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Virginia’s Economy and
Budget Outlook
A briefing for the
Virginia Association of Counties
Richard D. Brown
Secretary of Finance
November 14, 2011
Topics for Discussion
• Fiscal Year 2011 Performance and Surplus
• National and Virginia Economic Indicators
• Wall Street and Virginia’s Negative Credit
Watch
• Looking Ahead: Virginia Budgetary and
Funding Issues
2
Fiscal Year 2011 Revenues and Transfers
Finished $310.7 Million (2.1 Percent)
Above Forecast…
Summary of Fiscal Year 2011 Revenue Collections
(millions of dollars)
Major Source
Withholding
Nonwithholding
Refunds
Net Individual
Forecast
$ 9,574.8
2,068.4
(1,897.0)
9,746.2
Sales
Corporate
Wills (Recordation)
Insurance
All Other Revenue
Total Revenues
Actual
$ 9,635.1
2,178.6
(1,869.3)
9,944.4
Variance
Dollars
Percent
$
60.3
0.6 %
110.2
5.3
27.7
(1.5)
198.2
2.0
2,968.9
766.6
274.0
277.7
685.1
3,012.4
822.3
291.5
281.6
688.2
43.5
55.7
17.5
3.9
3.1
1.5
7.3
6.4
1.4
0.4
$ 14,718.5
$ 15,040.2
$ 321.7
2.2
46.2
217.3
159.6
50.5
204.0
157.6
4.3
(13.3)
(2.0)
412.1
$ (11.0)
ABC Profits
Sales Tax (0.25%)
Transfers
Total Transfers
$
423.1
Total General Fund
$ 15,141.6
$
$ 15,452.3
$ 310.7
Annual
Growth
5.0 %
14.3
(6.3)
9.4
(2.3)
2.0
0.4
7.5
(0.3)
%
5.8
%
9.3
(6.1)
(1.3)
1.1
(2.6)
(48.8)
(2.6) %
(27.3) %
2.1
%
4.5
%
• Total revenues increased for the first time since fiscal year 2008.
– Total revenues are still below fiscal year 2007 levels.
3
4
$544.8 Million FY2011
Budget Surplus
• Surplus Defined: Actual Revenues above Forecasted Revenues +
(Agency Savings + Agency Balances)
• $544.8 Million = $310.7 Million + $234.1 Million
• Total general fund revenue collections rose 5.8 percent, ahead of the
revised annual forecast of 3.5 percent growth.
• Revenue sources of FY2011 surplus originated from volatile sources
such as non-withholding personal income tax and corporate income
tax.
• Surplus committed by Virginia Constitution, Code and Appropriation
Act.
5
Uses of Surplus
Reappropriated NGF/Higher Education balances
Reappropriate GF operation balances:
Mandatory
Discretionary
Revenue Stabilization Fund deposit (FY2013)
VA Water Quality Fund
Accelerated sales tax to transportation
Natural Disaster Reserve
Capital Renovation (Treasury Loan repayment)
Unemployment Compensation Trust Fund interest
Federal Portion of electric rate refund
Federal Action Reserve Fund
Miscellaneous transactions
Transportation Trust Fund
Nonrecurring Expense Fund
BRAC commitments
Sheriff departments
VRS and other
Planned reversions in budget
Total uses
Difference
$ 63.6
84.4
37.2
47.2
132.7
50.3
26.0
17.3
13.1
8.9
1.4
30.0
2.9
67.2
33.6
7.5
7.4
18.7
13.4
544.8
0.0
6
Both the U.S. and Virginia Economies Performed
Near Expectations in Fiscal Year 2011
• As measured on a fiscal year basis (July through June), estimated real GDP
increased 2.6 percent.
–
Rising inventories supported growth, offsetting modest consumer spending in the face of
employment losses and shrinking incomes.
