Transcript Where is Virginia`s Economy and Budget Headed?

Where Is Virginia’s
Economy and Budget Headed?
Fiscal Analytics, Ltd
Virginia Municipal League
Legislative Committee
August 24, 2016
State Revenues Under-Performed
in FY 2016
•
•
•
•
•
$266 million GF revenue shortfall. 1.7% actual growth vs 3.2 percent
forecast. Shortfall will affect 2016-18 budget.
- Income tax withholding grew 2.4% versus 4.1% forecast
- Non-withholding grew 0.9% versus 1.9% forecast.
- Sales tax grew 1.9% versus 4.1% forecast
2016-18 revenue re-forecast due by Sept. 1. Likely over $1 billion 2016-18
budget shortfall. Revenue growth forecast in FY 2017 & FY 2018 likely to
be reduced at least 1 percent each year.
2016-18 state and state-supported local employee ($190 m) and
teacher/support salary ($134 m) increases contingent on FY 16 revenues not
being more than 1 percent below official forecast.
Use of $250+ in Rainy Day Funds will also likely be available to help cover
shortfall.
Still leaves $400+ mil. in additional 2016-18 budget cuts possibly
necessary.
2
Will GF Revenue Growth Be Lowered
in Fiscal Years 2017 and 2018?
Fiscal Years
Avg. Annual GF Growth*
1990-1999
5.9%
2000-2008
5.7%
2009-2015
1.9%
2016
1.7%
2017 Official Forecast
3.2%
2018 Official Forecast
3.8%
* Does not include GF transfers
3
Recent Decline in Individual Income Tax Withholding Growth
12 Mo. Moving Avg (% Growth)
8.0
7.0
6.0
%
5.0
4.0
G
r
3.0
o
w 2.0
t
h 1.0
0.0
(1.0)
(2.0)
Note: Income tax withholding % of total GF revenues = 63%
4
Income Tax Non-Withholding Revenues Are More Volatile, Amplifying
Economic Changes and Making Revenue Forecasting Difficult
Annual % Growth in Income Tax Withholding
and Non-Withholding Collections
40.0
30.0
Non-withholding
20.0
10.0
Withholding
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
-
(10.0)
(20.0)
Note: Non-W % of total GF revenues: 15.4% in FY 14; 17.1% in FY 15, 17.0% in FY 16
5
Where Will Budget Cuts Take Place?
2016 Session Adopted GF Budget ($ Mil.)
FY 16
FY 17
FY 18
Above FY 16
Budget
Budget
Budget
Budget X 2
Legislative and Executive
Judicial Dept.
Administration/Compensation Board
Treasury Board Debt Service
Other Finance/Technology
Rainy Day Fund
Car Tax Reimbursement
Commerce and Trade
Agriculture / Nat. Resources
K-12 Education/Central Office
Higher & Other Education
DMAS Medicaid
Other Health & Human Services
Public Safety & Veterans/HS
Transportation
Central Appropriations
Independent Agencies/Capital
Total GF Appropriations
GF Resources (Revenues + Transfers)
Balances
Unreserved Balance
107.7
456.0
691.7
675.0
181.6
950.0
197.0
174.7
5,576.0
1,865.5
4,159.5
1,682.6
1,837.5
69.1
334.8
143.2
$19,102.0
$19,119.3
$932.1
$265.3
115.5
484.5
711.8
734.9
191.6
605.6
950.0
203.9
237.7
5,900.0
2,046.7
4,280.4
1,772.7
1,921.8
41.0
139.6
12.0
$20,349.7
$19,481.2
$946.2
$77.7
115.5
485.2
718.6
766.3
188.6
0.0
950.0
217.3
172.2
6,190.6
2,081.1
4,405.1
1,780.7
1,949.4
41.0
223.0
0.3
$20,284.9
$20,230.3
-$0.5
$22.6
15.5
57.7
47.0
151.2
16.9
605.6
27.1
60.5
938.6
396.8
366.5
188.2
196.2
(56.2)
(307.0)
(274.1)
2,430.6
6
So Far, No Signs of Medicaid Spending
Exceeding Its 2016-18 Budget.
Fiscal Years
Avg. Annual Growth
2000-2009
8.8%
2010-2015
6.2%
2016
9.3%
2017
3.8%
2018
2.9%
7
GF State Aid to Localities ($ Mil.)
