Virginia’s Revised FY15-FY16 Revenue Forecast

This morning Governor McAuliffe presented the final revenue report for fiscal year 2014 and an interim look at the next two fiscal years, 2015 and 2016. As Kemper Consulting reported earlier this summer, the enacted Appropriations Act for FY15-FY16 assumed a total shortfall of $1.55 billion over the biennium. This included an inherited shortfall from FY14 of $350 million plus projected shortfalls from FY15 and FY16.

Back in May the large revenue decrease, mostly from non-withholding income, triggered a request from the Governor for a revenue re-forecast. On July 9th, the Joint Advisory Board of Economists (JABE) met and adopted their own JABE pessimistic forecast, a combination of the IHS Economics’ May Standard and other pessimistic outlooks. Then on August 1st, the Governor’s Council on Revenue Estimates (GACRE) met and adopted an even more pessimistic revenue projection, advising further caution, especially due to sluggish job reports and uncertainty surrounding capital gains tax revenue.

In turn, the GACRE Interim Revenue forecast reduces total general fund revenues from 5.2% growth to 2.7%, when compared to FY14. This equates to a $1.994 billion reduction in general fund resources for FY15 and FY16. Combined with the official shortfall from FY14 of $437.8 million, there is a total shortfall of $2.4 billion in the Appropriations Act.

Fortunately the General Assembly anticipated this downturn. The budget already includes $846.1 million in spending reserves and assumes $705 million in withdrawals from the Revenue Stabilization or Rainy Day fund. That brings the total new shortfall in the budget to $881.5 million, $345.5 million in FY15 and $536 million in FY16.

The Governor is authorized to make spending reductions up to 15% and indicated that he is currently working with the Department of Planning and Budget and all state agencies to find the $345.5 million needed to cover the shortfall in FY15. Chairman Jones also said this morning that the money committees will be working closely with the Governor’s office to make targeted spending cuts as soon as possible since by the end of this month, one sixth of FY15 is gone. Secretary Brown added that the Governor is hopeful for cuts in FY15 to be “base adjustments going forward,” which will make cuts in FY16 an easier task.

Both administrative and legislative decisions on future budget cuts can be anticipated in the coming months.  We will stay heavily involved in the development of the executive budget recommendations as that process unfolds.  This is the first budget development process for the new administration, and as such will involve a need for us to provide particularly detailed information.  Fortunately, the Department of Planning and Budget and many of the McAuliffe Adminstration personnel have experience with the state budget and provide a continuity that will be helpful in identifying cuts that are as sustainable as possible.   As we head into the fall budget season, we will keep you apprised of any developments, or plans for major cuts in spending as we become aware of them.

To read the full text of the Governor’s remarks click here and for the full revenue presentation by Secretary of Finance Ric Brown click here.