Presentation for Sorensen Institute Class of 2007 State ...

Presentation for Sorensen Institute Class of 2007 State ...

An Overview Of Virginias Budget Issues Presentation for Thomas Jefferson Institutes 2007 Innovations in Government Conference Jody M. Wagner Secretary of Finance Commonwealth of Virginia 1111 E. Broad Street, 3rd Floor Richmond, Virginia 23219 Phone: (804) 786-1148 Email: [email protected] December 17, 2007 2008-2010 Budget: General Fund vs. Nongeneral Fund Appropriations $76.4 Billion $36.1 billion General Fund $40.3 billion Nongeneral Fund GF NGF 47.3% 52.7% Source: Governor Kaines Proposed 2008-2010 Biennial Budget Nongeneral Fund Revenues do not include bond proceeds. 2 Components of General Fund Revenues o In FY07, individual nonwithholding, corporate income, and recordation tax payments accounted for $4.2 billion of GF Revenues, up significantly from FY02s $2.0 billion.

Corporate 6% Recordation 4% FY 2007 Nonwithholding 18% Withholding 55% Sales 20% Withholding o In FY02, 83% of GF Revenues were from withholding and sales tax collections. In FY07 75% were from those sources. Sales Nonwithholding Corporate 3% Corporate Recordation Recordation 2% Nonwithholding 14% FY 2002 Sales 23% Note: The percentages below each source

reflect the percent share of total general fund revenues. The sum of the components exceeds 100 due to the exclusion of individual refunds and other revenue sources. Withholding Withholding 60% Sales Nonwithholding Corporate Recordation 3 Withholding and Nonwithholding Fiscal Year Percent Change Percent Change 40 30 20 10 0 -10 -20 -30 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Withholding Nonwithholding 4 Virginia Completed Fiscal Year 2007 $234 Million Shy of the Forecast o Net individual income taxes fell $111.8 million below forecast in Fiscal Year 2007. o Both withholding and nonwithholding receipts grew, but much of the gains were given back in refunds.

o When the Fiscal Year 2007 shortfall was added to the reduced revenue forecast for Fiscal Year 2008, the total initial estimate of the shortfall grew to $641 million for the current biennium. o Today we announced that as a result of administrative actions and a revised revenue forecast, the appropriation or budget shortfall is $522 million. 5 The FY07 Forecast Variance was In Line With the Average Historical Forecast Variance Annual Revenue Surplus/Shortage Forecast Error on the Revenue Estimate (millions of dollars) Fiscal Year 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Nominal Dollars ($) 115.3 27.4 (149.4) 51.5 44.2

112.1 25.5 51.6 53.4 198.3 173.5 155.3 5.8 (76.0) (237.0) 60.5 323.8 544.6 147.0 (234.4) Percent (%) 2.3 0.5 (2.6) 0.9 0.8 1.9 0.4 0.8 0.7 2.6 2.0 1.6 0.1 (0.7) (2.2) 0.6 2.8 4.1 1.0 (1.5) Real Dollars ($) 159.5 36.3 (190.1) 62.7 52.2 129.0 28.8

56.9 57.7 209.9 181.6 160.7 5.9 (75.1) (230.8) 57.8 303.0 496.0 129.8 (202.4) The 20-year average forecast variance is 1.6 percent. 6 Revenue Growth is Slowing Across the Nation & State Numerous states are experiencing revenue problems Florida is expected to face a $1.5 billion shortfall due to the weakening housing market. (Florida alone collected $2 billion in real estate taxes in 2004 30% of the total collected by all states.) Maryland and Michigan each face $1.7 billion deficits for FY08. Both are cutting spending and raising various taxes. Arizona is facing a $600 million shortfall in its current biennial budget. Californias operating deficit is now expected to be more than $8.6 billion 40% higher than the $6.1 billion gap projected as recently as August. Virginia localities also are expected to face revenue challenges Fairfax County receives more than 60% of general fund revenues from real estate taxes. Residential real estate assessments declined for the first time since 1998 by -0.33 percent.

Prince William County faces declining property tax revenues, resulting in a budget shortfall of $8.6 million in FY08 and $51 million in FY09. Virginia Beach is facing a $30 million budget shortfall in FY09. 7 Withholding and Corporate Fiscal Year Percent Change Percent Change 50 40 30 20 10 0 -10 -20 -30 -40 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Withholding Corporate 8 Corporate Income Tax Receipts Were Slightly Weaker Than Expected in FY07, Finishing $21.8 Million Below Forecast Corporate income tax collections increased 1.4 percent in FY07, down substantially from the 32 percent annual increase averaged over the previous four fiscal years. Growth in Net Corporate Income Tax Receipts, FY82-07 Percent Growth Over the Prior Year 50 40 30 20

10 0 -10 -20 -30 -40 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 9 The Share of Corporate Income Tax Receipts Attributable to Housing Declined Significantly Between FY06 and FY07 Corporate Income Tax Receipts From Large Companies Final and Estimated Payments in April-June By Industry Percent Share of Total Fiscal Year 2006 9% Fiscal Year 2007 16% 20% 65% 10% 8% 55% $232 million Defense Housing Trade Other 17% $191 million The top 200 corporate payers represent about 53% of total gross payments.

