February 7, 2008

Revenues continue to spiral downward

General Assembly will close budget shortfall with cuts

This past August Gov. Tim Kaine announced that revenue collections in fiscal year 2007 were $234 million less than the official revenue projections. He attributed the revenue drop to a struggling housing industry and slower personal income growth. To manage spending in the current year, the governor ordered state agencies to work on strategies to reduce their operating budgets by 5 percent.

Special edition Legislative Bulletin This is a special edition of Legislative Bulletin prepared for the Feb. 7 VML/VACo Legislative Day, for which more than 550 local officials are registered.

By October, Kaine was ready to implement a plan to close a projected $641.1 million general fund budget shortfall in FY08, including some $300 million in service reductions, fund swaps, personnel reductions, and dollar cuts. The ‘599’ local law enforcement program was cut by 5 percent. In his December budget proposal (HB/SB 29), the Governor included $463.6 million in cuts and savings plus a transfer of $261.1 million from the “Rainy Day Fund” to cover the shortfall and $173.5 million in more spending for CSA overruns, jail per diems, and other costs.

For his “legacy” budget in 2008-2010 (HB/SB 30), Kaine assumed revenue growth of 3.3 percent in fiscal year 2009 and 6.7 percent in fiscal year 2010 to produce $34.3 billion. In addition to tax revenues, Kaine’s budget proposal assumes another $1.8 billion will be available for spending from end-of-the-year balances, lottery proceeds, and transfers. Thus, total general fund resources for appropriation are $17.7 billion in FY09 and $18.5 billion in FY10.

The estimated base budget is $34 billion, leaving $2.2 billion for addressing mandates such as SOQ and Medicaid, cost increases tied to retirement rates and inmate costs, caseload adjustments like CSA, and transportation. More than 90 percent of the $2.2 billion goes for these activities. To pay for mental health, economic development, Pre-K, and other initiatives, Kaine continued most of the agency spending reductions from this year into 2008-2010, producing savings of $600.8 million.

The slumping economy, however, has forced Kaine to call upon the Department of Taxation to prepare yet another revenue forecast. There is no doubt that the forecast used to develop both HB/SB 29 and HB/SB 30 will be significantly revised downward. The Tax Department is reviewing general fund revenue sources, particularly sales tax, personal and corporate income taxes, and recordation taxes. The bottom line is that the revision will be substantial and still may contain uncertainty.

Upon receiving the new information, the House Appropriations Committee and the Senate Finance Committee will probably have roughly one week to put together their respective budget amendments.

Talking points for all delegates and senators, especially those on House Appropriations and Senate Finance committees.

• In HB/SB 30, 53 percent of all general fund operating dollars are used either directly or indirectly for services provided by localities as mandates or in partnership with the state.
  
• The downward revision of the revenue forecast will almost certainly result in more spending cuts. Core services such as re-benchmarking of public education, law enforcement, jail operations, and health and mental health care must be protected.
  
• If these core services are not protected, local taxpayers must pay more taxes, suffer reduced services, or both.
  

Budget cutters may take another aim at law enforcement funding.

Some 65 percent of all Virginians depend on local police departments for public safety services. The ‘599’ program provides state funding assistance for this core service program at $205.0 million in fiscal year 2008. The officers of every participating police department – 39 cities, 9 counties, and 128 towns – must meet the minimum training requirements set by the state Department of Criminal Justice Services.

The ‘599’ dollars can only fund local public safety services, and cannot be used to supplant local money. Local governments must certify to DCJS that this requirement is met.

As part of his October budget reductions, Governor Tim Kaine cut 5 percent or $10.7 million from the ‘599’ program. In his new budget, he proposes to continue the cuts and to maintain the spending level at $205.0 million for each year.

Amendments have been introduced in the House of Delegates and the Virginia Senate to restore the Governor’s cuts, fund the program according to the statutory formula, or to express legislative intent to have the Governor restore the program. Thirteen Senators and 24 Delegates have sponsored or co-sponsored these budget amendments.

