2016-18 Budget Issues Virginia Association of School Superintendents

Fiscal Analytics, LtdOctober 20, 2015

22

The Good News: Additional 2016-18 Revenues Likely - Even With FY15 Surplus Consumed by Rainy Day Fund

Fiscal Year

Official Growth

Official GF Revenues

Adj. Est. Growth

Adjusted GF Revenues Difference

2014 -1.6% $16,411 -1.6% $16,411 $0

2015 4.7% $17,186 8.1%* $17,736* $550

2016 3.1% $17,721 3.1% $18,289 $568

2017 2.1% $18,092 2.1% $18,673 $581

2018 3.7% $18,755 3.7% $19,364 $609

* Preliminary Actual, FY 2015 surplus consumed by Rainy Day Fund constitutional deposit requirements

3

Will General Fund Growth Rates Perform Better than Expected?

• Accurate revenue forecasting has proven to be especially difficult in recent years.

- Income tax withholding (62% of GF) currently growing about 4-5 percent. Will federal budget issues (especially defense spending cuts) slow Virginia’s economy again?

- Increased federal tax rates in CY 2013 and strong stock market gains contributed to large swings in non-withholding income tax growth rates over the last 3 years. Non-withholding (16% of the GF) will continue to be a difficult revenue source to forecast.

- GF growth of 8.1% is overstated (about 1%) for FY 15 due to withholding payment and other timing issues and will reduce FY 2016 revenues by a like amount.

• Even though Virginia is still underperforming overall U.S. employment and income growth, the VA economy is improving from last year.

- NoVa employment growth is bouncing back (2.6% Yr over Yr Augustgrowth, stronger professional/business services).

4

Virginia Payroll Employment

4

-6

-5

-4

-3

-2

-1

0

1

2

3

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

YoY % Chg (SA) U.S.

Virginia

August 2015US: 2.1%VA: 1.1%

Source: Bureau of Labor Statistics/Haver Analytics

55Source: U.S. Bureau of Labor Statistics

Utah

Flor

ida

Was

hing

ton

Califo

rnia

Mas

sach

usett

s

Indi

ana

Mich

igan

Arizon

a

Conne

cticu

t

Color

ado

Distric

t of C

olum

bia

Kentu

cky

Iowa

Sout

h Dak

ota

Alabam

a

Delaware

Rhode

Islan

dOhi

o

Main

e

Penn

sylv

ania

Nebras

ka

Illin

ois

New M

exico

Wyo

ming

Alaska

Wes

t Virg

inia

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

August 2015 States’ Year-over-Year Employment Growth

2.1% U.S. Avg

6

Virginia Wages and Salaries

6

-6

-4

-2

0

2

4

6

8

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

YoY % Chg U.S.

Virginia

2Q: 2015US: 4.3%VA: 3.1%

Source: Bureau of Economic Analysis/Haver Analytics

7

Dec-0

7

Apr-0

8

Aug-0

8

Dec-0

8

Apr-0

9

Aug-0

9

Dec-0

9

Apr-1

0

Aug-1

0

Dec-1

0

Apr-1

1

Aug-1

1

Dec-1

1

Apr-1

2

Aug-1

2

Dec-1

2

Apr-1

3

Aug-1

3

Dec-1

3

Apr-1

4

Aug-1

4

Dec-1

4

Apr-1

5

Aug-1

5(2.0)

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Improving Growth in Individual Income Tax Withholding (62% of GF; 12 Mo. Moving Avg % Growth Thru Sept.)

