

66 65 Cost Driver Categories in the Preliminary Rebenchmarking $491.8 Million Overall, the rebenchmarking process has five broad categories that are updated in the projected estimates SOQ Model Base data reset updates: $6.6 million Personal Related costs: $230.7 million Student Related data: $61.9 million Non-personal Related costs: $146.2 million Combination Program Accounts: $46.4 million Incentive, Categorical, & GF impact from student participation changes in those programs that are in Lottery-funded accounts When the budget is released in December, it will reflect the remaining pending data updates and associated costs: September 30 th membership Sales Tax revenue estimates and school-aged populations Local Composite Index (LCI) VRS, RHCC, and Group Life rates

67 66 Main Drivers: Reset SOQ Model Base Data Reset SOQ Model Base Data FY 2019 ($ in millions) FY 2020 ($ in millions) Biennium ($ in millions) Restore funding related to the 25.4% savings from non-participation level in preschool Reset inflation factors to 0% for personal support costs from 1.15% Reset inflation factors to 0% for non-personal support costs Remove any one-time funding initiatives from the FY18 base year $24.2 $24.2 $48.4 (8.0) (8.1) (16.1) (12.8) (12.8) (25.7) Sub-total: $3.3 $3.3 $6.6

68 67 Main Drivers: Personal Related Data Updates FY 2019 ($ in millions) Adjust SOQ Instructional positions salaries to prevailing statewide averages in the base-year FY16 (table references) FY 2020 ($ in millions) Biennium ($ in millions) $19.7 $19.8 $39.5 Adjust SOQ Support positions cost to the prevailing statewide average PPA in base-year FY16 (total salary costs & positions Annual School Report) Adjust School Division Superintendents, Board Members & Nurses to the prevailing statewide average salary costs in base-year FY16 Remove funding for the state s 2.0% salary increase for Instructional & Support staff in FY18 budget Adjust & annualize state s 2.0% salary incentive to updated prevailing instructional & support salary costs (31.8) (31.8) (63.6) Update Support Position Cap ratio from 4.19:1 to 4.27:1 (9.5) ($9.4) (18.9) Update Health Care Premium to reflect the prevailing statewide average cost Sub-total: $115.1 $115.6 $230.7

69 68 SOQ Funded Instructional Salaries in Adopted Budgets Since and the Proposed Budget Instructional Positions* set out in Direct Aid Teachers Elementary $43,904 $45,118 $45,822 $47,185 $48,298 change from prior rebenchmarking 2.8% 1.6% 3.0% 2.4% Teachers Secondary $46,090 $47,267 $48,125 $49,744 $51,167 change from prior rebenchmarking 2.6% 1.8% 3.4% 2.9% Assistant Principals Elementary $62,383 $63,824 $65,037 $67,119 $68,545 percent change from prior rebenchmarking 2.3% 1.9% 3.2% 2.1% Assistant Principals Secondary $66,658 $67,824 $68,863 $72,057 $74,535 change from prior rebenchmarking 1.7% 1.5% 4.6% 3.4% Principals Elementary $76,766 $78,510 $79,796 $82,846 $85,115 change from prior rebenchmarking 2.3% 1.6% 3.8% 2.7% Principals Secondary $84,564 $86,464 $87,954 $92,041 $93,695 change from prior rebenchmarking 2.2% 1.7% 4.6% 1.8% Instructional Aides $16,104 $16,223 $16,613 $17,108 $17,738 change from prior rebenchmarking 0.7% 2.4% 3.0% 3.7% (*total statewide prevailing salary costs are calculated using Average Teacher Salary Survey)