Summary of Key U.S. and Virginia Economic Indicators
Percent Change Over the Prior Fiscal Year
FY11
Forecast
FY11
Actual
FY12
Forecast
2.2
2.6
2.7
2.1
2.5
2.3
Employment
0.5
0.6
1.6
Personal Income
3.3
5.4
3.5
Wages & Salaries
2.8
3.7
4.1
0.7
1.2
2.0
1.6
3.0
4.4
(3.0)
(0.3)
4.7
Personal Income *
2.8
5.0
3.6
Wages & Salaries *
2.6
3.5
4.7
U.S.
Real GDP
Consumer Spending
Virginia
Employment
Professional/Business
Construction/Mining
* FY11 Actual is based on three quarters of actual data and one quarter of forecast data.
• In Virginia, employment gains were slightly better than expected, thanks in
part to gains in the high-paying professional and business services sector.
Income growth also exceeded expectations.
7
8
National and State Economic Indicators
• Current national indicators continue to depict a weak recovery with a dark
outlook. National GDP is expected to grow just 1% in Q4 of 2011 and 1.1%
in Q1 of 2012 (on an annualized basis).
• According to Global Insight and Moody’s Analytics, the two major national
economists, the likelihood of the U.S. entering into a double-dip recession
remains high at 40%.
• The Federal Reserve has already injected its primary stimulus into the
economy.
• The Conference Board’s index of consumer confidence, fell to 39.8 in
October, the lowest level since the 2008-2009 recession.
• Job growth in Virginia has recently slowed significantly, with a recent
upward trend in unemployment from 6.0% to 6.5%.
• According to the Virginia Association of Realtors, for Q2 2011 compared to
the prior year, the median sales price declined 2% and the total number of
foreclosures increased 7.5%.
9
Virginia’s AAA Bond Rating at Risk
August 2nd
July 13th
Moody’s places
U.S. on review for
possible Aaa
downgrade
July 19th
Moody’s Places Five
Aaa States
(including VA) on
review for
downgrade
August 8th
•Congress raises U.S. Statutory Debt
Limit with triggers
•Moody’s confirms U.S. Aaa rating, but
changes U.S. outlook to negative
•Fitch takes no action, but announces
review of U.S. to conclude by end of
August
August 4th
Moody’s confirms
Aaa rating of
Virginia, but
changes
Virginia’s outlook
to negative
July
Standard & Poor’s places
VHDA’s Commonwealth
Mortgage Bonds’ AAA rating
on Negative Credit Watch
because of their “direct link”
as being insured by the FHA,
an agency of the Federal
Government, which was
downgraded to AA+
August 5th
Standard & Poor’s lowers
sovereign rating of the
U.S. from AAA to AA+
and changes outlook to
negative
August 16th
Fitch confirms
U.S. AAA rating
with a stable
outlook
August
Note: It is anticipated that Moody’s will conclude its review of Virginia and determine whether our outlook remains
negative or returns to stable by the end of November.
10
Strategy for Addressing Bond Ratings
(Future Borrowings)
• #1 - Enhance Liquidity:
– Revenue Stabilization Fund (RSF) will grow to $440 million by end of FY2013 and
could double in size, $600 million by end of FY2014 with continued revenue
growth. The RSF can only be used to offset a shortfall in revenue from what is
anticipated in an emailed budget.
– Create Federal Action Contingency Fund (FACT) is a cash reserve that can be used
to offset a variety of negative impacts on Virginia related to future federal actions
which cannot be addressed by RSF.
•
•
•
•
Replace certain losses in direct federal grants,
Use for incentives to retain or consolidate federal facilities in Virginia. Like BRAC approach.
Address federal tax policy changes from conformity,
Help businesses impacted by federal procurement or defense contracts as they change to other
customers
• #2 – Diversify Economy
– Long-range strategy given immediate attention.
– Executive order to direct economic development personnel to fully develop
strategy.
