Transcript Slide 1

State Economic and Budget Trends
Impact on Local Governments
Fiscal Analytics, Ltd.
September, 2014
Virginia GF Revenue Declined 1.6% in FY 2014
2.7% per Year Growth Now Projected in 2014-16
15.0%
10.0%
5.0%
0.0%
-5.0%
U.S. recessions
-10.0%
2
2014-16 Budget Now Requires an
Additional $882 Million in Cuts
• In FY 14, VA GF revenue declined for the first time without a U.S.
recession (-1.6 percent, or $439 mil. below official forecast).
Non-withholding income tax payments were the primary reason for
the missed forecast. Final payments were $342 million below
previous tax year. Withholding grew 2.3%.
Sales and corporate income taxes fell 4.8% and 4.9%.
Lower FY 14 GF revenue base carries over into 2014-16.
• Additional GF reduction of $882 million forecast ($346 m in FY 15 and
$536 m in FY 16) beyond the $1.55 billion shortfall anticipated in the June
23 adopted 2014-16 budget. Total GF growth lowered to 2.7%/yr.
Re-forecast of GF revenues further reduces payroll withholding
growth expectations from 4.5 percent to 2.7 percent in FY 15.
Non-withholding forecast capped at 15 percent of total GF
revenue collections.
3
Despite 5 Years of U.S. Economic Recovery,
Federal Cutbacks Are Hurting Virginia’s Economic Recovery
• In 2010, federal spending ($137 B total; $58B DoD)
contributed approximately one-third of Virginia’s gross state
product ($424 B).
VA ranked #2 in total per capita federal spending and
#1 in per capita DoD spending in 2010.
• From CY 2000-10 federal spending in VA grew 107% versus
60% in total Virginia’s gross state product.
• In federal fiscal year 2013, federal spending* grew only 0.7
percent, with military spending declining 7.2 percent. Thru
July FFY 2014, total spending* increased 0.4% with defense
spending declining 5.8 percent.
• Chmura Economics recently reported the DoD spent a total
of $41.4 billion on direct operations and contracts in
Virginia in 2013, down from $54.8 billion in 2012.
* Not including interest on debt and GSE payments.
4
4
Virginia Payroll Employment Growth
YoY % Chg
4
U.S.
Virginia
3
2
1
0
-1
-2
-3
July 2014
US: 1.9%
VA: 0.6%
-4
-5
-6
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Bureau of Labor Statistics/Haver Analytics
5
2015
Virginia Has a Much Higher Percentage of Professional
and Business Service Jobs Than the Nation
2013
U.S.
0.6
0.3
Natural Resources & Mining
Virginia
4.3
4.7
Construction
8.8
Manufacturing
6.1
19.0
Trade, Transportation & Utilities
16.9
2.0
1.9
Information
5.8
Financial Activities
5.1
13.6
Professional & Business Services
18.0
15.5
Education & Health Services
13.2
10.4
9.7
Leisure & Hospitality
4.0
Other Services
5.2
16.0
Government
18.9
0.0
2.0
Source: Bureau of Labor Statistics/Haver Analytics
4.0
6.0
8.0 10.0 12.0 14.0 16.0
Employment Share (Percent)
18.0
20.0
6
Federal Cutbacks Have Resulted
in Low Job Growth in High-Paying Jobs
Percent Change in Employment from a Year Ago, NSA
U.S.
