2020 Session Revenue and Budget Outlook Robert P. Vaughn, Director - - PowerPoint PPT Presentation

2020 Session Revenue and Budget Outlook

Robert P. Vaughn, Director Anne E. Oman, Fiscal Analyst House Appropriations Committee November 19, 2019

Snapshot of U.S. Economy

• The U.S. economy is growing, with GDP growth of 2.0% in the second quarter of

2019 and the first estimate of Q3 2019 posting a gain of 1.9%

• IHS forecast expects GDP to grow 2.1% in 2019 and 2020
• Growth in GDP aided by strength in consumer spending
• The U.S. economy added 128,000 jobs in October. The monthly average payroll

gain for CY 2019 of 167,000 indicates that job growth remains solid

• The current unemployment rate is 3.5%
• Initial unemployment claims show no signs of rising layoffs
• Recent economic activity in the manufacturing sector has contracted, although

the overall economy grew for the 126th consecutive month

• Employment in manufacturing trended up in October, a 1.4% increase over September, Although

manufacturing loss 4,447 job in October, on a year-over comparison shows manufacturing employment is up 54,000 jobs

• Trade uncertainty continues to dampen business investments, manufacturing and

farmers

1

Snapshot of U.S. Economy

• Consistent with a tight labor market, strong growth of hours worked, and an

acceleration in hourly compensation, economists expect real Disposable Personal Income (DPI) growth to remain strong, registering 2.8% growth in 2019 (Q4/Q4)

• Forecast growth of 2.2% in 2020, and 2.4% in 2021
• Retail sales are expected to grow between 4.3% - 4.8% for the holiday

season according to National Retail Federation’s annual forecast

• Job growth and higher wages is the cause for optimism
• Overall home sales are up 3.9% from a year ago according to the National

Association of Realtors. Total housing inventory declined 2.7% from a year ago, driving up prices

• Recession risks are somewhat elevated due to a global slowdown and trade
• wars. Both the New York Fed and IHS probability models suggests about a

30-35% chance of a recession beginning in the next 12 months

2

Is a Recession Coming? Here Are Some Key Indicators To Follow

• Inverted Yield Curve: When the yield curve inverts, it's because

investors have little confidence in the near-term economy. They demand more return for a short-term investment than for a long-term

• ne
• GDP: Broadest measure of an overall economy’s health. Technically,

we enter a recession when we have two consecutive quarters of negative GDP growth

• ISM Index: Measure of the overall health of the manufacturing

industry via its PMI Index. It shouldn’t read below 50, as anything under that represents a contractionary environment

• NMI Index: Measure of the overall health of the non-manufacturing

industry

3

Is a Recession Coming? Here Are Some Key Indicators To Follow

• Employment Indicators: Several employment statistics can signal trouble

in the economy

• A decline in employment & hours worked — especially for more than a month or

two in a row — can signal a slowdown in employment

• An increase in unemployment claims is also troubling
• Unemployment rate, labor participation rate, quit rates, and job openings
• Leading Index for the United States: This is an index published monthly

by the Federal Reserve Bank of Philadelphia used to predict future movements of the economy

• Consumer Confidence: Details consumer attitudes and buying intentions.

Whether consumers feel confident about spending and the present or future trajectory of the economy tells us a great deal about where our fortunes are

• headed. At present, this index continues to demonstrate persistently positive

consumer attitudes regarding the economy

4

When a Yield Curve Inverts, It's Because Investors Have Little Confidence In The Near-term Economy

• If investors believe a recession is imminent, they'll avoid any Treasury bill with

maturities of less than two years, sending the demand for those bills down, and their yields up, and inverting the curve

5

1.20 1.70 2.20 2.70 3.20

10-Year Treasury versus 3-Month Treasury

3-month 10-year

Survey of 60 Economists’ Expectations of When Next Recession Starts

Source: Wall Street Journal November 2019 Economic Forecasting Survey

34.2% 29.3% 14.6% 7.3% 7.3% 7.3%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 2020 2021 2022 2023 2024 2025

6

Did The U.S. Economy Really Slow Down?

• GDP is the broadest measure of the U.S. economy, however, many economists believe Final Sales

to Domestic Purchasers is a better measure of the strength of the U.S. economy. Final Sales to Domestic Purchasers measures personal consumption of expenditures (PCE) and private fixed investment, and excludes trade, government spending and inventories

• Much of the slow down in Q2 GDP was driven by businesses drawing down their inventories.

But lower inventory levels now could translate into fewer layoffs later

• Preliminary estimate of Q3 GDP registered at 1.9%, beating expectations, with consumer

spending rising 2.9%. Business investment continues to be a drag on GDP

• “For manufacturers, the biggest challenges remain finding skilled labor and trade uncertainties, which make it

difficult to hire and expand business operations,” said Chad Motray, chief economist at the National Association of Manufacturers 7

0.0 1.0 2.0 3.0 4.0 5.0 6.0

GDP and Final Sales To Domestic Purchases

GDP Real Final Sales

PMI Index Below 50% for the Third Month, Although October Rose to 48.3%, and the Overall Economy Grew for the 126th Consecutive Month

• The latest reading points to the steepest

contraction in the manufacturing sector since June 2009

• Despite the contraction, manufacturing

employment remains positive, with October year-over-year growth of 49,000 employees

• Monthly decline of October manufacturing

employment reflected the GM strike

• Average weekly hours are holding up
• “For manufacturers, the biggest

challenges remain finding skilled labor and trade uncertainties, which make it difficult to hire and expand business

• perations,” said Chad Motray, chief

economist at the National Association

• f Manufacturers

48.3

40 42 44 46 48 50 52 54 56 58 60

Purchasing Manager’s Index

8

NMI Index Remains Above 50%, With October Increasing to 54.7%. Overall, the Index Indicates Growth for the 123th Consecutive Month

• The 13 non-manufacturing

industries all reported growth in October

• All but 1 of the NMI index's

remain above 50%

• Imports have contracted for 2

consecutive months

• The employment index

increased 3.3% in October to 53.7%

• Labor shortage remains a major

factor in some industries

48 50 52 54 56 58 60 62

Non-Manufacturing Index

9

Record Market Highs Reflect Upbeat Q3 Corporate Earnings, But Q4 Earnings Are Expected to Weaken

• Equity markets have hit new record highs in November, buoyed by

better than expected earnings report

• 90% of the S&P 500 companies have reported third-quarter results,

with nearly 75% beating profit expectations

• Although many of the earnings had been lowered in the second-quarter
• On a year-over basis, third-quarter earnings declined 2.4%
• Expectations around U.S.-China trade talks remain a positive force

for the market

• Latest data has also improved sentiment, with the ISM services index

easing concerns that a slowdown in the manufacturing sector was spreading to other parts of the economy

