Legislative Newsletter - August 23, 2010

Number 12

FY10 Revenues Higher, but  Surplus Largely Committed

Governor Bob McDonnell briefed the General Assembly money committees last week on the official end-of-the-fiscal-year (FY10) revenue picture. Though state revenues were down for the year by 0.7%, the second straight year of declining revenues, revenue exceeded the FY10 estimate by just over $403 million. Of that amount, $228 million came from higher-than-expected tax collections, while state agencies spent $175 million less than anticipated. Individual income tax collections of nearly $94 million over projections and corporate income tax collections of nearly $76 more than expected helped to fuel the higher revenues. As noted in last month’s newsletter, much of the surplus dollars are headed to a state employee bonus, water quality improvement or for transportation, in accordance with established budget or state law provisions.

About $71 million of the excess dollars from the amount saved by state agencies can be viewed as discretionary. The governor has until November 1 to decide whether to revert those balances back to the agencies or to shift them to other general fund priorities. Any such allocations will be reflected in the budget the governor will submit to the General Assembly in December. Some lawmakers are expressing support for beginning to pay back funds to the Virginia Retirement System (this past session, the General Assembly diverted retirement dollars to balance the budget, promising to begin paybacks in the 2013/2014 state budget) and for reversing an early sales tax remittance policy imposed on retail establishments.

During the upcoming General Assembly session that begins in January, legislators will craft amendments to the FY2011 and FY2012 state budget. They will be challenged with filling budget holes with only modest increases, at best, in revenues to be expected. 

Federal Jobs Bill Means More Dollars for Virginia

Federal legislation approved and signed into law earlier this month will funnel $26 billion to states for Medicaid ($16 billion) and education ($10 billion). For the Medicaid portion, Virginia stands to receive nearly $266 million in Federal Medical Assistance Percentage (FMAP) funds by virtue of FMAP being extended six months (from January 1, 2011 through June 30, 2011). While this will reduce Virginia’s Medicaid expenses, the approved state budget for FY11/FY12 included Medicaid-related reductions totaling $417 million (anticipating an FMPA extension and additional dollars of a similar amount to come to the state). Approximately $177.5 million of the federal dollars Virginia will receive must be used to restore various Medicaid eligibility funding, while another $71 million is expected to be put toward other FY 11 reductions. Remaining Medicaid-related reductions the State made for FY12 will go unaddressed, thus pressuring legislators to direct dollars to these areas during the 2011 session.

As for the education funds, Virginia stands to receive just under $250 million, which the U.S. Department of Education says is designed to cover funding for an estimated 3,800 teacher jobs in the state. States must apply for the funds within 30 days, with dollars to be awarded to states within 45 dates of the federal law being signed (which was August 10). With the exception of a two percent set aside for administrative costs, all funds receive must be awarded to local school divisions on the basis of the primary education funding formula or on Title I participation. At this time, no decision has been made as to how such funds might be awarded, although the State allocated previous federal stimulus dollars through the state education funding formula. Dollars may be used only for compensation and benefits and other expenses, such as support services, necessary to retain existing employees, to recall or rehire former employees, and to hire new employees.

Jobs Commission Group Examines BPOL

The Small Business subgroup of the Governor’s Commission on Economic Development and Jobs Creation met last week and spent part of its time discussing the Business, Professional and Occupational License (BPOL) tax.  This subgroup, in its initial report issued last month, committed to looking at strategies to reform the BPOL tax, saying it unfairly affects small businesses and is a detriment to economic development and job growth. The group heard a report last week on a November, 2009, study of BPOL done for the Virginia Retail Federation. The review concluded that Virginia retailers pay a higher percentage of profits than the industry average, with the highest burden showing up during recessionary periods. The report noted, however, that Virginia-specific studies on taxes and the impact on job creation and business expansion do not exist.

The group also received a report about local government finances from Fiscal Analytics, consultants to VACo and VML, which stated the importance of keeping a mix of taxes, so as to not put additional burden on the property tax, and that any tax changes should be broad-based and not focused on “fixing” a single revenue source. In our region, localities imposing the BPOL or merchant capital tax expect to receive more than $16.5 million from the levies in FY11.
The full Jobs Commission expects to receive final recommendations from its subgroups the end of September.

Housing Policy Advisory Committee

Governor McDonnell’s Housing Policy Advisory Committee, established as a result of an executive order issued by the governor in April to create a housing policy framework for the state, has been working on shaping priorities this summer. The Committee’s work is concentrated in four areas: recognizing housing’s role in economic development, promoting sustainable communities, ensuring that a range of housing options is available to meeting the needs of a changing population, and addressing the needs of the homeless.

Most recently, the Committee and a 22-member work group established to assist in the work, identified critical issues in the areas of land use planning and regulation, housing development programs, housing subsidy programs and building/environmental standards/real estate practices. Several ideas in the land use planning area spoke to coordination of housing development with transportation and economic development projects; local and regional planning for affordable housing; infrastructure funding to incentivize affordable housing and mixed income development; and establishment of state guidelines for affordable housing.
The workgroup meets later this week and again in mid-September. The two groups will get back together in late September.