Secretary of Finance Aubrey L. Layne, Jr. brought positive news to the Senate Finance and Appropriations and House Appropriations Committees in his last briefing to the “money committees” in his current role, as state General Fund revenues (GF) are on track to generate a significant surplus for FY 2021, bolstered by growing strength in the economy and several infusions of federal assistance. May GF revenues increased by 66.2 percent relative to last May; although the majority of this increase is attributable to adjustments in income tax filing deadlines, revenues have also performed well over the course of the fiscal year. On a fiscal year-to-date basis, revenues have increased by 17.8 percent, far ahead of the forecast of 2.7 percent. Secretary Layne suggested that revenues are likely to continue to perform well given the current economic “tailwinds” of business reopening and federal assistance. He pointed out that since the onset of the pandemic, an estimated $26 billion in federal assistance to state and local governments has flowed into the state, with an additional $51 billion in aid to individuals and businesses.
The largest threat to the economic recovery, in the Secretary’s view, is inflation and the degree to which recent price increases are transitory or longer-term in nature. The Consumer Price Index increased by 0.8 percent in April and is 4.2 percent above its April 2020 level. The Federal Reserve Open Markets Committee, in its statement following its June 15 meeting, affirmed its goal of allowing inflation “moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent,” and members’ median projection for core inflation for 2021 is now 3 percent (up from 2.2 percent in March). Federal Reserve Chair Jerome Powell, in June 22 prepared remarks to the U.S. House’s Select Subcommittee on the Coronavirus Crisis, conceded that inflation has increased in recent months, but attributed this growth to short-term issues such as supply bottlenecks, stating, “As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal.”
In Virginia, major state revenue sources continue to perform well across the board. Individual income tax withholding has increased by 4.4 percent on a fiscal year-to-date basis, reflecting both wage and job growth, and comfortably outpacing the predicted 2.7 percent increase. Nonwithholding collections are up by a startling 69.2 percent on a year-to-date basis (far ahead of the annual estimate of 4.4 percent growth), reflecting stock market gains but also potentially the effects of adjusted due dates last year, which may distort year-over-year comparisons. Sales tax collections continue to perform well, with growth of 11.1 percent on a fiscal year-to-date basis (as compared with a forecast of 4.7 percent growth); this increase reflects some return to purchases at brick-and-mortar retailers, which had shifted to online sales during the pandemic. Strong recordation tax collections continue to reflect the super-charged housing market, although Secretary Layne predicted that this pace would not continue, due to constraints on the supply of housing.
Governor Northam is scheduled to present final revenue figures for FY 2021 to the money committees on August 18, and is likely to announce a large surplus, potentially as high as $2 billion. Constitutional and statutory provisions will govern the disposition of a portion of these funds, and Secretary Layne discussed with both committees the requirements for contributions to the state’s Revenue Stabilization Fund (the “rainy day fund” created in the Constitution) and Water Quality Improvement Fund, as well as the Revenue Reserve Fund (an additional cash reserve created by statute to provide additional flexibility in making deposits and withdrawals) in the event of a revenue surplus. For example, with a surplus of $1 billion, an estimated $462 million would be required to be deposited to the Revenue Stabilization Fund and the Water Quality Improvement Fund. Secretary Layne’s presentation may be found at this link.
Although the Governor’s proclamation announcing the August 2 start date for a special session to appropriate funding from the American Rescue Plan Act (ARPA) had not been issued at the time of the money committees’ meetings, developing a plan for use of the state’s federal relief dollars was clearly a priority for members of both committees. Senate Finance and Appropriations Chair Janet Howell indicated that she is soliciting priority spending ideas from Senators, and House Appropriations Committee staff provided an overview of funding streams in ARPA at the Committee’s June 23 meeting. Both Committees received a presentation from Rita McClenny, President and CEO of the Virginia Tourism Corporation, recommending the use of $50 million in ARPA funds to assist the state’s tourism industry in recovering from pandemic-related losses. She pointed out that in April 2021, travel expenditures were 30 percent less than pre-pandemic baseline levels and the leisure and hospitality sector represented 45.4 percent of total job losses in Virginia. Recovery has been “piecemeal,” with areas of the state offering more outdoor activities recovering more quickly than others. The proposed deployment of ARPA funds would support additional marketing efforts by the Virginia Tourism Corporation and assist localities with local marketing expenses and revenues foregone by destination marketing organizations due to reductions in transient occupancy taxes. House Appropriations staff indicated that state agencies have been asked to submit proposals to the Administration, which plans to share them with the money committees this week. Staff Director Anne Oman pointed out that legislators may only appropriate funds through the end of FY 2022 in the current biennium budget, and that there is an opportunity to revisit spending decisions in future years, as state Fiscal Recovery Funds need not be obligated until December 2024.
VACo Contact: Katie Boyle