Housing is defined as mortgage companies, home builders, and real estate-related companies. 10 Withholding and Recordation Fiscal Year Percent Change Percent Change 50 40 30 20 10 0 -10 -20 -30 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Withholding Recordation Note: Recordation growth rate is adjusted to remove the rate increase. 11 Total General Fund Revenues Have Become Increasingly Volatile The increased significance of individual nonwithholding, corporate income, and recordation tax have introduced additional variability into collections. Taken together, the three most volatile revenue sources represented 28 percent of total revenues in FY07 compared with the historical average of 21 percent. Volatility in Total Revenues, FY91-07 Percent Growth Over the Prior Year 40 Total Revenue Three Volatile

30 20 10 0 -10 -20 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 12 December Revenue Forecast

The December Forecast Is Essentially Unchanged From The August Interim Revenue Forecast Summary of the December 2007 Revenue Forecast (millions of dollars) Major Source As a % of Total Revenues Withholding 56.2 % Nonwithholding Refunds Net Individual Sales Fiscal Year 2008 $ Amount $ Fiscal Year 2009 $ Change $ Amount $ Change $ Amount $ Change 9,601.8 $ (35.1) $ 10,177.8 $ (56.6) 9,042.3

$ (49.1) 19.0 3,059.4 33.0 3,279.5 10.6 3,545.8 43.9 (10.4) (1,680.6) (43.4) (1,795.3) (43.8) (1,833.2) (44.1) $ 11,086.0 $ 19.3 $ 11,890.4 $ 31.4 $ $

(1.2) $ $ 4.9 64.8 % $ 10,421.1 $ 27.4 19.5 % $ $ 0.0 3,136.0 $ Fiscal Year 2010 3,300.9 3,488.7 Corporate 4.6 747.9 21.7 743.7 (21.7) 783.9

(12.1) Wills (Recordation) 3.2 520.3 (10.2) 449.4 3.2 489.8 3.5 Insurance 2.5 403.4 7.3 284.2 (0.0) 305.9 8.9 All Other Revenue 5.3 858.6 15.3 746.5 (12.6)

766.0 (11.8) 61.6 $ 16,610.8 $ (13.0) $ 17,724.7 Total 100.0 % $ 16,087.3 $ $ 24.8 14 The December Forecast Is Essentially Unchanged From The August Interim Revenue Forecast (continued) Summary of the December 2007 Revenue Forecast (millions of dollars) Major Source As a % of Total Revenues Fiscal Year 2008 (a) $ Amount Withholding 56.2 % Nonwithholding

19.0 3,059.4 Refunds (10.4) (1,680.6) Net Individual Sales $ 9,042.3 % Growth 5.6 % $ Fiscal Year 2009 (b) $ Amount % Growth Fiscal Year 2010 $ Amount % Growth 9,601.8 6.2 % $ 10,177.8 6.0 % 10.0 3,279.5 7.2 3,545.8 8.1

7.7 (1,795.3) 6.8 (1,833.2) 2.1 64.8 % $ 10,421.1 6.5 % $ 11,086.0 6.4 % $ 11,890.4 7.3 % 19.5 % $ 2.8 % $ 5.3 % $ 5.7 % 3,136.0 3,300.9 3,488.7 Corporate 4.6 747.9 (15.0) 743.7 (0.6)

783.9 5.4 Wills (Recordation) 3.2 520.3 (10.7) 449.4 (13.6) 489.8 9.0 Insurance 2.5 403.4 4.8 284.2 (29.5) 305.9 7.6 All Other Revenue 5.3 858.6 (2.6) 746.5

(13.1) 766.0 2.6 Total 100.0 % $ 16,087.3 3.3 % $ 16,610.8 3.3 % $ 17,724.7 6.7 % Notes: a) Adjusted for the Estate Tax repeal, underlying growth is 3.6% for fiscal year 2008. b) Adjusted for the Estate Tax repeal and HB 3202 (Transportation Plan), underlying growth is 5.2% for fiscal year 2009. 15 The December Revenue Forecast Reflects An Economy That Continues To Expand Over The Forecast Horizon Economic-based revenue growth is expected to improve over the next biennium. Total General Fund Revenues (annual percent change) Revenue Base Economic Base FY08 3.3% 3.6% FY09 3.3% 5.2%

