State Revenues Maintain Strength as State Contemplates Use of Federal Recovery Funds

May 19, 2021

Secretary of Finance Aubrey L. Layne, Jr., brought good news to the House Appropriations and Senate Finance and Appropriations Committees this week as he reported on state General Fund collections, which remain on track to surpass the forecast and are expected to produce a significant budget surplus at the end of the fiscal year.  Although changes in the usual tax filing deadlines mean that the months of April, May, and June must be considered as a whole in order to obtain a true picture of state finances, revenues are up 12.8 percent on a fiscal year-to-date basis, well ahead of the forecast of 2.7 percent growth.

Individual income tax withholding collections, the mainstay of General Fund revenues, have increased by 3.7 percent on a fiscal year-to-date basis, outpacing the forecast of 2.7 percent growth.  Sales taxes continue to perform well, growing by 8.7 percent on a fiscal year-to-date basis; Secretary Layne noted that sales tax collections have been bolstered during the pandemic by a shift to consumption of goods rather than services.  Strong sales tax collections in April reflect increasing consumer confidence amid the reopening of parts of the economy; however, Secretary Layne sounded a note of concern in pointing out that increasing sales tax receipts also reflect rising prices, and it is unclear whether recent indicators of inflation (such as growth in the Consumer Price Index of 0.6 percent in March and 0.4 percent in February) are transitory or signposts of a more lasting trend.

In addition to concerns about inflation, Secretary Layne highlighted several other areas of caution, including the slow population growth documented in the recent release of Census data, which raises concerns about future labor supply; rising housing prices in lower-cost markets, which may place homeownership out of reach for some prospective buyers; and significant increases in federal deficit spending, which may trigger reductions in defense spending and other federal procurement in the future if the federal government undertakes another round of sequestration or other budget reductions designed to shore up federal finances.

Virginia will be receiving a sizable infusion of federal resources through the American Rescue Plan Act, including $7.2 billion in direct, flexible aid to the state and local governments through the Coronavirus State and Local Fiscal Recovery Fund, as well as $6.6 billion channeled through various funding streams, such as Head Start, rental assistance, and aid to school divisions.  The state has requested its allocation of Fiscal Recovery Funds from the Treasury and expects to receive its $4.3 billion distribution in one lump sum due to its level of unemployment relative to February 2020 (an indicator Treasury plans to use to determine whether to split state distributions into two tranches).

Counties and larger cities will also receive funds directly from the federal government (although in two tranches), while the state will be responsible for distributing funds to “non-entitlement units” (smaller cities and towns).  Although detailed guidance from Treasury is still pending on allocations to non-entitlement units, the state is prepared to work with those localities to obtain their certification that funds will be used appropriately and verify that the amounts received do not exceed 75 percent of their budgets, in accordance with federal law.  In order to comply with state budget language that affords the General Assembly a role in directing the use of all federal relief funds provided to the state, the Administration will notify the legislature of planned distribution of funds for which the state has no discretion as to their use – such as the pass-through funding for the smaller cities and towns – and distribute funds in the absence of any legislative objections.

A special session to appropriate federal funds for which the state has discretion as to their use, such as the state’s Fiscal Recovery Funds, is expected to be convened later this summer.  Secretary Layne’s presentation is available at this link.  Additional detail about resources contained in the American Rescue Plan Act may be found in a presentation by Senate Finance and Appropriations Committee staff, available at this link.

VACo Contact:  Katie Boyle

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