FY 2009
FY 2014
FY 2016
FY 2017
FY 2018
$5,607.6
$5,240.3
$5,520.9
$5,838.9
$6,131.9
35.2%
29.6%
28.9%
28.7%
30.2%
888.4
791.7
867.5
883.4
886.6
CSA
299.7
217.2
237.2
235.9
235.0
Community MH/MR Services
249.4
269.3
318.0
331.1
335.4
Local Social Services Staff
117.4
115.3
114.4
117.5
117.5
Community Health Programs
117.6
107.2
115.1
117.8
117.6
Welfare Services and Programs
104.3
82.7
82.8
81.1
81.1
734.3
687.9
715.5
737.5
744.4
Local Sheriffs Offices
406.1
411.3
436.0
451.8
458.0
Local Police Depts HB 599
197.3
172.4
172.4
178.0
178.0
Local Jail Per diem
80.1
59.4
61.4
60.6
61.3
Assistance for Juvenile Justice
50.8
44.8
45.7
47.1
47.1
155.3
145.8
152.5
157.5
158.3
49.3
49.3
49.5
49.6
49.6
Car Tax
950.0
950.0
950.0
950.0
950.0
Aid-to-Locality Reduction
(50.0)
-
-
-
-
$8,334.9
$7,865.0
$8,255.9
$8,616.9
$8,920.8
Total GF Appropriations
$15,943.0
$17,705.2
$19,102.0
$20,349.5
$20,285.0
Local Aid % of Total GF
52.0%
44.1%
43.2%
42.3%
44.0%
Direct Aid to K-12
K-12 % of Total GF Appropriations
Health and Human Services
Public Safety
Constitutional Officers
Dept. of Accounts Transfers
Total Local GF Aid
8
National Economy
• National economy continues its slow growth
trend.
– Steady job growth, but low productivity gains
– Low inflation, modest growth in personal income
– Residential investment growing, but business
investment in structures and equipment is weak
– Strong auto sales and improving housing markets
– Accommodative, but increasingly ineffective
monetary policy
9
Virginia Economy
• Virginia economy has had a weak recovery,
although at 3.7% unemployment is still lower
than the nation’s 4.9%.
– VA payrolls, wages, and personal income only recently
reaching national growth rates – is data real?
– Are business and professional services jobs slipping again?
– What will the behavior of high income taxpayers be in the
next couple of years?
– Will housing and local revenue sources continue to
recover?
10
Theories for Recent Slowing Virginia Revenue Growth
• “Business and professional services” jobs are showing slower
wage gains.
- More retiring workers replaced with lower paid jobs and
younger workers.
- More lower paid administrative positions.
• Decline in labor force participation – retiring “baby boomers”
• Continuing slowdown in defense spending particularly hurts
Virginia. DoD Virginia contracts declined 30% from 2011-15.
U.S. Defense Spending (CBO Data)
FFY 2011
FFY 2012
FFY 2013
FFY 2014
FFY 2015
FFY 2016
$ Bil.
Change
678
651
608
578
562
Thru June
-4.0%
-6.6%
-4.9%
-2.8%
-1.4%
11
GF Revenue Slowdown Does Not Correspond to
U.S. Dept. of Labor Statistics for Virginia
The monthly Current Employment Statistics (CES), and
quarterly Census of Employment and Wages (QCEW)
program publishes a census of establishments, employment,
and wages by industry.
 Payroll Employment up 1.9% in June
 Unemployment Rate – 3.7% in June
 Real Personal Income - 3.6% 1st Q 2016 annualized
 Wages and Salaries – 5.6% 1st Q 2016 annualized
Will Economic Data Be Revised Lower?
12
Virginia Payroll Employment
YoY % Chg (SA)
4
U.S.
Virginia
3
2
1
0
-1
-2
-3
June 2016
US: 1.7%
VA: 1.9%
-4
-5
-6
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Bureau of Labor Statistics/Haver Analytics
2017
13
13
Virginia Wages and Salaries
YoY % Chg
10
U.S.
Virginia
8
6
4
2
0
-2
1Q: 2016
US: 5.3%
VA: 5.6%
-4
-6
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Bureau of Economic Analysis/Haver Analytics
2017
14
VEC Household Survey Shows a Recent Decline in Employment
The Virginia Employment Commission Local Area
Unemployment Statistics (LAUS) program publishes estimates
of the labor force, total employment, unemployment, and the
unemployment rate every month using concepts and definitions
that are consistent with those of the Current Population Survey
(CPS), also known as the household survey.
- This is a much small sample survey than CES or QCEW
data.
- LAUS data does show a recent decline in VA’s labor force
and employment.