• Looking ahead, analysts see a year-over decline in the fourth quarter,

followed by positive growth in 2020

10

Average Monthly Employment Gains Have Slowed, In Part Reflecting A Tight Labor Market

• 2019 year-to-date average monthly

employment gains have slowed to 167,000 versus 223,000 in 2018

• However, large revisions in August and

September bring the three-month average to 176,000

• Manufacturing employment remains

positive on a year-over basis. Employment declines in October attributable to the GM strike

• A number of factors have contributed

to the employment slowdown:

• Historically low unemployment rate, and

high labor force participation

• Lack of qualified workers
• Slowdown in production due to trade

uncertainty

• Average work week remains solid
• Average hourly earnings have
• utpaced inflation

227 193 179 223 167 50 100 150 200 250 2015 2016 2017 2018 2019 YTD

Average Monthly Employment Gains

(Thousands)

11

Average Hours Worked Has Remained Fairly Consistent, While Worker Wage Gains Have Outpaced Inflation

31.0 33.0 35.0 37.0 39.0 41.0 43.0

Average Weekly Hours Worked

Manufacturing Al Employees

• 1.00
• 0.50

0.00 0.50 1.00 1.50 2.00 2.50

Real Hourly Wage Gains

(year-over-year percent change)

12

Job Market Participation is Rate Back At Pre-Recession Levels, Unemployment Rate At a 50 Year Low, U-6 Rate At a 19 Year Low

0.0 5.0 10.0 15.0 20.0 25.0 30.0 2007-08-01 2008-02-01 2008-08-01 2009-02-01 2009-08-01 2010-02-01 2010-08-01 2011-02-01 2011-08-01 2012-02-01 2012-08-01 2013-02-01 2013-08-01 2014-02-01 2014-08-01 2015-02-01 2015-08-01 2016-02-01 2016-08-01 2017-02-01 2017-08-01 2018-02-01 2018-08-01 2019-02-01 2019-08-01

Unemployment Rate

Unemployment Rate U-6 Rate 80.0 80.5 81.0 81.5 82.0 82.5 83.0 83.5 2007-10-01 2008-04-01 2008-10-01 2009-04-01 2009-10-01 2010-04-01 2010-10-01 2011-04-01 2011-10-01 2012-04-01 2012-10-01 2013-04-01 2013-10-01 2014-04-01 2014-10-01 2015-04-01 2015-10-01 2016-04-01 2016-10-01 2017-04-01 2017-10-01 2018-04-01 2018-10-01 2019-04-01 2019-10-01

Participation Rate 25 - 54

13

4-Week Moving Average of Initial Claims Is Well Below Previous Pre-Recession Levels

294,125 312,700 214,875

200,000 250,000 300,000 350,000 400,000 450,000 500,000 550,000 600,000 650,000 700,000 2000-01-01 2000-06-01 2000-11-01 2001-04-01 2001-09-01 2002-02-01 2002-07-01 2002-12-01 2003-05-01 2003-10-01 2004-03-01 2004-08-01 2005-01-01 2005-06-01 2005-11-01 2006-04-01 2006-09-01 2007-02-01 2007-07-01 2007-12-01 2008-05-01 2008-10-01 2009-03-01 2009-08-01 2010-01-01 2010-06-01 2010-11-01 2011-04-01 2011-09-01 2012-02-01 2012-07-01 2012-12-01 2013-05-01 2013-10-01 2014-03-01 2014-08-01 2015-01-01 2015-06-01 2015-11-01 2016-04-01 2016-09-01 2017-02-01 2017-07-01 2017-12-01 2018-05-01 2018-10-01 2019-03-01 2019-08-01

Initial Unemployment Claims

14

Help Wanted - More Job Openings Than Number of Unemployed - But Do They Have The Skills?

• A high number of job openings is a mix of

good and bad news

• The good: Employers are hiring. When the

Great Recession was at its worst in 2009, job

• penings fell to 2.2 million, an all-time low
• Will spur employers to pay more to attract

workers

• The bad: The pool of qualified Americans is

shrinking and making some positions tougher to fill

• In 39 states there are more jobs than people

looking for them

• 59% of all job openings are in:

Professional and Business Services; Trade, Transportation and Utilities; and Leisure and Hospitality

• South region of the country accounts for

39.4% of all openings

1,750 3,750 5,750 7,750 9,750 11,750 13,750 15,750 17,750 2000-12-01 2001-12-01 2002-12-01 2003-12-01 2004-12-01 2005-12-01 2006-12-01 2007-12-01 2008-12-01 2009-12-01 2010-12-01 2011-12-01 2012-12-01 2013-12-01 2014-12-01 2015-12-01 2016-12-01 2017-12-01 2018-12-01

Job Openings Unemployment Level

15

Quit Rates Are the Highest Since 2001

• The quit rate is a useful measure of

how confident workers feel about the opportunity to switch to a more attractive job

• The percentage of working-age

Americans who voluntarily left their job stood at 2.3% in August, above 2007 pre-recession levels

• South region quit rates are the highest,

at 2.6%, up from 2.5% a year ago

• The rise in the quit rates also

bolsters expectations that wage gains will accelerate

• Leisure and Hospitality; Retail;

and, Professional and Business Services have the highest quit rates

1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2007-07-01 2008-01-01 2008-07-01 2009-01-01 2009-07-01 2010-01-01 2010-07-01 2011-01-01 2011-07-01 2012-01-01 2012-07-01 2013-01-01 2013-07-01 2014-01-01 2014-07-01 2015-01-01 2015-07-01 2016-01-01 2016-07-01 2017-01-01 2017-07-01 2018-01-01 2018-07-01 2019-01-01 2019-07-01

Quit Rates as a Percent of Employment

16

Leading Index for the U.S. Has Ticked Up the Last 2 Months, Suggesting Moderate Growth Should Continue

1.00 1.20 1.40 1.60 1.80 2.00 2.20

Leading Index for the U.S.

