The “money committees” held their annual pre-session retreats last week, with the House Appropriations and House Finance Committees meeting in Richmond on November 16 and 17 and the Senate Finance and Appropriations Committee gathering in Roanoke on November 18 and 19. These meetings traditionally offer an overview of state and national economic conditions and staff’s revenue projections, as well as a preview of major budget pressures and key funding issues that will be considered during the upcoming legislative session. Common themes of the two retreats were the significant additional resources expected in the current fiscal year and over the biennium relative to the budget adopted in spring 2021, paired with notes of caution, as revenues are expected to return to more typical levels of growth in future years, and uncertainty remains regarding the future course of the coronavirus and macroeconomic forces such as labor shortages, supply chain disruptions, and inflation.
In addition to the staff presentation outlining revenue projections and key budget drivers for the upcoming session, the House Appropriations Committee and House Finance Committee heard a presentation from the National Conference of State Legislatures on revenue trends among states and use of federal relief funds; a staff briefing on progress in meeting Chesapeake Bay water quality requirements; and an update on several studies regarding compensation among state employees (in particular the Virginia State Police and the Department of Corrections workforce) and sheriffs’ deputies. Committee members also received a presentation on a proposed National Slavery Museum in Richmond.
Given continued strong growth in state General Fund revenues, House Appropriations Committee staff are projecting 5.2 percent revenue growth in FY 2022, a significant upward revision to the current forecast of an 8 percent decline. However, staff cautioned that recent revenue growth is “atypical,” noting that growth since 2001 has averaged 4.2 percent, and reminding Committee members of the traditional volatility of nonwithholding collections, which represented nearly half of the FY 2021 surplus. Staff project General Fund revenue growth of 3.9 percent in FY 2023 and 3.6 percent in FY 2024 (these growth rates would be adding to the larger FY 2022 base, representing a projected increase of $9.6 billion in available resources over the biennium above levels in the 2021 Appropriation Act). In addition to the significant expected increase in General Fund revenues, the state also retains $1.1 billion in Coronavirus State Fiscal Recovery Funds from its American Rescue Plan Act (ARPA) allocation.
Although Staff Director Anne Oman pointed out that the General Assembly could theoretically fund all requests submitted by state agencies for the biennium (packages totaling $2.1 billion in FY 2023 and $2.5 billion in FY 2024), there are also $2.7 billion in expected cost increases over the biennium for current programs. These required or high-priority items include rebenchmarking of the Standards of Quality; inmate medical costs in the Department of Corrections; aid to localities with police departments (which is required to increase along with General Fund revenue growth); the Medicaid forecast; continued implementation of crisis services and the Marcus Alert initiative as well as STEP-VA; implementation of changes to federal funding for foster care; and costs of supply chain disruptions for state procurement, among other items.
Staff strongly encouraged members to dedicate one-time revenues to one-time spending items, providing a menu of such potential uses, including paying down unfunded liabilities in the Virginia Retirement System state employee and teacher plans; addressing capital outlay needs; eliminating the requirement for certain retailers to make an accelerated payment of sales and use taxes in June each year; providing a taxpayer relief payment; recapitalizing the Literary Fund; setting aside a deposit for the Major Headquarters Workforce Grant (which is anticipated to be required in 2028); supplementing programs such as the Virginia Telecommunication Initiative and the Housing Trust Fund; and funding the development of business-ready sites or industrial site revitalization.
Other possible funding priorities identified by staff include the Board of Education’s revisions to the Standards of Quality (which total $812.7 million over the biennium), additional funding for workforce credentialing or community college access, compensation for public safety and mental health staff, additional Medicaid waiver slots, and tax reform.
