State Revenues Continue Strength in May, Remain on Track for Significant FY 2022 Surplus as Federal Reserve Acts to Tame Inflation

June 16, 2022

Governor Youngkin announced this week that state General Fund (GF) revenues continued to perform well in May, placing the state in a strong position to end FY 2022 with a significant surplus.  However, despite a strong labor market, the state faces some economic uncertainty given high levels of inflation, a situation which prompted the Federal Reserve to raise interest rates by 0.75 percentage points on Wednesday, with the expectation of more rate increases to come.

Secretary of Finance Stephen E. Cummings reported in his monthly revenue memorandum that total revenue collections have increased by 17.8 percent on a fiscal year-to-date basis, and staff expect total GF revenues to exceed the February revenue projections by more than $1.2 billion.  House Appropriations Chairman Barry Knight indicated in a Richmond Times-Dispatch article that he expects FY 2022 collections to be sufficient to address the spending items earmarked in the budget conference report to be funded from surplus revenues that are not obligated for the Revenue Stabilization Fund or the Water Quality Improvement Fund.  These items, which include a $250 million deposit to VRS to address unfunded liability, $150 million for I-64 improvements, and $50 million for the Virginia Business Ready Sites Program Fund, are contingent on available surplus revenues.

May revenues reflected continued strength in individual income tax and sales tax collections.  Individual income tax withholding increased by 12.9 percent in May (by 8 percent when adjusting for the extra deposit day in May), and have increased by 9.7 percent on a fiscal year-to-date basis, ahead of the forecasted 9 percent growth.  Individual income tax nonwithholding collections have increased by 33.1 percent on a fiscal year-to-date basis, far outpacing the estimate of a 2.5 percent increase; however, nonwithholding collections have typically been a volatile revenue source.  Sales tax collections have increased by 13.8 percent on a fiscal year-to-date basis, ahead of the forecast of 11.4 percent growth.

Secretary Cummings noted in his memorandum that Virginia has seen improvement in job growth, with 2.7 percent growth in employment between April 2021 and April 2022.  The Virginia Employment Commission (VEC), citing the Bureau of Labor Statistics’ March 2022 Job Openings and Labor Turnout Survey, recently reported that the number of unemployed workers per job opening reached a “record low.”  Secretary Cummings cited as a positive sign the improvement in Virginia’s labor force participation rate, which grew by 0.9 percentage points since December, after falling from 66.3 percent in January 2020 to 63.2 percent in December 2020, according to the VEC.  (However, the VEC pointed out that returning to pre-pandemic labor force participation levels will be hampered by Virginia’s changing demographics, as the large “baby boomer” generation, which makes up an increasing share of the state and national population, retires.)

Despite these positive signs for the state’s finances, Secretary Cummings struck a note of caution in his memorandum, writing, “Monitoring national and global issues that may impact our future revenue streams remains a top priority.  Employment growth continues, and the unemployment rate remains low.  However, volatility in the financial markets, rising interest rates and persistent high inflation have the potential to cause consumers to tighten spending.  Wage growth is moving in a positive direction, but the effects of inflation will begin to squeeze consumers.  The consumer price index has increased more than wages, and critical products like gasoline, other energy related expenditures and food at home have risen [by] double-digit percentages, significantly outpacing average wage growth.”  He reaffirmed the state’s decision not to adjust FY 2023 and FY 2024 revenue projections in February, when the FY 2022 forecast was revised, and suggested that forecasts for the biennium will be revisited during the usual fall reforecasting process.

As noted by Secretary Cummings, last Friday the Bureau of Labor Statistics released updated inflation figures, disappointing forecasters who had hoped that inflation had peaked in April.  The BLS reported an increase of 1 percent in May in the Consumer Price Index for All Urban Consumers; the CPI increased by 8.6 percent over the last 12 months, the largest increase since the 12 months ending in December 1981.  On June 13, the S&P 500 officially crossed into bear market territory (reflecting a decline of at least 20 percent from the market’s recent peak).

On June 15, the Federal Reserve increased interest rates by 0.75 percentage points in an effort to tame inflation, and signaled that additional rate increases are likely to follow.  Economic projections released by the Federal Reserve indicate that the median member projection is for the target federal funds rate to reach 3.4 percent in 2022, increase to 3.8 percent in 2023, and then return to 3.4 percent in 2024 (with the June 15 action, this rate now ranges between 1.5 and 1.75 percent).  At the follow-up press conference, Federal Reserve Chair Jerome Powell explained the aggressive action as a matter of necessity, stating, “We at the Fed understand the hardship high inflation is causing.  We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so….Over [the] coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent.  We anticipate that ongoing rate increases will be appropriate; the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy.”

VACo Contact:  Katie Boyle

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