State revenues climb as recovery takes hold

Envious local officials will be turning a shade of green as news spreads of another month of strong state tax collections. Although the Virginia Department of Taxation does not consider the month of February to be a significant month for revenue collections, the 16.7 percent increase in revenues compared to February a year earlier is important. The money in the bank is clear proof that Gov. Bob McDonnell and the General Assembly were correct to revise the official revenue forecast upwards from 3.5 percent to 4 percent in FY11. In fact, on a year-to-date basis, total state revenue collections have actually increased 4.1 percent.

An improving economy is behind the growing revenues. The Virginia Leading Index rose 0.6 percent in January for the third consecutive monthly increase. All of the Index’s components – vehicle registrations, building permits, initial claims for unemployment benefits, length of manufacturing workweek, and the U.S. Leading Index – improved in January, and the Virginia Leading Index rose in all 11 metropolitan areas.

Individual income tax withholding, which accounts for 65 percent of general fund revenues, grew 10.6 percent. This marked the 10th consecutive month of growth in this source. Year-to-date withholding collections have increased by 5.8 percent compared with the same period last year, ahead of the revised official forecast growth rate of 4.3 percent.

The sales tax accounts for 20 percent of general fund revenues. These taxes have increased by 6.4 percent in February. Adjusted year-to-date collections have grown by 4.7 percent, close to the economic-base forecast of a 4.8 percent increase.

Wills, suits, deeds, and contracts account for roughly 2 percent of general fund revenues. This tax category, however, consists mainly of recordation tax collections. In February, this source jumped 8.2 percent. It is the seventh consecutive month of growth in this source, and on a year-to-date basis, collections are up 1.6 percent ahead of the revised forecast of a 5.6 percent decline. Although the year-to-date growth can be described as anemic, it may portend a slightly improving real estate situation notwithstanding reports of declining assessments throughout the state. contents

Report reflects weak state support of education

Local governments in Virginia bear one of the largest burdens in the nation when it comes to funding public education, according to a report released by the Joint Legislative Audit and Review Commission recently.

Virginia ranked 12th in the nation for local per-pupil funding in 2007-2008, according to the JLARC report entitled Virginia Compared to the Other States. Conversely, the report shows that Virginia ranked an anemic 38th in state per-pupil funding in the same year. The state had ranked 33rd in 2006-2007.

The report does not reflect recent reductions in government spending either in Virginia or the other states. For example, Virginia has reduced state support for public education by more than $1 billion since 2009. In contrast, Virginia’s local governments spent $3 billion more than required for public education in FY10.

The JLARC report also spells out Virginia’s national per capita ranking for state and local taxes. The rankings reflect the burden placed on local taxpayers to pick up a disproportionate share of the cost of public education. Virginia’s local governments ranked 15th in per capita local taxes in 2008 while the state ranked 31st in per capita state taxes.

According to the report, Virginia ranked:

• 7th in per capita personal income in 2009, reflecting the relative wealth of state residents.
• 40th in state and local taxes as a percentage of personal income in FY08, reflecting that Virginia’s taxes are low compared to other states.
• 2nd in per capita federal expenditures, reflecting the large percentage of the federal budget that is spent in the state on procurement, grants, salaries and wages, and other direct benefits.
• 47th in Medicaid expenditures in FY08, reflecting the state’s narrow eligibility requirements for the program and its very low reimbursement rates for healthcare providers.
• 43rd in welfare expenditures as a percentage of total state expenditures in 2009.
• 29th in average salary of public school teachers in 2007-2008.

A complete copy of the report is available on JLARC’s web site at http://bit.ly/gGX57E. contents

LOCAL BUDGETS

Added funds could slow school budget reductions

The General Assembly agreed to spend an additional $75 million for public education in FY12 beyond the amount proposed by Gov. Bob McDonnell. For a number of local school divisions, the actions taken by the legislature could slow down or stabilize the number of possible layoffs and program cuts.

Here are some of the budget issues that school boards across the state are addressing.

In Newport News, the superintendent proposes pay raises of 0.5 percent next year. The city will increase its support for the school division by $1 million, providing the school system with the resources to allow the raises. Health care costs for employees, however, are expected to rise, eating into any pay raise. All told, the proposed school budget for FY12 is $1 million less than the current budget, and uses $3.6 million of federal stimulus dollars and $2.6 million from the federal Education Jobs Fund to fill gaps. The budget proposal also includes a reduction of 62 positions.

