Virginia could lose less than half of the $1 billion in revenues it had expected to in the fiscal year that ended Tuesday, setting the stage for a potential restoration of spending that had been frozen in the new two-year budget that took effect Wednesday.
The final number won’t be known for more than a week as income tax payments continue to flow into the state treasury, but Secretary of Finance Aubrey Layne said Tuesday that the shortfall caused by the coronavirus pandemic could be less than $500 million in the fiscal year that ended Tuesday.
The improved revenue outlook will relieve some of the pressure on the two-year, $135 billion budget that took effect Wednesday, he said. It also will allow the state to reassess its forecast for future tax collections in the face of continued uncertainty over the spread of the coronavirus and its effect on Virginia’s hobbled economy.
“The situation is bad, but not as bad as we feared,” said Sen. Janet Howell, D-Fairfax, chairwoman of the Senate Finance & Appropriations Committee, on Tuesday.
Howell and other legislative budget leaders expressed cautious hope that the smaller shortfall will allow the General Assembly to reverse some of the decisions it made in late April to suspend more than $2 billion in spending that it had approved in the budget on March 12, the same day that Gov. Ralph Northam declared a public health emergency.
“Hopefully, we’ll be able to fund some of our priorities,” said House Appropriations Chairman Luke Torian, D-Prince William, on Tuesday.
Northam will announce the size of the fiscal year 2020 shortfall on July 10, setting in motion a formal process to revise the revenue estimates used to support future spending. The governor will outline the new forecast when he addresses a joint meeting of the assembly money committees on Aug. 18 in advance of an expected special legislative session to revise the budget.
During the special session, lawmakers also appear likely to act on proposed policing and criminal justice reforms that legislators say have become more urgent after George Floyd died in police custody in Minneapolis on May 25. His death has sparked intense public protests in Richmond and across the country.
Layne has steadily lowered the size of the likely revenue shortfall as income tax payments, delayed by a month to June 1 because of the coronavirus crisis, have swelled beyond expectations.
He sidestepped a question at a Senate Finance meeting last week about the potential for reversing decisions to “unallot” or unfreeze spending initiatives in the budget that the new Democratic majorities in both chambers of the assembly adopted. That decision will be up to Northam, he said, as the governor reassesses the prospects for future revenues to support state priorities.
However, Layne said the improved financial outlook vindicates Northam’s decision not to delay the deadline for state income tax payments beyond June 1, as some states did, or begin revising revenue projections last spring before the economic fallout of the health crisis was clearer.
“It puts us in a much better position to reforecast,” he told the committee.
The governor and the assembly also gained some breathing room by deferring a budgeted deposit of $600 million into the state’s cash reserve in the new fiscal year, which allows Virginia to avoid dipping into its reserves later, Layne said Tuesday. “These are not monies coming out of reserve; these are monies that were scheduled to go in.”
Layne cautioned that the state still does not know how much money to expect to support new spending in the two-year budget. Income tax collections from paychecks and sales taxes constitute about 80% of annual state revenues, but those revenue sources were down by about 5%, or about $1 billion.
Income taxes that are not withheld from paychecks, paid by self-employed professionals and investors, partly offset those losses, but he said, “It doesn’t necessarily mean we’re going to have a great deal of forecast revenue” for the budget.
Howell, as leader of Senate Finance, also remains cautious because of a potential increase in COVID-19 cases as the state reopens the economy and public life.
“I’m holding my breath because I believe we’re going to have a second round of COVID,” she said. “As we recover, we’re going to need to prioritize the new spending.”