State tax collections outpace local numbers

Total state revenues continue to perform better than forecast, according to a report on March revenue collections released by Secretary of Finance Ric Brown recently. Total general fund revenues rose 12.4 percent in March. On a year-to-date basis, total revenues have increased by 4.9 percent, almost 1 percent higher than the official forecast of 4 percent growth.

As proof of an improving economy, statistics from the Virginia Employment Commission show employment levels rose 1.5 percent from February 2010 to February of this year. The unemployment rate has fallen from 6.9 percent to 6.6 percent. And, the Virginia Leading Index rose 0.2 percent in February, the fourth consecutive monthly increase. The Leading Index improved in nine of Virginia’s 11 metro areas while the indices in Charlottesville and Hampton Roads held steady.

Collections of net individual income taxes jumped 7.5 percent compared to the same period last year, and were ahead of the official estimate of 7.2 percent growth. Sales and use taxes, reflecting February sales, climbed 8.5 percent. On an adjusted year-to-date basis, these taxes have grown by 4.9 percent, close to the official forecast of 4.8 percent. These two sources account for more than 85 percent of general fund revenues.

The only bad news was the 6.4 percent drop in collections of wills, suits, deeds, and contracts – mainly recordation taxes. This does not bode well for local governments.

The next three months of the fiscal year are significant collections months. To meet the forecast, fourth quarter collections must total about $4.6 billion. Last year, fourth quarter collections were $4.5 billion.

Concerning local tax collections, the news is not nearly as cheery. General property taxes account for 66 percent of all local revenues with real estate taxes comprising almost 54 percent of the total. The housing industry, however, remains mired in foreclosures and sinking housing prices.

In the Newport News area, foreclosure filings in March increased 32 percent from February as the housing market continues to see weak demand, falling prices and tight credit. In fact, foreclosures are strongly affecting all of the Hampton Roads market. The number of foreclosure-related sales – short sales and bank-owned homes – reached a new high in March at 43 percent. Those distressed sales are depressing home prices. And, many housing experts expect to see even greater numbers of foreclosed properties entering the market throughout Virginia in the months ahead. contents

Local budgets reflect ‘new reality’

The recommended budgets of local government managers and administrators are either in the final stages of development or are before their respective councils and boards. Public hearings have been either announced or are in progress. And, editorial writers and the public are having their say on the various proposals.

Here is a snapshot of the budget issues under discussion in communities across the state. With only a few exceptions, the message is similar – cuts in services, increasing fees for services, and higher taxes.

Hampton Roads

With real estate tax revenues expected to fall by $1.6 million in Poquoson next fiscal year, the city manager proposes an 11-cent real estate tax rate increase to make up for the lost revenue. Even if the tax hike is accepted by council, real estate collections are projected to produce $140,000 less in revenue than the current year collections. Without the tax rate increase, the drop in revenue is tantamount to the combined total of local funding for the library, Parks and Recreation and Public Works departments, and office of the Commissioner of the Revenue. There is also a proposed increase in solid waste fees

The proposed FY12 budget is $260,000 less than the current year budget, and includes no new programs, positions or pay increases. The budget reflects an increase in debt service requirements, further reductions in state and federal assistance, and potential increases in other operating costs.

In York County, the school board was forced to convert a raise for employees next fiscal year to a one-time bonus. A $337,000 reduction from the county, along with a new AP testing mandate that will cost about $175,000, soaked up half the money allocated for a step increase. The Board of Supervisors pointed out that it was unfair to provide a raise for school employees while the general government budget provides no raise for county employees. There have been no raises in two years.

Newport News is proposing to shift from property tax relief to a tax deferral program. Under a deferral program, the deferred taxes are due upon the sale of the property or the death of the owner. Changing to tax deferrals will save the city an estimated $3 million per year in lost revenue.

The city manager in Portsmouth submitted a budget proposal calling for a 6-cent hike of the real estate tax, raising $4.2 million. The extra revenue would provide an additional $1.4 million for schools (to offset large state cuts in assistance), pay for a 2 percent raise for general-wage employees, and help cover other rising costs. There has been no pay raise in two-years. The council, however, instructed the city manager to present instead a budget with a 3-cent increase on the real estate tax rate.

