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Governor McAuliffe Addresses General Assembly “Money Committees”

Governor McAuliffe presented his year-end report on FY 2017 revenue collections to the House Appropriations, House Finance, and Senate Finance Committees on Monday, August 21. The news was largely positive, with a state General Fund (GF) revenue surplus of $136.6 million, but the Governor sounded a strong note of caution in his remarks, citing continued uncertainty about the federal budget.

Overall GF revenue collections grew 3.6 percent over FY 2016 (excluding transfers), surpassing the forecast of 2.9 percent growth. This increase was largely driven by a continued strong performance in income tax withholding collections and corporate income taxes. Withholding collections grew 5.2 percent, ahead of the forecast of 3.6 percent growth. Secretary of Finance Ric Brown noted that collections in this sector improved over last fiscal year’s growth of 2.4 percent, and attributed this change to growth in employment and in wages and salaries. Corporate income taxes also exceeded the forecast with growth of 8.1 percent, outpacing the forecast of 3.8 percent growth. Sales tax continues to be an area of weakness, with growth of 1.9 percent trailing the annual forecast of 2.8 percent growth. However, Secretary Brown noted that collections were stronger in the latter half of the fiscal year as overall economic conditions improve, a trend that appears to be continuing in the first month of FY 2018, as sales tax collections grew 6 percent in July.

Governor McAuliffe reflected on the contrast between the state’s budget situation last August, when FY 2016 revenues were nearly $270 million below the forecast, and the FY 2017 surplus, but he counseled prudence in the use of the surplus. He warned that the federal government may resort to a Continuing Resolution for its upcoming fiscal year, which could trigger spending cuts pursuant to sequestration that would be particularly harmful for Virginia’s economy. Concerns about the effects of such federal budget reductions had influenced Standard and Poor’s decision earlier this year to place a negative outlook on Virginia’s AAA bond rating.

In light of these potential risks, the Governor announced his intention to place all of the revenue surplus into a reserve, after required deposits to the Water Quality Improvement Fund, rather than half of the surplus, as envisioned by the state budget as passed by the 2017 GA. Several GA leaders have previously signaled agreement with this proposal.

Attention now turns to the fall revenue forecasting process. In October, the Joint Advisory Board of Economists will be reviewing projections for FY 2018 and the upcoming biennium. In November, the Governor’s Advisory Council on Revenue Estimates will review the revenue forecasts; the forecast will be finalized in December and presented to the money committees along with the Governor’s FY 2018-2020 biennium budget and amendments to the current biennium budget (the “caboose” bill). The upcoming biennium budget will need to address several large spending items, including rebenchmarking of Standards of Quality costs and growth in the Medicaid forecast. Replenishing the state’s reserves and addressing these “big ticket” items will likely be priorities in the next session.

The Governor’s remarks as prepared for delivery are available here; Secretary Brown’s presentation is available here.

VACo Contact: Katie Boyle

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