State Funding Outlook for Locally-Administered Programs

1. State Funding Outlook for Locally-Administered Programs James J. Regimbal Jr. Fiscal Analytics, Ltd February 9, 2012

2. Increasing Reliance on Non-General Fund Revenues NGF* 2 * Federal funds, higher education tuition & fees, other fees, unemployment insurance taxes, institutional revenue, etc

3. State Aid is Falling For Localities Source: APA Comparative Reports on Local Revenues and Expenditures, Fiscal Years 2000-2010 3

4. State Assistance % of GF for Locally-Administered Programs Continuing to Decline 4 4

5. While Local Revenues Continue to Suffer Source: 1990-2010, Auditor of Public Accounts FY 11 & 12 estimates from VML/VACO 2011 Fiscal Survey 5 5 5

6. Important to Keep a Mix of Local Revenues • Locals dependheavily on real estate taxes Note: BPOL is the Business, Professional and Occupational License Tax. M&T is the Machinery and Tools Tax 6 Source: Auditor of Public Accounts Comparative Report of Revenues and Expenditures

7. Most Local Government Expenditures are Mandated or Regulated by the State 7 7 Source: Auditor of Public Accounts Comparative Report of Revenues and Expenditures

8. Proposed Change in FY 2013 State GF Appropriations 8 8

9. Little New K-12 GF Spending in Introduced Budget Above FY 2012 Base* * FY 12 “Base” funding annualizes part-year and removes one-time funding, such as $87.7 mil. appropriated for supplemental support. ** Does not include $28 mil. per year in Executive Amendments, primarily K-3 class size and early reading initiative funding. 9 9

10. Proposed 2012-14 K-12 Policy Changes Add to List of Recent SOQ Reductions* • Eliminate Non-personal Inflation Update – ($109.0) • - Did not fund inflation in 2010-12 biennium either. • Modify Federal Revenue Deduction Calculation for Federal Stimulus Funding – ($108.1) • Eliminate Support Cost-of-Competing Adjustment – ($65.0) • VPI: Use Kindergarten as a Proxy for 4 Year-olds – ($26.7) * Recent previous biennia reductions included: a funding cap on support positions, eliminating recognition of other SOQ support costs, increasing the federal deduct from 29% to 38% for support costs, changing funding assumptions for health care premiums, eliminating enrollment loss and support for construction, etc. (for further details see: http://hac.virginia.gov/committee/files/2010/11-16-10/Public_Education_Update.pdf

11. Includes GF, lottery profits, miscellaneous NGF, and state appropriated federal stimulus funds 11

12. Reasons the StateIs Restoring Little to Core Local-AidProgram Funding • Revenues not growing as fast as usual coming out of a recession (under 5% revenue growth expected in 2012-14). Tax changes reducing revenues. Concern over potential impact of federal deficit reductions. • Rainy Day Fund must be restored– Half of any GF revenue growth above prior 6-yr. avg. (2% now) goes to RDF. • 3. VRS contribution rates for teachers and state employees will be significantly increased. • 4. Medicaid spending continues to grow faster than state revenues. 2014 impact of federal health care big unknown, but law as written would add up to 425,000 new Medicaid recipients. • Use of one-time revenues/savings/debt in recession have to be replaced with ongoing revenues just to keep current spending. • - Debt only capital program has long-term consequences. • 6. Increasing efforts to use general funds for transportation. 12

13. Revenues Not Rebounding as Fast 13

14. General Fund Tax Changes Have More Than Neutralized 2004 Tax Increase 14 14

15. Retirement Rates Will Rise Notes: Employer rates only and do not include 5% member contribution. Over the last 10 years ending June 30, 2011 VRS annual average total fund investment return has been 5.7%. 15

16. Health Care Has Trumped Education 16

17. K-12 Medicaid (DMAS)

18. Non-Recurring Recession Revenues No Longer Available • State Appropriated Federal Stimulus Funding - $2.8 billion • Reduced VRS state employee and teacher retirement/OPEB benefit contributions - $850 mil. • Rainy Day Fund Withdrawals- $783 mil. • Replaced Capital Outlay Cash With Debt - $350 mil. • Accelerated Sales Tax for Dealers - $227 mil. • Captured NGF balances and interest earnings - $113 mil. • Tax Amnesty - $102 mil. • Eliminated Sales Tax Dealer Discount for Electronic Filers - $98 mil. 18 18 18

19. Source: Senate Finance Committee Retreat, Nov. 2011

20. Governor’s Transportation Proposal Would Divert Significant General Funds (HB 1248/SB 639) • Phase-in of additional 0.25% sales tax to transportation: $54 mil. in FY 13 increasing to $300+ mil. by FY 20. • Dedicates one percent of general fund if growth is above five percent – potentially over $170 mil./yr. • Increases dedication of GF surplus from 67% to 75% (FY 2011 surplus yielded $67 mil.). • Creates transportation improvement districts whereby projects are partially funded using growth in state general funds from that district.

21. Conclusion • State policymakers do not seem to understand the fiscal condition of localities when they propose: - Using GF to help solve transportation needs. - Proposing reductions in local revenue sources - such as exempting new equipment for 3 years for M&T tax purposes. - Increasing locality costs of providing services through a constitutional amendment on eminent domain. • Little restoration of state aid proposed for 2012-14 and continued depressed real estate assessments mean local budgets will remain under pressure for foreseeable future. - Little new K-12 funding proposed, except for retirement system, even though localities already spend $3.2 billion per year above their required local effort. - Local share of teacher retirement costs could increase $350 m per year – further straining school division budgets.