70 Administrative Type positions Support / Clerical Type positions SOQ Funded Salary Levels Included in Rebenchmarking Cycles Support Positions* Superintendent $132,141 $136,376 $138,327 $148,078 $151,671 % change from prior rebenchmarking 3.2% 1.4% 7.0% 2.4% Asst. Superintendent $106,021 $109,678 $113,296 $120,082 $119,925 % change from prior rebenchmarking 3.4% 3.3% 6.0% -0.1% Administration Administrative $68,991 $74,874 $76,054 $78,594 $80,173 % change from prior rebenchmarking 8.5% 1.6% 3.3% 2.0% Technology Professional $68,808 $71,305 $72,445 $77,992 $78,706 % change from prior rebenchmarking 3.6% 1.6% 7.7% 0.9% Operations & Maintenance Professional $67,823 $71,950 $72,776 $76,227 $78,107 % change from prior rebenchmarking 6.1% 1.1% 4.7% 2.5% Instructional Professional $64,105 $66,473 $67,321 $70,381 $71,494 % change from prior rebenchmarking 3.7% 1.3% 4.5% 1.6% Attendance & Health Administrative $54,139 $55,477 $56,976 $60,114 $60,880 % change from prior rebenchmarking 2.5% 2.7% 5.5% 1.3% Technology Support $39,705 $41,813 $43,144 $47,172 $47,981 % change from prior rebenchmarking 5.3% 3.2% 9.3% 1.7% Admin Technical/Clerical $36,629 $37,754 $39,081 $41,273 $42,423 % change from prior rebenchmarking 3.1% 3.5% 5.6% 2.8% Technology Technical/Clerical $30,411 $32,563 $33,904 $35,609 $37,180 % change from prior rebenchmarking 7.1% 4.1% 5.0% 4.4% School Nurse $33,378 $34,647 $35,465 $36,340 $36,986 % change from prior rebenchmarking 3.8% 2.4% 2.5% 1.8% Instructional Technical/Clerical $28,232 $28,926 $29,520 $31,025 $31,840 % change from prior rebenchmarking 2.5% 2.1% 5.1% 2.6% School Based Clerical $29,092 $27,917 $28,475 $29,798 $30,409 % change from prior rebenchmarking -4.0% 2.0% 4.6% 2.1% Operations & Maintenance Technical/Clerical $26,888 $27,419 $28,153 $29,330 $30,311 % change from prior rebenchmarking 2.0% 2.7% 4.2% 3.3% Attendance & Health Technical/Clerical $24,558 $25,861 $26,948 $27,897 $29,885 % change from prior rebenchmarking 5.3% 4.2% 3.5% 7.1% (* total statewide prevailing average salary costs are calculated using Annual School Report expenditure data) 69

71 70 Main Drivers: Student Related Data Updates FY 2019 ($ in millions) Update with base-year FY16 fall membership, ADM and revise projected enrollment counts Reflect changes to Special Education student data reported on December 1, 2016 Child Count Remedial Summer student enrollment and calculated per pupil amount revisions English as a Second Language student enrollment projections Career & Technical Education costs to reflect student enrollments & courses in FY17 Gifted, Instructional and Support Technology positions based on student enrollment changes Update the 3-year average for the Free Lunch percentage rates used for CEP Schools Update SOL Failure Rate data to FY16 and Student Eligibility for free lunch to FY17 FY 2020 ($ in millions) Biennium ($ in millions) $16.1 $22.3 $ (0.5) (0.4) (0.9) (10.5) (10.5) (21.0) Sub-total: $25.9 $36.0 $61.9

72 71 Main Drivers: Non-personal Related Data and Combination Program Accounts Non-personal Related Data Updates FY 2019 ($ in millions) Revise Non-personal Support Expenditures to baseyear FY16 ASR costs FY 2020 ($ in millions) Biennium ($ in millions) $35.8 $34.2 $70.0 Adjust Federal Revenue Deduct PPA to FY16 (1.1) (1.2) (2.3) Reflect Textbooks per pupil amount (7.2) (7.2) (14.4) Update Pupil Transportation costs (14.1) (10.0) (24.1) Apply new Inflation Factor percentages to Nonpersonal costs (chart on next slide) Sub-total: $71.9 $74.3 $146.2 Combination Program Accounts Updates FY 2019 ($ in millions) FY 2020 ($ in millions) Biennium ($ in millions) Update to programs funded with Lottery revenues $18.1 $25.7 $43.8 Incentive Program accounts (0.4) (0.4) (0.8) Categorical Program accounts Sub-total: $18.8 $27.6 $46.4