July 2014
Virginia
1.9
Total
0.8
5.6
Natural Resources & Mining
0.0
3.6
Construction
2.0
1.5
Manufacturing
0.4
2.2
Trade, Transportation & Utilities
Information
0.6
-1.0
-1.5
0.7
0.8
Financial Activities
3.5
Professional & Business Services
-1.0
1.8
Education & Health Services
3.9
2.6
Leisure & Hospitality
1.5
0.9
Other Services
2.4
0.5
Government
-0.4
-2
Source: Bureau of Labor Statistics/Haver Analytics
0
2
YoY % Chg (NSA)
4
6
7
Virginia’s Replacement of High Paying With Low Paying Jobs
Helps Explain Slow Growth in Wages and Tax Revenues
(% of Total VA Employment)
22.0%
21.0%
Health, Leisure, and Hospitality
20.0%
19.0%
18.0%
17.0%
Professional and Business Services
16.0%
2001
2002
2002
2002
2003
2003
2003
2004
2004
2004
2005
2005
2005
2006
2006
2006
2007
2007
2007
2008
2008
2008
2009
2009
2009
2010
2010
2010
2011
2011
2011
2012
2012
2012
2013
2013
2013
2014
2014
15.0%
8
High Paying Business and Professional Jobs
Generate Significant Tax Revenue
3rd Q 2013
Avg. Weekly Wage
Management of Companies and Enterprises
Professional, Scientific, and Technical Servi
Information
Finance and Insurance
Wholesale Trade
Utilities
Public Administration
Mining, Quarrying, and Oil and Gas Extraction
Manufacturing
Transportation and Warehousing
Construction
Real Estate and Rental and Leasing
Health Care and Social Assistance
Educational Services
Other Services (except Public Administration)
Unclassified establishments
Administrative, Support and Waste Manageme
Agriculture, Forestry, Fishing and Hunting
Retail Trade
Arts, Entertainment, and Recreation
Accommodation and Food Services
$1,860
$1,785
$1,491
$1,402
$1,366
$1,359
$1,343
$1,213
$1,034
$934
$924
$893
$878
$820
$728
$726
$699
$542
$509
$426
$332
9
Virginia Wages and Salary Growth
Significantly Below U.S.
YoY % Chg
10
U.S.
Virginia
8
6
4
2
0
-2
1Q: 2014
US: 3.6%
VA: 0.8%
-4
-6
2004
2005
2006
2007
2008
Source: Bureau of Economic Analysis/Haver Analytics
2009
2010
2011
2012
2013
2014
2015
10
Slowing Growth in Individual Income Tax Withholding
12 Mo. Moving Avg (% Growth)
8.0
7.0
6.0
%
5.0
4.0
G
r
3.0
o
w
2.0
t
h
1.0
0.0
(1.0)
(2.0)
11
Taxable Sales Growth Approaching Zero
6.0%
4.0%
A
n
n 2.0%
u
a
l
0.0%
G
r
o
w -2.0%
t
h
Total Counties
2007
2008
2009
2010
2011
2012
2013
2014 1H
Total Cities
-4.0%
-6.0%
Calendar Year
12
2014-16 Adopted GF Budget Anticipated Only $1.55 B Shortfall
Additional 2014-16 Cuts of $346 M and $536 M Needed
2014 Session Adopted Budgets ($ Mil.)
Legislative and Executive Dept's
Judicial Dept.
Administration/Comp Board
Treasury Board GF Debt Service
Other Finance/Technology
Rainy Day Fund
Car Tax Reimbursement
Commerce and Trade
Agriculture / Nat. Resources
K-12 Education/Central Office
Higher & Other Education
DMAS Medicaid
Other Health & Human Services
Public Safety & Veterans/HS
Transportation
Central Appropriations*
Independent Agencies/Capital
Total GF Appropriations
Available Balance to Spend
