Forecasting the Financial Future for Virginia’s Localities

James J. Regimbal Jr.

Virginia Association of Counties November 2010

“Bear” Case for Economy

• • • • • Debt bubble has shifted from private to public sector.

Waning federal stimulus, potentially rising federal taxes, increasing protectionism & regulation Anemic job growth with low consumer confidence Deflation risk Slow real estate recovery

2

“Bull” Case for Economy

• • • • • • • • • Strong growth in emerging economies Surging commodity prices suggesting strong global growth and trade Low borrowing costs with credit markets on the mend Steep yield curve predicting growth & no double-dip Healthy corporate profits, high productivity, and record high corporate cash Personal income and spending trending higher Consumers continue to save and reduce debt burdens Leading indicators again moving up Tame inflation 3

2010 Session General Fund Revenue Forecast

$16 000 $15 500 $15 000 $14 500 $14 000 $13 500 $13 000 $12 500 2005 2006 2007 2008 2009 2010 Current forecast 2011 2012 4

Economic Growth Critical For State GF Revenues

Individual Income Tax Sales Tax (incl. 0.25% sales tax transfer) Corporate Income Tax All Other General Fund Revenues Other GF Transfers Lottery Proceeds (NGF) Total General Fund + Lottery Proceeds FY 2010 $ Mil.

$9,088.3 % of Total 60.6% $3,291.9 $806.5 22.0% 5.5% $1,242.2 $357.8 $430.2 $15,216.9 6.6% 2.5% 2.9% 100.0%

FA

Estimated Additional General Funds Available for Appropriation ($ Mil.)

FY 2010 (a) Growth FY 2011 (e) Growth FY 2012 (e) Growth Individual Income $9,088.3 -4.1% $9,630.0 6.0% $10,210.0 6.0% Sales Taxes Corporate Income All Other GF Total GF Revenues GF Transfers Total General Fund $3,082.5 $806.5 $1,242.3 6.2% 24.4% -3.1% $14,219.6 -0.7% $2,930.0 -4.9% $792.8 -1.7% $1,322.2 $14,675.0 $3,033.0 $838.4 6.4% $1,354.0 3.2% $15,435.4 $567.2 39.5% $14,786.7 0.4% $425.5 -25.0% $15,100.5 2.1% $459.1 $15,894.5 3.5% 5.8% 2.4% 5.2% 7.9% 5.3%

Official GF Available 14,558.2

$14,997.9

1.4% $15,748.0

5.0%

Additional GF $228.5

$102.6 $146.5

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Budget Issues for 2011 Session

• Don’t anticipate significant budget restorations.

FA

anticipates about $350 million in new GF revenue/balances for biennium, assuming no policy changes.

Only about $100 mil. available from FY 2010 $228 mil. revenue surplus - most already committed to employee bonus, WQIF, transportation.

Latest FMAP extension for Medicaid fell short by about $150 million - pressure to undo contingent appropriation cuts and make providers whole. Other budget “holes” include $150 million for public safety, higher education and increased Medicaid utilization.

$249 million in federal “Jobs” bill education funding to local schools could potentially be used to offset state GF appropriations and directed to other priorities.

• Election and re-districting year will make for “interesting” session.

Proposals from economic development/job creation commission include corporate tax rate, BPOL, M&T changes, etc.

Impacts from Government Reform Commission and ABC privatization proposal?

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Counties Depend on Real Property Taxes

FY 2009 County Revenue Sources ($11.21 bil)

All Other Revenues 5% All Other Taxes 8% BPOL 3% Local Sales Taxes 5% Charges for Services 10% Real Property 56% Other Property Taxes 13% Source: Auditor of Public Accounts Comparative Report of Revenues and Expenditures

County Reliance on Property Taxes for Own Revenues Has Grown

70,0% 60,0% 50,0% 40,0% 30,0% 20,0% 10,0% 0,0% Real/Other Property Taxes Charges for Services Local Sales Taxes All Other Taxes & Revenues FY 2009 FY 1999 FY 1989 9

Virginia Existing Home Prices May Have Bottomed in 2010.1Q …

Median Sales Price of Existing Single-Family Homes for Metropolitan Areas (Thousands $)

Metropolitan Area U.S.

