Dormant economy may prompt additional cuts to state budget

Sales of new homes in the United States declined in August to a six-month low even as prices remain depressed. The Commerce Department reported new home sales fell 2.3 percent in August to 295,000. The number of housing stars this year, if seasonally adjusted, is 571,000 units. That is less than half of the 1.2 million that economists say is consistent with healthy housing markets. Why is this important? Economists have long held that housing is the industry that typically leads the nation out of recession, accounting for at least 15 percent of economic growth in the United States. As Governing Magazine’s Penelope Lemov recently noted, as housing is bought and sold, built and remodeled, local construction jobs are created, along with orders for refrigerators, carpeting, windows, screwdrivers, nails, and flower pots. Income and sales taxes increase, home values rise, and, as a result, state and local revenues stabilize and grow. The National Association of Home Builders says each home built creates an average of three jobs for a year and about $90,000 in taxes.

Foreclosures continue to plague Virginia’s housing industry with one in every 780 households having received a foreclosure notice.

The Federal Reserve Bank of Chicago released its own indicator of a struggling economy. The three-month moving average of the bank’s National

Activity Index slipped to negative 0.28. The negative readings reveal below-trend growth as consumption, housing, and employment remain soft.

The toll of the stagnating economy is showing up across the Commonwealth. The number of Virginians living in poverty in 2010 grew by 7.4 percent over 2009. Some 11.1 percent of the state’s population is living with incomes below the federal poverty line, about $22,000 a year for a family of four. And, statewide, the number of uninsured Virginians grew from 909,611 in 2009 to 1.02 million in 2010, an increase of about 10 percent.

On the job front, the news is mixed. Most economists expect the economy will grow no more than 2 percent for the year. That is barely sufficient to keep up with population growth, and far below the 5 percent rate that most economists say is needed to bring down the unemployment rate.

In Virginia, the seasonally adjusted unemployment rate increased 0.2 percent in August to 6.3 percent, which is better than last August’s rate of 6.8 percent. But, the August increase is the second consecutive monthly increase. Prior to these two consecutive monthly increases, the seasonally adjusted unemployment rate had been trending down since the peak rate of 7.2 percent reached in the December 2009 through February 2010 period.

Income tax collections are strong, but sales tax revenues are soft
Revenue Source	August Percent Growth over Previous Aug 2010	Official Percent Growth for FY 2012	Year-to-Date Percent Growth Compared to Official Forecast
Individual Income Tax Withholding	14.0	3.9	5.9
Sales Tax	(4.4)	2.5	(2.4)
Recordation and Related Taxes	3.4	3.3	(0.7)

The good news is that the number of Virginians receiving a regular unemployment benefit payment was 54,043 in August, which was down from the 55,195 in July and down from 64,414 a year earlier. Initial claims for unemployment benefits also improved over last August, but did increase over the July 2011 numbers. The Virginia Leading Index, however, fell 0.3 percent in July, following a 0.4 percent swoon in June.

So, how does this all relate to state tax collections? In appearances before the Senate Finance Committee and the House Appropriations Committee last week, Secretary of Finance Ric Brown reported that total general fund revenues rose 7.8 percent in August. On a year-to-date basis, total revenue collections in FY12 rose 8.8 percent, ahead of the revised annual forecast of 3.7 percent growth. But, the secretary pointed out that adjusting for the accelerated sales tax program and the additional deposit day in August, total revenues would have grown by 4.7 percent through August – 1 percent ahead of the official forecast of 3.7 percent.

However, even with revenue collections exceeding the official forecast, local governments have reason to worry. Gov. Bob McDonnell told the state board of education last week that the Commonwealth faces “significant budget challenges” in the next two years. McDonnell reminded the board that unfunded pension liabilities, infrastructure needs and an array of federal mandates add up to “billions of dollars of requirements over the next couple of years.” The governor said that “(m)oney is just not dropping off the trees again just because we’ve had a couple good years, and we’re very concerned about what’s happening with the unemployment rate.”

