Governor McAuliffe introduces revised FY 2018 and new 2018-20 biennium budget proposal

The FY 2018 “Caboose” Bill

The FY 2018 “Caboose” bill contains $294 million in increased 2016-18 biennium General Fund (GF) revenues from last year’s adopted budget. The increased resources are due mostly to the higher base resulting from the $137 million FY 2017 surplus. Growth in FY 2018 general fund revenues at 3.4 percent was left unrevised in the introduced “Caboose” budget. Transfers in FY 2018 were revised down $18.1 million from last year’s adopted budget, while available balances increased. An additional $40 million each in Lottery proceeds and Virginia Health Care Fund (VHCF) revenues are also now expected for FY 2018. These non-general funds are used for state K-12 education and Medicaid expenditures, respectively.

The FY 2018 revised budget includes net new GF spending of $101 million. New spending in FY 2018 primarily includes: 1) an additional $121 million GF on top of last year’s $35 million, for a proposed cash reserve of $156.4 million GF; and 2) $46 million GF (plus $40 million in increased VHCF) in unanticipated Medicaid utilization and inflation spending. FY 2018 spending decreases included a K-12 general fund reduction of $57.3 million, partially offset by $40 million in additional expected lottery proceeds, and $24.2 million in reduced Treasury Board interest payments. After adjusting for the proposed FY 2018 new spending and available unspent balances, a $223.5 million GF balance forward is available to spend in the 2018-20 biennium.

2018-20 Biennium

Total general fund revenues are expected to grow 4 percent each year of the 2018-20 biennium. After adding transfers, total general fund growth drops to 3.8 percent and 3.9 percent respectively. However, as indicated in Table 1, total general fund appropriations are only growing by 2.9 percent in FY 2019 and 3.3 percent in FY 2020. The lower growth in GF appropriations results from the loss of the $272.5 million Rainy Day Fund withdrawal used to fund operating appropriations in FY 2018.

The 2018-20 proposed budget relies on a slightly increased revenue forecast and even more importantly, a much lower forecast of Medicaid spending growth than has been recorded over the last 20 years. Medicaid spending is forecast to grow only 2.3 percent in FY 2019 and 3.4 percent in FY 2020. This contrasts with the 7 percent average growth experienced consistently over the last 20 years and the $86 million in additional funding that had to be provided in the caboose bill for FY 2018. The low growth forecast is primarily from an expectation that a large expansion of managed care on January 1, 2018, will drive cost savings in the Medicaid program. Medicaid expansion under the Affordable Care Act is also embedded in the budget, saving an additional $421 million. Medicaid expansion savings are assumed from the enhanced federal match, inmate medical costs, and substance abuse and mental health treatment. The low forecast and Medicaid expansion savings result in no projected growth in Department of Medical Assistance Services Medicaid spending in FY 2019, and only $145 million in FY 2020. It is likely the General Assembly will take a close look at the Medicaid budget.

Another large initiative in the Governor’s introduced budget is the expansion of the voluntary “Revenue Cash Reserve.” The Governor is proposing $156.4 million for FY 2018, $50 million for FY 2019, and $220.7 million for FY 2020. This would bring the state’s cash reserve up to $427.1 million by FY 2020, or exactly 2.0 percent of total general fund appropriations. Current GF revenue growth projections do not call for a “Rainy Day Fund” reserve for FY 2018, but do indicate small reserve amounts of $54 million for FY 2019 and $69 million for FY 2020. Deposit of these amounts will not be needed until the following biennium.

The other large initiative in the Governor’s 2018-20 biennium budget is a proposed two percent salary increase for state employees and state-supported local employees ($49.4 million), and for SOQ funded school positions ($51.3 million), beginning December 1, 2019.

2020-20 Biennium spending proposals of particular interest to localities:

Direct Aid to Public Education

K-12 education is proposed to receive about 34.5 percent, or $636 million of the additional $1,843 million total new GF spending in the 2018-20 biennium above FY 2018 spending. This is slightly more than the 30 percent K-12 receives of total general fund spending. Lottery earnings for public education are estimated at $586.7 million per year.

K-12 Direct Aid GF spending increases primarily included

• $487.5 million GF for normal Standards of Quality rebenchmarking.
• $42.7 million GF to update sales tax revenues for public education and $5.2 million for sales tax distributions based on school-age population.
• $80 million GF to offset decreased Literary Fund support for teacher retirement.
• $51.3 million GF for the state share of a 2 percent salary increase starting December 1, 2019.
• $11.5 million GF in FY 2019 for “no loss” funding in FY 2019 compared to FY 2018. This funding holds localities harmless that otherwise would lose state funding in FY 2019 relative to their FY 2018 allocations.
• $7.7 million GF in FY 2020 for one full‐time principal in every elementary school based on the Virginia Board of Education’s recommendations to amend the Standards of Quality.
• $7.1 million GF in FY 2020 for additional at-risk student funding based on numbers of students qualifying for free lunch.

K-12 Direct Aid GF spending reductions primarily included

• $80.4 million GF reduction due to increased Lottery proceeds projections.
• A reduction in the teacher retirement rate from 16.32 percent to 15.68 percent for a state savings of $45 million.
• $5.5 million GF in savings from revised lower student enrollment projections
• $1.7 million GF in savings from new LCI calculations.

