VVirginia’s irginia’s EEconomic conomic and Budget Climateand Budget Climate

Richard D. BrownSecretary of Finance

November 9, 2009

2

Total General Fund Revenue Collections Collapsed In The Second Half Of The Year

• For the second half of fiscal year 2009:– Payroll withholding tax collections fell 1.0 percent;– Individual nonwithholding declined 24.8 percent;– Individual refunds increased 17.0 percent;– Sales tax collections declined 5.9 percent;– Corporate income tax receipts fell 19.0 percent, and;– Recordation taxes declined 16.8 percent.

Growth in Total General Fund Revenue Collections

2.9%

-4.2%-3.5% -3.7% -3.5%

-5.5%-6.8%

-8.6%-9.3% -9.2%

-6.1%

-1.9%

-24%

-20%

-16%

-12%

-8%

-4%

0%

4%

8%

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Monthly Year-to-Date

Forecast: -7.3%

Monthly Growth: 2.9% -6.6% -7.4% -1.0% -4.6% -2.6% -15.0% -13.6% -13.9% -19.7% -15.6% -8.0%

3

What did Global Insight Say? “The Bottom Is Near – For Output, Not Employment”

• Global Insight expects real GDP to begin growing slowly in the second half of 2009

• The labor market is expected to gradually improve, with job growth not occurring until the fourth quarter of 2010. The national unemployment rate is expected to peak at 10.3 percent.

• Global Insight expects total personal income growth to slow further in fiscal year 2010, and does not expect a robust consumer recovery

• The housing market remains a drag on growth; however, home sales, housing starts, and building permits are showing signs of stabilization and are expected to have hit bottom in the second quarter of 2009

• The turmoil in the financial sector and stock markets has subsided; however, some instability remains (tight credit availability)

4

In the June Standard Forecast, the U-Shaped Growth Path for Virginia Has Become Deeper• Employment and income growth are not expected to reach a low point

until fiscal year 2010, compared with fiscal year 2009 in the official forecast.

Key Virginia Economic Indicators Official and June GABE Forecast

Annual Percent Change

08 09 10 11 12Employment

Official (Nov '08) 0.9 (0.6) (0.2) 0.8 1.5June GABE 0.6 (1.4) (1.8) 0.5 1.5

Personal IncomeOfficial (Nov '08) 4.4 2.1 2.3 3.4 4.2June GABE 4.5 2.3 1.2 2.8 3.9

Wages & SalariesOfficial (Nov '08) 4.3 2.6 3.2 3.2 4.0June GABE 4.4 2.2 1.3 2.8 4.1

Average WageOfficial (Nov '08) 3.4 3.2 3.4 2.3 2.5June GABE 3.8 3.7 3.1 2.3 2.6

Fiscal Year

5

The August Interim Revenue Forecast Incorporates Pessimism from the GACRE Meeting

• Based on GACRE comments:

– The pessimistic alternative scenario for sales tax revenue was adopted

– Corporate income tax receipts were lowered to reflect weak taxable profits

– Recordation receipts now anticipate that the bottom of the housing market has occurred in Virginia

• The August 2009 Interim revenue forecast is a blend of the standard outlook and the pessimistic outlook

– Payroll withholding and retail sales tax – 80% of general fund revenues – are forecast to track to the pessimistic alternative scenario

6

In the August Interim Revenue Forecast, Total General Fund Revenues Have Been Reduced by $1.2 Billion

August Interim Revenue Forecast(millions of dollars)

As a %of Total Annual

Major Source Revenues Growth

Withholding 62.6 % $ (15.9) $ 9,474.4 $ 9,331.8 $ (142.6) 2.1 %Nonwithholding 15.4 (37.9) 2,326.9 1,904.4 (422.5) (17.6)Refunds (11.8) (162.4) (1,786.2) (1,944.4) (158.2) (1.2) Net Individual 66.2 (216.2) 10,015.1 9,291.8 (723.3) (2.0)

Sales 20.2 (57.5) 3,050.1 2,784.7 (265.4) (4.1)Corporate 4.8 (37.0) 724.0 662.2 (61.8) 2.2Wills (Recordation) 2.0 16.2 298.1 284.0 (14.1) (9.6)Insurance 1.9 (2.5) 283.1 255.5 (27.6) 0.2All Other Revenue 5.0 (1.9) 755.8 665.4 (90.4) (6.7)

Total (Base) 100.0 % $ (298.8) $ 15,126.2 $ 13,943.6 $ (1,182.6) (2.6) %

Tax Policy Actions Tax Amnesty 38.0 38.0 0.0 0.0 Sales Tax Remittance 97.8 97.8 0.0 0.0