McDonnell asked the board to explore ways of increasing instruction time, saying, “The more time a young person is learning with a good teacher the better they’re going to be.”

If the economy and revenue collections do not improve shortly, the governor will be severely tested to fund his initiatives and address those areas of the budget that have received short-shrift in recent years. Without an influx of strong revenue growth, the likelihood of state budget cuts could move from a possibility to a probability. contents

Road maintenance funding changes possible

The McDonnell administration is exploring options to change state highway maintenance programs and policies. Among the proposals under consideration are returning responsibility for secondary streets to counties and reducing payments to cities, towns, and the two counties that own and maintain their own road networks.

“There is going to have to be a major reform of the system,” Secretary of Transportation Sean Connaughton asserted at last week’s planning session of the Commonwealth Transportation Board (CTB). He defined the issue by making use of a transportation budget term known as “crossover.” Crossover occurs when the CTB transfers money from VDOT’s construction budget to the agency’s road maintenance budget to keep pace with both a growing and aging highway system. The problem is further compounded by VDOT’s dependence on the gasoline tax to pay for maintenance – an excise tax that was last adjusted in 1986 and which has not kept pace with inflation.

From FY08 to FY12 crossover transfers have averaged $418 million annually, and VDOT projects this transfer to reach $600 million by FY17. To reduce the state’s responsibility to cover maintenance funding needs, these policy options were presented to the CTB:

• Eliminate acceptance of new subdivision roads into the secondary system;
• Reduce maintenance payments to urban localities by approximately $75 million annually; and
• Hand back secondary roads to counties while giving them additional taxing authority to cover the costs.

In terms of returning secondary roads to counties, Connaughton said, “We have already devolved the system de facto” because of federal transportation dollars being focused on interstate and primary roads.

Reactions to the proposals from CTB members were mixed, with some pointing to the underlying problem of the structural imbalance between needs and available revenues. Board member Aubrey Lane noted that Virginia has the third largest road network but is 40th in revenue collections among the 50 states. This raises the legitimate question of whether the current system for maintenance is broken or just not adequately funded.
It is expected that the CTB will provide specific recommendations on the policy options later this fall for possible inclusion in McDonnell’s legislative and budget packages. contents

Board of Education to seek waiver from NCLB standards

The Virginia Board of Education agreed to prepare a proposal to allow Virginia a waiver from the No Child Left Behind standards, according to action taken at the board’s meeting on Sept. 22.

U.S. Secretary of Education Arne Duncan announced Aug. 8 that President Barack Obama’s administration “… will provide a process for states to seek relief from key provisions of the law, provided that they are willing to embrace education reform.”

The Virginia Department of Education, Board of Education and stakeholders will work to draft an alternate federal accountability model based on Virginia’s Standards of Learning accountability program.

The waiver proposal would apply to the 2011-2012 assessment results and ratings to be announced in fall 2012. The timeline will depend on the U.S. Department of Education’s submission deadlines, which are yet to be announced.

A staff presentation to the board reported that only 38 percent, or 697 of Virginia’s 1,839 schools, met Annual Yearly Progress standards based on the 2010-2011 assessments, compared to 61 percent of schools that made AYP in the previous year.

Under NCLB, the percentage of students who have to meet accountability standards goes up every year. NCLB has come under criticism for unfairly classifying schools as “failing” when in fact the students in the schools are making progress. NCLB is scheduled for reauthorization but the fate of the act remains uncertain. contents

Governor appoints panel to study state mandates on local government

Gov. Bob McDonnell has appointed five officials from across the state to review mandates imposed by the state on local governments.

Under legislation sponsored by Sen. Stephen Newman in the 2011 General Assembly session (SB 1452), the five-person commission is also authorized to recommend temporary suspension or permanent repeal of such mandates, or any other action, as appropriate. The commission will be dissolved on July 1, 2014.

