Legislative Newsletter No. 12 — May 7, 2004

Biennial Budget Adopted!

On the 52nd day of a special session on the state budget, and the 115th day since the General Assembly convened in January, the legislature finally approved a compromise spending plan that had been hammered out over the past week-and-a-half by House and Senate budget negotiators. The votes to approve the plan were 32-5 in the Senate and 65-30 in the House, both coming after relatively short debates.

The budget was shaped only after a group of moderate Republicans teamed with their Democratic counterparts in the House and a bipartisan Senate to adopt HB 5018, the Tax Reform Compromise Act of 2004 (see details below). This package, which generates an additional $1.5 billion for the next biennium, provided revenue numbers for budget negotiators to use in crafting the two-year state budget. Following are key components of the compromise budget:

The budget increases state funding to public education an additional $760 million over the introduced budget:

• It restores $328.1 million to reverse 1) nearly three-fourths (71%) of the proposed policy change that would have deducted certain federal revenues from the SOQ cost calculations, and 2) all of the proposed deduction of locally generated revenues.
• It adds $326.1 million to fund initiatives recommended by the Board of Education, namely to provide five elementary resource teachers per 1,000 students; to require daily planning periods for middle and high school teachers (25% funded the first year, 100% the second year); and to provide an instructional (second year only) and a support (both years) technology position per 1,000 students. These initiatives are partly supported by half of the approved ¼ cent sales tax increase (about $189 million).
• The remaining half of the ¼ cent sales tax increase is distributed to localities based on school age population, consistent with the existing one-cent sales tax for education. This offsets the state's share of basic aid by $106 million, so localities basically realize a 45% gain.
• It funds a separate (not pooled) VRS retirement rate for teachers at 6.03% in FY05 and 6.62% in FY06, and does not adopt the House-suggested position that state VRS contributions be capped in future years (the governor had proposed pooling of the retirement contribution rates for teachers and state employees to yield a teacher rate of 6.56% of salary).
• It adds $50 million to fund 100% of at-risk four year olds unserved by Head Start programs. It also provides nearly $67 million to 1) finish the phase-in of the state recognizing the costs of administrative positions in calculating SOQ costs, first begun in 2002 ($45.6 million); and 2) eliminate the one-month roll-over in the SOQ calculation of fringe benefit costs ($21.3 million).

In the health and human services area, an additional $54 million is provided over the introduced budget. Most significantly, additional funding is provided to provide mental retardation services for 700 individuals on the urgent waiting list and for 160 people residing in mental retardation training centers. A "day support" waiver program also is established to serve another 300 individuals. The budget restores $1.6 million for area agencies on aging. Healthy Families is slated to receive $200,000 more in general funds each year than in FY04.

Funds are provided for a 3% salary increase for state-supported local employees, effective November 25, while sheriffs, deputy sheriffs and regional jail officers are slated for a 4.82% increase, effective December 1. A $26.8 million reserve has been set aside for awarding second-year pay hikes.

Under public safety, jail per diem funding of $26.4 million is included, but language is added to require that projected growth in per diem payments will be based on actual inmate population counts up through the first quarter of the affected fiscal year, thus deferring budgeting for projected increases. HB 599 payments to localities with police departments are increased by 5.2% in FY05 and 5.4% in FY06; however, this is less of an increase than was proposed in the introduced budget. Nearly $2.5 million is provided to expand local community corrections and pre-trial services programs.

In the natural resources area, $15 million is allocated each year to the Water Quality Improvement Fund, to be split evenly between point and nonpoint source programs. About $2.5 million is targeted to the Virginia Land Conservation Foundation for open space preservation. In addition, $150,000 is targeted in the second year for a new Secretary of Agriculture position, and $150,000 is provided over the biennium for a new Center for Rural Virginia.

In transportation, $272 million in general fund dollars contained in the introduced budget for the Priority Transportation Fund is removed. The budget does include $37.4 million each year for FRAN debt service payments. A language amendment requires the Secretary of Transportation to report by the next General Assembly session on the status of the TransDominion Express.

The specific language and dollar amounts for budget items contained in the compromise can be found at online.

Tax Package Produces Additional State Revenue

As noted above, HB 5018 provided revenues to allow a budget deal to be completed and will help stabilize expenditures for some core government services. Meanwhile, SB 5005 caps the state car tax reimbursement to localities, thereby saving the state additional general fund dollars after the next biennium. Following is an overview of the two bills:

HB 5018 generates additional revenue for the state as follows:

• Increases the sales and use tax on non-food items by one-half percent. Half of the increase goes to the state general fund ($377.7 million) while the remaining one-half (another $377.7 over the biennium) is to be deposited into a Standards of Quality/Local Real Estate Property Tax Relief Fund.
• Increases the recordation tax rate by 10 cents, thereby generating an additional $224.1 million for the biennium. Local governments will be authorized to increase their local recordation tax rates by an additional 3 cents for a maximum local rate of 8 cents.
• Increases the state cigarette tax to 20 cents per pack in FY 2005 and 30 cents in FY 2006 and dedicates the money to a health care trust fund largely to support Medicaid payments ($280.8 million).
• Removes the phase-out of the estate tax, thereby saving the state $104 million in FY 2006; removes the sales tax exemptions on public service corporations ($77.7 million); eliminates two common corporate tax loopholes ($30 million); and amends the senior age tax preference, thereby generating an additional $35 million for the biennium.

HB 5018 also provides the following tax relief:

• Reduces the state sales tax on food by one-half percent in three equal increments of a half percent, beginning in FY 2006. By beginning the phase out in FY 2006, the state saves more than $50 million in FY 2005 because the bill as introduced would have initiated the first phase of its penny phase out in FY 2005.
• Decreases the income tax by raising personal exemptions ($70 million).

Meanwhile, SB 5005 caps the state's car tax reimbursements to localities and requires local governments to set a separate, reduced rate for all vehicles in order to provide tax relief for assessed values of less than or equal to $20,000. Localities would apply their local tangible personal property tax rates (general rate) to values in excess of $20,000, just as they do now. The goal of the legislation is that the amount generated from the two rates and the state reimbursement would equate to the amount that would have been received if the general rate were applied to the total value of qualifying vehicles.

After FY 2005, each locality will receive a flat appropriation for car tax reimbursements, which will equate to a locality's CY 2005 appropriation. These flat appropriations will translate to decreasing tax relief in fast growing localities. The legislation requires VML and VACo, in consultation with the governor and legislature, to develop legislation for 2005 that establishes an acceptable and reasonable state reimbursement schedule. The new law also converts the reimbursement from a calendar year basis to a fiscal year basis. Thus the effect of the July start date could cause a cash flow interruption for localities billing semiannually. The work group described above will likely address this problem and offer changes that will be made to the 2006-appropriation schedule.

Please look for additional information on the budget in the coming days from TJPDC, VML and VACo.