Total Revenues $ 15,262.0 $ 14,079.4 $ (1,182.6) (1.6) %

VarianceFY09 Official

Forecast Change

Fiscal Year 2010

JuneForecast

7

Impact on State Government

• Including the August reforecast, there now have been a series of revenue reductions for the 2008-2010 biennium totaling almost $7.0 billion

Date Reductions in Millions

August 2007 -$ 849.1 February 2008 - 1,064.5 October 2008 - 2,513.7 December 2008 - 373.6 February 2009 - 821.5 August 2009 - 1,508.0

Total -$7,130.4

• Percentage loss in general fund revenue for FY 2009 is almost twice as severe as FY 2002 recession

8

9

Overview of the FY 2010 Budget Shortfall and Reduction Strategies

• Because almost three months of fiscal year 2010 already have elapsed, the Governor’s proposals were directed at:

– Managing the shortfall while minimizing impact on K-12 education, safety net services, and local governments

– Making agency and targeted budget reductions that could be continued through 2010-12 biennium and beyond

• The Governor’s plan includes a variety of actions including: – Agency and program reductions

– Reversion of prior year unspent general fund and nongeneral fund balances

– Use of alternative funding sources as a substitute for general fund spending

– Proposed Revenue Stabilization Fund transfer

$ in Millions

Balance in Appropriations Act (Chapter 781) 157$

FY 2009 Revenue Shortfall (299)

FY 2010 Revenue Shortfall (1,209)

Net Budget Shortfall for Biennium (1,351)$

Net Budget Shortfall for 2008-2010 Biennium

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Summary of Governor’s September 2009 Proposed Budget Actions

FY 2010

General Fund Revenue Shortfall (incl. transfers) (1,350.5)$

Agency-based Actions:Agency Pledged Balances 22.8 Agency GF/NGF Balances 143.4 Net GF Higher Education Reductions 105.3 Close Correctional Facilities 36.6 Constitutional Officers 30.4 One Day Employee Furlough 16.3 Indigent Care Funding 7.0 MH Treatment/Disability Training Centers 6.3 Economic Development/Tourism 3.1 Remaining Agency Reductions 190.4

Subtotal 561.6$ Revenue Sharing Adjustments:

K-12 Sales Tax 37.6 HB 599 Payments 13.7

Subtotal 51.3$ Other Actions:

Revenue Stabilization Fund Withdrawal 283.0 Federal Stimulus (K12 & Higher Education) 160.4 VRS Employer Retirement Rate Suspension 104.1 VRS Employer Non Retirement Programs Rate Suspension 30.9 Federal Stimulus (Medicaid Match Rate) 97.0 Literary Fund 55.0 Lottery Profits (from FY2009) 9.9

Subtotal 740.3$

Total of All Actions 1,353.2$

Amount in Excess of Shortfall 2.7$

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• Total general fund revenue collections fell 7.5 percent in September compared with September 2008.

• On a year-to-date basis, total revenues fell 7.4 percent, trailing the annual forecast of a 1.6 percent decline (-2.6 absent tax policy changes).

Growth in Total General Fund Revenue CollectionsFY10 Monthly and Year-to-Date

-8.1%-7.4%-7.3%

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Monthly Year-to-Date

Forecast: -1.6%

Monthly Growth: -8.1% -6.6% -7.5%

Policy Adjusted: -2.6%

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• Collections of payroll withholding taxes grew 4.0 percent in September.

• Year-to-date withholding collections declined by 2.3 percent over the same period last year, trailing the projected annual growth rate of a 2.1 percent increase.

Growth in Withholding Tax CollectionsFY10 Monthly and Year-to-Date

-7.1%

-2.3%

-5.3%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Monthly Year-to-Date

Forecast: 2.1%

Monthly Growth: -7.1% -3.4% 4.0%

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• The first individual estimated payment in fiscal year 2010 was due in September. Monthly collections declined 27.5 percent.

• Year to date, collections through September fell 23.4 percent compared with the annual estimate of a 16.8 percent decline.

Nonwithholding Tax CollectionsFY08-FY10 Monthly

0

100

200

300

400

500

600

700

800

900

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

FY08 FY09 FY10

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• The first estimated payment from corporations in fiscal year 2010 was due in September.

– Monthly collections fell 10.6 percent.

• On a year-to-date basis, collections in this source have fallen 7.9 percent, lagging the forecast of 2.2 percent growth.