In Virginia Beach, city council is reviewing a budget proposal that would cut $121,596 from a mental health substance abuse program, reducing services to about 450 indigent people with mental disorders and substance abuse problems. According to advocates for the mentally ill and the city’s sheriff, the cuts could mean that many of those people may end up back in hospitals or jails, or even homeless.

In addition to spending cuts, the proposed budget calls for a 2-cent increase in the property tax rate, an increase of 20 cents in the personal property tax rate, an increase in the stormwater fee and sewer rate, and a new $10-a-month garbage fee. The additional money would allow for a 1.5 percent pay raise for city employees and purchases of new vehicles and public safety technology. Employees have not had a pay raise since 2008.

In Suffolk, public hearings already have begun on the manager’s plans for a 6-cent real estate tax rate increase and a user fee for trash collection. The city manager has said that the measures are needed to close an $11.9 million budget gap caused by declining property values, loss of state aid and growing demand for city services.

Shenandoah Valley

In his budget message to the Waynesboro City Council, the city manager pointed out that layoffs and spending cuts will not sustain the city over the long term.

“Expenditure reductions as recommended and enacted in previous budgets should not be considered appropriate permanent budgetary measures because of their long term detrimental impacts on employees, the organization and the community,” he said.

The manager’s budget proposal includes an 8-cent increase in the real estate tax rate to equalize the rate, allowing the city to bring in the same amount of revenue through real estate taxes as in the current year. Water and sewer rates would rise by 10 percent and 35 percent, respectively. In addition, the meals and lodging tax rates would increase by 1 percent, and the local cigarette tax would climb by 4 cents per pack.

On the spending side, the budget proposal includes a one-time bonus of $750 for full-time employees. However, despite the additional revenues, the budget does not include enough money for core municipal services, economic development, “rainy day” reserves, employee raises and training, and technology upgrades.

In his budget message, the manager cited warnings about the city’s future challenges. “First, the essential operational expenses that have been reduced and deferred in previous budgets require funding. Second, it would be foolhardy to anticipate that the Commonwealth will not continue to reduce their financial support of local governments, as they have in previous years, by capping contributions, modifying funding formulas, transferring costs to localities, and reclassifying revenue sources from local to state sources. In the end, the local government assumes new and additional financial responsibility (or is pressured to assume more responsibility.)”

In Staunton, city officials want to hold the line on property taxes in FY12, but are asking for $2 per month increases in trash and recycling fees. Although slumping real estate prices hit hard the city’s main revenue source, the manager’s proposed budget calls for a 2.9 percent increase in total spending from the general fund. One of the biggest increases is a 3 percent pay increase for city employees, as well as a 25.2 percent leap in health insurance costs. The budget proposal also includes a 1 percent rise in police department spending and a 1.3 percent increase in the city’s contribution to the school system. The hiring freeze initiated in 2008 would continue, but the manager warned that “the city’s work force cannot sustain further cuts in personnel without significant reductions in services.”

The Staunton News Leader in the last few weeks has published a series of articles about the fiscal challenges that local governments face in providing services for public education, police protection, parks, recreation and libraries. The articles point out the problems of providing services when local revenues are hammered by declining real estate assessments and by declining state financial assistance. “The state government has been cutting aid to local governments . . . This year, the state for the first time began to require localities to pay for benefits for public safety workers injured or killed in the line of duty.”

In the story, a member of the House of Delegates from the Staunton area said he is familiar with the challenges of unfunded state mandates, and doesn’t care to hand them down. “Generally speaking, I’m against unfunded mandates,” the delegate said, “But sometimes, they’ve become necessary.” contents

Commentary

Inductive reasoning proves inaccurate when examining revenues

Inductive reasoning is a form of logic, and involves making generalizations about the environment as a whole, based on a limited number of observations. The advantage of inductive reasoning is that its evidence applies to the “real world”; however, a disadvantage is that the evidence may be inaccurate or anecdotal.