(percent)

• The leading index for each state

predicts the six-month growth rate

• f the state's coincident index. In

addition to the coincident index, the models include other variables that lead the economy:

• State-level housing permits (1 to 4

units), state initial unemployment insurance claims, delivery times from the Institute for Supply Management (ISM) manufacturing survey, and the interest rate spread between the 10-year Treasury bond and the 3-month Treasury bill

17

Consumer Confidence Remains Favorable

95.5 50.0 60.0 70.0 80.0 90.0 100.0 110.0

University of Michigan Consumer Sentiment 18

Virginia’s FY 2019 Economic Performance

19

Virginia’s FY 2019 Job Growth Was About Half the Rate Of the Nation’s

• In the Great Recession, Virginia’s job losses were

not as severe as the nation’s -- Virginia’s loss equaled about 5.0% of total employment versus 6.3% nationally

• During the recession and shortly thereafter, Virginia
• ut-performed the nation
• Budget sequestration and continued federal budget

uncertainty impacted Virginia’s growth in 2013, 2014, and 2015

• Uncertainty created by the inability of Congress to

pass Appropriations Bills continues to have a chilling effect on industries tied to federal spending

• Virginia’s recent job performance is impacted by a

number of factors:

• Already low unemployment rate
• Labor shortage, especially skilled workers for high

demand jobs

• Virginia’s job opening of 5.3% is among the highest in

the nation, slightly behind North Carolina’s at 5.7%,

• Available workers to job openings ratio is 0.6
• 6.0
• 5.0
• 4.0
• 3.0
• 2.0
• 1.0

0.0 1.0 2.0 3.0 4.0 2007-01-01 2007-08-01 2008-03-01 2008-10-01 2009-05-01 2009-12-01 2010-07-01 2011-02-01 2011-09-01 2012-04-01 2012-11-01 2013-06-01 2014-01-01 2014-08-01 2015-03-01 2015-10-01 2016-05-01 2016-12-01 2017-07-01 2018-02-01 2018-09-01 2019-04-01

Percent Growth Year-Over-Year

Virginia U.S.

20

How Low Can It Go? Only 4 States Have Lower Unemployment than VA

2.7%

1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 2007-01-01 2007-05-01 2007-09-01 2008-01-01 2008-05-01 2008-09-01 2009-01-01 2009-05-01 2009-09-01 2010-01-01 2010-05-01 2010-09-01 2011-01-01 2011-05-01 2011-09-01 2012-01-01 2012-05-01 2012-09-01 2013-01-01 2013-05-01 2013-09-01 2014-01-01 2014-05-01 2014-09-01 2015-01-01 2015-05-01 2015-09-01 2016-01-01 2016-05-01 2016-09-01 2017-01-01 2017-05-01 2017-09-01 2018-01-01 2018-05-01 2018-09-01 2019-01-01 2019-05-01 2019-09-01

Percent

21

Employment Situation Has Returned To Pre-Recession Levels

0.9 1.0

0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 2008-01-01 2008-07-01 2009-01-01 2009-07-01 2010-01-01 2010-07-01 2011-01-01 2011-07-01 2012-01-01 2012-07-01 2013-01-01 2013-07-01 2014-01-01 2014-07-01 2015-01-01 2015-07-01 2016-01-01 2016-07-01 2017-01-01 2017-07-01 2018-01-01 2018-07-01 2019-01-01

Total Unemployed 15 Weeks or Longer

(As a percent – 4-quarter moving average)

6.5 6.4

3.0 5.0 7.0 9.0 11.0 13.0 15.0 2008-01-01 2008-07-01 2009-01-01 2009-07-01 2010-01-01 2010-07-01 2011-01-01 2011-07-01 2012-01-01 2012-07-01 2013-01-01 2013-07-01 2014-01-01 2014-07-01 2015-01-01 2015-07-01 2016-01-01 2016-07-01 2017-01-01 2017-07-01 2018-01-01 2018-07-01 2019-01-01

Unemployed, Plus Marginally Attached, Plus Part-time

(As a percent - 4-quarter Moving average)

22

Virginia Employment Grew 0.9% from June 2018- 2019, Adding 36,400 Jobs. Was Performance Consistent With The Economic Forecast?

• Withholding taxes represents 63% of total general fund tax collections
• Job growth and average wages and salaries serve as the proxy for withholding
• In FY 2019, Virginia payroll withholding grew 3.6%, 0.2% ($26 million)

behind the 3.8% annual forecast

• However, timing of deposits can impact collections. June 2019 withholding

collections grew only 0.7%, while July growth (which was in FY 2020) was 19.3%, $172 million above the prior July’s collections. Had even 15% of these revenues been deposited in June, the forecast would have been met

• So why is there a disconnect between economic inputs and actual payroll

withholding?

• Are payroll tax collections driven more by where job growth occurs, the

industry mix, and wages paid?

23

Northern Virginia Continues To Grow, Accounting for 65.3% of Total Average Job Growth In Virginia

• Growth in the total number of jobs

statewide was 0.9% in FY 2019, below the official forecast of 1.7%

• Preliminary data suggests job growth

will be revised upward to 1.2%

• Job growth was strongest in

Northern Virginia

• High salaried Professional and

Business Services jobs accounted for 37.6% of job gains

• Construction and manufacturing

accounted for 26.4% of job gains

36.4 23.8 7.3 3.5 1.8 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 Virginia NoVa Richmond Hampton Roads Rest of State

June Year-Over-Year Job Changes By Region

(Jobs in Thousands)

24

Job Gains Were Widespread By Industry, But Professional and Business Services Accounted for 37.6% of the Total

13.7 7.0 2.6 7.7

• 3.4

0.4 6.0 4.1

• 6.0
• 4.0
• 2.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 PBS Manufacturing Construction

• Ed. & Health

Trade, Trans & Util. Financial Leisure & Hosp. All Government

Fiscal Year 2019 Average Payroll Growth (Jobs in Thousands) 25

NOVA Average Weekly Wages Are Significantly Higher Than All Other Regions of the State

• Northern Virginia accounted for

65.3% of the job growth in FY 2019 and have average wages 32% and 47% greater than Richmond, and Hampton Roads respectively

• NoVa accounts for 37.3% of all

Virginia jobs, followed by Hampton Roads at 19.8% and Richmond at 17%

• NoVa’s share of total

employment has grown nearly 1% since FY 2014

$1,219 $926 $827 $- $200 $400 $600 $800 $1,000 $1,200 $1,400 NoVa Richmond Hampton Roads

Average Weekly Wages FY 2019 26

Manufacturing and Construction Sector Accounts for 11% of All Jobs

• Construction and

manufacturing accounted for 26.4% of job gains in FY 2019

• Average wages are

approximately 4% higher than state average wages

27

$1,024 $1,047 $999 $600 $650 $700 $750 $800 $850 $900 $950 $1,000 $1,050 $1,100 Manufacturing Construction Virginia

Professional & Business Services Sector Equals 19% of Total Jobs, and 28% of NoVa Jobs

