December 17, 2013
To:
VML Key Officials and Local Liaisons
From:
VML Budget Staff
Subject: First look at 2015-2016 budget and changes to current
year (2014)
Note: This is a brief summary of the governor’s proposed biennial budget and
changes to the current 2014 fiscal year (caboose) budget. A more detailed analysis will
follow in the coming week.
Gov. Bob McDonnell introduced yesterday his last budget to a joint meeting of
the Senate Finance, House Appropriations, and House Finance Committees. This budget,
which is prepared by the out-going governor, will be managed by the incoming Gov.
Terry McAuliffe. Given the time constraints of the legislative process, McAuliffe will
have few opportunities to amend his predecessor’s submission. In other words, the new
governor is stuck with an “as is” budget. However, the governor-elect’s support for
“Obamacare” could change this dynamic, depending on which party controls the Senate
and, quite possibly, the party affiliation of the next Attorney General.
Local governments will welcome McDonnell’s actions to pump up funding for
public education by $583.0 million, continue the commitment to phase-in increases to
teacher retirement contributions in order to reduce future unfunded liabilities, dedicate
over $31.0 million from last year’s revenue surplus to the Water Quality Improvement
Fund, provide an additional $21.3 million to assist local police departments through the
“599” program, and deposit $8.0 million to the Virginia Housing Trust Fund and offer
another $1.0 million for assisting homeless Virginians.
However, local governments will not be pleased to learn that McDonnell proposes
to reduce general fund support for public education by over $76.0 million. The
administration decided not to recognize for re-benchmarking purposes any inflation for
health insurance, utilities, and transportation for the past two-years.
McDonnell also chose not to recognize the state’s portion of the unfunded liability
tied to teacher retirement. On a statewide basis, roughly 40 percent of the liability should
be assigned to the Commonwealth and not to localities.
In addition, the administration decided to move ahead with its initiative from last
session to establish the Opportunity Educational Institution (OEI) at $600,000 each year,
although the legislation faces a stiff judicial challenge.
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The bottom line is that state general fund support for state-mandated and highpriority programs carried out by local governments will continue to shrink as a portion of
the general fund, falling from 52.0 percent in FY 2009 to a projected 43.7 percent in FY
2016.
Budget assumes continuing modest economic expansion
For the new biennium, general fund revenues are expected to grow 4.2 percent in
FY 2015 and 3.9 percent in FY 2016. These figures are based on a new budget paradigm
that Virginia’s economy will no longer outperform the nation’s economic growth. The
slow rate of job growth over the next three years and federal sequestration are expected to
constrain growth in general fund revenue collections. In this fiscal year, total revenues
available for general fund appropriations are, thus far, increasing by 0.7 percent, behind
the official estimate of 1.7 percent.
TAX
SOURCE
INDIVIDUAL
INCOME
SALES
CORPORATE
INSURANCE
ACTUAL
FY13
6.9%
FORECAST
FY14
3.7%
FORECAST
FY15
5.1%
FORECAST
FY16
4.6%
3.1%
(7.3%)
2.5%
(4.4%)
0.4%
10.4%
3.1%
2.1%
0.5%
2.6%
0.7%
4.2%
The state’s revenue model also predicts flat growth over the next three fiscal years
for recordation tax collections. The state’s economic model says the housing market has
stabilized but increases in mortgage rates have constrained refinancing activity.
Overall budget continues to grow
The McDonnell budget weighs in at a record-setting $95.9 billion for the
biennium. This breaks down to $58.2 billion in non-general fund spending and $37.7
billion in general fund spending.
Non-general fund items include money from federal grants for programs like
Medicaid, institutional revenue paid with patient fees at behavioral health institutions and
teaching hospitals as well as college tuition and fees, transportation taxes, unemployment
insurance dollars, and the master tobacco settlement agreement fund.
The $37.7 billion of capital and operating general fund spending is almost 7.4
percent ($2.6 billion) greater than the general fund spending approved last session, but is
roughly $1 billion less than general fund dollars appropriated in the 2006-08 biennium.
This budget includes $939.6 million in budget cuts comprised of technical and
base budget adjustments ($688.9 million) as well as targeted cuts ($250.7 million). Over
half of the targeted cuts are in public education at $145.6 million.
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McDonnell’s spending plans reflect the priorities he articulated to the General
Assembly’s money committees. More than $300 million will be deposited to the Rainy
Day Fund, increasing the Fund’s balance to $1.0 billion by FY 2016. McDonnell also
proposes a $50.9 million unappropriated balance; the largest since unappropriated
balance since 1991.
The information below provides a “quick read” of some items of interest to local
governments. A more detailed accounting of the proposed budgets for the remainder of
FY 2012 (the “caboose” bill) and the 2012-14 biennium will be forthcoming.
FY2014 (the “caboose”budget)
State assistance and transfer payments to local government
 State assistance to local law enforcement (HB 599 program). No changes to
the level of funding approved by the 2013 General Assembly ($172.4 million).
 Tennessee Valley Authority (TVA) payments. Increases the payments in lieu
of taxes by $200,000, bringing the total distribution to $1.4 million for this year.
 Jail per diem payments. Increases funding by $4.5 million to pay the state share
of costs for the remainder of this fiscal year. According to the Compensation
Board, this represents approximately half the amount necessary to cover the cost
based on revised growth percentages approved by the Inmate Population
Forecasting Committee. The Committee will revisit this projection in early
January.
Economic Development
 Fort Monroe Authority. Adds $701,620 for operating the Fort Monroe
Authority.