% Growth

8

Non-Withholding Income Tax Is a Volatile Revenue Source*

* Note: % of total GF revenues: 15.4% in FY 14; 17.1% in FY 15

FY 2014 Budget FY 2015 Budget FY 2016 Budget FY14-16 over

FY14 x 2

Legislative and Executive Dept's 103.2 109.0 107.7 10.3

Judicial Dept. 425.2 452.6 455.4 57.6

Administration/Comp Board 654.1 689.6 680.5 61.8

Treasury Board GF Debt Service 608.5 672.1 683.7 138.7

Other Finance/Technology 171.8 179.8 181.5 17.5

Rainy Day Fund 339.6 372.7 - (306.5)

Car Tax Reimbursement 950.0 950.0 950.0 -

Commerce and Trade 183.3 181.9 197.0 12.3

Agriculture / Nat. Resources 144.0 184.3 174.4 70.7

K-12 Education/Central Office 5,292.7 5,456.5 5,615.3 486.5

Higher & Other Education 1,782.1 1,813.6 1,865.5 114.9

DMAS Medicaid 3,519.8 3,694.4 3,987.2 642.0

Other Health & Human Services 1,541.5 1,646.1 1,658.1 221.1

Public Safety & Veterans/HS 1,699.0 1,802.8 1,836.1 240.8

Transportation 42.0 13.2 69.1 (1.7)

Central Appropriations 247.2 20.4 160.2 (313.8)

Independent Agencies/Capital 1.2 1.4 142.6 141.6

Total GF Appropriations 17,705.2$ 18,240.2$ 18,764.2$ 1,593.9

GF Resources 17,304.1$ 18,301.0$ 18,767.3$

Balances 186.4$ 1.9$

Unspent Balance 247.2$ 5.1$

2015 Session Adopted Budget

9

Current 2014-16 GF Appropriations $1.6 Bil. Above its FY 14 Base

101010

2016-18 State GF Budget: Unless Growth Estimates Decline, There Should be Some Flexibility Beyond K-12 Rebenchmarking and Medicaid

• 2016-18 biennial GF base budget about $37.5 billion. Available GF resources (balances, revenues, transfers) of about $39.7 billion assuming current forecasted growth rates (i.e., $2.2 bil. above base budget). Additions to base budget could include:

- Initial K-12 rebenchmark ($341 million – net of $47 mil. VPI non-participation);Final rebench includes: Updated LCI, enrollment, VRS, lottery and sales tax

revenues

- Medicaid inflation and utilization (5% growth=$600 mil; 7% growth=$850 mil)

- Higher education base funding increases and initiatives.

- Other health & human service increases, such as behavioral health enhancements.

- Additional debt service for already authorized debt. New debt capacity $550mil./yr. Cash for capital spending?

- Increased employee health care costs. Restore agency cuts and one-time reductions?

- Salary increases for state employees, teachers, faculty?

- Accelerate full funding of VRS? Current projected 2016-18 teacher rate of 14.76% represents 90% of full contribution rate needed.

- Restore spending cuts for local-administered, state-priority programs, including K-12?

- Funding for new initiatives, such as “GO Virginia”?

- Tax policy initiatives such as repealing the accelerated sales tax payment, or new economic development incentives?

11

Summary of 2016-18 Initial K-12 Rebenchmarking

2016-18 $ Mil.

Prevailing instructional salaries from base year FY 12 to FY 14 108.7

Prevailing support and central office salaries 73.5

Prevailing non-personal support costs (74.8)

Reduction in support position cap ratio to 1-4.19 (25.3)

Reduced federal revenue deduct 53.7

Prevailing health care premiums 42.6

Update textbooks per pupil amount 15.4

Update pupil transportation 8.4

Special education child count 10.1

Update enrollment counts 22.0

Update SOL failure rate and free lunch percentages 21.3

Update ESL, remedial summer, categorical, incentive, and lottery accounts 63.5

Net inflation adjustments 29.1

Net other (6.9)

Total Initial Rebenchmarking* 341.3

* Does not include $46.7 m VPI nonparticipation

121212

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$3,983 $4,232 $4,408 $4,539 $4,890 $5,145 $5,508 $5,504 $5,423 $5,371 $5,549 $5,777 $5,823

$3,337$3,391

$3,527$4,007

$4,175$4,725

$4,813 $5,082$4,399 $4,303 $4,355

$4,606 $4,635

$516$564

$617

$656$690

$714$716

$729$1,198 $1,119 $1,065

$875 $784

Actual Funding Sources for K-12 Education in Virginia(Per Pupil $)

FederalStateLocal

Source: DOE Superintendent’s Annual Report, Table 15.