GF Resources**
Unspent Balance**
FY 2014
Budget
FY 2015
FY 2016
FY 15 Change
from FY 14
$103.2
425.2
654.1
608.5
171.9
339.6
950.0
183.3
144.0
5,292.7
1,782.1
3,519.8
1,541.5
1,699.0
42.0
247.2
1.2
$109.0
436.4
675.7
682.5
179.4
243.2
950.0
166.5
182.7
5,549.7
1,858.0
3,877.1
1,649.2
1,792.0
13.2
112.7
1.4
$107.2
435.5
679.1
724.0
181.2
950.0
179.1
152.4
5,641.7
1,858.8
4,043.1
1,620.9
1,799.8
69.1
167.5
1.2
$5.8
11.2
21.6
74.0
7.5
(96.4)
(16.8)
38.7
257.0
76.0
357.3
107.7
93.0
(28.9)
(134.5)
0.2
$17,705.3
879.7
16,954.1
128.6
$18,478.7
276.0
18,484.1
5.4
$18,610.6
6.2
18,616.4
5.8
$773.4
$480.0
$362.5
$842.5
($600.0)
$470.0
($600.0)
$ 237.5
* Net of CA Reserve
** Incl. prelim. revenue shortfalls
and Rainy Day Fund drawdown
($350.0)
($1,550.0)
$707.5 13
Local Priorities Losing Ground
Major GF Budget Drivers FY 2006-16
140.0%
123.7%
120.0%
96.8%
100.0%
80.0%
60.0%
51.2%
40.0%
22.5%
20.0%
11.9%
15.3%
All Programs 26.5%
14.6%
0.0%
-3.0%
-20.0%
14
Inflation-Adjusted State Per Pupil K-12 Funding
Reveals Even Larger Declines in State Aid
(2007 $ - All State Appropriated Funds)
$5,200
$5,039
$5,000
$4,868
$4,807
$4,800
$4,720
$4,600
$4,400
$4,342
$4,242
$4,250
2013
2014
$4,240
$4,175
$4,200
$4,083
$4,000
2007
2008
2009
2010
2011
2012
2015
2016
Includes GF, lottery profits, miscellaneous NGF, and state appropriated federal stimulus funds adjusted by the CPI
15
Relative State Aid to Localities
Still Declining in Adopted Budget
GF/Lottery State Funding for Localities
2008-10
2010-12
2012-14
2014-16 (a)
$11,248.0
$10,550.7
$11,444.9
$12,196.0
Health and Human Services
$1,767.1
$1,639.5
$1,610.6
$1,638.6
Public Safety
$1,291.1
$1,356.0
$1,367.1
$1,402.0
HB 599 Aid to Police
$378.1
$351.1
$344.8
$344.8
Constitutional Officers
$297.5
$288.0
$289.3
$304.9
$1,900.0
$1,900.0
$1,900.0
$1,900.0
$94.9
$96.6
$98.7
$98.7
($100.0)
($120.0)
($50.0)
$0.0
Total Local Aid GF + Lottery
$16,498.6
$15,710.8
$16,660.6
$17,540.2
Total GF + Lottery Appropriations
$31,600.8
$32,922.6
$35,861.4
$38,124.3
Direct Aid to K-12 % of Total
GF/Lottery
35.6%
32.0%
31.9%
32.0%
Total Local Aid % of Total GF/Lottery
52.2%
47.7%
46.5%
46.0%
Direct Aid to K-12
Car Tax
Recordation/Rolling Stock/TVA
Aid-to-Locality Reduction
16
Long-Term Headwinds for Increasing
State Support for Local-Administered Programs
• How will the Virginia economy replace the loss of high paying business
and professional jobs? Will highly paid professionals transition to new
industries?
• Medicaid program continuing to grow faster than GF revenues.
• Will VRS rates for teachers and state-supported employees continue to
rise? Will recent good VRS investment returns help rate outlook?
2014-16 VRS teacher rates rose 24 percent from 11.66% to 14.5%.
• State continues to incur more GF debt service due to lack of a pay-as-yougo capital program. Lower revenues will impact new debt capacity.
• More general funds for transportation scheduled.
