February 19, 2008

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Money committees report out budget packages

Spending and reductions reflect different priorities

The House of Delegates and the Senate will pass their respective budget amendments on Thursday. These amendments for the remaining months of this fiscal year and the next biennium profoundly affect local government finances. Because of shrinking state dollars, localities will have to balance growing service demands with taxpayer ire over higher real estate bills.

Both the Senate Finance and House Appropriations committees accept Gov. Tim Kaine's revised revenue projections -- almost $1.4 billion less than the amount forecasted two months ago in December. The two committees, however, employ different approaches toward managing state resources and spending.

Complete details on the differences will not be apparent until budget amendments are released today at noon. VML staff will produce a more detailed analysis of the two budget proposals later this week, following the release of the amendments.

House Appropriations Committee

To make up the revenue gap, the House focused mostly on swapping debt for cash on capital projects, freezing projects, and capturing unspent maintenance reserve funds ($633.6 million); tapping the Rainy Day Fund ($225 million), and cutting new initiatives and program expansions ($143.3 million). The House also grabbed excess cash and interest from state agencies ($105.5 million); substituted nongeneral funds for General Fund dollars ($56.9 million); and changed compensation policy, extending retirement amortization to 30 years (from 24 years) for state employees, teachers, and local employees paid through the Compensation Board ($65.8 million).

The House debt package totals $1.8 billion, which is $721.3 million less than the governor's proposal, producing a $19.7 million savings in debt service payments.

The signature spending items in the House budget focus on higher education and health and human resources. The House Appropriations subcommittee report indicates $106.1 million of new spending to support the base operations of the state's colleges and universities, creation of a new Tuition Incentive Moderation Fund, and boosting financial aid for undergraduates at public and private institutions.

For health and human resources, the House plan provides $547.6 million for mandatory costs related to Medicaid, CSA, children's health insurance, foster care, and state offsets for federal fund reductions. The House amendments also include $93.3 million for programs serving individuals with mental disabilities, $14.5 million for new child welfare initiatives related to CSA, and $7 million for community health clinics and free clinics.

Senate Finance Committee

The Senate Finance Committee uses several of the cost saving strategies employed by House Appropriations. Like the House, Senate budget amendments transfer dollars from nongeneral fund sources to the general fund and swap debt for general fund cash for capital projects. The committee also saves $55.2 million by using the longer amortization schedule for VRS.

There are, however, several significant differences, which will prove controversial on the Senate floor and later in budget conference. For example, the Senate uses the governor's recommended withdrawal of $423.5 million from the Rainy Day Fund. The Senate Finance Committee also elected not to replace the $180 million "surplus" general fund dollars earmarked for transportation capital projects in the 2007 session but recommended by the governor for reversion in fiscal year 2009. In addition, the Senate's capital package is much higher than the one endorsed by the House Appropriations Committee.

In terms of a signature item, the Senate amendments boost spending in health and human resources, providing $567.5 million for federal and state mandates, $42.1 million to expand community-based mental health services, $13.9 million to strengthen foster care and adoption services, $7.3 million to increase access to health care services through free clinics and community health centers, $7.2 million for additional mental retardation waivers, and $6.0 million to improve the quality of early childhood education through training, financial incentives and grants to communities developing programs.

The narrative below highlights the differences between the two budget plans regarding programs of interest to local governments.

Compensation & benefits

Salary increases

The House proposes a 2 percent salary increase for state employees effective Nov. 25, 2008 and for state supported local employees and teachers, effective Dec. 1, 2008. For the second year, the House put together a special reserve fund to partially pay the increases.

The Senate proposes a 2.5 percent increase for state employees effective Nov. 25, 2009, and for state supported local employees and teachers, effective Dec. 1, 2009.

Retirement contributions

The House proposes lowering state contributions for cost of living increases for retirement benefits for teachers, which would further shift additional costs to localities. Local governments already pay 60 percent of the costs of teacher salaries and benefits.

Both the House and Senate adopted a 30-year amortization period for the calculation of VRS benefits, which spreads the cost out for 30 years instead of the 24 years in the introduced budget. The biggest impact on localities is a lower cost for teacher retirement.

Line of Duty

The House proposes using $8.4 million in "599" funding to pay most of the costs of Line of Duty benefits. The state created the Line of Duty program and up until now has paid the cost of this program.

The Senate funds Line of Duty benefits through a fee-based program created under SB 329, which has passed the Senate and is currently under consideration in a House committee.

