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Commonwealth's Counties

Governor Addresses “Money Committees” as Budget Negotiations Continue

Editor’s Note:  VACo received notice early Friday afternoon that a budget agreement has been reached between the House and Senate budget conferees.  The notice indicates that the major components of budget revisions have been agreed to and that conferees and staff will be finalizing details in the coming days.  VACo staff will review the budget compromise and provide an update to members as soon as further details are available.

Governor Youngkin addressed the Senate Finance and Appropriations, House Appropriations, and House Finance Committees on August 23, touting the state’s strong financial position and signaling his priorities for the budget he will propose to the legislature in December.  Traditionally, the Governor’s August address to the “money committees” marks the unofficial pivot toward preparation for the next session’s budget advocacy work, but this year, the Governor’s presentation took place against the backdrop of negotiations on revisions to the current biennium budget, as budget conferees have recently renewed efforts to resolve an impasse that has lingered since February.

The Governor applauded positive trends in several economic indicators, summarizing recent progress in recovering from the pandemic as “Virginia is on the move!”  He pointed to improvements in Virginia’s labor force participation rate and job growth, as well as an apparent reversal of a worrisome trend of out-migration.  He also hailed recent investments in public safety, compensation for teachers, and school capital funding, and highlighted improvements in the administration of state government, including reductions in teacher licensure backlogs, savings in procurement, and streamlining of the permitting process at the Department of Environmental Quality.  Citing better-than-forecasted General Fund revenue growth and record reserves, the Governor characterized the state’s strong financial position as “a ‘both/and’ moment, not an ‘either/or’ moment,” urging legislators to provide “substantial tax relief” in addition to making investments to mitigate learning loss, enhance public safety, address the behavioral health crisis, support energy innovation, and preserve the Chesapeake Bay.

Secretary of Finance Stephen E. Cummings provided additional detail on FY 2023 revenues, including major obligations for unanticipated revenues and several elements of uncertainty regarding the outlook for FY 2024 and beyond.  Although FY 2023 General Fund (GF) revenues declined by $1 billion from FY 2022 levels (a 3.5 percent reduction), revenues outperformed the December 2022 projection of an 8.8 percent reduction.  As a result, revenues exceeded the December 2022 forecast by $1.45 billion.  Relative to the forecast embedded in the “skinny budget” (which is based on the revenue estimates used in the 2022 Appropriation Act and actions taken by the 2023 General Assembly), FY 2023 GF revenues exceeded these assumptions by approximately $3 billion.  There are also $1.6 billion in unspent appropriations (some of which are required to be reappropriated).

As outlined by Secretary Cummings, there are a number of claims on these surplus resources.  In addition to the required reappropriations, approximately $289.6 million is required to be deposited to the Revenue Reserve Fund (a deposit to the Constitutionally-mandated Revenue Stabilization Fund is not required).  More than $513 million is required for the Water Quality Improvement Fund (parts A and B).  The 2022 Appropriation Act included language directing certain surplus revenues to improvements to I-64 ($150 million), the Virginia Business Ready Sites Program Fund ($50 million), and the Major Headquarters Workforce Grant Fund ($35.5 million).  The Governor also set aside $2.1 billion in a reserve account for additional taxpayer relief and other budgetary priorities; Secretary Cummings indicated that that this reserve could provide a cushion against an economic downturn that is more severe than anticipated, as well as for refunds that may be required as part of the state’s new Pass-Through Entity Tax (PTET), the timing of which is injecting “noise” into the state’s forecasting process.

Governor Youngkin noted that the Administration continues to expect a recession in FY 2024, and Secretary Cummings reported that the Governor’s Advisory Council on Revenue Estimates also anticipates a slowdown in FY 2024, with a “modest recession” the consensus view at GACRE’s August 7 meeting.  Risk factors outlined by Secretary Cummings included the potential for additional interest rate increases by the Federal Reserve; ripple effects of a slowdown in the Chinese economy; and a potential federal shutdown later this fall, as well as the uncertainty surrounding PTET implementation.

Budget preparation for the 2024 General Assembly session is well underway at the state agency level, and the Joint Advisory Board of Economists will meet in October, followed by another meeting of the Governor’s Advisory Council on Revenue Estimates in November to review the revenue forecast for the 2024-2026 biennium.  The Governor will present proposed amendments to the FY 2024 budget (the “caboose” budget) and a proposed 2024-2026 biennium budget to the money committees on December 20.

Negotiations on the current biennium budget were set to resume after the conclusion of the money committees’ meeting on Wednesday.  As of the publication of this edition of County Connections, media reports have indicated that the framework of an agreement on tax policy has been reached, with the Governor indicating that he would not oppose the reported compromise, and conferees are negotiating on spending items.  VACo will report on the contents of any agreement once it becomes available.

VACo Contact:  Katie Boyle

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