The House Appropriations and Senate Finance and Appropriations Committees met on June 16 and 18, respectively; both meetings featured a relatively positive report on FY 2025 state revenues from Secretary of Finance Stephen Cummings, as well as updates on proposals at the federal level that could require the state to assume substantial new costs.
Secretary Cummings expressed confidence in FY 2025 revenues meeting the forecast in the current state budget. On a fiscal year-to-date basis, total General Fund revenues are up 5.9 percent year-over-year and are 1.8 percent, or $488.3 million, ahead of projections. The two major sources of General Fund revenues, individual income tax withholding and sales and use tax collections, are slightly outpacing their respective forecasts, with both revenue sources 0.2 percent ahead. Nonwithholding collections, which are traditionally more volatile and more challenging to predict, are 10.1 percent ahead of the forecast.
Although FY 2025 revenues are meeting or exceeding expectations, there are “potential headwinds in the form of federal employment reductions and trade uncertainty,” as Secretary Cummings wrote in his June 13 memorandum. Job growth is slowing in Virginia, with a modest increase of 500 non-agricultural jobs in April and losses in manufacturing, professional and business services, and government (including a loss of 900 federal government jobs). Virginia’s seasonally-adjusted unemployment rate increased by a tenth of a percentage point in April, to 3.3 percent – below the national rate of 4.2 percent, but an increase of 0.5 percentage point relative to last April. Secretary Cummings noted that the Virginia Department of Taxation continues to monitor payroll withholding collections from key federal agencies and federal contractors for early warning signs of contractions in federal employment or contracting.
Secretary Cummings provided an update on federal grants to state agencies that have been placed under review at the federal level; funding that has been paused has ranged up to approximately $1.2 billion as grants have been reviewed for compliance with executive orders and Trump Administration priorities. Approximately $461 million in funding remains paused, with a large portion of these funds (an estimated $350-400 million) likely to remain frozen as certain unspent pandemic relief funding balances are clawed back. Superintendent of Public Instruction Emily Anne Gullickson reported to the House Appropriations Committee that the US Department of Education had acted in March to rescind “late liquidation” approvals for approximately $52 million in pandemic relief funding provided through the Elementary and Secondary School Emergency Relief Fund (ESSER III) program, subject to appeal. This action affected funding for the state and 15 school divisions; thus far, the state has secured the release of $18.6 million through appeals, with $7.7 million in state funds and $25.7 million for school divisions still under review.
Commissioner of Social Services James Williams briefed both committees on proposals passed by the U.S. House and proposed by the U.S. Senate Finance Committee that would make significant changes to the Supplemental Nutrition Assistance Program as part of the federal budget reconciliation legislation. Among other proposed changes to the structure of the program, both bills would require states to assume a greater share of the program’s administrative costs, increasing the state responsibility from 50 percent to 75 percent of these costs. A large portion of the program’s administrative funds support staff in local departments of social services, and localities have traditionally contributed a 15.5 percent match for these costs; if this responsibility were maintained, local governments could expect to see their costs for SNAP administration increased as well. In addition, both the House and Senate bills require states to assume part of the costs of benefit payments for the first time, with the state match adjusted based on error rates and ranging from 5 to 25 percent in the House bill, and from 0 to 15 percent in the Senate Finance version. Based on Virginia’s FY 2023 error rate of 9.86 percent, the state would be responsible for approximately $359 million in benefit costs under the House version. It is unknown whether the state would seek to require local governments to contribute to these costs. Commissioner Smith also noted that the President’s budget seeks to eliminate the Low-Income Home Energy Assistance Program (LIHEAP), which provides temporary assistance to families with heating and cooling costs and certain weatherization projects. In an indication of the fluid nature of negotiations over the reconciliation bill, media reports indicated that over the weekend, the Senate parliamentarian ruled that the cost shift of benefits to the states did not comply with parliamentary rules for inclusion in the reconciliation bill, leaving the fate of these provisions uncertain.
Cheryl Roberts, the Director of the Department of Medical Assistance Services (DMAS), reported to the Senate Finance and Appropriations Committee about proposals affecting the Medicaid program in both versions of the reconciliation bill. Of importance to local governments, both bills would require eligibility determinations for individuals in the Medicaid expansion population to be completed twice a year, rather than annually; many of these redeterminations are conducted by staff at local departments of social services, and the IT system that supports this work (VaCMS) has serious limitations that have hampered local staff’s ability to complete timely redeterminations under the current annual requirement. VACo has worked with advocacy partners to support state funding to replace VaCMS; the 2024 Appropriation Act included funding to begin the replacement process, but additional investments will be needed to complete the project. Director Roberts and DMAS’s Chief Financial Officer, Chris Gordon, also reported on proposals in the Senate Finance version of the bill that would limit the use of special taxes on hospitals to enhance payments to providers. Currently, Virginia imposes a 6 percent tax on net patient revenues of private acute care hospitals and intermediate care facilities, and uses these funds for the state’s portion of Medicaid expansion costs, and to draw down additional federal funds to make supplemental payments to providers. The Senate bill would require incremental reductions in the maximum tax rate each year for states that have expanded Medicaid, and cap rates at 3.5 percent by 2031; this reduction is expected to reduce the funding available for supplemental payments to private acute and critical access care hospitals in Virginia.
VACo Contact: Katie Boyle