Virginia s Economic Trends and Impact on Local Budgets

Virginia s Economic Trends and Impact on Local Budgets Virginia Association of Assessing Officers James J. Regimbal Jr. Fiscal Analytics, Ltd July 13, 2012

Expect Virginia Personal Income to Grow Slower than Past Decades 6.0 Inflation-Adjusted Virginia and U.S. Personal Income Growth 5.0 4.0 3.0 % Growth 2.0 1.0 VA US 0.0-1.0-2.0-3.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Fiscal Year Est. 2

20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% State GF Revenues Not Rebounding as Fast After Recent Recession Compared to Previous Recessions Growth in Total General Fund Tax Revenues 3 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 12 est 13 est 14 est 15 est 16 est 17 est 18 est Fiscal Year State 6-yr. plan est.

Withholding Indicates Slowing Job/Salary Gains 4

Are Fewer High-Paying Jobs to Blame? March 2002 Employment March 2012 Employment % Change Total Nonfarm Employment 3,493,400 3,712,900 6.3% Mining and logging 11,000 11,000 0.0% Construction 215,300 180,900-16.0% Manufacturing 322,400 228,800-29.0% Trade, transportation, and utilities 636,300 630,600-0.9% Information 109,000 74,400-31.7% Financial activities 181,500 188,600 3.9% Professional and business services 549,200 663,400 20.8% Health and education services 363,200 477,600 31.5% Leisure and hospitality 295,800 356,800 20.6% Other services 176,600 185,400 5.0% Government 633,100 715,400 13.0% Federal 145,900 176,100 20.7% State government 146,100 154,900 6.0% Local government 341,100 384,400 12.7% Source: VEC Current Employment Statistics 5

Virginia Vulnerable to Federal Spending Cutbacks In 2010, Federal spending ($137 B) contributed approximately one-third of Virginia s gross state product ($424 B). - VA ranks #2 in total per capita federal spending and #1 in per capita DoD spending. From CY 2000-10 Federal spending grew 107% versus 60% in total Virginia s gross state product. VA particularly vulnerable to cutbacks in defense spending and procurement ($58 B). Stephen Fuller of GMU estimates that a $1 trillion DOD budget reduction over ten years could reduce Virginia employment by 123,000 jobs and $10 bil. in GSP. 6

Can Increasing Reliance on Non-General Fund Revenues Continue? $30,000 $25,000 Change in State Operating Appropriations ($ Mil.) NGF* $20,000 $15,000 GF $10,000 $5,000 $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (i) 2014 (i) * Federal funds, higher education tuition & fees, other fees, unemployment insurance taxes, institutional revenue, etc 7

$12,000 Average Funding per FTE Student at Four-Year Institutions (Constant Dollars) Tuition, Fees, etc $10,000 $8,000 $6,000 State GF $4,000 $2,000 $- 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Fiscal Year Source: http://www.schev.edu/schev/agendabooks/2011sept/agendabook0911.pdf, page 16. 8

2012-14 Changes in GF Appropriations* Where Is the Money Going? FY 2013 Change From FY 12 FY 2014 Change From FY 13 Legislative and Executive Dept's 95.8 0.2 95.8 0.0 Judicial Dept. 421.8 13.7 421.7 (0.1) Compensation Board 606.2 8.7 606.8 0.6 Treasury Board GF Debt Service 620.1 48.4 649.3 29.2 Other Admin. / Tech., Finance (w/o debt) 198.7 (6.4) 196.8 (1.9) Rainy Day Fund 132.7 132.7 166.4 33.7 Car Tax Reimbursement 950.0 0.0 950.0 0.0 Commerce and Trade 169.3 1.6 168.3 (1.0) Agriculture / Nat. Resources 230.0 95.3 137.4 (92.6) K-12 Direct Aid 5,244.9 353.7 5,274.8 29.9 Higher & Other Education 1,772.4 97.9 1,791.4 19.0 Medicaid (DMAS) 3,526.7 292.1 3,689.9 163.2 Other Health & Human Services 1,579.1 30.9 1,522.1 (57.0) Public Safety (incl. Veterans /HS) 1,698.8 38.7 1,680.0 (18.8) Transportation 41.0 (95.2) 41.0 0.0 Central Appropriations 35.2 (31.5) 105.7 70.5 Capital 20.0 11.1 0.0 (20.0) Total GF Appropriations $17,342.5 $991.4 $17,497.9 $155.4 * Enrolled version 9

16.0% 14.0% 12.0% 10.0% 8.0% 6.0% Local Revenues Continue to Suffer % Change in Local Revenues Real Property Taxes 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Total Local Revenue Fiscal Year Source: 1990-2011, Auditor of Public Accounts FY 12 estimates from VML/VACO 2011 Fiscal Survey 10