Here is an example of faulty inductive reasoning based on limited data. State revenue collections have exceeded the previous year’s amount in 12 out of the last 13 months, and state revenue collections for the past five months have enjoyed year-over-year revenue growth greater than 9 percent. Therefore, local revenues are also improving at similar or even greater rates.

Is this really the case? Some people in state government believe it to be true, although the data do not support their view. The table below measures the average monthly employment level in Virginia for local governments, and the state and federal governments. Which level of government has actually reduced payroll, and which levels have increased employment? (see table below)

Here is a sampling of “real world” facts that a number of local elected officials are facing:

• Since 2009 and the expected adoption of the FY12 budget, the number of Fairfax City employees will have declined by 13 percent;
• Property values in Waynesboro and Staunton have fallen 6.9 percent and 7.1 percent, respectively;
• Newport News is proposing to shift its senior and disable property tax relief program from an entire abatement of property taxes to a deferral program;
• Virginia Beach is considering paring therapeutic and medication services as well as evaluation and treatment programs for people coming out of hospitals, crisis stabilization programs, jails, and those living in the community; and
• Public bus service in Martinsville and Henry County could be in jeopardy if the two localities cannot increase local funding to make up for less state money.

Another “real world” fact is the evaporation of state financial assistance. In FY09, state general fund support for public education exceeded $5.6 billion or 35.2 percent of the state general fund budget. In FY12, the figure drops to $4.9 billion or 29.7 percent of the general fund budget. Total state general fund support for mandated and high-priority programs which made up 52 percent of the state general fund budget in FY09 will plummet to 45 percent of the general fund budget in FY12.

So, the next time a state official tells you that your situation must be improving because the state’s situation is on the upswing, please set him or her straight on the pitfalls of inductive reasoning.

Average monthly government employment in Virginia
Fiscal Year	Local	State	Federal
2009	382,300	153,517	163,142
2010	369,858	154,242	171,108
1st 9 months of FY11	368,611	155,467	174,211
Percent change 09-11	(4 %)	1 %	6 %
Source: VEC Labor Market Information. “State” includes public institutions of higher education and hospitals

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Governor proposes $2.6 billion in new funding for transportation

Gov. Bob McDonnell presented the administration’s draft FY12-FY17 Six-Year Improvement Program to the Commonwealth Transportation Board (CTB) last week.

In recent years the process of drafting and adopting the plan has been one of wielding an axe because of declining state transportation revenues. The CTB, which must approve the plan, will be reversing that trend this year.

Thanks to the General Assembly’s approval of the governor’s plan to authorize new debt – and accelerate already authorized debt – an additional $2.6 billion will be applied to correcting the deteriorating condition of the state’s transportation infrastructure. While the majority of these projects already exist in the current six-year plan, they’ve been unable to be built because of the lack of state funding.

In selecting the highest priority projects the McDonnell administration considered these policy objectives emphasizing:

Currently authorized projects that lack sufficient funding to complete;

Improvements to structurally deficient bridges;

Local and regional priorities;

Projects that can start construction within three years; and

Projects that would be eligible for a loan and/or grant through the Virginia Transportation Infrastructure Bank (VTIB)

Of the $2.6 billion, $2.4 billion is proposed for highway construction. The remaining $200 million is slated for rail and public transportation facilities. None of the $2.6 billion will be used to address Virginia’s growing road maintenance problem. And, the draft plan does not address how to proceed after the infusion of debt money is exhausted.

The six-year plan will be presented at public hearings throughout April and May and can be viewed online at http://bit.ly/eisyjB. The public hearings will take place at the following dates and locations:

April 27 (6 p.m.) - Hampton Roads Planning District Commission, 723 Woodlake Drive, Chesapeake, VA 23320.

May 4 (7 p.m.) - VDOT District Office, Potomac Conference Center, 4975 Alliance Drive, Suite 1N201, Fairfax, VA 22030.

May 12 (6 p.m.) - Salem District Auditorium, 731 Harrison Ave., Salem, VA 24153.