17
FY 13 Sources of Revenue for Virginia Cities
All Other Local
Taxes/Revenue,
7.4%
Meals, 3.4%
BPOL, 3.0%
Sales Tax, 4.0%
State, 33.9%
Service Charges,
7.3%
Other Property,
6.6%
Federal, 7.9%
Real Property,
26.4%
18
Without Tax Increases Local Revenues
Will Not Offset State Funding Losses
Local Revenue Trends
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
Real Property
4.0%
2.0%
0.0%
-2.0%
Total Local Revenues
-4.0%
Fiscal Year
19
Tough Choices Continued
for Local Budgets in FY 2014
* 44 localities responding to VML/VACO survey
Top 3 FY 14 Local Budget
Balancing Actions
Delay or Cancel Capital or Equipment Purchases
21
Increase tax rates or fees*
14
Drawdown Reserves or Balances
13
Other Targeted Budget Cuts
13
Reduce Employee Benefits
9
Eliminate Vacancies or Positions
8
Salary or Hiring Freezes
7
Renegotiate Debt
6
One-time/Other
5
K-12 Education Cuts
5
Early Retirement Incentives
3
Across-the-Board Budget Cuts
1
* 11 of 44 localities increased RE tax rates - 8 at rate greater than equalization
Source: Results from VML/VACO 2013 fiscal survey
20
Does Fall 2008 Budget Balancing Actions
Provide Clues for Fall 2014?
FY 09 Budget Balancing Actions:
Agency Reductions @ 7.5%:
Revenue Stabilization Fund Withdrawal
$400.0
Improved business practices
Bond Existing GF Capital Projects
$250.0
Transfer of NGF operating balances
$48.3
Literary Fund Balances
$51.3
Reduce or eliminate current services
$31.7
Capture 2008 GF Balances
$40.7
Reduce personnel costs
$27.2
Delay Salary Increases
$44.7
Supplant GF with NGF
$18.2
K-12 Sales Tax Adjustment
$20.7
Reduce aid to localities
$16.3
$7.7
Reduce discretionary expenses
$13.4
$6.2
Reduce or eliminate aid to non-state
agencies
$11.1
$279.0
Reversion of capital outlay balances
$10.6
HB 599 Payment Adjustment
Revert Excess in Tuition Moderation
Fund
Agency Reductions @ 7.5%
Total Balancing Actions
$1,100.3
$100.0
Reduce or eliminate aid to individuals
$1.6
Fee increases
$0.4
GF revenue producing items
$0.2
$279.0
21
Non-Recurring Budget Balancing Actions
Enacted During the Great Recession
• $50 million per year “clawback” in aid-to-localities for the 2008-10
biennium and $60 million per year in the 2010-12 biennium.
• Replace cash for capital projects to debt - $350 mil.
• Accelerated Sales Tax Collections from July to June – $241.8 mil.
• Tax Amnesty Program - $102.1 mil.
• Transfer non-general fund balances to general fund - $83.3 mil.
• Temporarily adjust FY 10 Land Preservation Tax Credit - $50 mil.
• University of Virginia/Radford balances for debt - $48.9 mil.
• Revert capital/maintenance reserve balances - $41.1 mil.
• Replace Fire Programs Fund balance with credit line - $26.0 mil.
• Enhanced Tax Compliance $22.9 mil.
• Divert interest on non-general fund accounts - $17.7 mil.
• Sale of surplus property and helicopter - $6.6 mil.
• Eliminate sales tax dealer discount for electronic filers - $98.2 mil.
22
Retirement/Benefit Savings Actions
Enacted During the Great Recession
• $87 mil. in FY 2010 by suspending employer retirement
contributions for teachers and state employees in 4th Q.
• $325 mil. in FY 2011 and $296 million in FY 2012 by using a lower
than actuarial certified VRS rate for state employee and teacher
retirement.
• $13 mil. in 4th Q FY 2010 by suspending employer contributions for
Group Life/Disability Insurance, and the Retiree Health Care Credit.
• $94.5 mil. from Group Life/Disability Insurance premium holiday in
2010-12 biennium.
• $20 mil. by recording employee retirement contributions in July
instead of June 2010.
• $9.8 mil. from one day furlough of state employees in FY 2010.
• $70 mil. by reverting retiree health care credit balances.
23
Should the State Look at Its Tax Preferences?