FY10 6.7% 6.7% 16 Tax Policy Changes That Reduce Or Reallocate General Fund Revenues Are Affecting Revenue Resources Tax Policy Changes Affecting General Fund Revenues (millions of dollars) December Forecast Increase Filing Threshold/Personal Exemption Sales Tax Holiday -- Hurricane/Energy Efficient Estate Tax Repeal 1/3 Insurance Premiums to Transportation $0.03 Recordation Tax to Transportation Total FY08 -13.5 -1.6 -42.2 0.0 0.0 -57.3 FY09 -27.1 -1.7 -140.0 -134.5 -53.9 -357.2 FY10 -26.9 -1.8 -140.0 -139.6 -58.8

-367.1 Tax policy changes remove $724.3 million from General Fund Revenue in the 2008-2010 biennial budget. 17 Year-to-date Revenue Collections Through November Are Running Very Close To The December Forecast Summary of Fiscal Year 2008 Revenue Collections July through November Major Source As a % of Total Revenues Percent Growth over Prior Year YTD Actual December 2007 Estimate Variance Withholding Nonwithholding Refunds Net Individual 56.2 % 19.0 (10.4) 64.8 5.0 % 13.4 (7.5) 6.8 5.6 % 10.0

7.7 6.5 (0.6) % 3.4 (15.2) 0.3 Sales Corporate Wills (Recordation) Insurance All Other Revenue (a) 19.5 4.6 3.2 2.5 5.3 2.8 (26.7) (15.3) 5.8 5.1 2.8 (15.0) (10.7) 4.8 (2.6) 0.0 (11.7) (4.6) 1.0 7.7 Total (a) 100.0 % 3.2 % 3.3 % (0.1) %

(a) Adjusted for nongeneral funds interest earnings for October and November that will be transferred in January. Not adjusted for the transfer, all other revenue growth is 11.7 percent and total general fund revenue growth is 3.6 percent. 18 Key Risks to the Outlook The National And Virginia Economies Face Significant Risks There are downside risks that members of the Governors Advisory Board of Economists (GABE) and Governors Advisory Council on Revenue Estimates (GACRE) highlighted: Housing Market not expected to recover until early calendar year 2009 Energy Prices oil prices over $90 per barrel could stall the economy Federal Government Spending future spending priorities unknown Price of West Texas Intermediate Crude Seasonally-adjusted 3-month moving average Dollars Per Barrel 100 90 80 70 60 50 40 30 20 10 Dec 2000 Jun Dec 2001 Jun

Dec 2002 Jun Dec 2003 Jun Dec 2004 Jun Dec 2005 Jun Dec 2006 Jun Dec 2007 20 One Key Risk To Economic Growth Is From The Slowdown In The Housing Market Recent data reveal a significant slowdown in housingrelated economic activity. The seasonally-adjusted, three-month moving average of home sales fell 22% in October. Pending home sales in Northern Virginia were down 18%. Sales volume in Northern Virginia is 56%

below the October 2004 level. The average sale price declined 2.8% in October, the third consecutive monthly year-over-year decline. The average sale price has declined in 4 out of the last 6 months. Over the last 10 years, it has declined in only 8 months. 21 Pending Home Sales, A Leading Indicator Of Future Closings, Illustrate The Weakness In Housing Pending Home Sales in Northern Virginia, Hampton Roads, and Richmond Levels Seasonally-adjusted 3-month moving average 5,500 5,000 4,500 5,500 Average Sale Price Northern Virginia Hampton Roads Richmond Oct-06 $493,615 271,893 266,402 Oct-07 $480,748 289,315 299,816 % Growth -3% 6% 13% 5,000

4,500 4,000 4,000 3,500 3,500 Hampton Roads Northern Virginia 3,000 3,000 2,500 2,500 2,000 2,000 1,500 1,500 1,000 1,000 500 Richmond 500 0 0 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Northern Virginia Hampton Roads Richmond (% share of total home sales in Virginia)

30% 24% 14% 22 The Risk From The Slowdown In The Housing Market Is That It Could Spread To The Overall Economy The general slowdown in housing and the subprime mortgage meltdown broaden risks to overall economic growth. Tighter credit requirements for consumers and businesses. Negatively impacts consumer spending. Weakens related sectors of the economy. 23 Other Key Risks For The Fiscal Year 2008-10 Forecast Other factors will influence economic and revenue growth: Stock market volatility 1,600 S&P 500 Index Calendar Year 2007 1,550 1,500 1,450

1,400 1,350 1,300 1/3 1/24 2/14 3/7 3/28 4/18 5/9 5/30 6/20 7/11 8/1 8/22 9/12 10/3 10/24 11/14 12/5 Defense and federal procurement spending International instability 24 The December Global Insight National Economic Outlook Is Signaling Caution The latest monthly forecast put probability of recession at 40%. The October probability was 30%. A recession would delay the recovery well into fiscal year 2009.