The Lynchburg schools superintendent estimates the division will face a budget shortfall of between $375,000 and $2 million in the next school year. His estimate includes the additional state money approved by the General Assembly. School employees who have not had a pay raise since 2008 would again go without one in FY12. In fact, the superintendent expects next year’s budget will mark the third year in a row that the school division faced cuts in the size of the operating budget.

In Petersburg, the school division’s finance director projects increases in health insurance costs by as much as 19.3 percent, a potential cost of more than $600,000 to the school system. This cost would be in addition to the nearly $2 million budget gap the school division is confronting for next year. The draft school budget, which is under consideration, calls for the elimination of 25 positions. (If approved, the school system will have cut more than 60 positions in the past three years.) Members of the school board would like to have the city increase its support of city schools, and reconsider the school system’s participation in the region’s two governor’s schools. School employees have not had a pay raise in three years.

In York County, the school division chief would like to revive the practice of step raise pay increases, a practice that has been placed on hold for several years. Additional state funding could boost the school budget by $1.2 million. He is also recommending more money for bus fuel. The county, however, is considering a reduction in the level of its support by $330,000 for 2012.

The Suffolk School Board recently approved a budget proposal that includes a 1 percent pay raise for employees, but the overall proposed budget would be roughly $900,000 less than the current school budget. The board is also asking for an additional $1.4 million in local support.

In the City of Franklin, school officials proposed a spending plan to the school board that includes no salary increase for the third straight year along with no layoffs or reductions in personnel. The budget proposal, which closes a $450,000 budget gap, was balanced by using a one-time slug of $334,000 from the federal Education Jobs Fund. School officials also recommended spending cuts for administration and health care, transportation and maintenance.

The Virginian-Pilot recently reported that a pattern is emerging in some of the ways schools have cut costs to cope during and since the recession. Services that once were free or inexpensive for families like testing fees, field trips, and summer programs are falling back on parents. In Chesapeake, the school division’s share of state and local funding has fallen by about 14 percent, or $61 million, over three years. In order to manage costs without laying off staff or closing schools, the division now charges or has increased fees for community college dual enrollment courses, PSAT for high school sophomores, Advanced Placement tests, field trips, summer enrichment programs, behind-the-wheel driver training courses, and school lunches. The Parent Teacher Association has had to change its mission from enhancing the lives of students and families to supplementing school budgets to pay for ink cartridges, copy paper, and classroom supplies.

After local school boards finish their work on the school budgets, city councils and county boards of supervisors will begin their work to consolidate the school budgets and general government budgets. Even with the last of the federal stimulus dollars and improving sales tax collections, this will prove to be a difficult task. contents

Local spending plans under review

Local governments have struggled over the past few years to balance the demand for public services with declining local and state revenues. Although state income and sales tax collections are growing, no one is detecting a resurgence of local tax dollars, particularly with real estate assessments continuing to drop in most communities. To further complicate the task, the half-life of federal stimulus dollars is upon us, and Congress is in no mood to launch another financial rescue mission.

With this backdrop, here is the budget development snapshot.

Responding to a sharp decline in the total value of real property of just over 27 percent from last year, the Town Council of Front Royal voted this week to advertise an increase in the real estate tax rate from 7 cents to 11 cents per $100 assessed value. The first two cents would go toward equalization of the town’s revenue to make up for the assessment losses. The other two cents would be dedicated for transportation and other town infrastructure needs. Town council could ultimately adopt a lower tax rate, but state law prohibits local governments from adopting a tax rate higher than advertised for the public hearing.

The City of Hampton is facing a $14.1 million shortfall due to a decrease in revenues and additional cost pressures. City officials have asked the public for budget options at four meetings and through an on-line survey. The idea of a small increase in the property tax rate has been supported by a majority among the 500 people who participated in the survey on what the city should do to close the multi-million budget gap.

Another idea under review by Hampton along with Newport News is combining government services between the two cities in order to cut costs. One area under review is animal control. Other items could include engineering and planning, purchasing and codes compliance. The two cities already cooperate on library privileges, recreation programs, and mental health services.

Elsewhere in Hampton Roads, city officials in Portsmouth predict a slight uptick in many of its revenue sources next year, but still anticipate a $25 million budget gap. About $10 million of the gap is tied to an expected increase in requested funding from the school division. The rest of the shortfall is tied to increasing debt service payments, health insurance costs, public safety salaries, and other business expenses.

