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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