There is concern that ‘599’ will be subject to additional spending cuts after the Governor releases his latest revenue projections for FY 2008 and the 2008-2010 biennium. Some General Assembly members have talked about either abolishing the program or designating the funds for specific purposes such as enforcement of federal immigration laws.

Talking points for all delegates and senators, especially those on the House Appropriations and Senate Finance committees:

• Law enforcement is a fundamental core service of government.
  
• The state provides financial support for sheriffs who serve counties without police departments. This funding program was not cut.
  
• Almost two-thirds of Virginians depend on police departments and not sheriff departments as their first responders for public safety.
  

Rebenchmarking at middle of education funding debate

Every two years the state updates the calculation of the cost of public education. The governor’s introduced budget includes an additional $900 million in state funding for FY09-FY10 just to cover the increased costs associated with maintaining existing K-12 programs. The process, referred to as rebenchmarking, reflects no additional programs or initiatives and does not move the state forward toward meeting new educational goals. It does not even adequately reflect what educational services will cost in the upcoming biennium. What it does is recognize, in part, the costs of K-12 public education already being delivered at the local level. The state should fully rebenchmark education programs despite the performance of state revenues because these costs are already being incurred.

There is a good chance that the General Assembly will try to hold down the state’s share of rebenchmarking, thus shifting costs to local governments and ultimately to local real estate taxpayers.

Legislators in the House Appropriations Committee, but also some in the Senate Finance Committee, are becoming increasingly more vocal in their dissatisfaction with the cost of rebenchmarking. Some legislators claim that local salary increases that exceed state salary increases are responsible for the high costs of rebenchmarking and that local expenditures are “the tail wagging the dog.” Others claim that funding directed at low income children-in particular, a program known as the at-risk add-on-is not effective and should be eliminated.

Talking points for all delegates and senators, especially those on the House Appropriations and Senate Finance committees:

• Changing the way that rebenchmarking is calculated does not affect what it costs to educate children; it simply changes what the state pays for.
  
• Some 75 to 80 percent of education costs are tied to salaries, which are driven by market forces.
  
• Passing more costs onto local government will increase reliance on the real estate tax, and will increase disparity among the school divisions in the state.
  
• Investment in education is working: Student achievement is rising; student and school performance on national and state accountability standards continue to improve each year.
  
• At risk funding is working: The percentage of economically disadvantaged students passing state Standards of Learning assessments in reading, science, and history and social science has increased at a faster rate from 2002-2003 through 2006-2007 than the pass rate for all students in Virginia’s public schools.
  
• Pre-kindergarten education works. Children participating in the Virginia Preschool Initiative, aimed at at-risk students, are less likely to need literacy remediation than students as a whole. However, the state must fully fund direct aid costs before expanding VPI.
  
• Localities need increased state aid for school construction. VML and VACo support the creation of a school construction revolving loan program, but the state must first fully fund direct aid costs.
  

Homestead exemption constitutional amendment moving forward

Before crossover, both houses will act on a constitutional amendment authorizing local governments to grant annual residential homestead exemptions and/or deferrals of up to 20 percent. The amendment is not submitted to the governor for approval, although Governor Kaine supports its passage. If the amendment is approved by the General Assembly, it will be submitted to the voters in November 2008.

The General Assembly and governor must enact a stand-alone enabling statute before localities may implement a voter ratified amendment. There are two enabling statutes at this point: HB 1118 (Miller) and SB 496 (Northam). They mirror the constitutional amendment and grant governing bodies the discretion to tailor programs to local needs. The bills also would allow localities to enact ordinances as of January 1, 2009, assuming the voters approve the amendment in November.

While the Senate appears ready to approve the constitutional amendment and enabling statute, the House apparently is intending to approve only the constitutional amendment this year. If that is the case, localities will have to wait for the General Assembly and governor to adopt an enabling statute, presumably in 2009.