In Henrico County, the county manager has proposed a salary increase for all county employees, after a pay freeze of two years. The 2.372 percent salary increase would apply for all school and general government employees. The budget plan also does not assume higher taxes, and refrains from service cuts, employee layoffs and furloughs. But, residents could see a 5 percent increase in water and sewer rates. The proposal also assumes a continuation of the hiring freeze that began in 2008. The general fund portion of the budget plan proposes a $2.6 million or 0.35 percent increase compared with the current budget.

A real estate tax increase and an $850 bonus for city workers (but not teachers or school employees) are part of the FY12 budget proposed to Fredericksburg City Council last week. The city manager described the proposal as reflecting “modest signs” of revenue growth along with attempts to start making up the lack of spending in recent years on maintenance and city employees. Under the proposal, the real estate tax rate would be raised by 4 cents. If ultimately approved, $1.4 million would be transferred from the increase to the city’s capital fund for roads and other infrastructure projects. City support for the school division would increase by $900,000 to $24.9 million. The city projects increases in sales tax collections, admissions taxes, and personal property taxes, but the total budget would not resemble pre-recession levels. Part of the reason, according to the city manager, is the strained fiscal relationship between localities and the state. Cuts in state funding add up to more than $600,000, equating to about 2 cents on the real estate tax rate.

In Alexandria, city council voted to advertise higher real property tax rates and a new transportation tax for commercial properties. The council decided to advertise a tax rate of $1 per $100 of assessed value, which is a 2.2 cents increase over the city manager’s recommended rate. Council also approved a rate of 12.5 cents per $100 of a commercial property’s assessed value that would be dedicated toward new transportation projects. (Arlington and Fairfax counties already have the commercial add-on tax at 12.5 cents and 11 cents, respectively.)

Staunton city officials expect to finish up a budget proposal by next week. The local newspaper said the proposal will not differ significantly from the current budget. Although city agencies’ requests for funding are in line with current revenue projections, officials are concerned about health insurance. The premium increase could exceed 20 percent. City employees have not had a pay increase in three years.

In Charlottesville, city council received last week both the school and general government budget proposals. The school budget proposal includes a 2.17 percent increase over this year’s budget. The general government proposal shows a 1.55 percent increase from the current year.

Lynchburg’s city manager presented a budget proposal for next year that calls for no tax increases, no pay raises for employees, and only a few changes to existing spending levels. The manager called his proposal “very much a maintenance budget.” Funding for Lynchburg city schools would remain level. The funding requests of city agencies are comparable to current levels. The agencies, however, would be expected to absorb a projected 10 percent increase in health care costs. City employees have not received across-the-board raises since 2008. contents

FROM THE CAPITOL

Senior senator asks JLARC to study retirement issues

Sen. Charles Colgan, chairman of the Senate Finance Committee, has asked the Joint Legislative Audit and Review Commission to study a number of issues relating to retirement.

In a letter dated Feb. 28, Colgan asked JLARC to examine the following:

• Whether the state should offer an employer-sponsored retirement plan.
• What are the distinguishing characteristics of defined benefit, defined contribution and other retirement plan designs?
• What are the goals for state and local governments in offering a retirement plan, and how should the employer and employee perspectives be balanced?
• What percentage of an employee’s salary should be contributed to retirement, and what portion should be funded by the employee and the employer?
• What is an appropriate retirement age?
• What is an appropriate percentage of a salary that should be replaced upon retirement, and what portions of income replacement should come from the employer retirement plan, Social Security income and other savings?
• Does the defined benefit plan offered by VRS meet the goals identified for state and local government plans, and if not, what changes should be made?
• What options are available to meet the needs of the state, local governments and school divisions?
• What are the merits of offering a single mandatory plan versus a menu of plans?

The letter suggests that JLARC use focus groups or other tools to gather direct input from state and local government, and asks that the study be completed this year.

The full commission will consider the study request at its May 9 meeting in Richmond. contents

VML backs redistricting approach that maintains communities of interest

VML Executive Director Mike Amyx told the Governor’s Independent Bipartisan Advisory Commission on Redistricting last week that the league supports an approach to redistricting that maintains communities of interest.

“VML supports the principle that redistricting should be undertaken with the public’s best interests in mind, and that those interests trump those of political parties and incumbents,” Amyx told the commission March 11 in Richmond. “Redistricting – to the extent possible – should reflect communities of interest. In short, election boundaries should reflect the social, cultural, racial, ethnic, and especially the economic interests common to a compact and contiguous district – and not just political philosophy or voting patterns. We believe that local governments embody the ideal of communities of interest.”