73 72 Main Drivers: Non-Personal Related Data Proposed Inflation Factors and Percentage Rates Applied to Non-personal Support Costs in SOQ Model for the Biennium Inflation Factors Rates Rates Percent Change Inflation Factors Rates Rates Percent Change Instructional: Oper & Maintenance: Classroom Instruction 2.20% 4.06% 1.86% Utilities (5.05%) 4.58% 9.63% Instructional Support 2.12% 4.09% 1.97% Communications 3.26% 4.22% 0.96% Improvement 1.90% 4.22% 2.32% Insurance 2.39% 3.98% 1.59% Principal's Office 2.08% 4.11% 2.03% Other 2.39% 3.98% 1.59% Miscellaneous: Fixed Charges: Administration 2.03% 4.14% 2.11% Unemployment 2.39% 3.98% 1.59% Attendance & Health 2.22% 4.05% 1.83% Workers Comp. 2.39% 3.98% 1.59% Facilities 3.29% 4.01% 0.72% Disability Insurance 2.39% 3.98% 1.59% Textbooks 2.39% 3.98% 1.59% Other Benefits 2.39% 3.98% 1.59% Pupil Transportation 1.28% 4.16% 2.88% Health Care Premium 2.09% 3.06% 0.97%

74 73 Other Projected Changes Since September Lottery Fund revenue is estimated to increase by $40.2 million each year FY18 Lottery Fund total is $546.5 million Department of Planning and Budget has estimated that the VRS rate change for teachers will save just over $21.0 million each year in state costs Likewise for schools, their estimated local savings may be in the range of $30-$35 million per year Additional Updates since September FY 2019 ($ in millions) FY 2020 ($ in millions) Biennium ($ in millions) Preliminary cost (Sept) $235.0 $256.8 $491.8 VRS rate from 16.32% to 15.68% and RHCC rate from 1.23% to 1.20% (21.3) (21.4) (42.7) Revised ADM to reflect Sept 30, 2017 enrollments (9.1) (10.3) (19.4) Local Composite Index (LCI) changes (1.0) (0.4) (1.4) Update Weldon Cooper estimate School-Aged Population Net Sales Tax Forecast Projection GF Backfill for Literary Fund Forecast Projection Revised Rebenchmarking Costs (Nov) $255.7 $290.5 $546.2

75 Remaining Data & Cost Updates for Rebenchmarking 74 In summary, DOE hasn t completed the calculations for the rebenchmarking costs - pending final data submissions Once the remaining issues are locks down, we could possibly add another $50 to $60 million to the $546.2 million revised estimate Finalize handful of school divisions ADM Resolve LCI data confirmations Run the VRS fringe benefit rates to account for finalized ADM Confirm the Literary Fund revenue estimate With the final numbers accounted for, rebenchmarking may end up in the neighborhood of about $600 million for the biennium

76 75 Health & Human Resources Budget Drivers Susan E. Massart

77 76 Medicaid Forecast Official Medicaid forecast updated every November 2017 Official Medicaid forecast updates projected spending for FY 2018 and the biennium In addition, Virginia Health Care Fund (VHCF) revenues will influence how much general fund dollars are required to meet the forecast costs of the Medicaid program Revenues in the fund are used as a portion of the state s match for the Medicaid program Comprised of tobacco taxes, Medicaid recoveries and a portion of the Master Tobacco Settlement Agreement (41.5%) Revenue changes in the VHCF are not included in Official Medicaid forecast The VHCF ended FY 2017 with a $10.5 million balance, slightly more than the $7.9 million balance projected during the 2017 Session

78 25.0% 20.0% November 2017 Medicaid Forecast: Annual % Change Actual This line represents the 7.1% avg. annual growth rate over 10 years for Medicaid. Projected % = % Annual Expend. Growth = Nov Forecast 10.0% 5.0% 0.0% 7.3% 7.8% 4.9% 6.5% 4.1% Nov Forecast 2.5% 3.4% FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 Note: Represents percentage change in all funds, state and federal, adjusted for payment timing changes, cash management, FMAP maximization. Source: 2016 and 2017 DPB and DMAS consensus forecast reports, adjusted for Medicare premium rate changes as of November 15, 2016.

79 78 Medicaid Forecast: FY 2018, FY 2019 and FY 2020 Projected needed funding is $670.6 million GF over 3-year period $865.9 million GF over 3-year period if CHIP not reauthorized GF $ in millions $5,500 $5,300 $5,100 $4,900 $4,700 $4,500 $4,300 $4,100 $3,900 $3,700 $86.7 million $199.5 million $384.4 million $3,500 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Actual Expendiutres Base Appropriation Forecast Forecast if CHIP Not Reauthorized Source: November 1, 2017 DPB and DMAS Consensus Forecast Report.

