Legislative Newsletter August 30, 2005

State Budget and Revenues

Governor Warner has told legislative budget writers that strong collections in three categories of state revenue were largely responsible for Virginia ending fiscal year 2005 with a $544 million surplus. Most of the extra cash, by law, must be deposited into the state's "rainy day" fund. For the year, revenue growth totaled 14.8%, roughly four percent above the expected growth rate. Nonwithholding payments increased nearly 33%, the most since 1987. Corporate income and recordation tax revenues both exceeded projections by almost $68 million. The corporate collections were the strongest on record, while real estate receipts showed double-digit growth for the fifth straight year.

The governor warned lawmakers that such accelerated growth is not sustainable, given the volatility of the sources, and that uncertainty about the federal deficit, energy prices and the housing market cloud the economic outlook for the coming months. He also highlighted an additional $2.8 billion in known spending requirements for the next biennial budget, which will be crafted during the 2006 General Assembly session. These include additional funds for public education (an estimated $1.2 billion) and Medicaid ($500 million), as well as additional dollars for car tax relief, state employee benefits and debt service. Not included in those figures was additional funding for transportation, higher education, state employee and teacher salaries, CSA and mental health services, public safety items and environmental cleanup.

The governor also announced that his December budget proposal will abandon the current, cumbersome format, and instead will be a user-friendly document that will link state services to the dollars appropriated and the objectives and performance measures of such services.

Compensation Board Examines Federal Prisoner Impacts

The State Compensation Board is reviewing several options for a revised cost recovery methodology to address all state funding to local and regional jails that house federal or out-of-state inmates. This review was required by budget language approved by the 2005 General Assembly. Some legislators began raising concerns in the late 1990’s about state reimbursement to jails that were otherwise compensated for housing such inmates, and in 2000, the General Assembly approved language for the recovery of half of the federal share of state-funded personnel costs (formula-based). Also included was language to exempt jails where the federal share of capital costs was greater than the corresponding state share. This exemption presently applies to the Central Virginia Regional Jail (as well as two others).

A workgroup established by the Compensation Board was presented four different cost recovery options, and the Compensation Board received the draft report last week. The first recommended option would retain the current methodology for calculating overhead cost recovery, and add to it state funded grants and office/vehicle and other reimbursements, construction reimbursements and state funded insurance premiums. A second option would replace the current methodology with a straight $14 per federal inmate day recovery. Option three would replace the current methodology with one that recovers federal per diems after applying a credit for local funding. A fourth option would apply only to regional jails and would recover part of the difference between operating costs and revenues.

Comments on the report will be accepted through September 9. The Compensation Board must submit its options to the General Assembly money committees by October 15.

House Panel Focuses on Transportation Funding

A special subcommittee of the House Transportation Committee met this week to continue discussing ways to fund the state’s transportation infrastructure. The panel received several reports, including a review of transportation revenues and related distribution methods. The FY06 transportation fund budget is about $4.1 billion, of which approximately one-quarter is federal funding. Of that total amount, about $1.6 billion is available for the highway construction program, with half of that distributed by formula for primary, secondary and urban road projects. Thus, only about 19% of the total transportation fund budget is available for state formula allocations, a point of particular note to several legislators on the panel who are looking at possible changes to distribution methods.

The panel also was briefed on a 2001 Joint Legislative Audit and Review Commission (JLARC) report on highway construction funding. The General Assembly has not acted on recommendations made in this report, which proposed establishing a three-tier system for allocating highway construction funds based on a new system that classifies roads as statewide, regional and local. It also recommended establishing new funding regions based on MPO’s and major transportation corridors, to replace existing construction districts established in the 1920’s.

Recall that in May, the Senate formed a Statewide Transportation Analysis and Recommendation Task Force (START) to develop an action plan for addressing future state transportation needs. The group’s pubic efforts continue with several meetings planned (beginning in September) to focus on needs, state and local policy reform and funding strategies.

Candidate Still Touting Real Estate Tax Proposals

While recognizing the concept is not popular with many local government officials, the major party candidates in this fall’s gubernatorial election still are highlighting their proposals to provide real estate tax relief for homeowners. Speaking at a recent conference of local government officials in Charlottesville, former Attorney General Jerry Kilgore said this is “something we must do.” The Republican also said he believes localities need more resources, but that doesn’t give state government the right to increase taxes. Kilgore’s plan proposes a five percent cap on annual real estate assessment increases until a property is sold. Democrat Lt. Governor Tim Kaine is proposing a local option “homestead exemption” of up to 20% of the value of owner-occupied homes. Speaking to the same audience, Kaine emphasized the “local option” component of his plan. Independent candidate Russ Potts, who also spoke, said both plans are bad ideas that would costs localities millions of dollars.

A consultant retained by VML and VACo has noted that real estate tax growth in recent years has been about six percent, about the same as growth in local government expenditures. Further, state income taxes and local property taxes have grown overall at identical rates since 1981, though they have not experienced the same growth patterns.

General Assembly Contact Numbers for David Blount, TJPDC Legislative Liaison

804-644-3702 (phone)

804-783-8226 (fax)

979-7310 x350 (Charlottesville voicemail)

(Richmond email)