State Funding Outlook for Locally Administered Programs Overview

State Funding Outlook for Locally-Administered Programs James J. Regimbal Jr. Fiscal Analytics, Ltd April, 2012

Growth in State Tax Receipts Is Stabilizing Growth in Individual Income Tax Withholding 12 Mo. Moving Avg (% Growth) 10.0 8.0 % G r o w t h 6.0 4.0 2.0 0.0 (2.0) 2

But Revenues Not Rebounding as Fast After Recession Growth in Total General Fund Tax Revenues 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 3 3 3

Virginia Economy No Longer Outpacing U.S.? Virginia Versus U.S. Personal Income Growth Differential 2.0 1.5 1.0 Percent (%) 0.5 - (0.5) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 est. 2013 est. 2014 est. Fiscal Year 4 4

Can Increasing Reliance on Non-General Fund Revenues Continue? Change in State Operating Appropriations ($ Mil.) $30,000 NGF* $25,000 $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 5 5

Average Funding per FTE Student at Four-Year Institutions (Constant Dollars) $12,000 Tuition, Fees, etc $10,000 $8,000 State GF $6,000 $4,000 $2,000 $- 1993 1995 1997 1999 2001 Fiscal Year 2003 2005 2007 2009 2011 Source: http://www.schev.edu/SCHEV/AgendaBooks/2011Sept/AgendaBook0911.pdf , page 16. 6

State Aid is Falling For Localities State Categorical Aid As % of Local Expenditures 34.0% 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 2000-2010 7 7

While Local Revenues Continue to Suffer % Increase in Total Local Revenues 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 2011 2012 est. Fiscal Year Source: 1990-2010, Auditor of Public Accounts FY 11 & 12 estimates from VML/VACO 2011 Fiscal Survey 8 8 8 8

FY 2013 Introduced Budget Change in GF Appropriations Change From FY 12 FY 2013 $95.7 $417.4 $608.1 $624.0 $198.0 $132.7 $950.0 $195.1 $186.5 $5,132.3 $1,781.8 $3,634.0 $1,430.9 $1,706.7 $45.0 $40.2 Legislative and Executive Dept's Judicial Dept. Compensation Board Treasury Board GF Debt Service Other Admin., Finance (w/o debt), & Tech Rainy Day Fund Car Tax Reimbursement Commerce and Trade Agr., Nat. Res. K-12 Direct Aid (incl. teacher retire) Higher & Other Education DMAS (Medicaid) Other HHS Public Safety (incl. Veterans /HS) Transportation * Central Appr. Capital $0.1 $9.3 $9.6 $51.8 -$7.1 $132.7 $0.0 $26.5 $51.8 $219.5 $107.2 $240.1 $12.8 $46.7 -$91.2 -$21.5 -$8.9 $0.0 Total GF Expenditures $17,178.4 $779.3 * Does not include $54 million in GF sales tax transferred to highway maintenance as NGF 9 9 9 9

Governor Proposed a Decline in State Assistance for Locally-Administered Programs As % of GF FY 2009 FY 2010 FY 2011 FY 2012 (i) FY 2013 (i) FY 2014 (i) GF Direct Aid to K-12 $5,607.6 $4,769.8 $4,713.3 $4,912.8 $5,132.3 $5,175.7 Health and Human Services $888.4 $878.7 $816.8 $850.5 $844.9 $810.9 Public Safety $734.3 $556.8 $686.0 $667.7 $679.2 $679.9 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 $143.8 $143.8 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 $7,503.8 $7,700.2 $7,715.3 Total GF Appropriations $15,943.0 $14,787.2 $15,457.4 $16,556.9 $17,178.4 $17,365.2 % Local GF Aid 52.0% 49.0% 46.9% 45.3% 44.8% 44.4% 10 10 10 10

Little New K-12 GF Spending in Introduced Budget Above FY 2012 Base* FY 2013 FY 2014 Update Teacher Retirement Contribution Rates $170.9 $171.5 All Other Spending Proposals** $9.6 $52.1 Net New K-12 Spending Above Chapter 890 Base $180.5 $223.6 * FY 12 Base funding annualizes part-year and removes one-time funding, such as $87.7 mil. appropriated for supplemental support. ** Does not include $28 mil. per year in Executive Amendments, primarily K-3 class size and early reading initiative funding. 11 11 11 11

Introduced Budget 2012-14 K-12 Funding Added to List of Recent 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 12 12

2012 General Assembly Recognized the Need to Help Localities 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 - $6.2 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. Rejected using GF for transportation. Provided localities the option of phasing in VRS rate increases. Added $42.3 mil. (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. 13

Other Issues In General Assembly of Local Concern Passed Eminent Domain Constitutional Amendment Defeated M&T Exemption for New Equipment Defeated Cap on BPOL 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 phase-in of higher rates for local employees. - Also benefit changes for unvested state employees and hybrid plan for new state employees in 2014. 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. 14