80 79 Preliminary Medicaid Forecast ($ in millions) Medicaid Forecast November 2017 Forecast Chapter 665 Funding (Base) Additional Funds Needed Added Costs if CHIP is not Reauthorized FY 2018 FY 2019 FY 2020 GF All Funds GF All Funds GF All Funds $5,003.4 $9,910.4 $5,116.1 $10,159.2 $5,301.0 $10,507.9 $4,916,6 $9,625.4 $4,916,6 $9,625.4 $4,916.6 $9,625.4 $86.7 $285.1 $199.5 $533.8 $384.4 $882.5 $34.7 $69.4 $79.0 $158.1 $81.6 $163.2

81 Historical Medicaid Annual Forecast Changes (GF $ in millions) 80 $1,000.0 $1,156.4 $800.0 $786.8 $691.5 $646.7 $86.7 $600.0 $157.1 $68.4 $166.6 $196.3 $583.9 $400.0 $84.3 $200.0 $277.3 $500.4 $46.2 $173.0 $477.5 $255.2 $419.2 $327.4 $461.7 $199.5 $384.4 $0.0 ($87.6) ($85.4) ($73.6) ($127.8) ($66.5) ($200.0) FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Original Foreast Amended Forecast Caboose Forecast

82 Factors Affecting Medicaid Spending Growth in FY 2018 Hospital Settlement Payments Prior year indigent care hospital payments to the state teaching hospitals were withheld pending approval from the Centers for Medicare and Medicaid (CMS) Represents $59.7 million GF and $89.0 million NGF in FY 2018 in one-time payments to VCU and UVA hospitals Intergovernmental transfers (IGT) for hospitals with medical school affiliations increase the federal share of Medicaid payments (Sentara, Inova & Carilion) Estimated at $31.1 million NGF in FY 2018 if approved by CMS (hospitals provide matching share) Managed Care Rate Increases Rates for new Commonwealth Coordinated Care will increase by 12.8% in FY 2018 Enrollment Growth FY 2018 average monthly enrollment growing at 2.9%, above 2016 forecast of 2.4% growth Low income caretaker adult average monthly enrollment has grown by 7.5% over FY 2017 Growth not due to woodwork affect Fewer number of enrolled caretaker adults are losing coverage due to eligibility systems and process changes CMS guidance requires the Department of Social Services to verify income and make a positive determination that an individual does not qualify for any other Medicaid eligibility category before they can be dropped from the Medicaid rolls Medicaid system update in December 2016 also resulted in 4,479 caretaker adults remaining enrolled who were no longer eligible for Medicaid (were disenrolled by November 1, 2017) Average monthly enrollment of aged, blind and disabled individuals is growing slightly (1.9%), but the average cost was about $22,000 per year in FY 2017, compared to $3,784 for low-income families and children 81

83 82 Average Monthly Medicaid Enrollment 1,200,000 1,000,000 Total Medicaid Average Monthly Enrollment 1,063,662 1,094, % over prior year 800, ,000 Children (including MCHIP) 400, , , % over prior year Aged, Blind & Disabled 218, ,000 0 Low Income Caretaker Adults 109, , % over prior yr. 117, % over prior yr. FY 2010 FY 2011 FY 2012 FY 2013 FY2014 FY 2015 FY 2016 FY 2017 FY 2018 YTD

84 Factors Affecting Medicaid Spending Growth in FY 2018 forecast adjustments annualized Hospital and nursing home inflationary adjustments (required by regulations) 2.8% in FY 2019 and 3.0% in FY 2020 for hospital inpatient expenditures 2.9% in FY 2019 and 3.0% in FY 2020 for nursing facility services 83 Medicaid Inflation Adjustments included in Forecast ($ in millions) FY 2019 FY 2020 GF NGF GF NGF Nursing Homes $10.8 $10.8 $23.4 $23.4 Hospitals $21.9 $21.9 $48.3 $48.3 Total Medicaid Inflation Adj. $32.7 $32.7 $71.7 $71.7

85 84 Factors Affecting Medicaid Spending Growth in Continued Developmentally Disabled (DD) Waiver Growth DOJ Settlement Agreement requires the addition of 825 new waiver slots over biennium $17.2 million GF in FY 2019 and $36.3 million GF in FY 2020 (plus like amount of federal matching funds) DMAS/DBHDS identified need an additional 200 emergency slots $3.8 million GF in FY 2019 and $7.6 million GF in FY 2020 (plus like amount of federal matching funds) Intergovernmental transfers (IGT) for hospitals with medical school affiliations increase the federal share of Medicaid payments 2017 Appropriation Act provides authority for these hospitals to use own funds to draw down federal Medicaid matching funds for supplemental physician payments (affects Sentara, Inova and Carilion hospitals) Forecast reflects the expected growth of the nongeneral fund (federal share) of increase in Medicaid payments Estimated at $96.6 million NGF in FY 2019 and $96.6 million NGF in FY 2020

