1. 1 The Potential Impacts of a Shrinking State Budget VACO Finance Steering Committee Updated August 19, 2009

2. 2 State Budget Summary Governor announced $300 mil. FY09 GF revenue shortfall and expected additional $1.2 billion FY10 GF shortfall, with only $287 mil. in Rainy Day funds available to cushion reduction. Governor will announce FY10 state budget cuts by Labor Day using executive authority. Reduced federal stimulus in FY11 (and expiring after) and a weak economic recovery will result in even tougher 2010-12 state budget. - $1,304 mil. ARRA for FY10; $811 mil. ARRA for FY11.* Despite recent federal match rate increase, Medicaid and other HHS cost pressures continue, putting additional strain on the state budget. Because of falling real estate and car values, and reduced sales and business taxes and fees, it will be difficult for localities to continue backfilling declining state support. Major policy changes will be required to align funding levels with revenues, unless state and/or local taxes are raised significantly. -Even with little re-benchmarking increases, K-12 funding policies will most likely be modified. * Includes state appropriated ARRA that effectively supplants GF

3. 3 9.2 percent decline in state GF revenue for FY09 and expected 1.6 percent decline in FY10, meaning more budget cuts above the over $4 billion already taken. Need 10+ percent growth in FY11 to fund existing spending policies in the 2010-12 biennium.

4. 4 Over Next Few Years, State Budget Will Continue to Be Under Severe Pressure FY10 GF revenues will be $750 mil. below FY06 GF revenues. K-12, Medicaid, and Other HHS programs (60% of GF) have grown the fastest in last 10 years. Virginia’s Medicaid program hard to reduce since it already ranks 48 th among all states. - $962.5 mil. available in ARRA Medicaid federal match increase for 2008-10, only $322 mil. available for FY11. State K-12 aid already reduced 10 percent in FY10. $365 mil. federal ARRA only partial and temporary offset. Other local aid primarily reduced through the $50 mil. “flexible” cut. However, budget still not yet right-sized for new revenue reality – “one-times” used for half of 2008-10 budget balancing. Transportation program also shrinking rapidly and big concern.

5. 5 Where Has the State Budget Grown? 10 Year Growth in the GF Budget * * Appropriated ARRA included where GF will be needed to keep current policy, primarily SFSF K-12 and Medicaid match increase

6. 6* Another $109 mil. kept in reserve for FY 10.

7. 7 General Fund Tax Changes Over Last 10 Years Cost $1.9B in 2008-10 Biennium

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9. 9 State Aid to Localities, Concentrated in 5 Programs, Has Already Been Cut

10. 10 Education Funding Summary The State already reduced FY10 K-12 funding by over $600 million GF – only partially offset by federal stimulus funding. Expect additional FY10 K-12 cuts because of an est. further $1.1 bil. GF shortfall. K-12 is 35% of state GF. FY10 support position funding will not likely be restored. State and local revenue problems will be compounded when federal stimulus funding ends after FY11. Localities are holding Virginia’s public education system together by spending $3 billion more per year than required by the state. -In total, localities spend 82% more than required by state. -This excess pays for 22% of all K-12 spending. Due to falling real estate and car values, and reduced sales and business taxes and fees, it will be difficult for localities to continue backfilling declining state support. Even with only minimal preliminary rebenchmarking costs ($138 mil.), major policy changes will be required to align funding levels with revenues, unless state and/or local taxes are significantly raised.

11. 11 FY 2010 K-12 Direct Aid* Changes *DOE distributions from 2009 session, including lottery, VPSA and other non-general funds

12. 12 2010-12 Preliminary K-12 Rebenchmarking of $138 Million Reflects the Recession Major Inputs that Increased Cost Compared to 2008-2010: –Enrollment Projections –Free Lunch Eligibility –Federal Revenue Deduct Per Pupil Amount –Pupil Transportation Major Inputs that Increased Cost Compared to 2008-2010: –Enrollment Projections –Free Lunch Eligibility –Federal Revenue Deduct Per Pupil Amount –Pupil Transportation Major Inputs that Decreased Cost Compared to 2008-2010: –Funded Instructional Salaries –Funded Support Salaries –Special Education Child Counts –Statewide Average SOL Failure Rate –Inflation Factors –Health Care Premium –Textbook Expenditures Major Inputs that Decreased Cost Compared to 2008-2010: –Funded Instructional Salaries –Funded Support Salaries –Special Education Child Counts –Statewide Average SOL Failure Rate –Inflation Factors –Health Care Premium –Textbook Expenditures Source:July 22, 2009 DOE Presentation

13. 13 The Severe Revenue Shortfall Makes It Likely the State Will Alter Current K-12 Policies in the 2010-2012 Budget There are seven key components to the SOQ funding formula: -Number of students -Staffing ratios for teachers and other funded positions -Salaries of teachers and other funded positions -Fringe benefit rates -Standard and prevailing support costs -Inflation factors -Prevailing federal revenues related to support costs Approximately 79 percent of SOQ funding is for salaries and benefits FY10 budget already reduced support cost funding by $341 mil. per year

14. 14 “Standards of Quality” Already Push Localities to Pay $3 Bil. More for Education Than Required State does not pay for all Board of Education approved standards. The state methodology (LWA) overemphasizes the generally lower values in the more numerous/smaller school divisions in calculating prevailing costs for teacher and support positions. FY08 base year for 2010-12 re-benchmarking does not reflect real-time salary costs. There were also no state teacher compensation supplements in 2008-10. Most localities go beyond state mandates, especially for at-risk student funding, including lowering class sizes to help meet SOL and SOA requirements. Expect the new state support position cap to increase local overfunding.

15. 15 Examples of Previous Proposals for State K-12 Budget Reductions Adopted One-third reduction in support position funding (1:4.03 instructional positions) adopted for FY 10 appropriations ($341 mil.). Still considering policy for 2010-12. Proposed 2004 Governor proposal to deduct 100% of federal revenue from SOQ ($177 mil.) 2004 House proposal to lower state contributions for teacher retirement by capping the contribution rate. 2008 House proposal to recognize only state funded salary increases in re-benchmarking process ($227 mil.). 2008 House proposal to remove cap on the federal deduct ($22 mil.) 2009 Committee discussion to defer state textbook funding ($79 mil.) 2009 Governor’s proposal to supplant remaining additional lottery support for school construction and operating costs ($61 mil.)

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17. 17 Large Increases in Real Property Tax Revenues are Ending ?

18. 18 Reprint from John Layman presentation to June 12 VML Leg, Comm.

19. 19 Shrinking Transportation Program In June, the CTB approved a budget and new six-year improvement program for 2010-2015 that: –Had $3.2 billion less for highway construction than the 2008-2013 program –20% less transit operating support than the 2008- 2013 program On August 19, the Governor announced an additional $900 million six-year reduction in transportation revenues.

20. 20 Major Policy Changes Proposed for FY09 - FY15 Six-Year VDOT Program Construction program primarily a federal match program and largely eliminates state formula distributions for unpaved roads, primary, secondary and urban systems. Adequate secondary road maintenance funding no longer available if all federal funds are to be matched. Surface Transportation Program federal formula funding will no longer be distributed by locality starting in FY11. CTB will do the programming. State can support no more than $2 billion in debt - unable to issue all $3 billion in bonds authorized in 2007.