15
VEC LAUS Employment and Labor Force Data
Year-over-Year % Growth
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
-2.0%
YoY Change in Labor Force
YoY Change in Employment
16
Professional/Business and Education/Health
Services Now Fuel Virginia’s Job Growth
March 2016
Employment
2006-16
Employment
Growth
Avg. hours
Worked
Avg. Hourly
Wage
Avg. Weekly
Wage
Professional and Business
Services
709,200
14.2%
37.1
$36.13
$1,340
Trade, Transportation, and
Utilities
662,900
1.5%
33.2
$20.33
$675
Education and Health Services
525,700
28.9%
34.8
$25.76
$896
Leisure and Hospitality
382,000
16.9%
26.2
$13.19
$345
Manufacturing
229,900
-20.6%
40.9
$22.09
$903
Other Services
201,200
11.6%
32.7
$27.40
$896
Finance
200,400
3.5%
39.1
$26.34
$1,030
Construction
178,900
-27.5%
37.7
$25.58
$964
17
Jan-08
Apr
Jul
Oct
Jan-09
Apr
Jul
Oct
Jan-10
Apr
Jul
Oct
Jan-11
Apr
Jul
Oct
Jan-12
Apr
Jul
Oct
Jan-13
Apr
Jul
Oct
Jan-14
Apr
Jul
Oct
Jan-15
Apr
Jul
Oct
Jan-16
Apr
Business and Professional Services Employment
Continues to Climb Higher (1,000's)
740.0
720.0
700.0
680.0
660.0
640.0
620.0
600.0
580.0
18
About Half of the 50 Largest Employers in
Virginia are Government-Related (3rd Q 2015)
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
Employer
U.S. Department of Defense
Wal Mart
Sentara Healthcare
Fairfax County Public Schools
Huntington Ingalls Industries, Inc.
Food Lion
County of Fairfax
Postal Service
HCA Virginia Health System
U.S. Department of Homeland Defense
Inova Health System
University of Virginia
Capital One Bank
Prince William County Schools
Loudoun County Schools
City of Virginia Beach Schools
Virginia Commonwealth University
U.S. Department of Commerce
Virginia Tech University
Lowes' Home Centers, Inc.
Kroger
Riverside Regional Medical Center
Target Corp
MCV Hospital
Ownership
Federal Government
Private
Private
Local Government
Private
Private
Local Government
Federal Government
Private
Federal Government
Private
State Government
Private
Local Government
Local Government
Local Government
State Government
Federal Government
State Government
Private
Private
Private
Private
Private
Industry
National Security and International Affairs
General Merchandise Stores
Hospitals
Educational Services
Transportation Equipment Manufacturing
Food and Beverage Stores
Executive, Legislative, and Other General Government
Postal Service
Hospitals
Administration of Economic Programs
Hospitals
Educational Services
Credit Intermediation and Related Activities
Educational Services
Educational Services
Educational Services
Educational Services
Administration of Economic Programs
Educational Services
Building Material and Garden Equipment and Supplies
Food and Beverage Stores
Hospitals
General Merchandise Stores
Hospitals
19
Rank Employer
Ownership
Industry
25
U.S. Department of Veterans Affairs
Federal Government Administration of Human Resource Programs
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
Booz, Allen and Hamilton
The Home Depot
University of Virginia Medical Center
Bon Secours Richmond Health System
City of Virginia Beach
Chesterfield County School Board
VDOT
Henrico County Schools
Wells Fargo Bank NA
Anthem
Anteon Corporation
Roanoke Memorial Community Hospital
U.P.S.