South Richmond, VA Hampton Roads Metro Washington D.C. Metro 2007 $217.9

178.8

233.7

226.8

430.8

2008 $196.6

169.4

223.5

220.0

343.4

2009 $172.1

155.0

N/A 210.0

308.6

2010.I $166.4

142.6

N/A 195.0

292.6

2010.II p $176.9

155.5

199.6

210.0

331.6

*All areas are metropolitan statistical areas (MSA) as defined by the US Office of Management and Budget as of 2004. They include the named central city and surrounding areas. N/A Not Available p Preliminary ©2010 National Association of REALTORS® 10

…

Commercial Real Estate Still Declining

Virginia Commercial Real Estate Activity - 2010 1st Q

Sales Volume Compared with Previous Quarter -10% Sales Volume Compared with Previous Year Sales Prices Compared with Previous Quarter Sales Prices Compared with Previous Year Volume of New Construction Compared with Previous Quarter Leasing Activity Compared with Previous Quarter Rental Rates Compared with Previous Quarter -12% -1% -12% -10% -1% -7%

2nd Q

-14% -15% -11% -16% -4% -11% -11% ©2010 National Association of REALTORS® Commercial Real Estate QUARTERLY MARKET SURVEY, June and September 2010 11

Property Tax Revenues Expected to Decline At Least Through FY 2011

% Annual Growth 16,0% 14,0% 12,0% 10,0% 8,0% 6,0% 4,0% 2,0% 0,0% -2,0% -4,0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Fiscal Year est.

2011 est.

Growth in Total RE Assessed Values (106 localities surveyed): 2009 to 2010: -5.0% Growth in Total RE Revenues (109 localities surveyed): FY2009 to FY2010: 0.2% FY2010 to budgeted FY2011: -2.8%

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…Growth in Total Local Revenues Still Declining as Well

% Annual Growth 12,0% 10,0% 8,0% 6,0% 4,0% 2,0% 0,0% -2,0% -4,0% -6,0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 est.

Fiscal Year

107 localities responding to VML/VACO survey: FY2009 to FY2010: -3.6% FY2010 to budgeted FY2011: -1.2%

2011 est.

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State Sources Provided Only 21% of All County Revenues in FY 2009 Federal Sources; 3% State Sources; 21%

Source: Auditor of Public Accounts Comparative Report

County Revenue; 63%

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… But 42% of All FY 2009 County Revenues If 4 Northern Virginia Counties* Are Excluded Federal Sources, 6% State Sources; 42% County Revenue; 52%

* Counties of Arlington, Fairfax, Loudoun, Prince William 15

State GF Appropriations to Localities Has Decreased by $1 Billion Since FY 2009

Direct Aid to K-12 Health and Human Services

CSA Community MH/MR Services Local Social Services Staff Community Health Programs Welfare Services and Programs

Public Safety

Local Sheriffs Offices Local Police Depts HB 599 Local Jail Per diem Assistance for Juvenile Justice

Constitutional Officers Car Tax Aid-to-Locality Reduction Total Local GF Aid Total GF Appropriations

(1) Does not include appropriated federal stimulus funds in FY 10 and FY 11.

FY 2009 $5,607.6

888.4

299.7 249.4 117.4 117.6 104.3

734.3

406.1 197.3 80.1 50.8

155.3 950.0 (50.0) 8,285.6 $15,943.0

FY 2010 $4,769.8

878.7

279.2 256.5 117.4 116.9 108.7

556.8

257.1 180.8 68.1 50.8

142.2 950.0 (50.0) 7,247.5 $14,787.2

FY 2011 $4,739.3

823.3

272.2 230.1 114.4 106.1 100.5

671.6

399.9 178.7 47.6 45.4

144.2 950.0 (60.0) 7,268.4 $15,377.0

FY 2012 $4,903.1

813.7

274.0 230.1 111.4 105.0 93.2

642.7

387.4 160.0 49.9 45.4

144.2 950.0 (60.0) 7,393.7 $16,021.1

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…And Is Falling as a Percent of Total GF Appropriations

FY 2009 FY 2010 FY 2011 FY 2012 Direct Aid to K-12 Health and Human Services Aid Public Safety Aid Car Tax Constitutional Officers Aid-to-Locality Reduction Total Local GF Aid 35.2% 5.6% 4.6% 6.0% 1.0% -0.3% 52.0% 32.3% 5.9% 3.8% 6.4% 1.0% -0.3% 49.0% 30.8% 5.4% 4.4% 6.2% 0.9% -0.4% 47.3% 30.6% 5.1% 4.0% 5.9% 0.9% -0.4% 46.1%

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Existing Spending Pressures Will Limit State Aid to Localities for Foreseeable Future

• Constitutional requirement to fill Rainy Day Fund.