Largest Virginia Tax Preferences
Description of Largest Tax Preferences
Sales Tax Exemptions
Personal Property Tax Relief Act ("Car Tax")
Subtraction For Those Aged 65 or older and 62-64 (means tested)
Social Security and Railroad Retirement Subtraction
Estate Tax Elimination
Tax Credit for Families Below the Poverty Level
Tax Credit for Land Preservation (credits transferable)
Coalfield Employment and Production Incentive Tax Credits ($3/Ton)
Tax Credit for Historic Rehabilitation
Single Sales Factor for Corporate Income Tax
Child and Dependent Care Deduction
Coalfield Employment Enhancement Tax Credits
Subtraction for Unemployment Benefits
Virginia Education Savings Trust
Blind and Aged Personal Exemption
Deduction/Credit for Long Term Health Care Insurance
Subtraction for Military Wages -- Up to $15,000
Tax Credit for Motion Pictures and Media Equipment
Neighborhood Assistance Tax Credit
Subtraction of Disability Income
Major Business Facility Job Tax Credit
Tax Credit for Equity and Subordinated Debt Investments
Cost Est. ($mil.)
See table next page
$950.0
$284.9
$244.0
$140.0
$115.7
$100.0
$59.4
$59.2
$59.0
$28.4
$25.0
$21.8
$17.9
$14.7
$8.0
$7.8
$7.5
$6.2
$5.8
$4.3
$2.1
24
Largest Sales Tax Exemptions
Cost Est. ($mil.)
Services Exemptions
Prescription Drugs
Partial Food for Home Consumption
Non-Profit Organizations
Advertising
Transportation Services
Residential Heating Fuels
Research & Development
NonPrescription Drugs
Railroad Common Carriers
School Lunches
Airline Common Carrier
Movie Theatre and Broadcaster Purchases
Churches
Donations of Tangible Goods to Non-Profits
Media Provider Equipment
Printed Materials for Out-of-State Distribution
School Supplies Holiday
Forestry Equipment
Pollution Control Equipment
Ships and Vessels
Durable medical Equipment
Hurricane Preparedness Sales Tax Holiday
$ Varies by Service
$378.8
$346.2
$178.2
$84.8
$83.8
$41.9
$28.9
$26.7
$20.1
$12.0
$10.1
$7.5
$6.0
$5.5
$5.2
$5.0
$4.1
$3.8
$3.8
$2.8
$2.3
$2.2
25
Transportation Will Still Be a Challenge
 In February, VDOT reported that the state revenue forecast for FY 2014 – 19
would be reduced by $796.0 million, mainly due to lower motor fuel prices
than originally expected in HB 2313.
 For the same period, VDOT forecasted a reduction of $123.0 million in
federal and other sources.
 For the FY 2015 – 20 improvement program, VDOT forecasted $491.0
million less than the previous six-year improvement program.
 $55.0 million less in state and federal revenues
 $436.0 million less in anticipated bond sales
 The projections for the new six-year improvement program mean fewer
construction dollars.
 Elimination of funds for urban and secondary roads through the
construction formula.
 Transfers from the construction budget to maintenance is projected at
$724.4 million for fiscal years 2015 – 2020.
Public Transit Challenges
 If Congress fails to pass the Marketplace Fairness Act (MFA) by January 1,
2015, then the motor fuel tax at the “rack” increases by 1.6% to make up the
revenue loss.
 However, the new increment would be used exclusively for road
maintenance. Transit would have received a share of MFA revenue.
Without MFA, DRPT expects $20.0 million less revenue for transit projects.
 After the state bonds for transit are exhausted in FY 19, even with the HB
2313 revenues the state match for transit capital projects will drop to about
10.0 percent by FY 20. Dropping from $160.0 million in FY15 to less than
$120.0 million in FY 2020 and to just over $60.0 million by FY 2023.
27
Local Funding Will Continue to be
Needed for Transportation System
• Local urban street maintenance expenditures exceeded state payments by
32% in FY 2012.*
Recent VDOT pavement condition survey found urban locality
pavements in worse condition, despite spending a higher percent of
funds on paving, than VDOT maintained roads.