• 86% of all PBS jobs are in

NoVa, Richmond and Hampton Roads

• 45.7% of FY 2019 PBS job

gains were in NoVa

• Within the PBS Sector, 58%

are in the Professional and Technical Services Sector, of which NoVa has 68% of the state total

• Professional and Business

Services have among the highest weekly wages

755 418 116 114

100 200 300 400 500 600 700 800 Virginia NoVa Richmond Hampton Roads

Total Professional and Business Services Jobs

(Jobs in Thousands)

28

Professional and Business Services Average Wages Are 44% Greater than the Statewide Average Pay

• PBS is the largest job sector in
• NoVa. Within that category is

the Professional, Scientific and Technical Services sector which accounts for 80% of NoVa’s PBS employment

• Average weekly wages are over

200% higher than the statewide average and over 54% greater than the average wages for Professional and Business Services

• Contributing to the increase in

jobs has been an increase in federal procurement in the Washington region

$2,212 $1,434 $999

$0 $500 $1,000 $1,500 $2,000 $2,500

NoVa Prof, Scientific &

• Tech. Serv

PBS Average Wage Statewide Average Wages

Average Weekly Wages

29

25 35 45 55 65 75 85 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

After Peaking in 2010, Federal Procurement Spending Dropped For 3 Years, Before Increasing Again Since 2014

Source: US Census, Consolidated Federal Funds Report and USASpending.gov, The Stephen S. Fuller Institute at the Schar School, GMU

($ in Billions) 30

Fall Revenue Forecasting Process and Fiscal Year 2020 First Quarter Employment

31

Fall Reforecasting Process

• The Code-required Fall reforecasting process is currently underway
• Joint Advisory Board of Economists (JABE) met on October 17 to review

the latest economic assumptions and revised methodologies

• Board includes economists from both private sector and academia; input from IHS

Markit and Moody’s Analytics

• Department of Taxation and Secretary of Finance develop a revised forecast based
• n input received
• Governor’s Advisory Council on Revenue Estimates (GACRE) will meet

November 25

• Cross section of leaders from Virginia business and industry, General Assembly

leadership

• Members react to forecast developed by the Tax Department, based on JABE

recommendations, and provide input on the proposed forecast and predicted economic climate

• Revisions to the Official forecast will be submitted with the Governor’s

proposed amendments to Chapter 854 and his proposed budget for the FY 2020-22 biennium

• Governor will present to Joint Money Committees on December 17

32

Revenue Forecast Process

Forecasting is Both an Art and a Science

• Core economic indicators serve as proxies for the two largest revenue sources
• Individual Withholding: employment growth and average wage and salaries
• Sales Tax: Personal income
• While personal income was a good gauge, it has performed less well in recent years
• The remaining revenue sources do not have similar proxies, however, several

factors can influence revenue collections:

• Nonwithholding or estimated payments: Includes small businesses/self employed and individuals

with substantial investment/dividend income

• Investment returns (i.e., stock market) have a strong correlation to nonwithholding taxes and

business earnings

• Employment growth does not adequately capture contract or self employed individuals
• Corporate income taxes: The most volatile of major tax sources and does not lend itself to an

easily discernible growth trend

• Recordation Taxes: Housing starts, interest rates and housing values
• Insurance Premium Taxes: Claims experience and interest rates can impact insurance premiums
• While the proxies serve as a gauge in measuring revenue growth, they don’t

always pick up the inflection points during an economic slowdown, recovery or expansion

33

Fiscal Year 2020 Outlook

• Economic outlook remains largely unchanged since last year
• Magnitude of the changes to the forecast variables since last year (Chapter

854) is quite modest, especially after adjusting for the alternate forecasts

• Chapter 854 originally assumed revenue growth of 5.0% for FY 2020

Percent Change

Job Growth Avg Wage/ Salary Growth Jobs +Avg Wage/ Salary Growth Total Personal Income Growth Proprietor Income Growth Dividends Interest & Rent Growth S&P 500 Prior CY Growth

Chapter 854 / Official

1.1% 3.0% 4.1% 4.8% (2.5%) 6.8% 14.3%

Oct 2019 Standard

1.5% 3.0% 4.5% 4.9% 4.4% 4.0% 12.1%

Oct 2019 Pessimistic

1.3% 2.9% 4.3% 4.7% 4.1% 3.9% 12.1%

Oct 2019 Moody’s

0.9% 2.7% 3.7% 3.4% 0.6% 1.4% 12.1%

34

Wage and Salary and Personal Income

• Wage and salary and personal

income serve as proxies for withholding and sales taxes

• Through the second quarter of

calendar year 2019, growth in wage and salaries and personal income were performing consistent with the FY 2020 forecast

35

3.4 3.9 4.4 4.9 5.4 5.9 2017-04-01 2017-05-01 2017-06-01 2017-07-01 2017-08-01 2017-09-01 2017-10-01 2017-11-01 2017-12-01 2018-01-01 2018-02-01 2018-03-01 2018-04-01 2018-05-01 2018-06-01 2018-07-01 2018-08-01 2018-09-01 2018-10-01 2018-11-01 2018-12-01 2019-01-01 2019-02-01 2019-03-01 2019-04-01 Wage and Salary Personal Income

Percent Change from Year Ago, Quarterly Seasonally Adjusted Annual Rate

Virginia’s Revenue Outlook: Turning to the 2020-22 Biennium

• Job growth is anticipated to slow over the upcoming biennium while wage and income growth are expected to

continue increasing as we reach full employment

• Baseline forecast is given a 55% probability while the Pessimistic alternative is given a 35% likelihood and the

alternative optimistic forecast is rated at only 10% likelihood

Projected Economic Variables (National Forecast, adjusted for Virginia specific data)

Percent Change Job Growth Avg Wage/ Salary Growth Jobs +Avg Wage/ Growth Proprietor Income Growth Dividends,

• Int. & Rent

Growth S&P 500 Prior CY Growth Personal Income Growth

FY 2021 Oct Stand. 0.8% 3.8% 4.6% 3.3% 3.9% 3.4% 4.4% FY 2021 Oct Pess.

• 0.7%

3.2% 2.5%

• 3.0%
• 0.9%
• 0.7%

2.2% FY 2022 Oct Stand. 0.4% 3.6% 4.0% 1.1% 4.4% 2.2% 4.3% FY 2022 Oct Pess.