One aspect of the biennium budget that will likely draw particular interest is K-12 rebenchmarking, traditionally a technical process that updates the components of the school funding formula. Preliminary figures for 2022-2024 rebenchmarking (currently estimated at $233 million for the biennium, pending additional data updates to be included in the Governor’s budget in December) indicate a significantly smaller cost than in previous biennia, in part due to the use of FY 2020 data for certain cost elements that were affected by pandemic-related school closures and may not be reflective of costs moving forward, notably pupil transportation, substitute teachers, and utilities. Staff suggested that legislators may instead wish to use FY 2019 data with an inflation adjustment as a base year in order to provide a more accurate reflection of costs for the upcoming biennium. The preliminary rebenchmarking estimate does include FY 2022 “no-loss” funding for enrollment as a placeholder, noting that post-pandemic enrollment is difficult to project. The preliminary estimate also reflects savings in VRS employer contribution rates for the teacher plan, as the plan benefitted from strong stock market gains, as well as an infusion of $61.3 million in FY 2021. In addition to possible use of more representative data, staff’s list of policy considerations for members includes continuing to use current VRS rates (rather than factoring in the savings associated with lower rates) in order to reduce the unfunded liabilities, as well as a reminder that federal pandemic relief funding includes a maintenance of effort requirement for state K-12 spending.
Senate Finance and Appropriations Committee
Members received a presentation on the state and national economic outlook from Sonya Ravindranath Waddell of the Federal Reserve Bank of Richmond, followed by a panel discussion on workforce issues. In addition to the staff overview of state revenues, members also received more detailed briefings on K-12 funding and major issues in health and human resources. Members also participated in breakout discussions of rural economic development and issues in higher education.
Similar to the House Appropriations Committee staff, Senate Finance and Appropriations staff anticipate a “significant upward adjustment” to the FY 2022 forecast, with revenues returning to more normal growth in FY 2023 and FY 2024. Staff project revenue growth of 5.1 percent in FY 2022, 3.8 percent in FY 2023, and 4.2 percent in FY 2024. Although staff anticipate significant resources available beyond the levels assumed in the current biennium budget, Staff Director April Kees encouraged caution, noting that recent revenue growth is anomalous, and uncertainty remains with respect to a resurgence of the virus, supply chain disruptions, inflation, and a lagging recovery in certain industries, such as leisure and hospitality. She strongly encouraged consideration of one-time spending items, such as using cash for capital projects, as a strategy to manage this uncertainty.
A key decision facing legislators that will affect General Fund revenues is the extent to which Virginia will conform to the tax-related provisions of the American Rescue Plan Act – for example, excluding grants to businesses under the Restaurant Revitalization and the Economic Injury Disaster Loan Advance programs from income taxes. Staff noted that fully conforming to the ARPA tax provisions would have an estimated revenue impact of $101.6 million in FY 2022. Legislators also must decide whether to continue the current state income tax exemption for Paycheck Protection Program loan forgiveness and the deductibility of a fixed amount of business expenses funded by forgiven Paycheck Protection Program loan proceeds, as well as the existing income tax subtraction for grants made through the state Rebuild Virginia program.
Major budget pressures – what Senate Finance and Appropriations Committee Chair Janet Howell termed “bills in the drawer”— identified by staff include SOQ rebenchmarking; the Medicaid forecast; water quality funding; capital outlay; enhancing Medicaid waiver rates and adding more waiver slots; compensation proposals developed by workgroups examining pay structures for the Virginia State Police, Department of Corrections, and sheriffs’ deputies; the Stormwater Local Assistance Fund; state hospital census reduction; the Housing Trust Fund; behavioral health facility compensation and staffing; reduction of VRS liabilities; and a one percent salary increase for state employees, state-supported local employees, and teachers, among other needs. Projected Medicaid spending in FY 2022 reflects a highly unusual reduction of $653.7 million as a result of the enhanced federal match rate provided during the public health emergency, as well as decreased utilization and lower managed care rates. However, the forecast for the biennium reflects an expected return to more normal levels of spending growth, as the enhanced federal match rate expires; GF spending growth for the Medicaid program is projected at $821.2 million over the biennium (reflecting annual growth of 18.5 percent in FY 2023 and 3.9 percent in FY 2024).
The Governor’s Advisory Council on Revenue Estimates (GACRE) will meet on November 22 to review the economic outlook for the current fiscal year and the upcoming biennium, and the Governor will present his revised forecast and proposed amendments to the budget for the current fiscal year (the “caboose” bill), as well as his proposed budget for the 2022-2024 biennium (which will include a six-year revenue forecast), on December 16.