Governor Northam Reports to “Money Committees” on State Revenues

August 23, 2019

Governor Northam made his annual late-summer address to the “money committees” on August 20, providing an update on the status of state revenues in FY 2019 and offering a preview of the Administration’s expectations and priorities for the upcoming 2020-2022 biennium budget. The overall tone of both the Governor’s remarks and Secretary of Finance Aubrey Layne’s presentation was one of caution. While the state concluded FY 2019 with a significant surplus, those revenues are largely committed to tax relief, deposits to reserve funds, and water quality improvements, and there are concerns about the sustainability of this revenue growth in the next biennium.

In his remarks, Governor Northam touted recent successes, such as Virginia’s reclamation of the top ranking in CNBC’s annual ratings of the best states for business and a host of business relocations and expansions comprising more than $20 billion in investment over the last 20 months, as well as Virginia’s continued low unemployment rate. He also pointed to the significant commitment of monies to the state’s reserves, which are expected to reach record levels of $1.6 billion by 2021, representing 7 percent of General Fund revenue, as a successful collaboration between the legislature and the Administration.

Although the Governor indicated that the Administration expects continued revenue growth in the upcoming biennium, he pointed out that there are significant spending obligations that must be addressed, such as the biennial rebenchmarking of the Standards of Quality and growth in the Medicaid forecast, as well as the continued rollout of community-based behavioral health services. He cited economic headwinds that are out of the state’s control, such as trade tensions and high levels of federal debt, as reasons for Virginia to position itself for the future by protecting its bond rating and making “strategic investments in our long-term success.” He signaled that several issues are likely to continue to be priorities in the biennium budget, including broadband access, affordable housing, school readiness, and workforce development.

Secretary Layne provided further details on FY 2019 revenues and the process for developing the FY 2020 “caboose” and 2020-2022 biennium budgets that will be presented to the money committees in December. As reported earlier in the summer, the FY 2019 surplus was largely attributable to increases in nonwithholding income tax collections, which is typically a volatile revenue source. Two mainstays of state revenues, individual income tax withholding and sales and use taxes, slightly underperformed expectations. Withholding collections increased by 3.6 percent, rather than 3.8 percent as forecasted, representing a shortfall of $26.1 million, and sales tax collections grew by 3.4 percent, rather than the expected 3.7 percent, for a $10.7 million shortfall. Secretary Layne pointed out that most of the growth in sales and use tax collections was attributable to growth in use taxes, likely from remote sellers newly required to collect and remit use taxes as a result of the Wayfair decision and subsequent legislation in Virginia, rather than in brick-and-mortar stores.

Given the underperformance of withholding and sales tax collections and uncertainty about the sustainability of growth in nonwithholding, Secretary Layne expressed some concern about whether revenues will be able to meet the FY 2020 projections included in the 2019 Appropriations Act. He outlined the process by which revenue forecasting will be conducted this fall, with a meeting of the Joint Advisory Board of Economists in October, a meeting of the Governor’s Advisory Council on Revenue Estimates in November, and the presentation of the Governor’s budget, along with the revenue forecast, to the money committees on December 17. In addition to the major funding commitments outlined by the Governor, Secretary Layne also listed several other items that are likely to require attention in the next budget, including potential changes to the VRS discount rate that may require an offsetting increase in employer contributions, increases in construction costs for capital projects, and the potential effects on lottery proceeds of the proliferation of “skill“ games in many retail locations that also sell lottery tickets.

VACo Contact: Katie Boyle

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