11
Fiscal Year 2012 Total Revenue Growth
Needs To Be 3.7 Percent To Achieve The
Chapter 890 Budget Estimate
Summary of General Fund Revenue Collections FY2011 and FY2012
(millions of dollars)
Official
Estimate
FY2011
%
Annual
Growth
Req By
Est
Actual
Collections
FY2011
% Actual
Growth
Official
Estimate
FY2012
Amount
Variance
% Change
From
Actual
Revenue Source
Individual Income Tax:
Withholding
Tax Dues/Estimated Payments
(Refunds)
$ 9,574.8
4.3%
2,068.4
8.5
(1,897.0)
(4.9)
$
9,635.1
5.0%
2,178.6
14.3
(1,869.3)
$
60.3
$
110.2
(6.3)
9,958.0
3.4%
2,223.6
27.7
2.1
(1,852.0)
(0.9)
Net Individual Income Tax
9,746.2
7.2
9,944.4
9.4
198.2
10,329.6
3.9
Sales and Use
2,968.9
(3.7)
3,012.4
(2.3)
43.5
3,115.5
3.4
Corporate Income
766.6
(4.9)
822.3
2.0
55.7
831.6
1.1
Insurance Premiums
277.7
6.0
281.6
7.5
3.9
289.6
2.9
Wills, Suits, Deeds, Contracts
274.0
(5.6)
291.5
0.4
17.5
301.1
3.3
74.8
(20.7)
81.1
6.3
103.6
27.7
(3.3)
623.8
2.8
Interest
Other Revenue
Total General Fund Revenue
Transfers
Total General Fund Resources
610.3
14,718.5
2.4
607.0
3.5
15,040.2
(14.0)
1.9
5.8
423.1
(25.4)
412.1
(27.3)
$ 15,141.6
2.4%
$ 15,452.3
4.5%
321.7
(11.0)
$
310.7
$
15,594.8
3.7
468.6
13.7
16,063.4
4.0%
12
How Are We Doing?
General Fund Revenue Collections - October 2011
$ in Millions
Year-to-date
FY2012
Estimate
% Change
October
Collections
FY2012
FY2011
% Change
FY2012
Official
Estimate
$ 9,958.0
+5.3%
$ 3,118.8
$ 2,989.1
+4.3%
+3.4%
2,223.6
+5.0%
410.9
352.9
+16.5%
+2.1%
Individual Income Tax:
Withholding
Nonwithholding
(Refunds)
(1,852.0)
-5.3%
(163.5)
(184.1)
-11.2%
-0.9%
Net Individual Income Tax
$10,329.6
+6.1%
$ 3,366.2
$ 3,157.9
+6.6%
+3.9%
Sales and Use Tax
$ 3,115.5
+2.9%
$
$
831.2
6.0%
3.4%
Corporate Income
831.6
-55.1%
208.9
216.8
-3.7%
1.1%
Wills, Suits, Deeds, Contracts
301.1
+0.9%
104.5
101.1
+3.4%
+3.3%
Insurance Premiums
289.6
0
-
0
+2.9%
Interest Income
103.6
-223.4%
26.5
24.8
+6.8%
+27.7%
All Other
623.8
+12.5%
135.4
131.0
+3.4%
+2.8%
$15,594.8
+3.1%
$ 4,722.6
$ 4,462.8
+5.8%
+3.7%
Total
881.1
-
13
Final Thoughts on Revenue Outlook
• Over half of the FY 2011 surplus revenue came from extra
nonwithholding and corporate income tax receipts, which are more
difficult to predict going forward.
• National projections of economic activity appear to be deteriorating,
especially in short-run (remaining half of calendar 2011), from where
we were during the last legislative session.
• Coming off the higher revenue base of FY2011 (surplus), we can grow
40% less in F2012 or +3.7% than originally forecast +6.0% and meet the
budget revenue estimate.
• Economic result is conflicting patterns to analyze.
Upside
Pent- up demand
Low inflation/borrowing costs
Liquidity in system (corporate cash)
Downside
Anemic job growth
Lack of consumer demand
Prolonged real estate slide
• The game appears to be ahead of us, not so much this year!