• 0.9%

2.8% 1.8% 10.3%

• 0.2%
• 7.5%

1.9%

36

Virginia’s Year-Over Job Gains Remain Positive Through September, But September Monthly Growth Fell

• Through the first quarter of

Fiscal Year 2020, job growth has averaged 0.8%, below the current forecast of 1.1%

• Job gains have averaged

31,400 in the first quarter of FY 2020

• September’s monthly job

numbers declined 14,700 from August

• Job losses were concentrated

in Professional and Business Services, Construction, and Leisure and Hospitality

• 20.0
• 10.0

0.0 10.0 20.0 30.0 40.0 50.0 60.0 Month Over Year Over

Virginia’s Monthly Versus Year-Over Job Numbers

37

First Quarter Job Gains Of 31,400 Reflect Strength in All But 1 Industry Sector

• 10.0
• 5.0

0.0 5.0 10.0 15.0 PBS Manufacturing Construction

• Ed. & Health

Trade, Trans & Util. Financial Leisure & Hosp. All Government

FY 2020 Q1 over FY 2019 Q1 38

Northern Virginia Continues To Lead, But 25% of Job Gains Were Outside the Urban Crescent

31.4 13.7 5 4.9 7.8 5 10 15 20 25 30 35 Virginia NoVa Richmond Hampton Roads Rest of State

Year-Over First Quarter FY 2020 Average Job Gains By Region

(Jobs in Thousands)

39

Unemployment Claims Are At a 30-Year Low

• Continued claims for

unemployment benefits were down over 15% in FY 2019 over FY 2018

• 20,243 average claims in FY 2019
• 23,861 average claims in FY 2018
• For the first 4 months of

FY 2020, claims are down 9%

• Not since November 1989 have

continued claims been lower

16,000 18,000 20,000 22,000 24,000 26,000 28,000 30,000

FY 2018 FY 2019 FY 2020 YTD

40

Over the Last 9 Months Virginia’s Growth Outlook Has Lagged the Nation, but the Gap is Declining

The leading index for each state predicts the six-month growth rate of the state’s coincident index. In addition to the coincident index, the models include

• ther variables that lead the economy: state-level housing permits (1 to 4 units), state initial unemployment insurance claims, delivery times from the

Institute for Supply Management (ISM) manufacturing survey, and the interest rate spread between the 10-year Treasury bond and the 3-month Treasury bill

0.60 0.80 1.00 1.20 1.40 1.60 1.80 2.00 2.20

Leading Index

U.S. Virginia 41

FY 2019 Revenue Performance

42

• 1.2%

1.9% 2.7% 4.5% 3.4% 1.5% 1.3% 3.5% 3.0% 6.2% 7.9% 7.2%

• 8%
• 4%

0% 4% 8% 12% 16% 20% 24% 28% Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Growth in Total General Fund Revenue Collections

FY19 Monthly and Year-to-Date

Monthly Year-to-Date

Forecast: 3.3%

Monthly Growth: -1.2% 4.5% 4.0% 10.2% -1.3% -5.7% 0.4% 26.6% -1.4% 27.4% 22.5% 1.7%

Forecast Needed for Taxpayer Relief Fund: 5.5%

FY 2019 Recap: GF Revenues Exceeded Forecast by $798 Million

Source: Virginia Department of Taxation

43

FY 2019 Revenue Surplus Fully Committed

Activity/Fund Amount ($ in millions) Taxpayer Relief Fund (used for TY 2018 refund checks) $455.0 FY 2021 Reserve for Revenue Stabilization Fund Deposit $73.6 Additional Deposit to Revenue Reserve Fund $270.8 Part A Water Quality Improvement Fund $32.4

44

FY 2020 Revenue Forecast

45

FY 2020 Performance Through October

• Chapter 854 assumed a GF growth rate of 5.0% in FY 2020
• Because FY 2019 actual collections exceeded the revenue forecast by

approximately $798 million, increasing the base against which growth is calculated

• We can now meet the budget forecast – the revenue numbers needed to

support appropriations in Ch. 854 – with a growth rate of 1.2% (excluding transfers)

• Through the first third of the current fiscal year, revenues have increased

8.5% and are exceeding the revised forecast by fully 7.3 percentage points

• Year-to-date strengths are widespread – no single source is

underperforming the forecast

• We could meet the current forecast for FY 2020 even if revenues

contract 1.7% over the remaining 8 months of the fiscal year

46

FY 2020 Year-to-Date Performance

General Fund Revenue Forecast for Fiscal Year 2020

Source Growth Rates Assumed in Ch. 854 Forecast Growth Required to Meet Ch. 854 Revenue Forecast Actual Performance Through October Nov-June Required to Meet Forecast Withholding 4.0% 4.2% 5.7% 3.6% Nonwithholding 12.2% (3.5%) 20.7% (8.3%) Refunds 5.2% 21.7% 15.0% 22.6% Net Individual 5.8% 0.2%

7.5%

(2.8%) Sales 3.9% 4.2% 8.0% 2.7% Corporate 1.8% 9.3% 15.9% 7.0% Wills (Recordation) 0.0% (4.6%) 25.8% (20.2%) Insurance 3.8% 7.4%

• Total GF Revenues

5.0% 1.2% 8.5% (1.7%)

47 Source: Virginia Department of Taxation

Impact of Tax Policy Changes on GF Revenues

• HAC projected growth rates for FY 2020 will appear out of sync with the

underlying economics as we adjust to the changes resulting from the TCJA – which impacted FY 2019 - as well as the changes to Virginia’s tax laws implemented by the 2019 General Assembly – which impact FY 2020 collections

• The TCJA resulted in a one-time windfall in FY 2019
• FY 2019 nonwithholding payments increased 14.5%, well ahead of the

assumed 1.5% contraction

• FY 2019 final payments included a larger than usual share of payments

from “withholders” because they no longer itemized at the state level because of the higher standard deduction at the federal level

• Final payments, which typically comprise about 40% of nonwithholding, made up

47% of nonwithholding in FY 2019

• Similarly, refunds fell 8.9% because another portion of the “switchers” now
• wed at the State level
• Virginia adopted tax policy changes in the 2019 Session but the adjustments do not

apply until the TY 2019 tax filing season

48

Impact of Tax Policy Changes on HAC FY 2020 Forecast

• Sales Tax: Chapter 854 assumed the additional revenues generated by the Wayfair

legislation would total $145 million

• FIS assumed approximately $13 million a month (11 months in first year) yet to date, we have

been generating $26 million a month

• Sales tax growth in FY 2020 will be substantially higher the proxies would indicate
• This will be a one-time growth bump, with rates reverting to typical levels in FY 2021 when we

have a full-year of remittance from all internet dealers is included in the base

• Refunds: Expect growth in refunds as a result of the increased state standard

deduction in contrast to the reduced refunds last year

• Similarly, deconformity from the SALT limitation will decrease tax liabilities, especially in

areas like Northern Virginia with high home values

• Nonwithholding: Forecast will be far lower than economic factors and YTD

market performance would suggest

• Nonwitholding made up 18.1% of total revenues in FY 2019 – the 10 year average is 16.14%
• FY 19 nonwithholding growth driven in part by “switchers” but also high wealth individuals
• Nonwithholding has grown 20.7% in first third of the year, and grew 35% in October, a settle-

up month

• We have projected growth off a base excluding an estimate of what were one-time final

payments, and then applied the 1% collar to that figure

49

Greatest Risk to the FY 2020 Forecast is Nonwithholding Tax Collections

50

• The September payment often a “safe harbor” payment than a reflection of current year wage and non-

wage income.

