The General Assembly’s “money committees” received generally positive reports about state revenues, tempered with uncertainty about broader economic factors, at their annual pre-session retreats in late November. The House Appropriations and House Finance Committees met in Abingdon on November 19, and the Senate Finance and Appropriations Committee held its event in Harrisonburg on November 21-22. In keeping with tradition, both meetings featured briefings about economic conditions, staff revenue forecasts, and presentations about key issues affecting the state budget, such as K-12 enrollment, Medicaid, and infrastructure needs. Staff to both Committees presented revenue forecasts that project substantial increases in state General Fund revenues relative to the forecast embedded in the current biennium budget, which had assumed a mild recession in FY 2024 that did not materialize. However, both staff directors cautioned that preserving structural balance will be a key task for the legislature, as much of the additional revenue is expected to be one-time in nature, and strongly encouraged members to prioritize use of the additional revenues for one-time spending items rather than ongoing commitments.
House Appropriations Outlook
Staff noted that FY 2024 revenues exceeded the December 2023 forecast by $1.72 billion ($1.1 billion after accounting for the $525 million in additional revenues that were assumed in FY 2024 as part of the budget negotiations in May), and that FY 2025 collections through October have continued to overperform the forecast, largely driven by individual income tax collections. Although staff expects some slowing in employment growth and consumer spending, a recession is not anticipated; based on the healthy performance of FY 2025 collections and resilience in key economic indicators, staff forecasts total General Fund (GF) growth of 4.5 percent in FY 2025, moderating to 1.8 percent in FY 2026. These forecast adjustments result in $2.2 billion in additional GF resources above the forecast in FY 2025 and $1.04 billion above the forecast in FY 2026. After factoring in FY 2024 uncommitted surplus revenues, unexpended appropriations, and other adjustments, staff projects $2.6 billion in additional resources in FY 2025 and $1 billion in FY 2026, for a total of $3.6 billion over the biennium.
Staff presented a significant caveat to this relatively sunny forecast, writing, “We are entering an era of change, which brings uncertainty.” Forecast risks identified by staff include higher tariffs, federal spending changes, the timing of Federal Reserve adjustments to interest rates, geopolitical conflicts, and changes to immigration and energy policy.
Staff identified a total of $839.1 million over the biennium in mandatory spending increases, notably in unexpected additional needs in the Medicaid program. In addition to growth in program spending attributable to policy actions by the legislature, Medicaid enrollment has not declined as much as projected after the expiration of the pandemic-era prohibition on disenrollment, which required some FY 2024 expenses to be shifted to FY 2025. Further adjustments may be required based on revenue estimates for the Virginia Health Care Fund (which is partially derived from tobacco taxes and used as a portion of the state’s share of the program). Staff noted several long-term factors to be monitored, including enrollment and utilization trends, as well as potential changes to the program at the federal level. Staff also provided a list of high-priority spending items submitted by state agencies, as well as major policy issues that will likely require additional state investments, such as funding the recommendations of JLARC’s 2023 report on K-12 funding and addressing child care subsidy waitlists. Although substantial resources are anticipated relative to revenue levels in the current budget, staff strongly encouraged members to focus on one-time investments to avoid creating a structural imbalance in future years, as most of the additional revenues will be generated in the first year and carried over as balances in FY 2026.
Senate Finance and Appropriations Outlook
Senate Finance and Appropriations staff pointed to similar economic indicators in depicting an economy that is stronger than projected in December 2023, albeit with job and wage growth moderating. Staff projects GF revenue growth of 3.7 percent in FY 2025 and 2.6 percent in FY 2026, for total GF revenues above the December 2023 forecast of $2 billion in FY 2025 and $991.8 million in FY 2026. When these resource adjustments are added to FY 2024 balances and unexpended appropriations, total GF resources above the current budget base are projected at $2.4 billion in FY 2025 and $991.8 million in FY 2026, for a total of $3.4 billion over the biennium. Staff identified $870.8 million in mandatory spending pressures over the biennium (including the unexpected Medicaid requirements discussed earlier), as well as a series of anticipated priority spending items, including bonuses or salary increases for state and state-supported local employees and teachers, as well as funding for JLARC’s SOQ recommendations.
Similar to House Appropriations staff’s notes of caution, Senate Finance and Appropriations staff listed a series of potential risks to the forecast, including monetary and fiscal policy at the federal level and geopolitical factors such as oil prices and tension with China. Staff strongly encouraged members to allocate the bulk of the additional GF resources that are anticipated in FY 2025 for one-time items and not to increase ongoing spending items beyond the $289.3 million anticipated to be available in FY 2026 for these purposes (after accounting for spending levels in the existing budget and anticipated new mandatory spending), to avoid creating a structural imbalance in FY 2027.
Federal Tax Policy and Virginia’s Budget
The federal Tax Cuts and Jobs Act, which was enacted in 2017, expires at the end of 2025; several expiring provisions that affect individual income taxes were adopted by Virginia and will need to be addressed by the General Assembly. House Appropriations staff suggested that the legislature might want to consider waiting until after Congress acts, which could require state action after the conclusion of the 2025 regular session. The Senate Finance and Appropriations meeting included a presentation by the Department of Taxation on the effects on Virginia of extensions of these policies, as well as the potential revenue effects of the legislature’s action in 2023 to adopt rolling conformity of Virginia’s income tax structure to federal tax changes, with certain guardrails. Marcia Howard, Executive Director and Executive Editor of Federal Funds Information for States, also discussed potential impacts to states of possible changes to federal spending (including potential reductions in federal Medicaid contributions) and the process by which spending reductions might be enacted.
Presentations on other topics of interest at the House Appropriations retreat (including Medicaid, behavioral health, economic development, and transportation) may be found at this link. Senate Finance and Appropriations retreat materials (including presentations on K-12, public safety, health and human services, and infrastructure, among other topics) are posted at this link.
VACo Contact: Katie Boyle