$11,315 $11,242

13

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016$3,000

$3,200

$3,400

$3,600

$3,800

$4,000

$4,200

$4,400

$3,491

$3,400 $3,392 $3,407

$3,721

$3,841

$4,156

$4,082

$4,275

$4,012

$3,549

$3,471

$3,606 $3,591

$3,655 $3,647

Real Inflation-Adjusted State K-12 Appropriations Below 2005(FY 2001 $ Per Pupil - All State Appropriated Funds)

Sources: VA Dept. of Education Direct Aid Entitlement Calculation Templates, and Dec. 17,2014 GACRE Report (CPI) Secretary of Finance

14

2007 2008 2009 2010 2011 2012 2013 2014 2015 20160.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Medicaid Costs Squeezing K-12 Funding(% of State GF)

K-12 Direct Aid

DMAS Medicaid

FY 2006-15: GF Medicaid up 79%; GF DOE direct aid up 18% (adjusted for Lottery switch to NGF).

15151515151515151515

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016$0

$100

$200

$300

$400

$500

$600

$700

$800

… As is Growing State GF Debt Service

Fiscal Year

$ M

illio

ns

Overall State Aid to Localities Declining as a Percent of the GF BudgetGF State Aid to Localities ($ Mil.)

FY 2009 FY 2012 FY 2014 FY 2015 FY 2016Direct Aid to K-12 $5,607.6 $4,903.1 $5,240.3 $5,405.4 $5,560.3Health and Human Services 888.4 822.7 791.7 810.1 846.8 CSA 299.7 245.2 217.2 217.4 217.4 Community MH/MR Services 249.4 269.0 269.3 287.3 317.1 Local Social Services Staff 117.4 111.4 115.3 112.1 114.4 Community Health Programs 117.6 109.3 107.2 110.6 115.1 Welfare Services and Programs 104.3 87.8 82.7 82.7 82.8Public Safety 734.3 670.0 687.9 713.2 704.2 Local Sheriffs Offices 406.1 396.9 411.3 431.2 436.0 Local Police Depts HB 599 197.3 172.4 172.4 172.4 172.4 Local Jail Per diem 80.1 54.5 59.4 63.9 50.1 Assistance for Juvenile Justice 50.8 46.2 44.8 45.7 45.7 Constitutional Officers $155.3 $143.8 $145.8 $152.4 $152.5 Car Tax 950.0 950.0 950.0 950.0 950.0Aid-to-Locality Reduction (50.0) (60.0) 0.0 (30.0) 0.0 Total Local GF Aid $8,285.6 $7,429.6 $7,815.7 $8,001.1 $8,213.7 Total GF Appropriations $15,943.0 $16,556.9 $17,705.2 $18,240.2 $18,764.2

52.0% 44.8% 44.1% 43.9% 43.8% 16

171717171717

State Support For Locally-Administered Programs Has Fallen Over Time

17Source: APA Comparative Reports on Local Revenues and Expenditures, Fiscal Years 2000-2014

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 201426.0%

27.0%

28.0%

29.0%

30.0%

31.0%

32.0%

33.0%

34.0%

State Categorical Aid as % of Local Expenditures

18

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Localities Only Beginning to Recover from Real Estate Recession

Total Local Revenues

Real Property

Note: real property tax rate changes from FY 13-15: 20 cities increased, 2 decreased; 57 counties increased, 7 decreased .

Since Recession, Local Revenues & Expenditures Have Not Kept Pace with Inflation* / Population Growth

19

* Inflation as measured by the CPI grew 10.5% from FY 2009-14

Note: 40% of locally-generated and 54% of all local-available revenues spent on K-12.