Commission members include Bob Dyer (Virginia Beach City Council), Pat Herrity (Fairfax County Board of Supervisors), Kimball Payne (Lynchburg city manager), Joan Wodiska (Falls Church School Board), and Shaun Kenney (Fluvanna County Board of Supervisors).
VML recently wrote to Lt. Gov. Bill Bolling about the hardships caused by state mandates, and suggested a number of reforms. Read the letter and supporting material at http://bit.ly/pkAvRc. contents

Governor cautions Board of Education on budget

Gov. Bob McDonnell emphasized the precariousness of state finances at the Virginia Board of Education meeting on Sept. 22.

“We have significant budget challenges,” McDonald reminded the board.

The governor said that the state faces unfunded liabilities in its pension system, critical infrastructure needs, and “dramatic” unfunded mandates from the federal government. McDonnell said that the state would have to be prudent and fiscally conservative.

The governor asked the board’s help to think of ways to increase instructional time in schools. In the 2011 session, the administration supported legislation called the “65 solution” that would require that 65 percent of funding be dedicated to particular spending categories. The legislation as drafted would have exempted expenditures items such as transportation, food services and custodial services from the definition of “instructional time.” contents

CSA program comes in under budget once again

For at least the third year in a row, the Comprehensive Services Act for At-Risk Youth and Families program (CSA) ended the fiscal year with unspent funds – $32.4 million this year.

State officials don’t know exactly what contributed most to the cost-savings, but they point to three factors: 1) the decrease in Medicaid spending in CSA (likely due to the continued drop by communities in the use of residential/in-patient services as well as tightened Medicaid rules); 2) the decrease in expenditures for services in public schools (late last year the state approved a more restrictive policy about use of CSA funding for certain school-based services); and 3) a decrease in census and expenditures for some foster care services.

Unfortunately, the effective work that localities have done to prevent foster care placements and more expensive interventions is not reflected in data collected by the state. That’s because state data programs are not programmed to collect this type of information. Because of this shortcoming, the state cannot provide outcome numbers that reflect the prevention work being done by many communities, and that would more accurately reflect the reason for savings in CSA. contents

Managed care among changes being considered for CSA

Given the rising cost of Medicaid, the state has been trying to rein in Medicaid-related costs in a number of ways.

In July, a care coordination program was put into place for Medicaid-eligible children who are not in the CSA system but who were recommended for community-based behavioral health services. These include intensive in-home services or day treatment by other agencies or private entities.

Also in July, Community Services Boards (CSBs) assumed responsibility for care coordination for these children.

At the Sept. 21 meeting of CSA’s State Executive Council, there was discussion of the care coordination program and the intention to expand care coordination to cover all Medicaid-funded services for children. The Department of Medical Assistance Services intends to release a RFP for a single statewide entity that would oversee all “special” services used by children (services not already covered under existing care coordination or managed care programs). This could – and would likely – be expanded to include all children covered by CSA. In addition, all foster care children would be moved into managed care under DMAS, since many children in CSA are Medicaid-eligible.

Another proposal under consideration by the state is to move CSA’s payment system away from the Department of Education to a private vendor. The state originally was considering moving CSA’s payment system to the Department of Medicaid Assistance Services, but that apparently is no longer under consideration. It is unclear how moving the payment system to a private vendor would affect local governments. contents

ETCETERA

Annual water and wastewater survey available on-line

Draper Aden Associates has released the 23rd Annual Water and Wastewater Rate Report, which is available online at www.daa.com.

Draper Aden also has created an interactive dashboard that allows viewers to see the 2011 survey results and make instant custom comparisons with other utilities. The report presents the results of surveys completed by more than 160 water and wastewater providers who were asked questions about the monthly residential water bill based on consumption of 5,000 gallons of water per month.

Follow this link to review the report: http://daa.com/publications/survey-reports.htm

Follow this link to make use of the dashboard: http://daa.com/publications/dashboard/ contents

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