Caution is the Watchword at Money Committee Briefings

September 24, 2019

The House Appropriations and Senate Finance Committees met last week to receive updates on August revenue collections as well as briefings on the progress of Medicaid expansion, efforts to address overcrowding at state mental health hospitals, and concerns about potential threats to lottery revenues, among other issues. Secretary of Finance Aubrey Layne suggested that, while the state’s economy continues to grow, spending pressures in major programs appear to be outpacing growth in the state’s major revenue sources, creating a “math problem” to be reckoned with in the next legislative session. Growth in income and sales taxes, which generate approximately 80 percent of state General Fund revenues, has been trending at about 3.5 percent per year, while education and health care costs, which comprise 74 percent of General Fund expenditures, have been growing at rates between 5 and 7 percent.

Total General Fund collections increased by 0.3 percent in August (which may reflect the month being short one deposit day relative to last August). On a fiscal year-to-date basis, total revenues have grown by 7.3 percent, ahead of the forecast of 1.2 percent growth. Withholding collections fell by 3.2 percent in August, but on a year-to-date basis have grown by 7 percent, remaining ahead of the forecast of 4.2 percent growth. Sales and use tax collections turned in a strong performance, with an increase of 12.9 percent in August (reflecting July sales). Secretary Layne pointed out that a major factor in this growth was the registration of online sellers to collect and remit use taxes in accordance with statutory changes implemented this session; the growth in collections from online sellers offset weakness in sales from traditional brick-and-mortar retailers. Secretary Layne noted that recordation tax collections increased by 15.2 percent in August and have grown by 21.7 percent on a year-to-date basis, ahead of the forecast of a 4.6 percent decrease; he suggested that this growth reflects a spike in refinancing of mortgages by homeowners taking advantage of continued low interest rates.

Collections in September, which will include estimated payments for nonwithholding income taxes and sales tax collections for August sales, will provide a clearer picture of the performance of the state’s major revenue sources as the formal fall revenue forecasting process begins. Secretary Layne noted several national headwinds affecting the state economy, including uncertainty about financial shocks stemming from geopolitical conflict, such as trade tensions, and concern about the federal government’s ability to assist states in the event of an economic slowdown, given high levels of federal debt.

Several other factors that complicate Virginia’s budget planning were discussed at the Committees’ hearings. Virginia is currently in negotiations with the federal government over the provisions of its proposed Medicaid § 1115 demonstration waiver, which, as envisioned in the 2018 Appropriations Act, would include support services to assist able-bodied adults who would be newly-eligible for Medicaid coverage in securing employment. Although the Administration continues to push for federal approval of this element of Virginia’s waiver application, there is a possibility that Virginia will have to fund these services out of state resources. (Director of the Department of Medical Assistance Services Karen Kimsey’s presentation is available at this link.) In addition, Kevin Hall, Executive Director of the Virginia Lottery, presented to both Committees about the proliferation of unregulated “games of skill” and the potential for losses of an estimated $139 million in lottery sales in FY 2020, and a potential loss of $39 million in lottery profits. Acting Commissioner of the Department of Behavioral Health and Developmental Services Mira Signer outlined a plan to add temporary beds at Catawba Hospital to relieve census pressures on the state mental health hospital system, which has struggled with overcrowding in recent years. As of last week, the state hospitals were operating at 101 percent capacity.

Secretary Layne’s presentation may be found at this link.

VACo Contact: Katie Boyle

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