Juggling the Revenue

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.

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16 responses to “Juggling the Revenue

  1. The state cannot run a budget deficit and is legally bound to finish in the black. Never said it wouldn’t. The $1 billion figure, as I understand it, refers to expected shortfall in the general fund revenue sources (income tax, sales tax, etc). We’ll see how Layne’s prediction holds, but I’m more pessimistic. What is not included in the potential GF shortfall?

    Transportation taxes….motor fuel and vehicle sales in particular. But also aviation and mass transit. The deficit there is devastating and his report showed it.

    The various revenue streams of the state universities….

    The provider taxes paid by the hospitals to fund the Medicaid expansion, an expansion the Governor was just bragging about yesterday. How’s that revenue holding up? (THATs what ended the ban on non-emergency care…..)

    The unemployment trust fund will go into deep deficit. Deep.

    All the boodle gathered from the Hysterical Horse Race gaming, which has been totally shut down. I think I saw the lottery is off too.

    Many, many more revenue streams getting dry, I’m sure.

    On the plus side, the federal helicopter money flowing in will be non general fund, for the most part. The accounting will be interesting.

    As has become a steady drum beat with me, the general fund is now the minor partner in state government finances. A narrow focus on that alone is deeply dangerous. All the non-general fund activities are now the largest part of the game and they are not “off budget.”

    • I don’t disagree with you for the most part, except I contend that the GF is still the centerpiece of state funding. Nongeneral fund appropriations may exceed GF appropriations, but that is due to transportation and federal Medicaid money, primarily. Most of the core elements of government–education, public safety, mental health, administration–are funded out the general fund.

      Originally, I was going to include the drop in transportation revenue in this discussion, but decided to devote a separate, shorter post to it. Higher ed will be in serious trouble if campuses are closed down in the fall or if students don’t show up as planned. All of this factors into the problems to be faced in the coming fiscal year.

      • But Dick, you yourself say:
        “Most of the core elements of government–Most of the core elements of government–education, public safety, mental health, administration–are funded out the general fund.administration–are funded out the general fund.”

        Are not the income short falls of “education, public safety, and mental health,” and Virginia hospitals exploding by the day, indeed facing collapse?

        Don’t these shortfalls threaten to grow to monster proportions if this lock down and attendant scare tactics continue?

        Is not the Federal government being looked at as the funder of last resort? Is not UVA already headed that way?

        • I would not say they are “exploding by the day”. Nor, has anyone in Virginia talked about looking to the federal government as a funder of last resort. There will be large shortfalls and there will be budget cuts next fall to bring expenditures into line with revenue. It will be painful.

          • Reed Fawell 3rd

            Dick, –

            The University of Virginia has announced seeking more CARES aid. Check out UVAToday.

            So have America’s hospitals announced great need for federal funds, including those in Virginia. They are threatened with financial ruin. While the American people are facing a huge surge in the ruination of their health, according to a growing numbers of doctors.

          • Dick Hall-Sizemore

            I had not heard about UVa applying for CARES funding. I tried to go to the UVaToday website, but my browser warned of a security threat with that site, so I stayed away.

  2. Yep. Thank you. It sounds like this administration had already in place a “conservative” budget (that I’m sure Haner will disagree with) but if you look at the rainy day fund which this administration did tend to AND the GA session to cut back planned increased AND the agency hiring freezes, etc.. we probably will weather the fallout this year and next year will be a big challenge.

    But heckfire what happened to those terrible tax & spend fools? Heck, if you compare Virginia to what the Feds are doing, we are the paragon of fiscal responsibility!

    I also wonder for income taxes , how much the lower income folks were paying to start with as we are told here in BR that they folks don’t pay taxes anyhow, right?

    The damage is coming from the money they do make then then drives the economy – aggregate demand – which basically is GDP for that segment of the economy. People who work even in low paying jobs, buy stuff – in fact, they usually spend everything paycheck to paycheck and THAT’s what’s actually driving the economy up the food chain.

    Local government if no help from the Feds WILL get hurt because even folks who don’t pay income tax, still pay sales tax and property tax that funds local govt and if local govt ends up having to lay off teachers and public safety workers – there WILL be a LOT of economic pain that will continue well into 2021.

    Now, Trump and the GOP say that Dem-run states are irresponsible, and he does not want to help them. I wonder what the excuse will be for Virginia?

  3. Dick and Steve, please make this exchange a quarterly feature. It is very informative.

    • Second the motion. It is a joy to start the morning with such thoughtful, intelligent, knowledgeable analysis.

    • Call it “He taxes. He borrows. We spend.”

      Just some spitballing here, but… unlike 2008, this wasn’t caused by bad financial products and won’t result in heavy losses at the big institution level.

      There is no need to attempt a fix this with extreme belt-tightening. The State has time.

      I think the springback from this will be amazing fast. Come October, the WH may even be able to make some truthful statements of “amazing growth”. State revenue streams will start filling.

      Yes, business was hurt, but what business? Restaurants. Movie theatres. Putt-Putt. Just about any “leisure business”. Definitely. But restaurants are the least successful ventures to start with. Something like half don’t make a year and 2/3 are gone in 3. Your barbers, tattoo artists, nail salons, etc. have only to open. Their success is based on the skill and talent of the “artist”, and not some perishable commodity.

      Plus, as a people, Americans were the most leisure deprived in the 1st world anyway. Essential businesses didn’t close. Higher income employees continued to work at home. Some businesses moved more to online than before.

      Three numbers: 7, 11, 13. A clear ton of the effected businesses are going to reorganize and come out of this better than before. The losers? Real estate, especially commercial rental rates, and regional banks and other small business creditors.

      Investments? For me, small cap growth. Bio and pharma? No thank you.

      • Don’t confuse Virginia with the rest of the country. Our shutdown was far more shallow. Again, your (and Trump’s) optimism vs. my pessimism will be tested by time. The Third World is just getting hit hard now.

        • Well, look on the bright side. The reality TV shows are gone. I cannot imagine a situation where the reprehensible “Bachelor” can be filmed in masks. Won’t have to retreat to the office on Monday nights. OTOH, that’s two hours more to spend with the wife… hmmm, mixed.

          Look at the nation as “households” not people. It’s easier that way, psychology I mean. This down turn smacked the crap outta the lower 50%, and they can easily be helped, even made whole.

      • re: ” but what business? Restaurants. Movie theatres. Putt-Putt. Just about any “leisure business”. Definitely. But restaurants are the least successful ventures to start with. Something like half don’t make a year and 2/3 are gone in 3. Your barbers, tattoo artists, nail salons, etc. have only to open. Their success is based on the skill and talent of the “artist”, and not some perishable commodity.”

        same viewpoint… add professional and Collegiate sports, cruise ships, vacations in the Caribbean, etc..

        LOTs of employees, most on the margins wealth-wise.. paycheck-topaycheck… yet they brought the economy down.

        AND those jobs are the ones that are “risky” in terms of social-distancing…

        Lots of focus on the govt shutting down the economy…

        take a look at this:

  4. Dick, you make a good case that there’s no cause for panic this fiscal year (which ends next month)…. although Steve also makes a good case that there are still some considerable unknowns that could bite us in the booty.

    How about next year? Many economists are talking about a slow, drawn-out economic recovery. Any sense of how the recession will impact next year’s budget?

    • If nothing else, next year’s budget will start with less funding than planned. A lot of that unreserved balance will be gone. There will have to be cuts, but at this point, no one really knows how severe. If I did, I could make a fortune consulting.

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