Direct Aid to Education

The House and Senate put almost the same amount in public education for the upcoming biennium, but do so in very different ways. The House fundamentally changes the process of rebenchmarking, and in so doing shifts additional costs to local governments for school employee salaries and retirement benefits. Changing the process for rebenchmarking does not change what education costs; it only changes what costs the state will recognize and fund.

The changes in rebenchmarking result in a savings to the state of $80 million a year in 2008-2010, and a projected savings to the state of $225 million a year in 2010-2012. For the upcoming biennium, the House uses these savings to help fund a salary increase in FY09. The House also proposes an additional $35 million a year in school construction grants.

The problem for localities is that the methodology changes would be permanent, and would result in decreased state funding for education from here on out. While the savings are proposed to be kept in education for the next biennium — in the form of teacher salary increases and increased school construction grants — these initiatives may not be included in future budgets.

The major methodology change is that the House proposes to recognize only the salary increases granted in the state budget in the rebenchmarking (or updating) of education costs for support personnel for the 2008-2010 budget. For the 2010-2012 budget, the House extends that same methodology for teacher salaries: that is, the next rebenchmarking would recognize only the salary increases for teachers included in the state budget. Essentially this change does away with the current process of recognizing (to some degree) prevailing costs for salaries.

Other methodology changes proposed by the House 1) increase the federal revenue deduction, which results in a savings to the state but an increase in required local costs and 2) cap state contributions for cost of living increases for retirement benefits for teachers, which would further shift additional teacher retirement costs to localities.

Salary Increases

The House proposes a 2 percent teacher salary increase, effective Dec. 1, 2008 and creates a contingent reserve for a salary increase in FY10.

The Senate does not fund a salary increase in FY09, but proposes a 2.5 percent salary increase, effective Dec. 1, 2009.

Virginia Preschool Initiative

The House retains the current funding methodology for the Virginia Preschool Initiative, and strips funding from the introduced budget for the expansion of the program.

The Senate scales back the proposal in the introduced budget to expand the Virginia Preschool Initiative. It proposes increasing the per pupil payment for students from $5,700 to $6,000 in FY09 and to $6,790 in FY10, and adds an additional 575 slots.

Literary Fund

The House shifts an additional $25 million in FY09 and $20 million in FY10 from the Literary Fund to the general fund to help pay the state share of teacher retirement.

The Senate shifts $14 million from the Literary Fund in FY09 to the general fund, to help pay teacher retirement.

School construction

The House funds an additional $35 million in school construction grants a year.

The Senate proposes reducing the school construction grants program by one-half (for a cut of $13.75 million a year in the program).

Lottery profits

The House keeps intact the current methodology, including the distribution of a portion of the increase in lottery profits to localities.

The Senate uses a portion of the increase in lottery profits that normally would go to localities to help pay the state share of education. This results in the loss of $17 million a year in lottery profits that normally would go to local governments and school divisions.

Comprehensive Services Act for At-Risk Youth and Families (CSA)

The House and Senate both listened to local governments, and added language calling for a workgroup with local representation to look at match rates in this program and assist in implementation of financial incentives for use of community-based services. Both bodies helped local governments by reducing the local match rate for foster care services, but they differed by the level and timing of the reduction. Both bodies also reduced the local match for community-based services beginning July 1, 2008. The amount of the reduction differed, as did plans for any additional reductions in that match rate. The two bodies used different strategies regarding the local match for residential services. Both increased the local match rate in some manner, but they differed substantially on the timing and way in which this would be done. In both cases though, the strategy was less drastic than that presented in the introduced budget. We will present more information about these proposals once the specific budget amendments are released.

State assistance to local law enforcement ("599" funding)

The House and Senate took opposite approaches to this program. The Senate added $2.5 million in FY09 to fully fund state aid to this program. The Senate level-funded the program in FY10.

The House took approximately $14.9 million off the top of the program during the biennium ($7.9 million in FY09; $7 million in FY10) to pay for other programs, including state agency programs. For example, the State Police would receive "599" funding to help pay for its task force combating Internet crimes against children. So would the Bedford County Sheriff's Department. Other recipients of "599" funding would include the school resource officers program and regional criminal justice academies. The largest diversion of "599" funds would go toward paying a majority of the state cost of line of duty benefits. This program was created by, and has been funded by, the state until this time.

The dedication of "599" funds for purposes other than those set out in state statute clearly indicates a drop of support in the House for the program. Past assaults on the program focused on appropriation reductions. By dedicating the money, the House can claim that they have not reduced the appropriation.

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