86 Factors Affecting Medicaid Spending Growth in Managed Care Expansions and Rate Increases 2 major managed care plans undergoing significant changes Commonwealth Coordinated Care Plus (CCC Plus) Medallion 4.0 Rates significantly affect Medicaid forecast Higher rates for including populations and services traditionally financed in the Medicaid fee-for-service program Rates required to be actuarially sound by federal government Growth in managed care will be offset by reductions in the fee-forservice program Forecast includes $82 million in savings to the fee-for-service program over the forecast period, largely from better management of behavioral health and long-term care services 85

87 Managed Care Changes Coordinated Care Plus (CCC Plus) program began phase-in during August 2017 with completion scheduled for January managed care organizations (MCOs) Will serve approximately 214,000 aged, blind and disabled individuals with complex care needs Many of whom were in the fee-for-service program, e.g., nursing home recipients not enrolled in current CCC Demonstration Waiver, recipients enrolled in elderly and disabled (EDCD) waiver and technology-assisted (Tech) waiver Adds behavioral health, substance use disorder, early intervention services and longterm care services and supports Beginning January 2018, rates set on a calendar year basis Rates level off from FY 2018 to increase by 2.4% in CY 2019 and 3.5% in CY 2020 Revised Medallion 4.0 managed care program will begin in FY 2019 Will serve more than 700,000 caretaker adults, pregnant women and children Will add behavioral health, residential psychiatric and early intervention services Rates will be set on a fiscal year basis FY 2019 rates are higher reflecting the cost of covering new services Rates to increase by 28.2% in FY 2019 and 3.8% in FY

88 Managed Care Benefits & Risks to Medicaid Forecast Expected Benefits Improve quality of care and health outcomes Bend the cost curve of Medicaid expenditure growth Provide better budget predictability Stronger MCO contracts and DMAS contract management, including Profits caps Adjustment of rates to ensure they do not cover excessively high spending, account for savings from required initiatives and account for negative historical trends in medical spending to be included in setting rates Provision of additional MCO financial and utilization data and to better monitor spending and service utilization trends Incentives for MCOs to improve performance Risks Near term changes in the Medicaid management information system may disrupt the collection and analysis of critical data to analyze MCO financial and utilization data and set rates Impact of population growth, particularly aged and disabled, on MCO rates in later years of contract (5-year contract with potential for 5 renewable 12-month extensions) 87

89 88 Other DMAS Budget Requests Description (GF $ in millions) FY 2018 FY 2019 FY 2020 Increase personal care rates to 70% of benchmark $20.6 $21.6 Increase personal care rates to comply with electronic visit verification requirements Expand GAP eligibility to include individuals with substance use disorder as primary diagnosis Fund increased costs for Cover Virginia call center and Medicaid eligibility determinations Replace Medicaid management info. System $1.7 Complete implementation of Same Day Access to services at CSBs for Medicaid recipients $5.4 $5.6 $2.8 $8.3 $3.8 $1.1 $1.3 $1.3 Medallion 4.0 mailings and enrollment activities $0.5 $0.7 $0.2 Complete long-term care screenings in 30 days $0.5 $0.5 Total: $2.2 $35.1 $38.6

90 89 DOJ Settlement Agreement Costs Description (GF $ in millions) FY 2019 FY 2020 Required 825 waiver slots for facility transition and to address the community waiting list $17.2 $ reserve emergency waiver slots $3.8 $7.6 Training Center discharges of individuals not eligible for DD waiver $0.2 $0.2 Rental subsidies for 366 DD individuals in the community $3.2 $6.4 Crisis services for DD community $3.4 $3.4 Regional health support networks in Central Virginia $0.6 $ FTEs for Office of Licensing and 2 FTEs in Quality Management Div. $1.2 $1.8 Increase Family/Peer Support for DD Individuals Transitioning to Community $0.2 $0.2 Increased workload of Independent Reviewer $0.1 $0.1 DBHDS facility closure savings ($1.0) Medicaid savings from facility closure ($10.5) ($17.0) Total New Costs: $19.4 $39.3