It is of paramount importance that the General Assembly enact implementing legislation providing localities with the authority and flexibility to design a program that bests suits the needs of each locality rather than approving a prescriptive measure that withholds the flexibility to make the program work. VML and VACo support the constitutional amendment and prefer that enabling legislation be enacted this session.

Talking points for all delegates and senators:

• An optional homestead provision will give local officials an additional revenue management tool. For example, it is more likely that governing bodies will grant exemptions during economic booms.
  
• The pressure to offer or not to offer a homestead is not any greater than the pressure local elected officials routinely face in making yearly budgetary and taxation decisions.
  
• The business community argues that the enactment of a homestead will cause local business taxes to soar. Local officials will not “cut-their-noses-to-spite-their faces:” local governments welcome local businesses and will not intentionally harm the commercial tax base.
  
• Localities need an enabling statute before Virginia’s voters act this November. Virginians should know the full extent to which localities will and will not be able to provide exemptions and deferrals before voting on the amendment.
  

Proposed repeal of the local machinery and tools tax

The Virginia Manufacturers’ harmful machinery and tools tax proposal, HB 124 (Purkey), awaits action by the House Appropriations Committee. VML and VACo oppose the bill.

HB 124 eventually repeals the local machinery and tools tax by classifying it as intangible personal property, which is exempt from taxation. The bill also exempts certified pollution control equipment and facilities placed in service on or after Jan. 1, 2010, from the local machinery and tools tax. Local governments currently have the option of exempting this equipment from taxation.

Local governments collected more than $192 million in machinery and tools tax revenues in FY 2006. HB 124 does not provide any replacement revenues.

Talking points for all delegates and senators, especially delegates on House Appropriations:

• HB 124 repeals local revenues without providing replacement dollars. The passage of the bill will put greater pressure on local real estate taxes.
  
• The machinery and tools tax generates just under $200 million statewide.
  
• Local officials are anxious to join the governor and General Assembly in a discussion of systemic tax reform that reduces local governments’ dependence on property taxes (and replaces current taxes with new revenue sources including consumption and income based taxes). However, localities are dependent upon the machinery and tools tax until the Commonwealth initiates real tax reform.
  

Proposed bills alter assessing, taxing and budgeting process

Several bills before the House Finance Committee propose to alter local government processes for assessment, taxation and budgeting. The measures affect current timetables, processes and in some cases, legal procedures. While local governments are willing to examine and consider changes to the current processes, VML and VACo are opposed to altering the legal presumption for assessments as well as artificial caps on assessments and tax rates.

Several of the bills are an initiative of the Republican caucus; a press release dated Jan. 23 makes these points:

• “HB 927/SB 783 - Requiring local governments to determine tax rates before authorizing a spending plan. Currently, local governments have to vote only if the rate increases, even if a reduction still results in higher revenue collections. Under these bills, local governments would have to justify the tax rate and the revenues produced by it before adopting a spending plan.
  
• HB 1009/SB 779 - Increasing transparency in the assessment process. The previous year’s assessment and rate, as well as the rate that would result in flat revenue and the proposed new rate, would be added to the public notice requirements.
  
• HB 602/SB 789 - Transferring the burden of proof for assessment increases to local government when increases exceed 20 percent. Currently, homeowners have to prove that an assessment hike is unjustified. This measure would place that burden on local government when an assessment increase exceeds 20 percent in a single year.”
  
• Before cross over, the House Finance Committee is primed to report several-if not all-of the House bills to the House floor. The Senate Finance Committee has sent the Senate versions of the bills to a special subcommittee for review. The subcommittee will meet prior to the 2009 legislative session.
  

Talking points for all delegates, especially those on House Finance:

• Current statutory processes provide transparency in government: information about and processes related to assessments, current and proposed tax rates, and current and proposed spending plans are readily available.
  
