Governor Northam brought encouraging news to the “money committees” in his August 18 report on state revenues, with strong growth in all major General Fund revenue sources resulting in a record surplus of $2.6 billion in FY 2021. Although the Governor noted that uncertainty remains regarding the future course of the COVID-19 pandemic, he described the state’s finances as “solid,” touting the significant improvement in the state’s economic outlook since 2020, the state’s maintenance of its triple-A bond rating, and its selection as “America’s Top State For Business” by CNBC twice in a row. He pointed to the state’s reserves as another marker of fiscal health, noting that the Commonwealth is on track to have almost 15 percent of General Fund revenues in reserves by the end of his term, close to doubling his original goal of setting aside 8 percent of GF revenues.
Secretary of Finance Joe Flores followed the Governor’s presentation with a more detailed briefing about the performance of state revenue sources. Overall, total General Fund revenues grew by 14.4 percent in FY 2021, far outpacing projections of 2.7 percent growth. Individual income tax withholding and sales and use taxes – what Secretary Flores called the state’s “bread and butter” revenue sources — turned in solid performances, growing by 4.7 percent and 12.4 percent, respectively (growth in these sources was projected at 2.7 percent and 4.7 percent, respectively). Sales and use tax payments showed growth in most major industries, although restaurants and department stores posted declines, reflecting the continued toll of the pandemic. Individual income tax non-withholding payments represented nearly half of the surplus, based on growth of 37.1 percent, in part a reflection of the surging stock market. Secretary Flores noted that this revenue source has historically been volatile and will need to be closely monitored when developing the revenue forecast for the upcoming biennium.
Secretary Flores sounded a similar note of caution in explaining the expected claims on the surplus, notably the deposits that will be required to the Revenue Stabilization Fund (the “rainy day fund” established in the state Constitution) ($1.1 billion) and the Water Quality Improvement Fund ($310 million), as well as funds set aside to continue initiatives funded with one-time federal relief funds ($171 million) and funds reserved in the event that the expected use of federal relief funds under the “revenue loss” provisions of the American Rescue Plan Act is disallowed and the expenditures must be backfilled with General Fund dollars ($221 million). The Secretary also indicated that there is the potential for a required “super deposit” to the Revenue Stabilization Fund if the three statutory conditions are met (the most recent fiscal year’s annual percentage increase in General Fund tax collections was greater than 8 percent, the most recent fiscal year’s annual percentage increase in General Fund tax collections was greater than or equal to 1.5 times the annual increase in General Fund tax collections for the immediately-preceding six fiscal years, and revenue growth of 5 percent is forecast for the next fiscal year); if this is the case, which will be determined in November during the revenue forecasting process, a deposit of approximately $564 million would be required. Even without the super deposit, the state is projected to have $3.3 billion in reserves by FY 2023, between the Revenue Stabilization Fund and the voluntary Revenue Reserve Fund.
The fall forecasting process will begin soon, with the Joint Advisory Board of Economists meeting in October to review economic projections and the Governor’s Advisory Council on Revenue Estimates meeting in November to review revenue forecasts for the remainder of FY 2022 and the 2022-2024 biennium. The Governor will present his final budget proposals for the FY 2022 “caboose” budget and the 2022-2024 biennium budget to the money committees in December 2021, along with an updated revenue forecast, for deliberation by the 2022 General Assembly.
VACo Contact: Katie Boyle