May 15, 2024
Lawmakers Backed Off Plan to Pay for Critical Investments. How Did They Fund Them Anyways?
The governor recently signed a budget that maintained key investments originally passed by the General Assembly (GA) in March that makes important progress in K-12 education, affordable health care, and much more. These investments were initially made possible by rejecting Governor Youngkin’s proposed tax package that would have lined the pockets of millionaires and billionaires and improving his initial proposal to close the ‘tech tax loophole’ by ensuring corporations pay more of their fair share in this modernization of our tax code.
Despite backing off of the proposal to modernize our tax code, which would have provided the resources to sustain critical investments, lawmakers retained almost all new spending from the GA budget. (The decision to not modernize the tax code reduced funding for Direct Aid to K-12 by $169 million since a portion of sales tax is dedicated to K-12 public education.) While TCI applauds these long overdue investments, budget negotiators relied on a variety of tactics that may jeopardize our ability to support these critical investments in the future. In order to maintain and build on these decisions, lawmakers must update our tax code to reflect the economy we live in today and make sure millionaires and corporations pay their fair share come tax time.
Losing out on new revenues
The lawmaker-improved proposal to modernize our tax code would have added $1.05 billion to the General Fund (GF), the part of the budget over which legislators have the most flexibility, to invest in key priorities. However, the modernization proposal and the subsequent GF resources were not included in the final budget signed by the governor.
Overall, the final budget had a $1.075 billion reduction in available GF revenues, a reduction of $800.2 million in GF spending compared to the GA-passed budget from March, and a $299.6 million reduction in spending overall (GF and NGF).
With fewer GF resources available, lawmakers relied on a few key tactics to maintain critical investments:
- FY24 revenue performance: Recently, state revenues have been performing ahead of the state forecast, resulting in surplus funds in the budget year that will end on June 30 (fiscal year 2024). With strong growth in withholding revenues in particular ($536 million), considered a stable revenue source, revenue assumptions in the final budget increased as a result. The new budget carries forward some of this balance ($498.7 million) to be used in FY25 and FY26. The revised budget for FY24 also includes additional spending if revenues continue to perform over projections. These include $175 million for I-81 improvements and $400 million to use cash instead of debt for wastewater improvement projects.
While it’s a positive sign to see actual revenues perform over the forecast, there are still a couple of key months for revenue collections left in the fiscal year. Performing over expectations in the current forecast does not guarantee future revenue increases. While a positive sign, these additional revenues should be treated as a one-time surplus. There is not yet an adjustment to the revenue base for the FY25-26 budget. - Switching cash for capital to debt service: To protect other investments, lawmakers significantly reduce using one-time cash for spending on capital projects. The final budget frees up $467.8 million in General Fund spending by taking on debt instead of using cash for capital spending and issues $515.1 million more debt in total. This move accounts for over half of the $800 million reduction in GF spending compared to the previous GA budget. However, this also reduces one-time spending in a budget that relies heavily on carryforward from FY24.
- Technical adjustments and savings from failed legislation: Other savings were captured from technical adjustments and failed legislation. This includes:
- Virginia Preschool Initiative (VPI) non-participation rate adjustment ($71 million decrease)
- Medicaid Reserve Fund ($55 million decrease)
- Health Care Fund ($40 million in FY24 carryforward)
- Criminal justice reform vetoes ($8.2 million decrease)
- Veto of minimum wage legislation partially offset by increase in personal care attendant rates ($23.5 million decrease)
Where does this leave us?
Use of one-time funds
In the compromise budget, lawmakers relied heavily on leftover funds from FY24 — nearly $3 billion in total and $498.7 million more than the GA March proposal — as well as a large transfer from the Revenue Reserve Fund ($805 million) to make critical investments. This reliance comes without creating new revenue streams to invest in ongoing priorities. Furthermore, the budget also reduces one-time spending, like cash for capital, despite having substantial one-time funds.
Lawmakers also have to shift around one-time funds from FY25 to meet needs in FY26. While the transfer from the revenue reserve does not change in size, rather than a relatively even split of the transfer across the two fiscal years in the new budget, $276 million is shifted from FY25 to FY26 — accounting for $675.7 million of the $805 million transfer — to help cover the cost of funding priorities in the second year. This is not the only place where a shift like this happens as $150 million of Literary Funds are also switched from FY25 to FY26.
While the ending balance across the biennium remains at a similar level ($17.6 million compared to $17.9 million as previously enrolled), even with the aforementioned changes, there is a negative ending balance in FY26 of $234.4 million. This balance is covered in this budget as a whole thanks to the $252 million positive ending balance in FY25, as well as potentially by continued optimistic withholding revenue collections. However, this leaves little wiggle room to invest in other priorities or adjust for unexpected costs.
One-time funds are not a guarantee of increased revenues and available resources. While things are looking up for revenue collections, there is not yet a reforecast of the FY25-26 revenue base.
Action needed to sustain investments
Lawmakers were able to make meaningful investments in their budget, however, they will need new ways to raise funds in order to guarantee that these priorities, as well as future ones, are funded well and equitably. This work is set to start in the Joint Subcommittee on Tax Policy, who are tasked in new budget language to study ways to modernize Virginia’s income and sales taxes in 2024. Virginia families are counting on the recommendations of this subcommittee to safeguard today’s investments and build on them for a better tomorrow.
Category:
Budget & Revenue