• The General Assembly and governor have enacted changes to these processes each of the last two years, including: increasing from seven to 30 days the minimum notice that a locality must give the public of a public hearing in which the locality proposes to increase its total real estate tax levies more than 101 percent of the prior year's tax levies; and requiring increased notice of changes in assessments, taxes and public hearings.
  

Comprehensive Services Act changes proposed

The Governor’s introduced budget includes several policy and funding recommendations regarding the Comprehensive Services Act for At-Risk Youth and Families (CSA) program. VACo and VML support several of these recommendations:

• Decreasing the local match rate for foster care services by 25 percent
  
• Raising payments for foster care and adoptive families
  
• Increasing funding to bolster foster care and adoptive family recruitment, support, training and retention
  
• Funding additional social workers to work with foster care families in communities
  

VACo and VML oppose the recommendation changing the match rate local governments would pay for children who are placed in residential treatment. As proposed, local governments would be penalized with paying a higher match rate for any children in a residential treatment setting (including a local group home) beginning July 1, 2008. The penalty would increase again on Jan. 1, 2009, and again in the next year.

Executive branch officials say that this higher match rate would be offset by a lower match rate that localities would pay for community-based services (also phased in over the biennium). Local governments are concerned that many localities will not have sufficient local funding, staff, and access to willing private providers to develop and implement more community-based services. The language as proposed does not address the:

• Immediate cost-shift to localities on residential care that would take place July 1;
  
• Lack of control localities have over children in special education who are placed in residential treatment through the federally-mandated Individual Education Plan (IEP) process;
  
• Children who are placed in residential treatment by the courts; and
  
• Additional children and families the state moved to the CSA mandated, sum-sufficient category for services in 2007, whose primary need is mental health treatment.
  

VACo, VML, and local social services executives, working with legislators, have introduced budget amendments addressing the immediate cost-shift caused by the change in match rates. Additional budget amendments would help local governments with this costly and complex program, including an overdue increase in the state’s share of administrative funding to this program (localities currently pay about 90 percent of this program’s administrative costs).

In conversations and correspondences with legislators or their staff, local governments should focus on these budget amendments:

1. Match rates: Del. Kilgore’s (Item 283#9h) amendment to require the Secretary of Health and Human Resources to convene a workgroup with local representation to prepare guidelines for a system of financial incentives to localities to use community-based services while eliminating the budget language setting the new match rates. (There is no companion item in the Senate.)
   
2. Match rate exemptions/workgroup: Del. Hamilton’s (Item 283 #2h) and Senator Houck’s (Item 282 #1s) amendment also calls for a workgroup, and includes some exemptions from higher match rates for residential placements (for IEPs, court placements, and newly mandated mental health treatment).
   
3. Administrative Process Act: As large and complex as CSA is, this program is not covered under the Administrative Process Act (APA). It instead operates under its own set of public participation guidelines that are less stringent than the APA. Del. Carrico (Item 283 #8h) and Senator Wampler (Item 283 #5s) have amendments to require that all proposed rules, regulations, and policies issued by the State Executive Council (CSA’s governing body) would have to conform to the provisions of the APA.
   
4. Administrative funding. Del. Morgan’s (Item 283 #4h), Del. Phillips’s (Item 283 #5h) and Senator Norment’s (Item 283 #2s) amendments would increase by $2.5 million the state share of administrative funding for this program each year of the biennium.
   

Talking points for all delegates and senators:

• Local governments oppose the higher match rate for residential services in the introduced budget. Localities must not be financially penalized for appropriately placing children in residential treatment programs or for abiding with federal laws or direction by the courts.
  
• Local governments support a lower match rate for community-based services in the introduced budget. Local governments pay a significant portion of the cost for CSA services as well as the majority of the program’s administrative costs. Localities further would appreciate state assistance in helping them develop community and regional services.
  