Number of Total Amount Number of Total Amount Payments

• f Payments M$

Payments

• f Payments M$

FY07 149 $37.7 930 $330.8 FY08 162 $38.1 924 $344.2 FY09 144 $37.6 511 $257.9 FY10 81 $19.0 328 $112.5 FY11 79 $18.6 547 $204.7 FY12 119 $48.9 521 $184.4 FY13 115 $41.5 884 $327.5 FY14 118 $34.9 427 $141.5 FY15 139 $40.0 606 $215.5 FY16 171 $50.1 687 $220.2 FY17 159 $54.0 645 $178.7 FY18 165 $52.5 646 $201.8 FY19 212 $62.4 1,195 $463.8 FY20 237 $79.3 ? ?

Large Individual Payments

September April - May

Source: Secretary of Finance’s October 2019 Revenue Report

HAC Estimate: FY 2020 Revised Forecast

• Adjustments to the current year forecast are expected to generate about $429 million

above assumed revenues in Ch. 854, a collared growth rate of 3.1% (exclusive of transfers)

Source ($ in millions) HAC Forecast Growth $ in millions above Ch 854 Forecast HAC Revised Forecast

Withholding 4.4% $19.6 $13,559.3 Nonwithholding (2.6%) 36.6 3,874.5 Refunds 15.0% 116.2 (1,998.9) Net Individual Income 1.4% $172.3 $15,434.8 Sales 4.5% 157.0 3,886.5 Corporate 9.0% (2.5) 1,028.3 Recordation 6.5% 43.0 411.6 Insurance 5.0% (9.4) 400.9 All Other 2.0% 49.6 804.6 Transfers (0.5%) 18.6 654.4 Total GF Revenue Growth 3.0% $428.7 $22,621.2

51

Caboose Bill Requests

• Agencies were asked to identify additional spending needs beyond those provided

for in Chapter 854

• Agency decision packages for the caboose bill generally focus on items that are “mandatory”

in nature – i.e. forecast changes or Code requirements – and typically include few “nice to do’s”

• Agency submitted FY 2020 budget requests total $89.6 million GF, as follows:
• $42.2 million for increased K-12 SOQ updates
• $13.0 million increase for the Housing Trust Fund
• $11.4 million for DOC health care - $10.4 million related to Hepatitis C treatment
• $4.9 million for increased contracts for Lawrenceville private prison
• $6.3 million for Social Services for IT improvements and child welfare
• $6.0 million for Department of Health legal fees
• $5.8 million for costs of 2020 Presidential primary
• Based on our reforecast estimates, we will have $428.7 million in additional

revenues to address $89.6 million of identified Caboose bill budgetary needs

• We would recommend that revenue amounts not needed for current fiscal year needs to be

appropriated to the Reserve Fund

• These amounts are measured solely against revenue adjustments and exclude budgetary

savings outlined on the next slide

52

Known FY 2020 Savings Items Total $430.4 m.

• In addition to the revenue forecast adjustments, substantial resources have become

available from FY 2019 discretionary balances and reduced appropriation needs for Medicaid and the Rainy Day Fund in FY 2020

• FY 2019 finished with approximately $130 million of discretionary balances – we

assume at least $60 million will revert and be available to carry forward into the next biennium

• The items are outlined on the table below, and are assumed to be available as a starting

balance in FY 2021 as part of the new biennial budget

FY 2020 Savings/Carry Forwards ($ in millions)

Chapter 854 Unappropriated Balance $7.6 GF Medicaid Forecast Adjustment for FY 2020 211.7 Virginia Health Care Fund FY 19 Balance – offsets GF Medicaid costs 53.1 Amount Set Aside for FY 2020 RDF Deposit – No longer needed because of high revenue growth in FY 19 97.5 Assumed Reversion FY 2019 Discretionary Balances (Medicaid and Compensation Board Per Diem payments) 60.5 TOTAL $430.4

53

FY 2020-22 Biennial Revenue Forecast

54

Beyond FY 2020 Risks to the Outlook Skewed to the Downside

• Standard forecast assumes continued growth, albeit at slower rates
• Outlook incorporates a number of downside risks, including:
• Assumed GDP growth below 2% in CY 2020
• Trade policy uncertainty
• Rise in protectionism
• Slower global growth
• Contraction of business investment
• Cooling of housing market
• Fact that we’re in longest expansionary period leads to fear of a downturn

but as one economist noted, “expansions don’t die of old age, something has to happen to cause them to end”

• Positive components of outlook buoyed by fact that the consumer remains

engaged and the low unemployment rate continues to push up wages

• In total, this results in assumed modest growth in the 3.0%-3.5% over the

biennium

55

Sales Tax Growth Has Been Propped Up by Internet Sales

• The Department of Taxation reports that all the year-to-date growth in

sales tax revenue in FY 2020 has been attributable to internet sales & use tax dealers

• Part of this relates to the Wayfair legislation, but it also reflects rapid growth in

the broader E-commerce arena

• Nationally, E-commerce sales grew 13.3% last year and now make up

almost 11% of all sales

• During the same period, brick-and-mortar sales increased only 2.1%
• After the first year bump, the Wayfair amounts will be in the base and we

can expect to see far slower growth moving into the next biennium in line with slower growth of in-store sales

• While internet sales continue to show strong growth, and we are now

fully capturing those sales, the total sales tax base continues to decline as a share of personal income due to the increased share of personal consumption expenditures on non-taxable services

56

Personal Income Has Become Less Reliable Proxy for Sales Tax Growth Rates

• 71% of all personal consumption expenditures now are directed to services
• Demographic shifts
• Cost of exemptions

57

50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Virginia Personal Consumption Expenditures for Goods vs. Services

Goods Services Spending on services has increased 173% over the last 20 years while spending on durable and nondurable goods has grown only 86%

Anticipate More Modest Growth in Major Sources for FY 2021 and FY 2022

($ in Millions) HAC FY 2021 FY 2021 Growth HAC FY 2022 FY 2022 Growth Net Individual Income Tax $15,933.7 3.2% $16,515.2 3.6%

.