Centra Health
George Mason University
Northrop Grumman Corporation
Dominion Virginia Power
GEICO, Government Employees Insurance
Navy Federal Credit Union
Norfolk City School Board
Chesapeake City Public School Board
Arlington County School Board
United Airlines Inc
City of Norfolk
Giant Food
Private
Private
State Government
Private
Local Government
Local Government
State Government
Local Government
Private
Private
Private
Private
Private
Private
State Government
Private
Private
Private
Private
Local Government
Local Government
Local Government
Private
Local Government
Private
Professional, Scientific, and Technical Services
Building Material and Garden Equipment and Supplies
Hospitals
Hospitals
Executive, Legislative, and Other General Government
Educational Services
Heavy and Civil Engineering Construction
Educational Services
Credit Intermediation and Related Activities
Insurance Carriers and Related Activities
Professional, Scientific, and Technical Services
Hospitals
Couriers and Messengers
Hospitals
Educational Services
Computer and Electronic Product Manufacturing
Utilities
Insurance Carriers and Related Activities
Credit Intermediation and Related Activities
Educational Services
Educational Services
Educational Services
Air Transportation
Executive, Legislative, and Other General Government
Food and Beverage Stores
20
Fastest Growing Companies in VA
IT/Software and Government Service Providers Dominate
Inc. Magazine 2014/15 Virginia List of 5,000 Fastest Growing Private Companies in America
Industry Type
IT Services/Software
Government Services
Business Products & Services
Construction, Engineering, Manufacturing
Financial Services, Insurance
Advertising & Marketing
Real Estate
Health
Telecommunications
Security
All Other
Total
Source: http://www.inc.com/inc5000/list/2015/
Year 2014
84
81
19
14
13
12
8
8
7
N/A
31
Year 2015
80
88
20
13
12
9
6
8
5
8
26
277
275
21
Since Recession, Locality Resources Have Not
Kept Pace with Inflation/Population Growth
FY 2009 - FY 2015 VA Locality Revenue Growth
LocallyGenerated
All Localities
12.0%
Growth in
State Sources All Revenue Population/Inflation
6.6%
9.6%
16.8%
Note: CPI from fiscal years 2009-15 = 10.6%
Sources: Virginia Auditor of Public Accounts Comparative Revenue and Expenditure Reports, Weldon Cooper Local Tax Rates,
U.S. Bureau of Labor Statistics
22
Slow State Income Tax Growth Has Still Significantly
Exceeded Local Real Estate Tax Growth Since Recession
$13,000,000,000
$12,500,000,000
State Individual Income Tax
$12,000,000,000
$11,500,000,000
$11,000,000,000
$10,500,000,000
?
$10,000,000,000
$9,500,000,000
Local Real Estate Tax
$9,000,000,000
$8,500,000,000
$8,000,000,000
2009
2010
2011
2012
2013
2014
2015
2016
23
Slow Real Property Revenue Growth
Has Still Required Sharply Rising Rates
Median Real Estate Tax Rates in Virginia Localities*
CY 2009/FY10
CY 2014/FY15
Change
Cities
0.900
1.040
0.140
Counties
0.550
0.640
0.090
Towns
0.180
0.180
-
Nominal rates per $100 of assessed value. Source: Weldon Cooper Center, “Virginia Local Tax Rates”
Real property tax rate changes from FY 13-15: 20 cities increased, 2 decreased; 57 counties increased, 7 decreased.
24
Local Government Has Grown Slower than
Federal and State Employment Since 2006
March 2016 March 2006
Total Nonfarm
Change
% Change
3,888,500
3,702,500
186,000
5.0%
Government
721,400
680,300
41,100
6.0%
Federal
176,000
152,300
23,700
15.6%
State
164,300
155,000
9,300
6.0%
Local
381,100
373,000
8,100
2.2%
Source: Virginia Employment Commission
25
Localities Need Help With Their Finances
• Balancing the state budget on the backs of local government.
- Re-writing the K-12 Standards of Quality when state revenues decline (e.g., support position cap)
- Adding K-12 responsibilities without additional funding
- Routinely substituting Lottery and Literary funds for K-12 general funds.
- Requiring local governments to write checks back to the state.
- Not delivering promised funding (e.g., statutory-based HB 599 Aid to Police)
- Underfunding state mandated-locally provided services (jails, constitutional officers, CSA,
community-based health and welfare services).
- Ending distributions of ABC Profits and Wine Taxes to localities in 2009.
• Shifting state responsibilities to local government
Mandating employee benefits, such as VRS and OPEB, but requiring local government to pay most
of the bill.
Shifting Line of Duty Act responsibility to locals and increasing benefits
• Eroding local revenue sources
Car tax reimbursement (limiting usefulness as a revenue source)
Real estate assessment appeals (e.g, changing assessment presumption of correct by court)
Fines and Fees (remanding a portion to the state)
Real property tax exemptions (disabled veterans; surviving spouses; first responders killed in line of
duty being considered)
Annual attempts to eliminate or limit BPOL, Machinery and Tools taxes without replacement
• Modernize local revenue sources
Communications sales tax (not capturing revenues from a changing industry as promised, (e.g., prepaid wireless, streaming services)
No sales taxes on internet sales, and growing services sector
Equal taxing authority between cities and counties for meals, transient occupancy, tobacco,
and admissions taxes.