May 18 (6 p.m.) - VDOT Central Office Auditorium, 1221 E. Broad St., Richmond, VA 23219.

Written comments may be submitted via mail or e-mail until May 27 to: Public Information Office, Virginia Department of Rail and Public Transportation, 600 E. Main St., Suite 2102, Richmond, VA 23219 or drptpr@drpt.virginia.gov.

The CTB is expected to adopt the final 2012-2017 Six-Year Plan in June. contents

Report: Localities continue to prop-up K-12 system

Data included in the Superintendent of Public Instruction’s Annual Report for FY10 show that local governments continue to be the major financier of the state’s public education system, and that the state’s support of public education is slipping.

In FY10, local governments paid 49.2 percent of the operating costs for public school. In contrast the state paid a paltry 39.9 percent, a decline of about 5 percent in just one year.

The superintendent’s report shows the effect of federal stimulus funding, with the federal contribution to public education increasing from 6.4 percent in FY09 to 10.9 percent in FY10.

The data for FY10 can be found in Table 15 of the superintendent’s report, which is available in either PDF or excel format on the Virginia Department of Education’s web site at http://1.usa.gov/ibya9x. The superintendent’s annual report generally is regarded as one of the most authoritative and comprehensive source of data on education funding. The figures are derived from the annual school reports submitted by the divisions.

Historically, the local, state and federal shares over the last five years are as follows:

Sources of financial support for education operating expenditures (Expressed as percentage of total operating expenditures)
	FY10	FY09	FY08	FY07	FY06
Local	49.2 %	48.6 %	49.9 %	48.6 %	50.2 %
State	39.9 %	44.9 %	43.6 %	44.7 %	42.8 %
Federal	10.9 %	6.4 %	6.5 %	6.7 %	7.1 %

Source: Table 15, Annual Report, Superintendent of Public Instruction, for the fiscal years indicated. The state share includes the state sales tax dedicated to public education. Totals may not equal 100 percent due to rounding. contents

Line of Duty census documents sent to cities, counties

By now all cities and counties should have received a packet from the Virginia Retirement System asking for the completion of a census of paid and volunteer hazardous duty professionals across the state to determine the cost of the Line of Duty Act program.

The budget adopted in 2010 requires local governments to pay the cost of these state mandated benefits for their employees starting this July 1. Up until a year ago, the state paid for these benefits, and for the last year they have been paid through loans from the state/local group life insurance program.

The VRS packet asks for a census of paid and volunteer hazardous duty professionals.

Completion of the census is not related to the decision local employers have to make about whether to participate in the Line of Duty Act Fund that will be administered by VRS. Localities have to make an irrevocable decision about participating in the VRS fund by July 2012.

So far only cities and counties have received these mailings. VRS will be contacting those towns that have their own police departments. Further, according to the VRS staff, towns that have fire and rescue departments physically in their boundaries are usually included in the county ordinances relating to recognition of the departments or volunteer squads. In that case, the 2010 Appropriation Act states that the localities will need to determine the basis and apportionment of the required covered payroll and contributions for each department, company or rescue squad. contents

VRS Trust Fund continues growth

Despite the state of the housing market, the Virginia Retirement System Trust Fund continues to increase in value, totaling $54.4 billion on April 5. The fund stood at $52.8 million on Dec. 31, 2010.

Employment is growing, but at a slow pace, and the United States will not see anything like full employment before 2015-2019, according to a staff report by Steve Peterson at the April 14 meeting of the Virginia Retirement System’s Board of Trustees. Housing starts are less than one-half of what would be normal, and the expectation is that housing will lose another 5 percent in value. The state of the housing market is a significant drag on the economy.

The board also learned that the unfunded status of the state employee pension plan will decline by 0.9 percent as a result of the decision to grant state employees a 5 percent salary increase. That salary increase was an offset to the decision to require all state employees to pay the 5 percent member contribution.