14
Looking Ahead: Virginia
Budgetary and Funding
Issues
15
Base Budget Issue
Structural Balance Going Forward
$ in Millions
Carryforward Amount to Balance FY2012
Less One-Time Spending:
Reserve for Revenue Stabilization Fund
Supplemental Support for K-12
BHADS Trust Fund
Subtotal
$ 265.4
114.0
87.7
30.0
231.7
Plus One-Time Revenue:
Sale of Brunswick
Structural Difference Going Forward
20.0
$
53.7
16
Virginia Budgetary Funding Issues
State Challenges
•
K-12 Public Education Rebenchmarking for Standards of Quality
•
Virginia Retirement System rates for increasing unfunded pension liabilities
•
State Employee salary increases
Unfunded Federal Mandates
•
The U.S. Environmental Protection Agency - Watershed Improvement Plan for Clean-Up of
the Chesapeake Bay with expected total costs approaching $8 Billion
•
The Federal Health Care Reform Program is expected to cost Virginia in excess of $2 billion
by 2022. The number of New Medicaid recipients could rise by as much as 425,000
Virginians
•
Moreover, the Federal Health Care Reform Program contains a permanent “Maintenance of
Eligibility (MOE)” provision for basic Medicaid services and the Children’s Health Insurance
Program (CHIP).
17
Big Budget Issues
Public Education
• Rebenchmarking – $318.7 million (based on Board of Education
approval)
• VRS rates – $600.0 million to reach current actuarial rates
• Composite index – $84.2 million, changes will likely increase as
Northern Virginia housing continued to slump during the
measurement period
• Enrollment changes – final TBD after collection of Fall Membership
2011
• Sales tax updates – TBD with final revenue forecast
18
Big Budget Issues
Higher Education
• No more stimulus dollars to offset past reductions
• Tuition increase policy
• $10.0 million annual reversion in FY 2012 – maintain or eliminate?
• Focus on enrolling students in STEM programs
• 100,000 new degrees
• Student financial assistance/Tuition assistance grants (TAG)
• Future of “base adequacy” as a funding model/use of financial
incentives
• State Council of Higher Ed request, approximately $350 million.
19
Big Budget Issues
Health and Human Services
• Medicaid –
– restore the base to replace funds moved from FY 2012 to FY 2011 to
obtain the enhanced FMAP match - $263.2 million
– rebasing of utilization and inflation forecast/Part D credits – Final TBD
– current estimate exceeds $700 million
– healthcare reform – current estimate exceeds $65 million in FY 2014
• Sexually Violent Predators –
– caseload growth
– capital needs – current estimate of $50.0 million – final TBD, waiting for
results of JLARC study
20
Big Budget Issues
Health and Human Services – continued
• Behavioral Health – costs TBD
– outcome of negotiations with the U.S. Department of Justice
– increases in community-based slots
– potential downsizing of facilities
• Replacement of TANF funds – estimate to continue
current commitments - $28.8 million
• Other HHR issues – costs TBD
– CSA, child welfare, local health and DSS operations
21
Big Budget Issues
Public Safety
• Corrections
–
–
–
–
–
inmate forecast – cost TBD
loss out-of-state prisoners (1,000 inmates) – $40.8 million
opening a prison – approximately $48 million for Grayson
inmate medical costs – $16.0 million
criminal fund and involuntary mental commitment fund – $17.0 million
• Sheriffs
– Per diem payments – costs TBD
– Continuation of supplemental sheriff’s funding not in base – $7.4
million annually – $14.8 million for biennium
– New jails - $14.1 million for staffing costs
22
Big Budget Issues
Commerce and Trade
• Ongoing commitments under existing grants and performance
agreements – $55.6 million
• 1st time payouts of previous commitments to grants and
performance agreements – $16.0 million
• New Deals – TBD
• BRAC / FACT
Natural Resources
• Water quality –15 year commitment. $50 million reserved for
Water Quality Improvement Fund from surplus.
• Dam safety – preliminary estimate of immediate need is $200.0
million (cost study due in September)
23
Big Budget Issues
Statewide Issues
• VRS Rates
– Annual cost of one percent increase – approximately $17.0
million
– Replacement of deferred amounts - $150 million annually ($300
million for biennium)
– VRS Board Certified Rates – Approximately $270 million
• Revenue Stabilization Fund
– Required deposit for FY 2013 – $132.7 million
– Current estimate of required deposit in FY 2014 – $91.7 million
– A one percent shift in revenue growth will add or subtract
approximately $73 million from this amount.
