The House Appropriations and Senate Finance Committees held their annual pre-General Assembly session retreats this week. These meetings are an opportunity for committee members to receive briefings from staff about topics that are expected to be the subjects of legislative or budget action during the upcoming session. Staff also typically provides an update on state revenue collections and projections for revenue growth.
Both committees received briefings on the state revenue shortfall for FY 2017 and FY 2018 and an update on the Governor’s actions to address the shortfall in FY 2017. Staff to both committees noted that some of the revenue shortfall can be attributed to a realignment in Virginia’s labor market and growth in lower-paying jobs rather than high-paying jobs in the business and professional sector; an increasing amount of retail sales being conducted through online transactions was also cited as a factor in reducing sales tax collections. Likewise, both committees received a set of potential options for addressing the FY 2018 shortfall. Staff to both committees noted that balancing the FY 2018 budget will be more painful than the actions taken to address FY 2017, because the “low-hanging fruit” has already been harvested through one-time actions such as the use of excess lottery proceeds. Large areas of the budget, such as K-12 education and Aid to Localities, were exempt from the Governor’s FY 2017 savings plan, but it is unlikely that the FY 2018 budget can be balanced without reductions being applied more broadly.
There are some signs of improvement in state revenues, as October was a strong month, and year-to-date collections are outperforming projections. Senate Finance Committee staff are projecting 2.9 percent General Fund revenue growth in FY 2017, ahead of the August interim forecast of 1.6 percent growth. House Appropriations staff also expect that FY 2017 revenues will outperform the forecast, projecting 2.2 percent growth. House Appropriations staff agree with the interim forecast for FY 2018 of 3.6 percent General Fund growth, but Senate Finance staff take a more cautious approach, projecting growth at 2.4 percent due to their expectation of weakness in personal income tax withholding. (Senate Finance Staff Director Betsey Daley explained this caution by noting that revenues had looked strong at this point last year before declining.) Both “money committee” staffs note that growth in the Medicaid forecast and in the Children’s Services Act represent significant budget pressures that will have to be addressed before any additional discretionary spending can be considered.
Senate Finance members also received presentations on investments in research and development, including the recently created “cyber range” for cybersecurity education; dual enrollment programs, in which high school students take community college courses while enrolled in high school; and compensation and retirement issues for the state workforce. Members expressed a desire to revisit the salary adjustments for state employees, state-supported local employees, and teachers that were cancelled for FY 2017 due to the revenue shortfall, but cautioned that it is too early in the budget process to commit to restoring the raises in FY 2018. Members also received briefings on capacity limitations at state psychiatric hospitals and the connection with local jails serving as de facto mental health providers. All presentations are available on the Senate Finance Committee website, under the “Annual Meeting” tab.
House Appropriations members received presentations on a variety of topics, including the impacts of sequestration on Virginia, local fiscal stress, drug treatment courts, and employee compensation. All presentations are available on the House Appropriations Committee website, under the header “2016 Interim Meetings.”
The next steps in the budget process include the development of a revised revenue forecast. The Joint Advisory Board of Economists (JABE), which includes public- and private-sector economists, met November 9 to review economic data and assist the Department of Taxation and Secretary of Finance with developing a revised forecast. Subsequently, the Governor’s Advisory Council on Revenue Estimates (GACRE), which includes Virginia business representatives and General Assembly members, will meet on November 28 to review the proposed forecast; revisions to the official revenue forecast will be presented to the General Assembly with the Governor’s budget amendments on December 16.
VACo Contact: Katie Boyle