The General Assembly returned to Richmond on April 11 to continue work on the “caboose” and biennium budgets after negotiations reached an impasse during the regular session over the question of Medicaid expansion. After the House and Senate adopted procedural resolutions governing what matters may be considered during the special session, the House Appropriations Committee met on Friday, April 13, to review Governor Northam’s introduced budget and receive a briefing on state revenues from Secretary of Finance Aubrey Layne.
General Fund revenue collections fell in March by 3.5 percent, but on a fiscal year-to-date basis, revenue collections have increased 5.2 percent, and are still expected to meet the annual forecast of 3.4 percent growth. The drop in revenues in March is attributable in part to a decline in individual income tax withholding of 4.7 percent relative to March 2017. However, March 2018 had one less day for deposits than the same month last year, and on a fiscal year-to-date basis, collections have grown by 4.2 percent, ahead of the annual estimate of 3.5 percent. Of more concern, sales and use tax collections grew slightly in March, but have slipped behind the forecasted 3 percent growth, growing 2.9 percent on a year-to-date basis.
Secretary Layne noted that it is too soon to determine whether March’s faltering performance is an aberration or the beginning of a worrisome trend. The last quarter of the fiscal year, which encompasses collections of estimated and final corporate income tax payments and individual nonwithholding payments, as well as most individual income tax refunds, will be critical in ensuring that the state meets its FY 2018 revenue estimates, as well as signaling future trends in revenue performance. Information on income tax refunds will also help the state determine whether the spike in December nonwithholding collections represents sustainable growth or tax planning strategies.
In the long term, Secretary Layne told Committee members that he is most concerned about cuts to federal spending, particularly drastic action by Congress such as sequestration. He pointed to the Congressional Budget Office report released last week that projected federal budget deficits of $1 trillion per year beginning in 2020 as a factor that might prompt moves by Congress to curtail federal spending in a way that would damage Virginia’s economy. In the near term, the state Department of Taxation continues to analyze the federal Tax Cuts and Jobs Act of 2017 to determine its effect on Virginia revenues.
Secretary Layne also provided Committee members with an update on discussions with the bond rating agencies. Standard and Poor’s placed a negative outlook on Virginia’s AAA rating in April 2017 due to concerns that the state’s reserves were insufficient to weather future economic downturns. Secretary Layne presented a comparison of Virginia’s existing Revenue Stabilization Fund (the “Rainy Day Fund”) balances with those of other AAA-rated states, noting that Virginia’s Rainy Day Fund balance as a percentage of expenditures is well below the levels in other AAA-rated states. An additional revenue reserve was created by statute in the 2018 regular session and the amounts to be deposited over the biennium are part of the budget discussions. House Appropriations Chairman Chris Jones emphasized his commitment to taking steps needed to reassure the rating agencies and preserve the state’s credit rating.
The Committee then considered Governor Northam’s introduced caboose and biennium budget bills and reported them to the House floor in the forms in which the House passed its budgets during the regular session, with several key amendments:
HB 5001 (the “caboose” bill amending FY 2018 appropriations):
- Language is added to the Training, Education, Employment, and Opportunity Program (TEEOP) to disenroll individuals from Medicaid who fail to meet TEEOP’s requirements for three months of the plan year, unless the failure was due to circumstances beyond the individual’s control.
- Language is added at the request of the Governor to increase the amount of FY 2018 revenue surplus to be deposited to the new Revenue Reserve Fund from 50 to 100 percent, after the mandatory deposits to the Revenue Stabilization and Water Quality Improvement Funds.
- Language that would have directed the provision of a one-time two percent bonus for state employees on December 1, 2018, contingent on a FY 2018 revenue surplus, is removed, as surplus funds are instead to be directed to the Revenue Reserve Fund.
HB 5002 (the 2018-2020 biennium budget bill):
- Language is added authorizing the Secretary of Health and Human Resources to apply for a state innovation waiver under the Affordable Care Act to implement innovative solutions to reduce premiums and out-of-pocket costs in the individual insurance market, such as the creation of a state reinsurance program or high-risk pool.
- Language is added to reflect the additional deposits to the Revenue Reserve Fund in FY 2018 and the deposits in FY 2019 and FY 2020 as set out in legislation adopted by the General Assembly in the 2018 regular session. Language regarding the proposed bonus for state employees that was removed from the caboose budget is also removed from the biennium budget.
- Language from the caboose budget regarding disenrollment from Medicaid for failure to meet TEEOP requirements is included.
The full House approved the two budget bills on Tuesday, April 17; the bills now await action by the Senate.
VACo Contact: Katie Boyle