Locally-Generated

Revenue

State/Federal Revenue for

LocalitiesAll Revenue

for LocalitiesO&M

Expenditures PopulationPopulation/

Inflation*

VA Cities 3.9% -1.4% 1.7% 0.1% 3.7% 14.2%

VA Counties 9.0% 6.8% 8.2% 8.3% 5.3% 15.8%

FY 2009 - FY 2014 Growth Comparison

202020

State Standards of Quality Funding Do Not Reflect True Costs of Local K-12 Divisions

• State does not pay for all Board of Education approved current practices and standards; overemphasizes the lower values in the more numerous, smaller/rural school divisions in calculating prevailing costs; does not reflect real-time costs in re-benchmarking; and no longer pays prevailing support costs.

• Funding teacher salaries at the national average (VA about $7,000 less than the national avg) and providing funds for prevailing support costs would require an additional $750 million/year ($625 per pupil).

• Localities go beyond state mandates to meet SOL and SOA requirements -- spending $6.94 billion for school division operations in FY 2014 (56 percent of state-local K12 funding) -- or $3.6 billion (110%) above Required Local Effort (RLE).

• All school divisions exceeded RLE in FY 14.Divisions up to 25% Above RLE 10

Divisions Exceeding 25% to 75% 54

Divisions Exceeding 76% to 100% 26

Divisions Exceeding 100% RLE 45

2121

State K-12 Policy Changes Adopted to Reduce Funding

21

Major K-12 Funding Policy Changes Since 2008 Session SessionBiennial

$ in Mil.

Cap Funding for Support Positions 2009 ($754)

Eliminate School Construction Grants 2009 ($55)

Adjust Health Care Participation Rates 2010 ($269)

Eliminate Equipment, Travel, Misc. Expenses From SOQ Calculation 2010 ($244)

Include $0 Values in Linear Weighted Avg Calculation 2010 ($79)

Eliminate Lottery Support for School Construction 2010 ($67)

Drop Lowest Tier From K-3 Class Size Calculation 2010 ($36)

Extend School Bus Replacement Cycle From 12 to 15 Yrs 2010 ($19)

Eliminate Enrollment Loss Assistance 2010 ($16)

Eliminate Non-personal Inflation Update (not originally intended as permanent, partially offset in 2012-14 biennium) 2012 ($109)

Eliminate COCA for support positions in NoVa 2012/14 ($50)

Use Kindergarten as Proxy for 4-yr-old Pre-K Count 2012 ($27)

Total Major Policy Changes Since 2008 ($1,725)

More Difficult and Diverse Student Population to Educate

More At-Risk Students Changing Student Demographics

22

2007 2008 2009 2010 2011 2012 2013 20140.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

26.0% 26.0%27.3%

30.1%32.1% 32.9% 33.5%

34.5%

Percentage of Free Lunch Students in VA

Am-Indi

an/A

sian

Hispan

icBlac

kW

hite

Unspe

cified

/2 or

mor

e0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

VA Public K-12 Student Population by Race

2003-04

2013-14

23

The Achievement Gap Persists

32 Percent of All Schools Are Not Fully Accredited (2014-15)

Fully Accredited 1249

Provisionally/Conditionally Accredited 23

Accredited with Warning 541

Accreditation Denied 13

2014-15 SOL Pass Rates

English Math

Asian 90 93White 86 85Hispanic 71 73Black 65 67Economically Disadvantaged 66 68Limited English Proficiency 61 67

24

VASS Spring 2015 Superintendent Survey“Great Recession” Spending Cuts Are Still Felt

92 percent of school divisions responded. Key findings included:

- 10,180 FTE reduced, including 5,138 teachers.

- 87% of respondents who reduced staff have added duties to the remaining staff

- 77% of respondents believe that teachers have left their division due to their salary.