Dept. of Housing and Community Development

• $49 million GF for the GO Virginia Initiative to foster public‐sector growth and job creation through state incentives for regional collaboration by business, education, and government.
• $12.8 million GF per year for the Virginia Enterprise Zone Program.
• $11 million GF to provide support for the Housing Trust Fund.
• $7.5 million GF to establish the Virginia Grocery Investment Fund to encourage the development of supermarkets and other healthier food retail in underserved communities.
• $4.5 million GF for the Brownfields Rehabilitation program.
• $4 million GF for the Virginia Telecommunication Initiative to enhance broadband infrastructure – $1.5 million increase from the 2016-18 biennium.
• $3 million GF for the Removal of Derelict Structures Fund – a $1 million decrease from the 2016-18 biennium.
• $1 million GF for the Virginia Main Street Program

Compensation Board

• Language and funding have been included to support a 2 percent across-the-board salary increase effective December 1, 2019 (FY20), for constitutional officers, regional jails and their employees, provided that the governing body uses the added funding to support such salary increases; this increase mirrors the percentage and timing of a like salary increase proposed for state employees.
• Additional per diem funding of $374,114 in FY19 and $1.4 million in FY20 is provided based upon revised local- and state-responsible inmate population forecasts.
• No performance or compression based increases are included for constitutional officers and their employees in FY19 or FY20; no additional funding to support qualified and unfunded new participation in approved career development programs is included for FY19 or FY20.
• No additional funding or positions are included to address staffing standards, including law enforcement, court services, or jail overcrowding.

Health and Human Services

• $54.2 million GF over the biennium to fund anticipated caseload and expenditure growth in services provided through the Children’s Services Act (CSA). The majority of growth in the program is attributed to an increase in special education private day programs. The budget provides $250,000 for the Office of Children’s Services to contract for a study on rates paid by localities to special education private day programs, to include a review of the adequacy of those rates and recommendations for implementing a rate-setting structure.
• $45 million GF to add 825 Community Living (CL) and Family and Individual Supports (FIS) waiver slots as required by the Department of Justice Settlement Agreement.
• $6 million GF to develop an Electronic Health Records System in the Department of Health. This new system will allow the agency to efficiently and effectively operate its preventive health clinics, collect standard demographic information, and provide the capacity for electronic orders for laboratory tests, results, and prescriptions.
• Provides $6.9 million GF to transition individuals currently on the extraordinary barriers to discharge list at state mental health facilities into the community. These funds are phased in the first year.
• Provides $11.8 million GF for the staffing costs at Community Services Boards of complying with same‐day access legislation passed in the 2017 session. State law requires that all CSBs offer same‐day access to behavioral health assessment services by July 1, 2019. Funding for 18 CSBs is currently in the 2018 base budget. The funds in this amendment will provide the same support to the remaining 22 CSBs.
• Provides $3.7 million GF in FY 2019 and $7.4 million GF in FY 2020 to implement primary care screening at all CSBs by July 1, 2019, as required by statute.
• Provides $10.2 million GF for the implementation of electronic health records at state behavioral health facilities and Southeastern Virginia Training Center. The agency currently operates an electronic health records system at three facilities. These funds will allow for the expedited implementation at the remaining nine facilities.

Other

• $6.6 million in FY19 and $13.8 million in FY20 for increased state assistance to police departments (the HB 599 program).
• $22.5 million GF for the mandatory deposit to the Water Quality Improvement Fund (WQIF) associated with the FY 2017 year‐end surplus. $19.8 million is designated for Virginia cost‐share programs and technical assistance provided through the Virginia Natural Resources Commitment Fund, and $2 million is designated for the WQIF Reserve. The remaining $750,000 remains in the WQIF for specified statewide purposes.
• Authorizes the sale of $110 million in bonds in FY 2020 to address the public transit fiscal cliff. The Department of Rail and Public Transportation has stated that debt service will be paid out of the Priority Transportation Fund, which currently serves HB3202 CPR bond debt service and that the debt authorization will not impact any planned projects or funding levels for SMART SCALE or other grant programs.
• Provides $150 million in dedicated, on-going capital funding for WMATA to address state of good repair – Virginia’s share under WMATA capital formula.

-$85 million from existing NVTA revenues in recognition that $7B in projects and on-going revenues have been put in place over the last four years without any regional funding
-$65 million from restoring key regional taxes back to rates intended by General Assembly in 2013 – Grantor’s Tax and Transient Occupancy Tax back to levels from the HB2313 Conference Report and regional fuel tax floor
-Funding is contingent on (i) implementation of “Reform Board” as recommended by Secretary LaHood for 3 years and (ii) the District and Maryland providing their share of the $500 million
-Allows the Northern Virginia Transportation Commission to appoint non-elected officials to the WMATA Board
-Also provides $19 million in dedicated, on-going funding for VRE and restores PRTC regional fuels tax to help fund VRE 2040 systems plan

VACo Contact: Dean Lynch, CAE