• Please support the Carrico/Wampler amendments that place CSA under the provisions of APA. CSA affects the public and private sectors, and those affected by the program should be assured that rules and policies are created and implemented with full public scrutiny and involvement.
  
• Local governments support additional state funding for the administrative costs, which are increasingly borne by localities.
  

Mental health bills move forward

The General Assembly has seen the introduction of a record number of mental health-related bills this year. The bills cover a host of issues, including involuntary commitment standards and timelines, outpatient treatment standards and requirements, and sharing of information among health providers, law enforcement, and the courts. Some of these bills affect the roles and responsibilities of community services boards (CSBs), which oversee publicly-funded mental health services at the local level. The introduced budget includes items to pay for some of these new responsibilities.

Many of the bills introduced this year have a fiscal impact and have been reported and referred to the House and Senate budget-writing committees for further consideration. The real challenge is going to be funding initiatives in a year when revenues are down, and continuing necessary funding in future years.

There will be more initiatives and legislation likely to come forward in the 2009 session of the General Assembly. The Chief Justice’s Mental Health Law study group will finalize its work in the coming months. This process is supposed to include public hearings later in the spring.

Talking points for all delegates and senators:

• Local governments support additional state investment in the basic infrastructure of the publicly-funded behavioral health system, particularly to sustain community-based services for residents who have no other alternatives for such services.
  
• Local governments support increased state funding for the provision of mental health services for children through the existing publicly-funded mental health, mental retardation, and substance abuse services system.
  

Urge senators to carry-over impact fee bill

The Senate Finance Committee on Feb. 6 reported legislation that deals a serious blow to local government’s efforts to pay for growth. The bill also will result in a major loss of revenue compared to the current cash proffer system. SB 768 (Watkings) ends cash proffers for residential rezonings and allows an impact fee system, but the impact fees caps are too low and unworkable. Senate Floor debate is likely Friday, Feb. 8 or Monday, Feb. 11.

The bill:

• Repeals authority to accept voluntary cash proffers from new residential projects.
  
• Limits authority to accept off-site non-cash proffers.
  
• Limits the amount of impact fees a locality can impose
  

Talking points for all senators:

• SB 768 will shift the burden of paying for growth to citizens who pay real estate taxes. Existing taxpayers will be hit with an even greater share of the cost of growth with the bill in its current form.
  
• SB 768 caps the impact fees for houses at $8,000 per unit in Northern Virginia, $5,000 elsewhere and caps commercial/industrial impact fees. The caps are too low to equal the revenues the cash proffer system provides.
  
• In the longer term, smaller counties that lack large staffs to administer the extensive requirements in the bill will be unable to enact an impact fee system. They will then be forced to deny residential rezonings because the existing taxpayers would have to pick up the tab for the schools, roads, fire stations and other facilities the growth would demand. Larger localities will also suffer and will be less likely to grant residential rezonings.
  
• Cities and towns would benefit from a healthy impact fee system, since the adjoining counties could rezone for higher density residential and commercial near the city or town. SB 768 in its current form will not promote that result.
  

Please talk with your senator to have this bill studied for a year. This major revamping of this important land use regulation must be done correctly to protect local governments, taxpayers and the development industry. In general, impact fees are better than the proffer system. SB 768, however, establishes a system worse than the proffer system that shifts the cost of growth to existing taxpayers.

Overtime for law enforcement officers in Senate Finance

The Senate Finance Committee on Feb. 6 stripped local governments out of legislation expanding overtime requirements. (SB 269-Deeds) now applies only to the State Police; in addition, it will become effective only if funding is included in the budget. Local governments particularly should thank Senator Stolle, who made the motion to remove localities from the bill.

Legislation passed by indefinitely, carried over or tabled

Local governments liked some of these, didn’t like others, and didn’t agree on whether they liked them or not. Nonetheless, these bills all met the same fate, and are no longer in play for this session.

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