Moodys Economy.com puts the probability of recession at 48%. 25 How the General Fund Revenue is Appropriated in the 2008-2010 Biennium Where the Money Goes 2008-2010 (General Fund Operating) = $35.1 Billion 80.8% of state general fund revenues are for education, public safety, and health programs. Public Safety $3,659.9 10.1% Other $1,590.5 4.4% General Government $2,120.5 6.0% Car Tax $1,900.0 5.4% Debt Service $1,040.4 3.0% Transportation $262.0 0.7% Education $16,874.4 46.7% Health & Human Resources $8,672.6 24.0%

K 12 $12,884.8 76.4% Higher Education $3,642.4 21.6% Other $347.1 2.1% Other includes legislative and judicial branches, technology, natural resources, commerce and trade, independent agencies, and non-state agencies. General Government category includes administration, finance, executive offices, and central appropriations. Other Education includes Education Secretariat and Museums. Excludes Capital Outlay. Source: Governor Kaines Proposed 2008-2010 Biennial Budget 27 Almost One-half of the General Fund Operating Budget Goes to Localities Aid to Individuals $7,243.5 20% Debt Service $1,017.8 3% Public Education $12,744.7 71.5% Aid to Localities $17,824.3 49% Car Tax $1,900.0 10.7% Local Sheriffs $1,006.2 5.6% State Programs $10,034.7 28%

Source: Governor Kaines Proposed 2008-2010 Biennial Budget Other Aid to Localities $2,173.4 12.2% 28 Proposed Budget Actions Steps Taken To Close The Fiscal Year 2008 Budget Shortfall Agency-based budget reductions contained in the Governors Budget Reduction Plan released October 1, 2007. Carryforward of unexpended appropriations from fiscal year 2007. Transfer funds from the Revenue Stabilization Fund. 30 What Are the Permitted Uses of the Revenue Stabilization Fund? 1. A shortfall in current enacted budget YES 2. A projected severe downturn in economy in next biennium NO 3. An emergency spending event (i.e. natural disaster or terrorist attack) NO 31

How Much Can Be Withdrawn From The Revenue Stabilization Fund? A Withdrawal From The Revenue Stabilization Fund May Be Possible In The Event Of A Revenue Shortfall ($ in millions) Rule #1 The General Assembly may appropriate a withdrawal from the Revenue Stabilization Fund if there is a revenue shortfall of 2 percent or greater in certified tax revenue ($278.8 million for FY2007). FY2008 calculation uses data from FY2007 Individual Income + Corporate Income + Sales Tax = Total x 2% Shortfall $9,787.8 $879.6 $3,274.3 $13,941.6 $278.8 Rule #2 The withdrawal cannot exceed of the revenue shortfall ($522.3 million). Shortfall $522.3 Potential Withdrawal 2 = $261.1 32 The Governor Is Proposing A $261.1 Million Withdrawal From The Revenue Stabilization Fund In Fiscal Year 2008 Revenue Stabilization Fund -- June 30 Balance FY 1995-07 Actual and FY 2008-10 Forecast (millions of dollars)

Millions of Dollars 1,400 History Forecast 1,215 1,190 1,200 1,065 1,165 1,098 1,000 800 716 575 600 482 472 400 361 224 200 340 247 157 80 85

0 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 33 The Governor is Proposing a General Obligation Bond to Address Construction of Higher Education Buildings Virginias Fiscal Health And Financial Management Practices Are Reflected In Our AAA Bond Rating Historic Debt Capacity (millions of dollars) 1,000 946 886 900 800 700 671 698 662 628 600 691 531 500 445 482

400 300 260 284 249 220 243 200 100 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year of Recommendation 35 The Governors Proposal For Higher Education Improvements Will Still Leave Virginia With Debt Capacity Historic Debt Capacity Plus New and Potential Authorization (millions of dollars) 1,000 946 886 900 798 800 671 700 698 662 628

600 691 615 531 500 445 482 400 300 260 284 249 220 243 200 100 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Year of Recommendation (1) Notes: (1) Represents 2006 Base Capacity plus debt authorized during 2007 Session. (2) Represents 2006 Base Capacity plus 2007 authorization plus potential 2008 Proposed Authorization ($1.5 Billion of General Obligation Bonds and $700 Million of VCBA/VPBA Bonds) (2) 36 Constructing The Higher Education Buildings

Now Will Save Money Over The Long Term Percent 10.0 9.0 Construction costs have historically outpaced inflation. Historical Increase in Construction Cost For Buildings Commercial Construction Hospitals & Health Facilities CPI 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 Breakout of type of building: $728.3 million is related to the sciences/technology $896.2 million to classroom and administrative space $27.5 million is infrastructure 37

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