“Slicing up cities, counties and towns in order to protect political interests can leave communities disconnected,” Amyx continued. “There are times when the challenges facing an urban area, for example, differ from those of surrounding neighbors. To the extent possible, communities of interest should be protected. The values of a representative democracy and, indeed, the economic vitality of communities across the Commonwealth, demand that redistricting plans reflect the basis of shared common interests rather than the interests of political parties.”

Legislative redistricting is a process undertaken to redraw electoral districts to reflect changes in population growth patterns – usually following the decennial census. In Virginia, this responsibility is designated by statute to the legislature, and historically has been completed by the political party in power. In the House, that means that Republicans will be in charge of redrawing districts this spring. In the Senate, Democrats will control the process.

Not unlike states with similar systems, the redistricting process in Virginia has led to complaints by citizen groups of gerrymandering by political parties interested in maintaining their majorities, effectively limiting competition. In response, Gov. Bob McDonnell appointed a bi-partisan commission to solicit comments from the public. The commission will make its recommendations on April 1 following the last of four statewide public forums. Also, the Wason Center for Public Policy at Christopher Newport University and the Public Mapping Project are sponsoring the Virginia College and University Legislative Redistricting Competition to help educate students and the public about the process of redistricting. Sixteen teams representing 13 colleges and universities are participating in the competition.

To what extent the two houses make use of the public input and recommended maps remains to be seen.

“Common sense would seem to dictate that legislative district lines should help foster a closer relationship between local governments and state legislators,” Amyx said. “Ensuring that state elected officials and local governments share common communities of interest will better enable us to address our most pressing problems. A more effective working relationship would benefit all citizens in the Commonwealth.” contents

IN THE COURTS

Va. Supreme Court makes BPOL collection from multi-state companies more difficult

Figuring out how much business license tax a local office of a multi-state company should pay is always a challenge for local assessors and commissioners of the revenue. A decision this month by the Virginia Supreme Court has made collection of BPOL taxes from large national businesses even more difficult. In Ford Motor Credit Company v. Chesterfield County, the court handed down recently a very complicated rule for determining the amount of BPOL tax the local office of a multi-state operation is responsible for.

Ford Motor Credit Co. (FMCC) had a branch office in Chesterfield that issued individual retail car loans and leases. It also financed floor plan loans and other dealer loans. The branch did not manage the servicing of the loans, did not make final decisions on the larger dealer loans, and did not collect delinquent loans. FMCC is a nationwide, intertwined business and the Chesterfield office was only a part of the operation that made money for the company.

The county took the very reasonable position that while other offices may service loans, make decisions on certain loans and collect delinquent loans, the Chesterfield office, where the loans originated, was the situs – or location – for tax purposes of the revenues the loans that originated in Chesterfield created. FMCC had agreed with the county for years, had paid the taxes, but then changed its mind and sued. The dispute between the county and FMCC involved $1.4 million in taxes the branch office had paid during a four-year period.

The Supreme Court ruled that any FMCC office across the country that had dealings with loans that originated in the Chesterfield office must be included for the purpose of determining the amount of taxable business that took place in Chesterfield. The court ruled that those other offices were responsible for part of the total revenues. That meant that the Chesterfield office was not responsible for all the revenues from the loans and the county could not tax the revenues attributable to the other offices. To determine the dollar amount the Chesterfield office was responsible for, the court ruled that the county must add up the payrolls of all the various offices that touched the loans and then calculate the percentage of that payroll that the Chesterfield office represented. FMCC’s Chesterfield office would only be responsible for the tax based on its proportionate share of total payroll.

In the modern business world, seldom does a customer deal only with the storefront or office where a transaction starts, especially when the local office provides services to customers. In contrast, a Home Depot sells hard goods that go out the door of the local office, so the problem highlighted by the FMCC decision is not a major one in that case.

The Ford Motor Co. decision makes determination of how much tax a business owes extremely complicated for a commissioner of the revenue or assessor when assessing a local office of a large, national business. As a result, some commissioners will likely err on the side of safety, so that taxes that should be owed will not be paid. In addition, given the complex formula the decision requires, taxes will not be assessed, simply because the commissioner or assessor will be unable to get all the necessary information from the taxpayer. As a result, taxable activity will go untaxed. The Ford Motor Co. decision isn’t an entirely new problem for local governments or the court, but the case points out how difficult it will be to assess a local office of a national business. contents

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