Is Housing Beginning to Rebound? VA home sales in 2011 were up slightly (0.2%) over 2010, while prices were down (-3.3%). Virginia foreclosures dropped 21% in 2012 Q1 versus 2011 Q1. 1Q 2012 statewide increase in overall home sales and prices, although large regional differences. 2011 vs 2010 1Q 2012 vs 1Q 2011 Sales Prices Sales Prices Northern Virginia -8.4 1.6-0.3 5.9 Hampton Roads 6.3-8.8 7.3-1.4 Central VA 5.3-6.5 3.8-4.1 Central Valley 27.8-1.9 9.9-1.2 Roanoke/Lynchburg 5.1-3.8 8.8-1.4 Southside 8.0-5.7 6.5 11.1 Southwest 16.8-7.6 38.2 6.2 Statewide 0.2-3.3 3.8 2.4 Source: Virginia Home Sales Reports, VA Association of Realtors 11

Local Option Sales Tax Beginning to Grow Again $290,000,000 Quarterly Local Option Sales Tax $270,000,000 $250,000,000 $230,000,000 $210,000,000 $190,000,000 $170,000,000 $150,000,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 12

14.0% Local BPOL Collections Are Beginning to Grow Again (Annual % Growth) 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Fiscal Year 13

State Aid is Falling For Localities 34.0% State Categorical Aid As % of Local Expenditures 33.0% 32.0% 31.0% 30.0% 29.0% 28.0% 27.0% 26.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: APA Comparative Reports on Local Revenues and Expenditures, Fiscal Years 2000-2011 14

State Assistance for Localities Has Declined Significantly From Pre-Recession Levels Major State GF Aid for Locally-Administered Programs FY 2009 FY 2010 FY 2011 FY 2012 (e) FY 2013 (e) FY 2014 (e) GF Direct Aid to K-12 $5,607.6 $4,769.8 $4,713.3 $4,891.2 $5,244.9 $5,274.8 Health and Human Services $888.4 $878.7 $816.8 $827.2 $846.4 $811.8 Public Safety $734.3 $556.8 $686.0 $667.7 $677.8 $678.4 HB 599 (Aid-to-Police) $197.3 $180.8 $178.7 $172.4 $172.4 $172.4 Constitutional Officers $155.3 $142.2 $144.2 $143.8 143.5 143.5 Car Tax $950.0 $950.0 $950.0 $950.0 $950.0 $950.0 Aid-to-Locality Reduction ($50.0) ($50.0) ($60.0) ($60.0) ($50.0) ($45.0) Total Local GF Aid $8,285.6 $7,247.5 $7,250.3 $7,419.9 $7,812.6 $7,813.5 Total GF Appropriations $15,943.0 $14,787.2 $15,457.4 $16,556.9 $17,342.5 $17,497.9 % Local GF Aid 52.0% 49.0% 46.9% 44.8% 45.0% 44.7% 15

2012-14 Introduced K-12 State Budget Proposed Further 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.pdf 16

2012 General Assembly Recognized That Localities Cannot Shoulder Mandated Expenses Without Help General Assembly added $212 mil. to K-12 funding in 2012-14 above introduced budget. - $110 mil. in block grant assistance for inflation, retirement costs - $47.1 mil. to update K-3 class size program and $6.8 to correct career and technical education funding - $40 mil. to partially restore cost-of-competing in NoVa - $8.3 mil for early intervention reading assistance in 3rd grade Endorsed introduced budget ATL clawback reduction to $50 mil. in FY 13 and $45 mil. in FY 14. Provided localities the option of phasing in VRS rate increases. Added $42.3 mil. to Introduced budget (total $87.6 mil.) for Water Quality Improvement Fund to upgrade 57 local and regional wastewater treatment plants. $7.0 mil added by GA to capitalize the Housing Trust Fund. Rejected using GF for transportation. Defeated M&T Exemption for New Equipment Defeated Cap on BPOL 17

$5,400 But Per Pupil State Funding Still Well Below FY09 Peak (All Appropriated Funds) $5,274 $5,200 $5,000 $5,000 $4,800 $4,811 $4,813 $4,600 $4,513 $4,546 $4,400 $4,200 $4,000 2009 2010 2011 2012 2013 2014 Fiscal Year Includes GF, lottery profits, miscellaneous NGF, and state appropriated federal stimulus funds 18

Other Policies With Long-Term Consequences Enacted Passed Eminent Domain Constitutional Amendment Instituted new policy on district court fines and fees where state keeps half of amount exceeding 50 percent of the total local amount collected. Retirement System Changes - Mandatory local employee 5% for 5% (with optional phase-in 1% for 1% over 5 years). - Mandatory teacher 5% for 5%, with optional phase-in over 5 years. - Optional locality rate phase-in allows Board-certified rate; or the higher of FY 2012 rate or 70% of Board-certified rate in 2012-14 (80% in 2014-16, 90% in 2016-18). Transportation Bill - Requires local comprehensive plan conformity for localities (budget removed requirement for cities/county maintained roads), carves out $500 mil. pot of money for discretionary CTB projects. 19