• About 22.4 percent of the projected fiscal year’s corporate revenue have been collected.

– Typically about 25 percent is collected in the first quarter of the fiscal year.

Net Corporate Income Tax Collections

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Looking Ahead to the Next BienniumSlower Revenue Growth

Average Annual Growth

5 years (FY03 to FY08) +7.6%10 years (FY98 to FY08) +6.0%15 years (FY93 to FY08) +6.5%20 years (FY88 to FY08) +5.9%25 years (FY83 to FY08) +6.9%30 years (FY78 to FY08) +7.3%35 years (FY73 to FY08) +8.0%40 years (FY68 to FY08) +7.8%

• How have general fund revenues grown?

• The August 2009 forecast of general fund revenues projects much slower growth in the future.

Average Annual Growth

FY2010 -1.6%FY2011 +3.8%FY2012 +5.3%

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Year over Year Change in Total General Fund Revenues,

FY 1962 - FY 2009

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Fiscal Year

Perc

ent C

hang

e O

ver P

rior Y

ear

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Looking Ahead to the Next Biennium

• We expect:

– Slower revenue growth in the future – no quick post-recession “bump”

• FY 2006: $14,834.8 billion• FY 2008: $15,767.0 billion• FY 2010: $14,079.4 billion (August Interim General Fund Forecast)• FY 2012: $15,389.2 billion (August Interim General Fund Forecast)

– Growing spending needs as the result of recessionary pressures, rising costs, and unmet needs, and

– The end of enhanced federal aid as the stimulus package funding phases out

• Means that:

– Significant budget pressures will continue in the next biennium, and

– Budget reductions against current spending levels will be needed in many areas to maintain fiscal balance

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Outlook for Budget Drivers• K-12 Education

– Enrollment– Cost Rebasing– Retirement

• Higher Education– Education and General– Student Financial Assistance

• Medicaid– Utilization and Inflation– Federal Match Rate

• Other Health and Human Resources– CSA– MH / MR

• Corrections– State Responsible Population– New Facilities

• Employee Compensation– Pay Increases– Fringe Benefits

• Debt Service• Revenue Stabilization Fund• Capital Outlay

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Where the Money Goes in 2008-2010

81% of state GF revenues are used for education, health and public safety programs

Health & Human Resources$8,373.625.6%

Education$14,757.7

45.0%

Debt Service$957.32.9%

Car Tax$1,900.0

5.8%

General Government

$1,640.05.0%

Other$1,513.1

4.6%Public Safety

$3,536.010.8%

Transportation$82.00.3%

Higher Education$3,317.222.5%

Other$348.62.4%

K-12$11,091.8

75.2%

*Governor Kaine’s Introduced 2008-2010 Biennial Budget

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Almost Half of the General Fund Operating Budget Goes to Localities

Local Sheriffs$955.96.1%

Other Aid to Localities$1,964.312.5%

Car Tax$1,900.012.7%

Public Education$10,949.3

69.4%

Aid to Localities$15,769.6

48.1%

State Programs$8,907.927.2%

Debt Service$957.32.9%

Aid to individuals$7,125.021.7%

*Total GF Operating $32,759.7 million; HB1600 Introduced.

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Federal Stimulus Package

• Allocation: $4.8 billion

• Received to Date: $1.0 billion

• Big Ticket Items:– Fiscal Stimulus Funds for Education - $984 million

• K-12 - $435 million

• Higher Education - $217 million

• Reserved for FY2011 - $332 million

– Fiscal Stimulus Funds (Flexible Portion - $218.9 million)• FY2009 - $109.8 million

• FY2010 - $109.8 million

– Medicaid - $1.3 billion• FY2009 - $368.8 million

• FY2010 - $593.7 million

• Remainder in FY2011

– Byrne Justice Assistance Grants - $23.3 million• Use in FY2010

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The Balance in the Revenue Stabilization Fund Will Exceed $300 Million After the Proposed

FY2010 Withdrawal of $283 Million

$80.1 $85.0

$156.6 $224.3

$361.5

$574.6$715.6

$472.4

$247.5$340.1

$482.3

$1,064.7$1,189.8

$1,014.9

$575.1 $583.7

$0

$200

$400

$600

$800

$1,000

$1,200

Revenue Stabilization Fund -- June 30 BalanceFY 1995-09 Actual and FY 2010 Forecast

(millions of dollars)

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For more information on Virginia’s budget, visit these websites at:

www.Finance.Virginia.gov or

www.DPB.Virginia.gov