Requires deposit of half of growth above previous six-year average GF revenue growth. Expect $200-300 million/year in deposits in FY 2014-2017 to restore fund.

• Continued 10% Medicaid growth rates (costs + utilization), plus new health care bill requirements in 2014 (additional Medicaid eligibility costs state $100’s of millions /yr).

• VRS contributions for both teachers and state employees will have to be restored to actuarially sound levels. Plus, adopted budget calls for 10 year payback of prior cuts. Employer rates will significantly increase.

• Continued growth in future biennia debt service requirements.

• Other numerous pent-up demands for additional state agency funding, including growing VITA contractual demands.

• No appetite for general fund tax increases and additional revenue pressures for transportation first.

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Revenue Stabilization Fund Balances ($ Mil.)

$1,800.0

$1,600.0

$1,682.0

$1,526.4

$1,400.0

$1,200.0

$1,216.7

$1,189.8

$1,064.7

$1,014.9

$1,000.0

$920.6

$800.0

$715.6

$613.6

$600.0

$574.6

$575.1

$472.4

$482.3

$400.0

$361.5

$247.5

$340.1

$295.2 $305.3

$365.9 $378.4

$200.0

$80.1 $85.0

$156.6

$224.3

$0.0

FY 95 FY 96 FY 97 FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 est est est est FY 15 FY 16 FY 17 FY 18 est est est est Out-year RDF balances could rise even higher if constitutional amendment passes, increasing max. from 10-15% of major GF taxes 19

2010-12 VRS Teacher Rates May Triple in Future Biennia

Fall 2009

VRS

Board Certified

Employer Rates

Spring 2010

VRS

Adopted Budget

Employer Rates Retirement* = 12.91% Retiree Health Care Credit = 1.08% Group Life = 1.11% VSDP = 0.66% Retirement* = FY 11: 3.93%; FY 12: 5.16% Retiree Health Care Credit = 0.60% Group Life = 0.28% VSDP = 0.00% * Does not include 5% member contribution

2012-2014: “In setting the employer retirement contribution rates in subsequent biennia, the Board shall calculate a separate, supplemental employer contribution rate that will amortize the FY 2011 and 2012 contribution shortfalls over a 10-year period using the Board's assumed long-term rate of return. The Governor shall include funds to support payment of such Board-approved, supplemental employer contribution rates in the budget submitted to the General Assembly.”

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Medicaid Expenditures Growing Faster Than Rest of State Budget

8000 7000 6000 FY 1999-09 Avg. Growth = 9%,

FY 10 = 14.7%

5000

$ Mil.

4000 3000 2000 1000 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Fiscal Year

* DMAS forecasted - does not include Medicaid expenditures for MH&MR facilities and CSA 21

General Fund Appropriation Trends

K-12 Direct Aid

Higher & Other ED Other HH&S

DMAS (Medicaid)

Public Safety/Comp Board Car Tax Debt Service All Other FY 2009 FY 2010 FY 2011 FY 2012

35.2%

12.2% 9.2%

14.7%

15.3% 6.0% 2.8% 4.6%

32.3%

12.0% 9.6%

16.3%

14.6% 6.4% 3.2% 5.6%

30.8%

11.6% 9.0%

18.3%

14.7% 6.2% 3.7% 5.7%

30.6%

9.9% 8.5%

21.2%

13.8% 5.9% 3.8% 6.2% 22

VACO/VML Survey Results Indicate Localities Still Pessimistic

Meet its financial needs

All Localities(127):

FY 2010 as compared to FY 2009? FY 2011 as compared to FY 2010? FY 2012 as compared to FY 2011?

Cities (37):

FY 2010 as compared to FY 2009? FY 2011 as compared to FY 2010? FY 2012 as compared to FY 2011?