State Six-Year GF Plan Expects Little Relief for Localities ($ Mil.)* FY 2013-18 Annual GF Appropriation Growth Expected K-12 Education 3.1% Higher and Other Education 4.4% Medicaid 6.4% Other H&HS 0.6% Public Safety 0.6% Other Finance and Admin. 0.1% Judicial 0.3% Commerce & Trade -2.6% Nat Res., Ag, Forestry -5.1% Total Appropriations 3.2% * See http://dpb.virginia.gov/forms/20120206-1%5c2012_gfsix-yearplan.pdf 20

Can the State Restore Local-Aid Program Cuts? Serious Challenges Must Be Overcome. 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 are being significantly increased since recession lows. 4. Medicaid spending will continue 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 policies. - Debt only capital program will have long-term consequences. 6. Increasing efforts to use general funds for transportation. 21

General Fund Tax Changes Have More Than Neutralized 2004 Tax Increase Enacted/Amended 2012-14 ($ Mil.) Age Subtraction (net of means testing) 1994/2004 ($555) Subtraction for UI/Military/Gov't Empl 1999 ($73) Historic Rehab Tax Credit 1999 ($92) Coalfield Employment Tax Credits 2000 ($89) Low Income Tax Relief 2000, 2004, and 2007 ($377) Land Preservation Tax Credit 2003 ($275) 2004 Tax Reforms* 2004 $1,780 Elim. 2.5% Sales Tax on Food 2004 ($437) Shift Insurance Premiums and Recordation from GF to Transportation 2009 ($340) Estate Tax Repeal 2009 ($280) Other Tax Changes since 1999 1999-2011 ($182) Total ($920) * 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 22

Retirement Rates Are Rising 2011 & 2012 VRS Board Cert. Rates FY 2011 6/25/2011-3/24/2012 3/25/2012-6/24/2012 FY 2012-14 FY 2012-14 VRS Board Cert. Rates * Adopted Rates** State 8.46% 2.13% 2.08% 6.58% 13.07% 8.76% Teachers 12.91% 3.93% 6.33% 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 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%. 2012 Session adopted hybrid defined benefit/contribution plan for new state employees. 23

Health Care Has Trumped Education $3,000 $2,500 2006-08 Budget Compared to 2012-14 Enrolled Budget (Change in Appropriated GF Mil. $) $2,457 $2,000 $1,500 $1,000 $500 $0 $517 $47 ($500) ($1,000) ($1,500) ($899) ($255) Medicaid Debt Service Public Safety K-12 Higher Ed 24

K-12 and Medicaid Funding are Converging (% of Total GF Spending) 40.0% 35.0% 30.0% K-12 25.0% 20.0% Medicaid 15.0% 10.0% 5.0% 0.0% FY 2009 FY 2010 FY2011 FY 2012 FY 2013 FY 2014 25

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. 26

$700 $600 $500 General Fund Debt Service Increasing Rapidly ($ Mil.) $649 $620 $572 $542 $479 $434 $400 $387 $321 $300 $200 $100 $28 $43 $65 $91 $284 $222 $234 $247 $236 $223 $200 $185 $167 $138 $126 $105 $0 Sources: Senate Finance Committee Retreat, Nov. 2011 2012 Session Appropriation Acts 27

Pressure to Raise Transportation Revenues 4.00 Growth in State General Fund and Transportation Revenues Versus Growth in Virginia Personal Income 3.50 Personal Income 3.00 1988=1 2.50 GF Revenues 2.00 1.50 State Transportation Revenues 1.00 28

Summary Virginia s economy is not growing as fast as in past. - Possible federal budget/defense cuts a risk for VA s economy. Local revenues slowly beginning to grow again, but have to dig out of a deep hole. Are state policymakers beginning to recognize the fiscal condition of localities? But - Defeated proposal to use GF to help solve transportation needs. - Defeated exempting new equipment for 3 years from M&T tax. - Restored some K-12 funding cuts contained in the introduced budget. - Endorsed introduced budget ATL clawback reduction. - Increased local costs by mandating VRS local employee 5 for 5, even if phased-in over five years. - Eminent domain constitutional amendment increases locality costs of providing services while decreasing economic development opportunities. It will take several more biennia, even without another recession, for the state to restore funding cuts to local government to pre-recession levels. Will leadership emerge to fix transportation funding crisis? Expect more pressure for local transportation funding. 29

Important to Keep a Mix of Local Revenues Note: BPOL is the Business, Professional and Occupational License Tax. M&T is the Machinery and Tools Tax Source: Auditor of Public Accounts Comparative Report of Revenues and Expenditures 30 30

Most Local Government Expenditures are Mandated or Regulated by the State Source: Auditor of Public Accounts Comparative Report of Revenues and Expenditures 31

100% Source of Funds for Local Operating Expenditures - FY 2011 90% 80% 70% 60% 50% 40% 30% Local State Federal 20% 10% 0% 32