- 20% have reduced compensation and 44.5% of divisions have reduced employees’ benefits since FY 2009.

- 71% of divisions have increased class sizes since FY 2009.

- 23% of divisions closed schools for financial reasons.

- 52% of divisions reduced curricular programs.

- 29% of have reduced co-curricular programs.

25

JLARC Report on K-12 Spending Efficiency and Effectiveness Agreed With VASS K-12 Funding Assessment

• Like 29 other states, Virginia spends less to educate each student than a decade ago – 7% less per student adjusted for inflation (FY 2005-14).

- Non-instructional spending was reduced the most. Health insurance spending increased 66%.

• Efficiency of instructional spending could not be assessed.• More than 80% of divisions reported challenges in recruitment and retention. High

turnover may reduce instructional effectiveness. Data not available to assess whether teacher turnover is increasing statewide. Recommends VDOE track teacher turnover.

• Teacher support services declining. Recommends VDOE provide more teacher support services.

• Divisions spent 30% less to operate and maintain facilities since 2005. 80% of divisions deferred bus purchases. Recommends VDOE provide centralized best practices for facilities and transportation management.

• Online learning is a small but growing part of K-12 education. Most effective for students with strong motivation and time management skills. Can cost less than physical schools.

262626

Will Tax Policy Be On the Agenda?

• Tax policy reductions occur most often when Virginia’s revenues are growing.

• Governor recently indicated he is going to have Secretary of Finance Ric Brown look at the state tax code to see:

1) “Is it as pro-business as it should be?”

2) “Is there a way we can cut some of these rates?”

27

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Inco

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State S

ales

MV S

ales

Corpo

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Moto

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Lottery

Pro

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Insu

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Prem

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Recor

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MV L

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co$0.0

$2,000.0

$4,000.0

$6,000.0

$8,000.0

$10,000.0

$12,000.0

$14,000.0

$12,328.7

$4,582.7

$890.4 $831.9 $722.5 $557.6 $451.0 $388.3 $311.1 $291.2 $176.3

FY 2015 Major State Revenue Sources ($ Mil.)

282828282828282828

Over Last 20 Years, Tax Changes Have Reduced Biennial State Revenues by $3.1 Bil.*

Enacted/Amended Biennial ($ Mil.)Age Subtraction (net of 2004 means testing) 1994 and 2004 ($581)Car Tax Reimbursement 1997, 2003 ($1,900)Subtraction for UI/Military/Gov't Empl 1999 ($74)Historic Rehab Tax Credit 1999 ($152)Coalfield Employment Tax Credits 2000 ($68)Low Income Tax Relief 2000, 2004, and 2007 ($412)Land Preservation Tax Credit 2003 ($200)Impose 2.5% Sales Tax on Food 2004 ($1,094)Estate Tax Repeal 2009 ($280)Other Tax Changes since 1999 1999-2014 ($182)State Tax Reductions since 1994 ($4,942)

Sales Tax Presence in Virginia Amazon 2012 $41Sales tax on satellite TV equipment 2014 $19Add 1/2 percent sales tax on non-food items 2004 $986Recordation Tax Increase (net of 3 cents to transp.) 2004/2007 $210Tobacco Tax Increase 2004 $285Close 2 Corp. Tax Loopholes/Eliminate ST Exem for Pub. Svc. Co. 2004 $286State Tax Increases since 1994 $1,827

Net State Tax Change Since 1994 ($3,115)

Source: Senate Finance Committee Retreat, Revenue Outlook, Nov. 20 , 2014

* Does not include GF tax shifts to transportation, such as insurance premiums and sales tax.

29292929

Local Revenues Dominated by Property Taxes

Source: Auditor of Public Accounts Comparative Report of Revenues and Expenditures 29

Note: “All Other Taxes” includes, transient occupancy, MV license, recordation, bank stock, tobacco, admission, severance, franchise license, other