Counties (90):

FY 2010 as compared to FY 2009? FY 2011 as compared to FY 2010? FY 2012 as compared to FY 2011? Better Same Less Able 2.3% 29.0% 6.3 68.7% 32.8 60.9 2.4 39.4 58.3 0.0% 0.0 2.7 3.2% 8.9 2.2 23.7% 35.1 45.9 31.2% 31.1 36.0 76.3% 64.9 51.4 65.6% 60.0 61.8

Survey Indicates Declining State Aid a Major Concern for Localities

Localities Citing Concern: 2009 Total 2010 Total

Declining personal property assessments Declining real property values and taxes Declining sales taxes Other taxes and local revenue declining Declining economic conditions

Declining state aid Declining state aid to Education

Declining state aid to CSA /Social Services Declining state aid to Comp Board State mandates Elimination of stimulus funds Declining federal funds Maintain level of services Elimination of 599 Funds Other 33 48 19 78 45

72 11

1 3 9 13 0 3 2 16 5 33 15 15 10

73 16

5 14 13 5 8 2 0 11 Total Concerns Expressed 353 246 24

Local Government Budgets Reduced by 2.7% and School Budgets by 3.3% in FY 2011 *

In Top 3 Budget Balancing Actions * 109 localities responding

Delay or cancellation of capital outlay/infrastructure Personnel layoffs- RIF Increase tax rates Targeted cuts in other services and programs Draw down reserves Targeted cuts in public education Hiring freeze Across the board service cut Renegotiate debt Delay of annual equip. replacement programs Reduced contributions to civic/cultural Reducing staff health care benefits Fee increases Replacing local general funds with special funds Salary or wage reductions Early retirement incentives Targeted cuts in public safety services Personnel furloughs Other 6 6 5 5 3 16 13 12 11 10 7 40 33 29 27 26 25 18 16 25

There Have Been Large Shifts in Virginia Employment Over the Last 10 Years

June 2000 Employment June 2010 Employment Change % Change Total Nonfarm Natural Resources and Mining Construction Manufacturing Trade, Transportation, and Utilities Information Finance Professional and Business Services Educational and Health Services Leisure and Hospitality Other Services Government

Federal State Local

Source: Virginia Employment Commission 3,557,400 11,500 214,600 364,900 648,100 120,000 180,700 575,200 330,700 317,700 162,200 632,000

158,700 139,400 333,900

3,674,400 9,700 182,600 231,800 623,300 74,700 178,300 643,400 460,000 366,900 197,700 706,000

180,600 149,500 375,900

117,000 (1,800) (32,000) (133,100) (24,800) (45,300) (2,400) 68,200 129,300 49,200 35,500 74,000

21,900 10,100 42,000

3.3% -15.7% -14.9% -36.5% -3.8% -37.8% -1.3% 11.9% 39.1% 15.5% 21.9% 11.7%

13.8% 7.2% 12.6%

Where Are Jobs Coming Back?

June 2009 Employment June 2010 Employment Change 1 Year % Change Total Nonfarm Natural Resources and Mining Construction Manufacturing Trade, Transportation, Utilities Information Finance Professional and Business Services Educational and Health Services Leisure and Hospitality Other Services Government

Federal State Local

3,678,000 10,100 192,100 238,300 625,200 81,800 181,800 639,300 450,700 364,000 188,400 706,300 166,200 148,600 391,500 3,674,400 9,700 182,600 231,800 623,300 74,700 178,300 643,400 460,000 366,900 197,700 706,000 180,600 149,500 375,900 (3,600) (400) (9,500) (6,500) (1,900) (7,100) (3,500) 4,100 9,300 2,900 9,300 (300) 14,400 900 (15,600) -0.1% -4.0% -4.9% -2.7% -0.3% -8.7% -1.9% 0.6% 2.1% 0.8% 4.9% 0.0% 8.7% 0.6% -4.0% 27

Local Government Job Losses by MSA

MSA Region Northern Virginia Hampton Roads Richmond Roanoke-Blacksburg Charlottesville Danville Harrisonburg Lynchburg June 2009 - June 2010 Job Changes (5,700) (4,800) (3,600) (800) (500) (200) (100) 200 Source: Virginia Employment Commission

Localities Should Plan On Tough Budgets for Foreseeable Future

• • • Federal relief is waning. Do not expect meaningful increases in state aid for several biennia.

While a double-dip recession is not likely, job growth and real estate recovery will likely be slow, therefore: Slow increases in real estate assessments; And slow growth in most other local taxes.

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