Board of Elections
 Recount costs. The budget includes $50,000 to reimburse state agencies for costs
connected with the recount for the Attorney General’s race, but contains no
funding to reimburse cities and counties for their costs.
Compensation and retirement
 State employee bonus. The budget includes funding for a 2 to 3 percent bonus
for state employees, effective Dec. 1, 2014, contingent on agency savings in
discretionary spending and revenue growth but there is no funding for bonuses for
teachers or state-supported local employees (such as constitutional offices, social
services department, etc.).
Direct aid to education
The budget decreases direct aid to education by $21.9 million, primarily reflecting
changes in sales tax collection, student enrollment and participation in incentive,
categorical and Lottery-funded programs (including programs such as pre-K and reduced
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class size). Lottery funds are projected to be $33 million higher in FY14 than included in
the current budget.
 The budget removes $9.3 million from the $70.2 million compensation account,
reflecting the fact that around 15 school divisions give the 2 percent salary
increase for teachers and other instructional personnel included in the budget, and
therefore did not receive the state funding.
FY2015 and FY2016
State aid and transfer payments to local governments
 State assistance to local law enforcement (HB 599). Increases funding to this
program by $7.1 million in the first year (total $179.5 million) and by $14.24
million in the second year (total $186.7 million). This is the first appropriation
increase for the program since the 2007 Session. As recently as FY2009, the
funding level for this program was $197.3 million.
 Recordation taxes. Maintains the $40 million distribution in each year.
 Tennessee Valley Authority (TVA) payments. Proposes $1.4 million for each
year.
 Rolling stock taxes. Proposes a funding level of $6.9 million each year.
 Communications sales and use tax. Maintains a funding level of $440 million
each year.
 Virginia Wireless Tax. Increases the amount to be distributed by $11.8 million
in the first year (total of $33 million) and by $14.8 million in the second year
(total of $36 million).
 ABC profits/wine taxes. Although the Code of Virginia still authorizes the
sharing of ABC profits/wine taxes with local governments, the state no longer
shares any proceeds with local governments.
Local fines and fees to be transferred to Literary Fund
 Deposit of Fines and Fees. Maintains state practice of keeping a certain amount
of fines and fees assessed by local ordinances when such fees exceed 50.0 percent
of the total state and local collections.
Compensation and retirement

Salary increases. The budget includes funding for a 2 to 3 percent bonus for state
employees, contingent on agency savings in discretionary spending and revenue
growth but there is no funding for bonuses for teachers or state-supported local
employees (such as constitutional offices, social services department, etc.). The
budget funds a 4 percent salary increase for the deputy court clerk I positions; a 2
percent increase for deputy court clerk II positions and for Grade 7 and Grade 8
sheriff’s deputy and regional jail officer positions; and, as the second phase of an
initiative begun last year, a salary increase for assistant commonwealth’s
attorneys. The Compensation Board has posted detailed information here.
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Direct aid to education
The big number. The budget includes $5.57 billion for direct aid in FY15 and $5.62
billion in FY16. By comparison the direct aid amount in FY14 is $5.3 billion. Here are a
few highlights.
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Rebenchmarking. The budget rebenchmarks most of the costs for public
education except in two areas. The budget removes $10 million in each year to
pay cost-of-competing for support positions in Northern Virginia school districts.
It also eliminates the use of an inflation factor for non-personal services, for a
reduction in state spending of more than $24 million a year in the biennium. Nonpersonal services include the costs of items such as utilities, insurance reported in
the 2012 Annual School Reports. A true rebenchmarking will apply an inflation
factor to bring those 2012 costs up to 2014, the start of the next biennium. This
policy change means that the state will be basing its share of costs in FY15 and
FY16 for utilities, transportation, utilities and similar items on what those services
cost in 2012. This clearly is just a cost shift to localities.
Opportunity Educational Institution. The budget includes $600,000 a year for
administrative costs of the OEI, funded not through the direct aid section of the
budget but as a separate state agency comparable to a college or university.
Literary Fund. The budget includes $10 million a year from the Literary Fund
for use for school construction loans.
Teacher retirement. The budget includes the state share of funding for a 14.50
percent employer teacher retirement contribution rate, in line with the schedule
adopted by the General Assembly in 2012 to phase in full funding of the rates
certified by the VRS Board of Trustees. The phase-in is to be completed by the
2018-20 biennium. The credit rating agencies have made it very clear that the
failure to follow the schedule will jeopardize the state’s credit rating. The current
employer rate for teachers is 11.66 percent; a rate of 14.50 percent represents a
significant increase, but the failure to fund the higher rate would jeopardize the
state’s credit rating, add to the unfunded liability that will be shown on local
government financial statements and increase costs down the road.
Teacher salary increase. No state funding for a salary increase or bonus for
teachers.
Natural Resources
 Grants to localities for stormwater improvements. Authorizes $20 million in
bonds in FY 2016 for the Stormwater Local Assistance Fund (SLAF). SLAF
grants provide 50 percent matching funds to qualifying locality projects that
reduce stormwater pollution. The fund was created and seeded with $35 million in
bond proceeds by the 2013 General Assembly.
Want to see the budget proposals now?
The introduced budget bills are posted on the Legislative Services state budget web site:
http://leg2.state.va.us/MoneyWeb.NSF/sb2014
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The Department of Planning and Budget’s outline and explanation of new items or
amendments to the budget (the executive budget) may be seen at this website:
http://www.dpb.virginia.gov/
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