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Special Session Budget Finalized; Preparations for 2021 Budget Cycle Underway

Governor Northam approved the revised biennium budget this week, completing the final piece of legislative business from the 2020 Special Session. The Governor had proposed ten amendments to the budget conference report passed by the legislature on October 16. The legislature considered these amendments on November 9. Of particular interest to local governments, the Governor had proposed revisions to the language and funding allocations related to the state’s distribution of its Coronavirus Relief Fund allocation, including language regarding the deadline by which unspent funding would be transferred to the Unemployment Compensation Fund. The House declined to take action on this amendment, effectively rejecting it and returning the budget to the Governor with the legislature’s language for this item. With the Governor’s approval of the budget, the Coronavirus Relief Fund language reverts to the legislature’s October 16 language, which would provide that unspent allocations as of December 18, 2020, would be transferred to the Unemployment Compensation Fund. VACo is awaiting formal guidance from the Secretary of Finance as to the process by which localities’ unspent funds will be recouped and will share this information when we receive it.

With the 2020 Special Session now complete, the legislature turned this week to preparations for the 2021 session. The Administration’s revenue reforecasting process is underway, and the Governor is scheduled to present his next budget proposal in approximately four weeks, on December 16. This week the “money committees” held their annual pre-session retreats to receive briefings from staff and discuss key budget priorities in advance of the upcoming session.

The House Appropriations Committee’s retreat, held November 17, featured presentations on the health of the national and regional economy, the effect of the pandemic on K-12 enrollment, and Lottery revenues, as well as Committee staff’s preliminary revenue forecast and overview of expected spending priorities and budget pressures. Staff Director Anne Oman encapsulated the experience of 2020 with the word “unprecedented” while reviewing the magnitude of the changes made to the state budget since the beginning of the year. State revenues have generally performed better than the August reforecast, with particular strength in sales tax and recordation tax collections, although income tax withholding has underperformed projections. Committee staff predict an upward revision to growth estimates in the December reforecast. HB 5005, the budget signed by the Governor this week, projects a decline in General Fund (GF) revenues of 1.8 percent in FY 2021 and growth of 3.9 percent in FY 2022; Appropriations staff estimate 1.6 percent growth in FY 2021 and 2.6 percent growth in FY 2022 (which would be growth from a larger FY 2021 base than predicted in HB 5005). These projections translate into an additional projected $1.3 billion in GF revenues above the budget approved this week.

State agencies have already begun compiling budget requests, which include mandatory budget drivers (such as the Medicaid forecast and medical costs for individuals incarcerated in state correctional facilities) and high-priority requests, such as broadband investments, support for the Virginia Employment Commission, and needs associated with a mass COVID-19 vaccination program. Committee staff suggested that in developing their budget priorities, members may wish to revisit spending items that were included in the budget passed by the legislature in March, but unallotted in April and converted to reductions in August. Staff cautioned members that considerable uncertainty remains about the course of the pandemic and timing of vaccine distribution, potential federal assistance, and long-term effects of the pandemic on patterns of work and consumption and on the state’s safety net. While the state has captured substantial savings in Medicaid managed care rates in this biennium, significant GF dollars are projected to be required to fund the state’s share of the program in the next biennium. Lastly, staff highlighted a structural imbalance in the second year of the biennium, where spending is reliant on a balance carried forward from the previous fiscal year.

The Senate Finance and Appropriations Committee convened for its retreat two days later. Committee members received briefings on the national economy, Medicaid spending, the effects of the pandemic on K-12 education, higher education, and transportation, in addition to Committee staff’s revenue projections and analysis of major budget pressures. Similar to House Appropriations staff, Senate Finance and Appropriations staff expect revenues to perform better than expected in the August forecast, citing strength in sales tax (buoyed by online sales) and recordation tax collections (bolstered by continued low interest rates). Senate Finance and Appropriations staff expect income tax withholding to improve, pointing to expected wage growth due to increases in higher-wage jobs, despite an overall predicted decline in employment. Staff project GF growth of 2 percent in FY 2021 and 2.7 percent in FY 2022, with the caveat that uncertainty remains regarding the course of the pandemic and the timing of the vaccine. Staff also noted that the legislature will need to make policy decisions regarding conformity to the federal income tax provisions included in the CARES Act, which could have a significant impact on state revenues. Other expected budget pressures include potential additional needs for the state’s COVID-19 response, restoration of unallotted spending items, salary increases for state and state-supported local employees and teachers, and further criminal justice reform proposals. The Medicaid forecast in the next biennium and the need to ensure structural balance were also cited as long-term pressures for Committee members to consider. Staff suggested using one-time revenues for investments such as building up the state’s reserves, using cash for capital projects, and replenishing the Unemployment Insurance Trust Fund.

VACo Contact: Katie Boyle

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