24
The Projected Balance in the Revenue
Stabilization Fund Will Be $440.5 Million
After the Proposed $132.7 Million Deposit
in Fiscal Year 2013…
Revenue Stabilization Fund – June 30 Balance
$1,064.7
$1,400
$1,200
$1,014.9
(millions of dollars)
$1,189.8
FY1995-2011 Actual and FY2012-2013 Forecast
$200
$0
25
$440.5
$303.6
$299.4
$295.2
$575.1
$482.3
$340.1
$472.4
$715.6
$247.5
$224.3
$85.0
$400
$156.6
$600
$361.5
$574.6
$800
$80.1
Millions
$1,000
Big Budget Issues
Statewide Issues
• Employee Health Insurance/utilization – preliminary estimates
of $60.0 million
• Enterprise systems development and support - $70.0 million
• Aid-to-localities – restore a portion of the $60.0 million annual
reduction?
• Debt Service – TBD, draw schedules being developed now: more
than $600 million of the $1.1 billion in frozen projects (21 of 32
projects in total) have been approved for release
• Capital (use of planning fund) – TBD
• Maintenance Reserve - TBD
26
Big Budget Issues
Governor’s Priorities
– Job Creation (Diversification)
– Higher Education
– Retirement Funding
– Government Reform
27
Looking Ahead:
The Bottom Line
28
Looking Ahead
The General Fund Budget
$ in Millions
Appropriation
Act
FY2012
Assumed
Base
FY2013
Comment
Resources
Balance from Prior Year
Adjustments to Balance
Revenue
Transfers
Total Resources
Spending
Operating Expenses:
K-12 One-Time Supplement
$
$
15,594.8
468.6
16,559.0
$
87.7
Difference
$
116.1
-
16,275.7
468.6
$ 16,860.4
-
(Assume one-time)
114.0
-
(FY2013 Reserved in Surplus)
$
30.0
16,316.3
16,548.0
8.9
16,556.9
30.0
16,316.3
$ 16,346.3
15.0
$ 16,361.3
$
2.1
Revenue Stabilization Fund
Intellectual Disabilities Trust
Other
Total Operating
Capital Outlay
Total Spending
265.4
230.2
$
$
($2.1 Unappropriated Balance
+ $114.0 RSF Reserve)
(mostly VRS deferral)
(+3.7% FY2012
+4.5% FY2013)
(No change but downside risks)
$
(Assume continues)
(Assume continues)
(Planning Fund)
499.1
29
Looking Ahead
Resources Available for Appropriation
Will Not Go Far!
$ in Millions
Difference: Resources Available (from prior page)
Assumed Base
FY2013
$
499.1
Potential Demands:
VRS-State Employees (Deferment and Certified Board Rates)
$150 to $285
VRS-Teachers (Board Certified Rates)
$300
Medicaid (Base Adjustment and Utilization)
$300
K-12 Rebenchmarking
And, Many, Many, More
$145.5
?
30
Concluding Thoughts
• The economic picture has deteriorated from expectations (only
9-10 months ago).
• Because of the FY2011 revenue surplus, only moderate growth is
needed to make budget estimate for FY2012. (+3.7% vs. +6.0%)
• Accordingly, FY2012 appears to be okay, but there is a greater
need for flexibility and liquidity (#+@*Federal Government /
Bond Rating Firms).
• Uncertainty means cash reserves are in order (Revenue
Stabilization Fund/ FACT Fund).
• Slower growth will begin to squeeze budget in FY2013 as
pending mandates and funding demands for core expense items
exceed available resources with revised economic outlook.
31
Concluding Thoughts
• The Governor’s call for 2%, 4% and 6% budget cut plans
from state agencies was in order and necessary, given
the circumstances.
• FY2013 is the choke point in the budget (FY2014 is
largely solved if FY2013 is addressed with on-going
budget actions).
• The way ahead will be very difficult (my wife reminded
me I could have retired!).
• Good luck to us all. (We will need luck and skill moving
ahead.)
32