• Including capital outlay expenditures, local unreimbursed expenditures for
highways exceeded $366 million in FY 2012, not including toll revenue, and
debt service for transportation bonds.*
• State revenue sharing increasing. $181 mil. for 212 projects allocated to 79
localities in FY 15.
• Local general funds subsidizing public transit include $265 million for
operating assistance and $58 million for capital in FY 2013.**
• More special tax districts, such as commercial and industrial property in
NVTD (up to 0.125 per $100) for transportation.
* FY 2012 Weldon Cooper Road, Street, and Highway Finance Survey
** Dept. of Rail and Public Transportation SYIP
28
New Regional Revenues in FY 2015
Northern Virginia Region
0.7% Sales Tax
Hampton Roads Region Region
$245
2% Transient
Occupancy
$28
$0.15/$100
Grantor's Tax
$34
Total Local
NoVa Tax
$307
0.7% Sales Tax
$130
2.1% Gasoline tax
$71
Total Local HR Tax
$201
29
Appendices
30
Virginia Housing Starts Stuck in Low Gear
SAAR, thousands
2,500
SAAR, thousands
90
Virginia (Left Axis)
80
United States (Right Axis)
2,000
70
60
1,500
50
40
1,000
30
20
500
10
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0
2015
Source: Bank of Tokyo-Mitsubishi UFJ/Haver Analytics
31
31
…And VA Prices Growing Slower Than U.S. Avg.
House Price Index—FHFA
YoY % Chg
24
U.S.
Virginia
21
2Q: 2014
US: 5.8%
VA: 2.7%
18
15
12
9
6
3
0
-3
-6
-9
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Federal Housing Finance Agency/Haver Analytics
32
State GF Debt Service Growing Rapidly
$800
$700
$600
$ Millions
$500
$400
$300
$200
$100
$0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Fiscal Year
33
Rainy Day Fund Withdrawals: Half of Budget
Shortfall or Max. Half of RDF Balance
Revenue Stabilization Fund Year-End Balances
1400.0
1189.8
1200.0
1064.7
1014.9
1000.0
930.7*
$
M
i 800.0
l
l
i 600.0
o
n
s
400.0
715.6
575.1
574.6
482.3
472.4
440.0
361.5
224.3
200.0
340.1
470.1
295.2 299.4 303.6
247.5
238.3
156.6
80.1 85.0
0.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
* Includes mandatory FY 15 deposit of $243.2 million from FY 13 revenues. RDF withdrawals in FY 15 and 16 of
$470m and $235m expected.
34
Virginia Is a Wealthy, Relatively Low Tax State,
With Higher Reliance on Locality Taxes
State Rank
Per capita personal income
8
State and local taxes as a percentage of personal income
43
Per capita state taxes
32
Per capita local taxes
14
Individual income taxes as a percentage of state and local tax revenue
7
Per capita state and local debt outstanding
28
Source: Virginia Compared to Other States, JLARC, 2013 Edition
35
Virginia Spending Rankings
Reflect Tax Policies
State Rank
State Per Pupil Funding Pre-K-12
38
State and Local Per Pupil Funding
21
Average Salary of Public School Teachers
29
Per Capita Medicaid Expenditures
46
In-State Tuition and Fees at Public 4-Year Institutions
13
State Corrections Expenditures per Offender
13
Source: Virginia Compared to Other States, JLARC, 2013 Edition
36
Virginia Board of Education Recommended,
But Unfunded, Changes to the SOQ
Year First
Recommended
FY 2014
Est. $ Mil
A full-time principal for each elementary school
2003
$8.0
A full-time assistant principal for every 400 students in the school
2003
$70.6
One reading specialist for every 1,000 students in K-12
2003
$51.3
One mathematics specialist for every 1,000 students in K-8
2006
$35.0
A data manager-test coordinator for every 1,000 students in K-12
2006
$51.3
Reducing speech-language pathologist caseloads from 68 to 60
2003
$5.3
Total Annual Unfunded BOE Recommended SOQ Changes
$221.5
37