91 90 Major DBHDS Budget Requests Description (GF $ in millions) FY 2018 FY 2019 FY 2020 Community discharge and diversion funds for census management at state facilities $4.9 $9.8 VCBR - Expand Temporary Capacity at Central State Hospital $5.2 $9.1 Add critical positions at MH hospitals due to census increase $5.8 $6.2 CSB Same Day Access to Services (STEP-VA) $5.9 $5.9 Address compensation issues at state facilities $4.8 $4.8 Western State Hospital operational support for additional 56 Beds $1.4 $6.2 Caseload increase - Early Intervention Program $1.3 $2.5 $3.5 Transitional housing for Not Guilty by Reason of Insanity Acquittees $2.0 $2.0 Total: $1.3 $32.5 $47.5

92 91 Children s Services Act (CSA) CSA coordinates local services for emotionally and behaviorally disturbed children and their families Localities are mandated to serve eligible children Special education Foster care cases Children requiring mental health services to avoid placement in foster care CSA expenditures are expected to grow by 5% annually through the biennium CSA Budget Request (GF $ in millions) FY 2018 FY 2019 FY 2020 Expenditure Growth $12.5 $13.2 $27.0

93 92 Growth in CSA Both CSA expenditures and the number of children served has grown steadily since FY 2013, after years of decline 6.5% annualized growth rate in expenditures and 1.7% annualized growth rate in children served $ in millions $500.0 Actual Projected Child count 24,000 $450.0 $ ,000 $ ,000 $ ,000 $250.0 $ ,000 $ ,000 $100.0 $ ,000 $ Total Expenditures CSA Cases 10,000

94 $450.0 Growth in CSA Expenditures by Type ($ in millions) 93 $400.0 $350.0 $300.0 $250.0 $200.0 $150.0 $314.2 $316.9 $35.2 $37.8 $77.6 $72.4 $100.0 $95.5 $343.3 $40.5 $79.0 $99.6 $364.0 $44.0 $80.6 $100.6 $382.1 $49.9 $79.1 $96.9 $100.0 $50.0 $101.4 $111.2 $124.2 $138.8 $156.1 $0.0 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 SPED Private Day Foster Care/Therapeutic Trtmt. Residential/Cong. Care Community Based Svs. CSA growth is being driven by special education private day placements Special education private day placements now account for 41% of total CSA expenditures, up from 32% in FY 2013 At the same time, residential/congregate care and foster care/therapeutic treatment have decreased as a percentage of total CSA expenditures

95 94 Growth in Special Education Private Day Placements Expenditures for private day placements have increased by 54% since FY % annualized growth rate Caseload has increased by 28% since FY % annualized growth rate Costs driven by an increasing number of special education children placed in private day treatment through federally mandated Individualized Education Program (IEP) plans, particularly those diagnosed with autism spectrum disorders Annual cost of a private day treatment placement was $41,088 in FY 2017 compared to an average annual cost of $24,274 for all CSA services

96 Growth in Special Education Private Day Placements $ in millions $180.0 $160.0 $140.0 $120.0 $100.0 $80.0 $60.0 $40.0 $20.0 $0.0 2,974 3,158 $101.4 $ ,416 $ ,585 $ ,816 $156.1 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Priv. Day Expenditures Child Count Child Count 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Appropriation Act directs HAC/SFC staff to study issue and report to the Joint Subcommittee on HHR Oversight Scheduled to meet on November 29 Issues remain unresolved: How can the state best manage costs & outcomes? Can outcomes be centrally tracked to inform parents, CSA & local schools on child s progress and effectiveness of placements? Should CSA services and funding be rebalanced to better service children and families? Should funding be moved to DOE, since CSA cannot impact local IEP placement decisions? Study will need to be continued into