The state has been paying that member contribution for state employees hired prior to July 1, 2010. This action did not increase contributions to VRS; instead, it simply switched who was paying the 5 percent. Because the salary increase will increase average final compensation for employees who retire, the effect of the salary increase is to add to the unfunded status of the state employee fund. contents

Pew Center pension study sure to generate discussion

An updated study of the status of state pensions systems is sure to direct even more attention to retirement benefits for state and local employees.

The Widening Gap: The Great Recession’s Impact on State Pension and Retiree Health Care Costs, released April 25 by the Pew Center for the States, presents data showing that the gap between the promises made by states and the money set aside to pay for those benefits now totals $1.26 trillion. Nationwide, pension funding shortfalls accounted for $660 billion of the $1.26 trillion gap, and unfunded retiree health care costs accounted for the remaining $635 billion. The study, which is a large PDF file, can be downloaded at http://bit.ly/eVHQGF.

Nationally, state pension plans were 78 percent funded, a decrease from the 84 percent funded status in 2008.

Virginia’s retirement system was funded at 80 percent, according to the study.

A Pew Center report released in February 2010 said there was a $1 trillion dollar gap between what states have promised in retirement and health care benefits, and what they actually have on hand to pay for those benefits. That report also showed that Virginia’s system was in relatively good shape, and that the state had funded 84 percent of its total pension bill. (This study, entitled The Trillion Dollar Gap, is available at http://bit.ly/b4bwmx.)

The state’s pension plan, however, looked as good as it did in part because the research by the Pew Center lumped all Virginia’s plans together for analysis. Virginia’s plans include not only the state employee plan, but the plans of more than 500 political subdivisions, as well as the plans for teachers, state police, state law enforcement officers (such as corrections officers) and judges. The plans for the political subdivisions have a higher funded status than the other plans, and “helped save the state,” according to a presentation at the Virginia Retirement System’s Board of Trustees meeting on Feb. 12, 2010.

In all likelihood the state pension system is benefiting again this year from the practice of lumping state and local plans together. contents

AT THE LEAGUE

VML president names policy committee chairs

VML President Jim Councill has named the association’s 2011 policy leaders. They will lead VML’s six policy and steering committees this coming year.

The policy leaders are:

Community & Economic Development -- Chair: Katie Sheldon Hammler, council member, Town of Leesburg; Vice Chair: Wayne Walton, vice mayor, City of Hopewell.

Environmental Quality -- Chair: Robert W. Lazaro Jr., mayor, Town of Purcellville; Vice Chair: George Solley, council member, City of Fredericksburg.

Finance -- Chair: Carolyn Dull, council member, City of Staunton; Vice Chair: Brian Thrower, city manager, City of Emporia.

General Laws -- Chair: Connie Hutchinson, vice mayor, Town of Herndon; Vice Chair: Brian Moore, mayor, City of Petersburg.

Human Development & Education -- Chair: Frank Thornton, chairman, Board of Supervisors, Henrico County; Vice Chair: Anita J. Price, council member, City of Roanoke.

Transportation -- Chair: Bruce Goodson, supervisor, James City County;

Vice Chair: Bradford J. Stipes, vice mayor, Town of Christiansburg.

All six policy committees will meet on Thursday, July 28, at the Greater Richmond Convention Center in downtown Richmond.

VML is still accepting policy committee nominations. If you need more information, send e-mail or call Janet Areson at VML, 804/523-8522, jareson@vml.org. contents

Register for VML-VACo bay cleanup seminar

VML and VACo are sponsoring a seminar May 26 in Hanover County to explain the costs local governments will incur to comply with the new federally-mandated plan to clean up the Chesapeake Bay.  Registration is only $10.  Registration form and agenda.

Under the federal plan, local governments can expect the costs for treating sewage and stormwater to increase significantly. The seminar will help local officials better understand what to expect. It will be held from 9 a.m. to 3:15 p.m. at the Hanover County Board of Supervisors auditorium. Local officials who attend also will learn more about why the federal plan was mandated, the science behind the program and innovative approaches that might help them improve the quality of nearby rivers and streams.

Joyce Engineering and the Richmond law firm of Sands Anderson are sponsors for the lunch and refreshments. contents

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