Sales 3,995.3 2.8% 4,091.2 2.4% Corporate 1,090.0 6.0% 1,177.2 8.0% Recordation 415.7 1.0% 407.4 (2.0%) Insurance 412.9 3.0% 429.5 4.0% Total Major Sources $21,847.7 3.2% $22,620.6 3.5% Transfers & Other Revenue 1,480.1 1.4% 1,495.7 1.1% Total GF Resources $23,327.8

3.1%

$24,116.2 3.4%

58

Budget Outlook: FY 2020-2022 Biennium

59

Budget Outlook: FY 2020-2022 Biennium

• What is our base budget?
• What are the known budget drivers?
• Does our projected revenue growth fully support these

drivers?

• How can we hedge against the higher than average

potential for revenue volatility?

60

Virginia Will Enter New Biennium With Strong Structural Balance

• The Committee has resolved many of the structural imbalances

implemented to weather the Great Recession

• Fully repaid the deferred contributions to the VRS and expedited the phase-in of

funding 100% of Board certified rates

• Eliminated the requirement that all but the largest retailers accelerate their June

sales tax payments

• Reduced reliance on transfers of nongeneral funds to support GF spending
• Created the Revenue Reserve Fund
• These actions address many of the key concerns of the bond rating

agencies which relate to structural balance, pension liabilities and liquidity

61

Virginia Will Enter New Biennium With Strong Structural Balance

• FY 2020 revenues fully support current levels of on-going spending
• As is often the case in the second year of the biennium, in FY 2020 spending exceeds

same-year GF revenues by $222.3 million

• Caused by uneven growth where drivers grow at faster rate than overall revenues
• However, appropriated deposits to the Revenue Reserve Fund total $222.8

million (exclusive of deposits made from the FY 2019 surplus) – more than

• ffsetting that imbalance
• In addition, $97.5 million was set aside for an assumed mandatory deposit

to the Rainy Day Fund based on FY 2020 revenue growth

• An additional $79.4 million in one-time spending was identified and

removed during the base budget adjustment exercise

• In total, this means there is a net excess of $177.4 million annually of

existing base revenues available to offset increased spending requirements in each year of the next biennium

• So instead of starting the biennium with base expenditures exceeding base

revenues, we are positioned to address a portion of increased spending requirements even without revenue growth

62

Adjusted Base Budget for FY 2020-2022

(GF Dollars in Millions) FY 2021 FY 2022 Chapter 854 (FY 2020 GF Appropriation) $22,747.8 $22,747.8 Remove One-Time Spending ($707.4) ($727.6) Annualize Partially Funded Costs/Restore One-Time Savings $55.1 $55.1 HAC Estimated Base Budget $22,095.5 $22,075.3

63

Range of Resources Available for Budget Drivers

64

$’s in millions FY 2021 FY 2022 Assumed FY 2020 Carry Forward $430.4 Estimated Transfers $675.5 $687.9 HAC Revenue Forecast $22,652.3 $23,428.4 Total GF Resources

(including FY 20 carryforward)

$23,758.2 $24,116.2 HAC Base Budget $22,095.5 $22,075.3 Net Resources Above Base Budget (including transfers) $1,662.7 $2,040.9

For purposes of budget development, not assuming any additional revenue in FY 2020 beyond Ch. 854. Revenue carry-forward includes only known adjustments of Ch. 854 appropriations.

Agency Budget Requests

• As part of the annual budget development process, agencies are asked to

submit “decision packages” outlining their budget requests for the next biennium

• To date, agencies have submitted preliminary general fund budget requests

totaling $1.6 billion in FY 2021 and $1.9 billion in FY 2022 for a total of $3.6 billion over the biennium

• This includes caseload adjustments, unavoidable cost increases, technical adjustments,

information technology requests and other spending for new or expanded initiatives

• Not limited to mandatory spending – includes agency wishes
• As is typical, the two largest requests are for the Medicaid forecast and

K-12 rebenchmarking, which alone cost $1.5 billion

• The Governor has requested all agencies to submit plans outlining how

they could either reduce expenditures by 5% or generate a like amount of new revenue to offset 5% of their budgets to balance any new initiatives against existing operations

• However, based on revenue estimates, the reductions would not be needed to sustain
• ngoing services or mandatory cost increases but rather to support new initiatives and

priorities

65

Major Mandatory Spending Items Total $2.15 billion

66

FY 2021 FY 2022

$174,400,000 $500,500,000 DBHDS - Fund STEP VA Crisis, Outpatient Services and Oversight $24,960,801 $29,027,401 $18,349,764 $29,124,714 $10,750,000 $22,250,000 $9,345,066 $10,376,278 $9,255,816 $16,169,014 $4,063,456 $14,684,986 $9,242,724 $5,799,367 $2,502,818 $2,577,903 $3,368,116 $510,240 DSS - Annualize Cost of Foster Care Omnibus Bill $482,943 $482,943 $405,200,000 $438,700,000 $24,000,000 $24,000,000 Direct Aid - Preliminary Rebenchmarking costs as of Nov. 2019 School Counselors per 2019 Legislation

General Fund $

Health and Human Resources DMAS Medicaid Forecast of Utilization and Inflation DMAS - DOJ DD Waiver Slots CSA – Fund Expenditure Growth Public Education DBHDS - O and M for 56 beds at Catawba Hospital DMAS - Continue funding for MMIS until system certified DMAS - TDO Fund forecast DSS - Federally Required SNAP Eligibility Improvements DSS - Adoption and Foster Care Forecast & COLA DBHDS - Fund VCBR expansion and increased admissions

Major Mandatory Spending Items Total $2.15 billion

67

FY 2021 FY 2022

$54,000,000 $114,000,000 $4,545,000 $4,590,450 $2,752,980 $6,852,673 $1,273,950 $1,273,950 $70,900,000 $42,900,000 State Employee Retirement Plans $25,589,500 $25,589,500 Comp Board - Annualize Ch. 854 Commitments $2,759,370 $2,818,896 $857,742,304 $1,292,228,315 VRS Contribution Rates Public Safety Supreme Court - Increase Criminal Fund Appropriation DOC - Inmate Medical Cost Increases Indigent Defense - Annualize FY 2020 Paralegal Position Costs Commerce and Trade Finance Treasury Board: Increased Debt Service Payments