97 Child Welfare Expenditure Growth 96 GF $ in millions FY 2018 FY 2019 FY 2020 Foster Care and Adoption Subsidy Forecast $2.3 $4.3 $6.1 COLA for foster care and adoption rates $1.3 $1.3 Mandated reinvestment in child welfare services $5.2 $5.2 Total $2.3 $10.8 $12.6 Increase in children qualifying for Title IV-E foster care maintenance payments due to parental drug abuse coupled and slightly more utilization of the Fostering Futures program which serves older youth from age 18 to 21 (in the 2 nd year of implementation) Anticipating growth in IV-E foster care maintenance payments as more children may be eligible due to changes in income requirements in federal law Appropriation Act requires a inflationary adjustment to foster care and adoption payments in fiscal year following a year in which salary increases are provided to state employees Changes in federal law provide federal matching funds for a greater number of foster care and adoption assistance cases, however, it requires states to reinvest the state general fund savings in child welfare services DSS will use the reinvestment funds for a centralized call center to receive all telephoned reports of child abuse, post adoption case management services, family assessments, and other foster care and adoption services

98 97 Comparison of Available Resources To Identified Budget Drivers $ s in millions FY 2019 FY 2020 Biennium Net Resources for Budget Drivers $562.1 $1,112.4 $1,674.5 Mandatory/Statutory Spending Drivers $618.4 $967.4 $1,585.8 High Priority Drivers $153.6 $154.3 $307.9 Total HAC Identified Drivers $772.0 $1,121.7 $1,893.7 Available Resources After Budget Drivers Funded ($209.9) ($9.3) ($219.2) FY 2019 revenues are insufficient to support budget drivers in part because funding FY 2018 mandatory spending required the use of a number of one-time revenue sources $148.0 million carry-forward from FY 2017 Tax amnesty collections of $89.5 million $272.0 million withdrawal from the Revenue Stabilization Fund

99 Session: Balancing Priorities to Ensure Structural Integrity

100 99 Challenges of the 2018 Session Meeting commitment to fund core programs Responding to federal spending adjustments and federal tax policy changes and their impact on Virginia Codifying and strengthening the cash reserve in the face of tepid revenue growth and concerns raised by rating agencies

101 100 Importance of a Cash Reserve The three bond rating agencies came to Virginia in October and each articulated Virginia s lack of cash reserves as their greatest concern Moody s released a publication last year, Fiscal Stress Test: Ability to Withstand Next Recession Depends on Reserves, Flexibility In it, they identified 4 factors as key to determining a state s ability to withstand recessions: Relative revenue volatility Reserves relative to a potential revenue decline Revenue and spending flexibility Fixed costs as a percentage of revenues Compared to other states, Virginia was perceived as having relatively low revenue volatility, moderate revenue and spending flexibility, moderate fixed costs and thus overall a moderate recession preparedness score However, Virginia stood out as having one of the lowest coverage by reserves of a first year revenue shortfall

102 101 Building a Revenue Reserve The Constitution contains tightly prescribed limitations on when withdrawals can be made from the Revenue Stabilization Fund The Fund may be accessed only if appropriations in an adopted budget exceed collections by more than 2.0% of the certified tax revenues, and then only one-half of the projected shortfall may be covered by the fund In addition, no more than one-half of the fund may be transferred in any fiscal year Practically speaking, this means that if, for example, a major shortfall had occurred in FY 2017, the Fund could not be used to address any resulting shortfall in the FY budget, nor could it be used to offset shortfalls smaller than 2.0% of total revenues

103 102 Building a Revenue Reserve Chapter 836 included language establishing a Revenue Reserve Fund which is intended to provide a hedge against revenue shortfalls that cannot be addressed by the Revenue Stabilization Fund FY 2017 included an appropriation into the Reserve of $35.0 million from a reestimation of the amounts anticipated to be generated by Tax Amnesty Also included language directing that at least 50% of any revenue surplus not required for the Revenue Stabilization Fund or the Water Quality Improvement Fund be deposited into the Fund When the Governor presented to the Joint Money Committees in August, he announced the reservation of the full amount of the unencumbered excess FY 2017 revenues for the Reserve Fund, a total of $120.8 million Goal will be to expand the Reserve Fund to 2.0% of General Fund revenues over a period of no more than six years Based on current revenue forecast, that would be in the range of $400 million

104 Deposit of $605.6 Million Was Made to the RDF FY2017 as Well as a Withdrawal of $294.7 Million 103 Revenue Stabilization Fund June 30 Balance FY Actual and FY 2018 Forecast (millions of dollars) $1,200.0 $1, ,065 1,190 1,015 $ $ $400.0 $ $ Another withdrawal estimated at $272.5 million will occur in FY 2018 No deposit is required to the Fund in FY 2018 or FY However, if FY 2018 revenue growth of the major sources exceeds 3.99%, a deposit could be required in FY 2020