The House Appropriations and Senate Finance and Appropriations Committees met on September 13 and September 14, respectively, to receive briefings on state revenues as well as other updates. Secretary of Finance Stephen E. Cummings provided positive news to committee members, although he cautioned that economic signals are difficult to interpret, with continued high levels of inflation, interest rate increases, financial market volatility, and an apparent slowdown in the housing market posing potential concerns.
When adjusted for an additional payroll deposit day in the month of August, state General Fund (GF) revenues increased by 5.4 percent relative to last August. After adjusting for the repeal of the accelerated sales tax requirement and the extra day of withholding collections, GF revenues are up by 5.3 percent on a fiscal year-to-date basis. The state’s main sources of GF revenue, individual income tax collections and sales tax collections, continued to perform well, with individual income tax withholding collections up 8.9 percent on a fiscal year-to-date basis (when adjusted for the additional deposit day) and sales tax collections up 4.3 percent on a fiscal year-to-date basis when adjusted for accelerated sales tax elimination. The FY 2023 forecast projected a decline of 14 percent in GF revenues; out of an abundance of caution, the mid-session revenue reforecast in February 2022 did not adjust the FY 2023 and FY 2024 forecast. As noted in Secretary Cummings’s memorandum, actual collections in July and August are “significantly exceeding projected levels” such that revenue collections for the remainder of FY 2023 could decline by 17.6 percent and still meet projections. It is likely that these revenue forecasts will be revised as part of the fall revenue reforecasting process.
Secretary Cummings reported that Virginia has recovered 97.4 percent of pre-pandemic employment levels; however, Virginia’s competitor states have already recovered their lost jobs and are now exceeding pre-pandemic employment levels. Although Virginia has added 99,600 jobs since January, 113,000 jobs are yet to be recovered. Other potential economic headwinds include cost of living pressures created by persistent high inflation, and a potential cooling of the housing market. As a possible signal of a slowing housing market, Secretary Cummings indicated that recordation tax revenues are down 19 percent on a fiscal year-to-date basis relative to last year, lagging the forecast of 9.2 percent decrease. The volume of home sales decreased by 21 percent in July, although the median home price continues to increase. House Appropriations Committee Chairman Barry Knight spoke to the challenges in achieving a “soft landing” in cooling down the economy and cited the wisdom of using the state’s strong revenue growth for one-time expenditures and bolstering the state’s reserves in the biennial budget adopted this summer.
Inflation numbers released later in the day on September 13 underscored the challenging nature of economic forecasting; although energy prices fell, core inflation (which does not include food or energy) increased by 0.6 percent in August after a more modest increase of 0.3 percent in July. On September 21, the Federal Reserve raised interest rates by 0.75 percentage points, in keeping with August 26 remarks by Federal Reserve Chair Jerome Powell, who warned, “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
In preparation for the Governor’s December 15 presentation of his amendments to the biennium budget, the Joint Advisory Board of Economists will meet October 12 to review economic projections and the Governor’s Advisory Council on Revenue Estimates will meet November 21. Secretary Cummings’s presentation may be found at this link.
The House Appropriations Committee subsequently received briefings from money committee staff and staff from the Department of Accounts and the Department of Education on the use of federal relief funds provided to the state from the six coronavirus relief bills enacted by Congress since 2020. House Appropriations Committee Staff Director Anne Oman provided an overview of the series of federal funding packages, noting that some federal relief dollars had to be spent quickly, and suggesting perhaps a “postmortem” or “mid-stream review” might be conducted on how the funding is flowing and how spending decisions were made. Joe Flores of the Department of Accounts explained that the state has received in excess of $100 billion from the six federal relief packages plus the Infrastructure Investment and Jobs Act. The State and Local Fiscal Recovery Fund (SLFRF) included in the American Rescue Plan Act is among the most flexible allocations of funds; Virginia received approximately $4.3 billion in its SLFRF allocation, of which all but $15 million has been appropriated. Approximately $1.7 billion has been obligated, of which $1.5 billion has been spent. Information provided by state agencies to the Department of Accounts indicated that supply chain constraints, staffing and workforce shortages, and internal administrative capacity are hampering state agencies’ ability to expend funds. Committee Chairman Barry Knight encouraged localities to keep up to date on reporting requirements and deadlines to expend their portion of SLFRF dollars.
Following an overview of federal pandemic relief funding supporting education by Zack Robbins of House Appropriations Committee staff, Deputy Superintendent of Budget, Finance, and Operations Kent Dickey provided more detail on the use of education relief dollars by school divisions and the Department of Education. Elementary and Secondary Education Relief (ESSER) funds have been distributed in three tranches (in federal legislation enacted in March 2020, December 2020, and March 2021), with 90 percent of funds passed through to school divisions and 10 percent retained by the state. ESSER I funding must be obligated by September 30, 2022; ESSER II funding must be obligated by September 30, 2023; and ESSER III must be obligated by September 30, 2024. Most of the school divisions’ share of ESSER I funding has been expended by school divisions (with only 9.5 percent remaining as of September 1); 56 percent of ESSER II funding remains, and 85 percent of ESSER III funding remains. In accordance with state budget language, school divisions will report later this fall on their obligated and planned uses of their remaining ESSER funds.
VACo Contact: Katie Boyle