By Dick Hall-Sizemore
Jim Bacon mentioned in an earlier post that the state’s revenues for April were $700 million less than in April of last year. I was surprised that there were no cries of outrage from readers and dire warnings of the state running a budget deficit. I was also surprised that I did not detect any signs of panic on the part of the administration.
After I dug into the details and thought about them for a while, I realized that, for reasons to be set out later, the state is in position to finish this fiscal year in the black. It is next year that has the administration worried.
Total general fund revenues for April 2020 were 26% lower than those for April 2019, leading to the $700 million decrease. Although total General Fund (GF) revenue year-to-date was higher (1.4%) than the comparable period in FY 2019, 3.1% growth for the year is needed to meet the forecast. In summary, the state revenue growth rate through April was less than half what was needed to meet the forecast.
Four categories account for almost 92% of total GF revenue: individual withholding; individual non-withholding; sales tax; and corporate income. Through April, revenues from the individual withholding tax and sales tax were equal to what was needed to meet the forecast for those categories. However, additional and continued unemployment in May and June will probably result in revenue from those sources falling short of the projections at the end of the year.
Large shortfalls in revenue from individual non-withholding taxes and corporate income taxes accounted for almost all of the $700 million decrease in April from the year before. These two categories are the most volatile and difficult to forecast. Furthermore, due to the pandemic, the Governor moved the May deadlines for submission of returns, estimated payments, and installment payments to June 1.
Although state finance officials will need to wait until early June, when the delayed returns and payments have been submitted, to have a clearer picture of the state’s finances, they are preparing for the worst. In the news release accompanying the data, Aubrey Layne, Secretary of Finance, repeated his estimate of a “$1 billion reduction in the fourth quarter, related to the impacts of COVID-19.”
News accounts have interpreted Layne as saying that the state will experience a loss of $1 billion in revenue for the year. But as noted above, his remarks related to the reduction in the fourth quarter, not the entire year. That $1 billion loss in the fourth quarter does not necessarily translate to a $1 billion reduction for the entire fiscal year. At the end of the third quarter, before the fiscal effects of the pandemic had kicked in, the state had collected about $476 million more than what was required to meet the forecast at that point If Layne’s estimate for the fourth quarter holds, that would mean a GF shortfall for the year of about $500 million.
There are several sources of funding that will enable the Commonwealth to end FY 2020 with a balanced budget, despite a shortfall of $500 million to $1 billion in general fund revenue:
- Unreserved balance—The final version of the 2020-2022 budget bill shows the state ending FY 2020 with an unreserved balance of $1.2 billion. In short, there is a nice cushion built into the current fiscal year budget.
- Reconvened session action– One of the Governor’s proposed budget amendments in the reconvened session deleted the $601 million GF deposit to the Revenue Reserve Fund (not the rainy day fund) initially appropriated for this fiscal year. That amendment moved that funding to the budget’s bottom line.
- Agency savings– The freeze on hiring and admonition to agencies to curtail all but necessary expenditures should produce significant savings and year-end balances.
With these resources available to the administration to get through the fiscal year, the concern of the administration is for the next biennium. As noted above, the 2020-2022 budget bill passed by the General Assembly last session was built on the assumption that there would be a $1.2 billion unreserved balance at the end of FY 2020 for use in FY 2021. Obviously, the pandemic has upended that assumption and Layne has projected GF revenue falling short of forecasts by $1 billion each year of the biennium. The current concern and maneuvering by the administration is centered on producing a year-end balance as large as possible because every dollar of the unreserved balance, money moved from the Revenue Reserve, and agency savings that is used to balance this year’s budget is a dollar that will not be available for next year’s budget. As part of this effort, one can be sure that the Secretary and his deputies are carefully scrutinizing the daily revenue and expenditure reports.
