Virginia’s Fiscal Year End Update

On August 26, Governor Terry McAuliffe presented his fiscal year end address to a joint meeting of the General Assembly’s “money committees” (the committees of House Appropriations, House Finance and Senate Finance). As foreshadowed, the revenue news is disappointing. State general fund revenues rose by only 1.7 percent in fiscal year 2016 or $268.9 million short of the adopted forecast of 3.2 percent growth. Coupled with a $10.4 million decrease in transfers, the total FY 2016 shortfall is $279.3 million.

The revised interim forecast of today reduces FY 2017 revenues from 3.2 percent to 1.7 percent for a decrease of $564.4 million, and FY 2018 revenues from 3.9 percent to 3.6 percent for a reduction of $632.7 million. The total 2017-2018 biennial budget shortfall is just under $1.2 billion, but the combined budget shortfall is $1.476 billion (when factoring in the FY 2016 reduction).

Unlike the FY 2014 revenue shortfall that was driven largely by a fall in capital gains earnings, this downturn is driven by lower than expected payroll withholding and state sales tax revenues. These two sources combined account for the lion’s share of the current shortfall.

The good news is in the Commonwealth’s rate of job growth. More than 86,000 jobs were created in FY 2016. After five straight years of job growth hovering at one percent, Virginia saw a 2.3 percent gain last budget year, the strongest rate since FY 2005. And Virginia’s growth is above the national average of 2.0 percent.

While more jobs were created, state tax revenues have not increased. 47.6 percent of the new jobs are considered “low wage” with an average weekly salary range of $267 to $940. Comparatively, 15.1 percent of the new jobs are considered “high wage” with an average weekly salary wage range of $1,514 to $2,087. This wage trend translates to a budget problem.

Since actual FY 2016 revenues were more than one percent below the forecasted estimate, the Governor was required to revise the official 2017-2018 biennial budget revenue estimate. As required, the Commonwealth’s Joint Advisory Board of Economists met on July 15 to discuss the economic outlook, and the Governor’s separate Advisory Council on Revenue Estimates (GACRE) met just last week. Relying on available data, counsel from his budget team and the advisory groups, the Governor chose a “standard forecast” rather than a more pessimistic one. (The difference between the standard and the gloomy estimates is approximately $700 million.)

As a result of the revenue downturn, the Governor announced that the previously authorized FY 2017 state, teacher and state-local employee raises are on hold. This action saves more than $125 million the first year. Additionally, the Governor indicated that up to $378 million is available from the Rainy Day Fund to help shore up FY 2017. These two actions, if adopted by the General Assembly, would address 89 percent of the FY 2017 shortfall.

Moving forward, the Governor will immediately start to identify and implement budget actions. Consequently, state agencies may reduce spending upwards of 15 percent.

Over the next three months, significant revenue milestones will be incorporated into the fall forecasting process culminating with the GACRE review of state revenues through FY 2020. In December, the Governor will unveil an updated revenue forecast and introduce his amended biennial budget. His proposals will suggest implemented savings for the 2017-2018 biennial budget. The General Assembly will convene on January 11, 2017.

Kemper Consulting will continue to keep you apprised of major budget events or actions. If you have any questions, please do not hesitate to contact us.