State Per Pupil Funding Projections (All Appropriated Funds) $5,400 $5,274 $5,200 $5,000 $5,000 $4,813 $4,811 $4,800 $4,600 $4,546 $4,513 $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 15 15 15 15 15 15

State Six-Year GF Plan Indicates Little Future Relief in Store for Localities ($ Mil.)* FY 2013-18 % Growth 16.4% 23.9% 36.4% FY 2013 FY 2018 K-12 Education Higher and Other Education Medicaid Other H&HS Public Safety Personal Property Tax Relief Debt Service Rainy Day Fund Other Finance and Admin. Judicial Commerce & Trade Nat Res., Ag, Forestry All Other Total Appropriations $ 5,190.1 1,724.0 3,537.8 1,802.0 1,697.1 $ 6,041.9 2,135.7 4,824.2 1,852.5 1,748.3 2.8% 3.0% 0.0% 4.7% -25.1% 0.1% 1.2% -13.7% -28.3% 203.1% 17.1% 950.0 624.0 132.7 797.7 417.4 195.1 186.5 198.9 950.0 653.3 99.4 798.1 422.4 168.4 133.7 602.8 $ 17,453.3 $ 20,430.7 Total GF Resources Balance Available $ 17,466.3 $ 13.0 $ 21,084.0 $ 653.3 20.7% 16 16 * See http://dpb.virginia.gov/forms/20120206-1%5C2012_GFSix-YearPlan.pdf

Reasons the State Is Restoring Little to Core Local-Aid Program Funding 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. Rainy Day Fund must be restored Half of any GF revenue growth above prior 6-yr. avg. (2% now) goes to RDF. VRS contribution rates for teachers and state employees are being significantly increased. 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. 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. Increasing efforts to use general funds for transportation. 2. 3. 4. 5. 6. 17 17

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 Shift Insurance Premiums and Recordation from GF to Transportation 2004 ($437) 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 18 18 18

Retirement Rates Will Rise FY 2012-14 FY 2012-14 2011 & 2012 VRS Board Cert. Rates FY 2011 6/25/2011- 3/24/2012 3/25/2012- 6/24/2012 VRS Board Cert. Rates * Conference Rates** State 2.13% 2.08% 6.58% 13.07% 8.76% 8.46% Teachers 3.93% 6.33% 6.33% 16.77% 11.66% 12.91% * 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%. 19 19

Health Care Has Trumped Education 2006-08 Budget Compared to 2012-14 Introduced Budget (Change in Appropriated GF Mil. $) $3,000.0 $2,423.5 $2,500.0 $2,000.0 $1,500.0 $1,000.0 $529.0 $500.0 $47.3 $0.0 ($2.5) ($500.0) ($371.1) ($1,000.0) ($1,110.6) ($1,500.0) Medicaid Debt Service Corrections K-12 Higher Ed CSA 20 20

K-12 and Medicaid Funding are Converging (% of Total GF Spending) 40.0% 35.0% K-12 30.0% 25.0% 20.0% Medicaid (DMAS) 15.0% 10.0% 5.0% 0.0% 2009 2010 2011 2012 2013 2014 21

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. 22 22 22 22

GF Debt Service Increasing Rapidly ($ Mil.) $700 $658 $624 $593 $600 $542 $500 $479 $434 $387 $400 $321 $300 $284 $247$236 $222$234$223 $200 $200 $185 $167 $126$138 $105 $91 $100 $65 $43 $28 $0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Senate Finance Committee Retreat, Nov. 2011 23

Governors Transportation Proposal Would Have Diverted Significant General Funds (HB 1248/SB 639) Phase-in additional 0.25% sales tax to transportation: $54 mil. in FY 13 increasing to $300+ mil. by FY 20. Dedicate one percent of general fund if growth is above five percent potentially over $170 mil./yr. Increase dedication of GF surplus from 67% to 75% (FY 2011 surplus yielded $67 mil.). Create transportation improvement districts whereby projects are partially funded using growth in state general funds from that district. 24

Growth in State General Fund and Transportation Revenues Versus Growth in Virginia Personal Income 4.00 3.50 Personal Income 3.00 GF Revenues 1988=1 2.50 2.00 State Transportation Revenues 1.50 1.00 25

Conclusion Are state policymakers beginning to recognize the fiscal condition of localities? - 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. But - Increased local costs by mandating VRS local employee 5 for 5, even if phased-in over five years. - Constitutional amendment on eminent domain potentially increases locality costs of providing services. It will take several biennia, even without another recession, for the state to restore funding to local government. Will leadership emerge to fix transportation funding crisis? Expect more pressure for local transportation funding. 26

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 27 27 27 Source: Auditor of Public Accounts Comparative Report of Revenues and Expenditures

Most Local Government Expenditures are Mandated or Regulated by the State 28 28 28 28 Source: Auditor of Public Accounts Comparative Report of Revenues and Expenditures

Source of Funds for Local Operating Expenditures - FY 2011 100% 90% 80% 70% 60% 50% Local State Federal 40% 30% 20% 10% 0% 29