26
The State Has Also Reduced Its GF Tax Base by $2 Bil.
Car Tax Reimbursement
Impose lower 2.5% Sales Tax on Food
Age Subtraction (net of 2004 means testing)
Low Income Tax Relief, increase filing thresholds, exemptions, etc.
1/3 Insurance Premiums to Transportation
Estate Tax Repeal
0.1% sales tax diversion to transportation
Land Preservation Tax Credit
Historic Rehab Tax Credit
Corp. double weighting sales and single sales factor
Sales tax exemption for data centers
Sales tax exemption for non-prescription drugs
Subtraction for military wages and unemployment benefits
Coalfield Employment Tax Credits
All Other Tax Reductions Since 1999
State GF Tax Reductions since 1994
Add 1/2 percent sales tax on non-food items
Recordation Tax Increase (net of 3 cents to transp.)
Tobacco Tax Increase (Va Health Care Fund)
Close 2 Corp. Tax Loopholes/Eliminate ST Exem for Pub. Svc. Co.
Sales Tax Presence in Virginia Amazon
Sales tax on satellite TV equipment
State Tax Increases since 1994
Net Annual State Tax Changes
Enacted/Amended
1997, 2003
2004
1994 and 2004
FY 2016
($950)
($556)
($292)
2000, 2004, and 2007
2007
2009
2013
2003
1999
1999, 2009
2010/2011
1990
1999
2000
1999-2014
($203)
($150)
($140)
($101)
($100)
($76)
($74)
($51)
($39)
($37)
($34)
($121)
($2,924)
2004
2004/2007
2004
$500
$150
$146
2004
2012
2014
$143
$22
$10
$971
($1,953)
Source: Senate Finance Committee Retreat, Revenue Outlook, Nov. 19 , 2015
27
Is Slower Growth the New Normal?
•
Has globalization permanently reduced inflation?
•
Is innovation slowing, or is a new innovation wave just beginning?
- Are air conditioning and indoor plumbing, etc. more important economically
than genome sequencing, instant communication, phone apps, etc.
•
Rising income inequality has reduced the share of economic gains going to the
middle and working classes and with it their disposable income and purchasing
power.
•
Growth in educational attainment as measured by years of schooling completed has
slowed. In addition, the quality of primary and secondary education has become
more stratified and the costs of higher education has increased. Such trends in
education are contributors to growing income inequality.
•
Baby boomers are reaching traditional retirement age, reducing the number of hours
worked per person. In addition, labor force participation among people who have not
yet reached retirement age has dropped.
•
All levels of government face mounting debt, in large measure due to the aging of
the population, as spending on “entitlement” programs such as Social Security and
Medicare increases and pension obligations to public-sector employees grow.
28
Slower Growing Working Age Population
Could Impact Virginia’s Future Growth
Total Projected
VA Population
2014
8,326,289
% of Total
Population % of Total Pop. Pop. 65 years Pop. Age 65
Age 25-64
Age 25-64
and over
and Over
4,480,907
53.8%
1,146,886
13.8%
2020
8,811,512
4,655,363
52.8%
1,359,168
15.4%
2030
9,645,281
4,836,080
50.1%
1,767,340
18.3%
29
Are Younger Generation Spending Decisions
Changing the Economic Outlook?
Life Decisions Millennials Are Putting Off:
 Living on their own
Getting a credit card
Marriage
Having children
Buying a house
• Millennials buy experiences rather than goods
30
What Can Virginia Do
to Improve Its Economy?
•
•
•
•
Encourage an approach to economic development that helps turn ideas into
start-ups and expansion and also keeps successful companies here. Help
successful companies sustain growth.
Encourage risk capital formation and connections to allies across the state.
Virginia is weak in venture capital and new patent creation.
Build workforce capabilities – turn community colleges into career factories
linked to industry/company needs.
Use “Go Virginia” and other policies to help create regional centers of expertise
assembled through businesses, school, and government agencies that leverage
existing skill sets.
Create more development-ready sites with public/private and regional
partnerships. VA has very few large, development-ready sites.
Purge duplicative regulations and encourage investment in technology and
automation to better compete worldwide.
Build on Virginia’s competitive advantages.
31
Build on Virginia’s Advantages
• Location and Unparalleled Deep Water Port
• Proximity to D.C. – A World Power Center
- E.G., Cyber Security Leadership, Internet/Cloud Computing
Hub
• Economic Benefits of Military Concentration
• Maintain Competitive Energy Prices
• Leverage Renowned Higher Education System
32