General Fund $

Grand Total Economic Devel. Incentive Payment Commitments Administration

Major High Priority Spending Items Total $662 million

68

FY 2021 FY 2022

DMAS – Children’s health insurance federal match rate changes & forecast $61,546,991 $86,978,406 DSS – Child Welfare Improvement - Family First, Child Protective Svs. $22,914,233 $24,726,213 DMAS – Behavioral health redesign $8,284,919 $16,862,512 DSS - Child Welfare IT System Improvements $2,002,905 $9,747,506 DBHDS – Add community transition support to address census at state MH hospitals $7,600,800 $8,100,800 DBHDS – Other DOJ Costs for licensing, quality mgmt. and other $7,084,387 $6,786,774 DBHDS – Support enhancements for data warehouse, data analytics & cloud capabilities $4,496,366 $5,918,830 DMAS – Increase nursing services rates $4,433,727 $4,433,727 DMAS – Increase rates licensed mental health professional rates $2,374,698 $2,458,479 DBHDS – Add staffing at Commonwealth Center for Children & Adolescents $765,428 $765,428 DSS – SNAP Error Rate Payment $3,368,116 $510,240 DOE – New - 11.0 FTEs and Creating Va Learner Equitable Access Platform $7,131,000 $6,103,000 DOE -2.0 FTEs for IT Security Compliance & Consultant in Budget/Finance $399,243 $399,243 DOE - Tchr Licensure IT Sys: add Educator Prep Prg & Prof Dev & 1.0 FTE $486,514 $236,514 DOE -IT Online Mgmt of Education Grant Awards (OMEGA) Replacement $600,000 $200,000 DOE -Supplant for 2.0 FTEs that Support State Operated Programs $182,198 $182,198 DOE - Comply with Exec Order #19 - Cloud Migration $1,400,000 $0 Tuition Moderation $30,000,000 $30,000,000 Targeted Undergraduate Financial Aid $15,000,000 $15,000,000 Tech Talent $16,000,000 $16,000,000 Va Tuition Assistance Grant (for every $50.00 increase) $1,000,000 $1,000,000 VMSDEP $800,000 $1,100,000 Virtual Library of Virginia $800,000 $1,000,000

General Fund $

Health and Human Resources Public Education Higher Education

Major High Priority Spending Items Total $662 million

69

FY 2021 FY 2022

• Comp. Board: Fund Commonwealth Attorney's Staffing Standards

$6,500,000 $6,500,000

• Comp. Board: Provide Funding to Restore Staff Position Funding

$119,775 $119,775 DHRM: Funding for Annual Salary Equity Analaysis $200,000 $200,000 Elections: Additional Security Positions $526,045 $526,045 Tax: Funding for Taxpayer Relief Fund Consultant $175,000 $175,000 Tax: Funding for Security Enhancements $469,068 $95,471 DOC: Implement Electronic Health Records at all Facilities $17,113,445 $12,935,649 DOC: Increased Provision of Hepatitis C Treatment $12,637,518 $14,921,449 DOC: UVA & VCU Medical Pilots at DOC Facilities $6,543,970 $6,469,385 Judiciary: Additional Deputy Clerk Positions $3,728,031 $7,456,062 DOC: Staffing Support for New VCU Outpatient Clinic $485,078 $970,156 Forensic Science: Increased Laboratory Equipment Costs $248,000 $368,000 Broadband Initiative $19,000,000 $19,000,000 VEDP Business-Ready Sites Program $4,500,000 $9,500,000 Housing Trust Fund $7,000,000 $7,000,000 VEDP Custom Workforce Development Prog. (Projected $9.7m annual) $0 $4,700,000 DCR: Water Quality Improvement Fund Deposits TBD TBD DCR: VA Land Conservation Fund Deposits $15,500,000 $15,500,000 DEQ: Update Air and Water Monitoring and Compliance Activities $8,816,000 $8,816,000 DEQ: Update Permitting Capacity $1,839,500 $1,839,500 Ag and Forestry: Implement WIP-3 Requirements $673,037 $673,037 DCR: Natural Bridge State Park Operations $413,990 $413,990 GRAND TOTAL: $305,159,982 $356,689,389 Administration General Fund $ Public Safety Commerce and Trade Ag and Natural Resources Finance

Comparison of Available Resources To Identified Budget Drivers

70

$ in millions FY 2021 FY 2022 Biennium Net Resources for Budget Drivers $1,662.7 $2,040.9 $3,703.6 Mandatory/Statutory Spending Drivers $857.7 $1,292.2 $2,149.9 High Priority Drivers $305.2 $356.7 $661.9 Total – HAC Identified Drivers $1,162.9 $1,648.9 $2,811.8 Available Resources After Budget Drivers Funded $499.8 $392.0 $891.8

Capital Outlay Needs Total $1.8 billion

• Due to higher inflation in the construction market, initial bids on

previously authorized projects are greater than anticipated, resulting in cost overruns of about $100 million across all capital pools

• 25 projects previously authorized for planning and ready to go to bid

within the next biennium - $1.3 billion

• 14 new projects related to life safety, code compliance and

infrastructure - $123 million

• 3 projects previously authorized for planning but not ready to go to

bid until later biennia – current cost of $242 million

71

Estimated General Fund Cost of a 1% Salary Increase

72

GF Cost for 1% for Full Year GF Cost of 1% Per Month State Employees (Excluding College Faculty) $26.02 $2.17 College Faculty $9.97 $0.83 State Supported Local Employees $10.05 $0.84 State Incentive for Teachers $45.0 $3.75 Total $91.04 $7.59 ($ in millions)

Note: Any first year salary increase would have to be carried forward into FY 2022, thus doubling cost for the biennium

Final Thoughts on 2020 Session Outlook

• The US economy has grown for 121 consecutive months following the Great

Recession, making it the longest economic expansion

• While some indicators point to a recession, such as a slowdown in manufacturing
• utput and ​a downturn in business investment, continued strong consumer spending

is still stoking the economy

• Virginia’s economic growth has been lagging the nation’s, however this may be

more a result of record low unemployment and the inability to fill jobs that require specific skills

• The revenue outlook reflects stable but slow revenue growth, but we will be able to

meet core funding priorities

• Fiscal policy from Washington could impact Virginia in FY 2022, as the Budget

Control Act of 2019 expires…what’s next?

• The General Assembly has worked hard to achieve a structurally balanced budget,

fully fund its pension obligations, and build up cash reserves

• However, based on an analysis from Moody’s, depending on the size of the fiscal shock, Virginia

may have difficulty weathering a moderate downturn; and, would have insufficient reserves to weather a severe recession

73