It was less than a month ago, but Virginia’s economic and revenue outlook in March is already nostalgic.
State revenues rose 10.8% over the same month a year ago and grew at more than twice the projected rate in the first nine months of the fiscal year that began on July 1.
The General Assembly adopted a $135 billion budget that Democrats declared the most progressive in state history — on the same day that Gov. Ralph Northam declared a public health emergency from the global coronavirus pandemic.
But all bets are off now, as state and local government officials brace for an economic convulsion that some fear could rival the Great Depression as businesses shut down or change the way they operate in response to a public health threat that has forced most Virginians to shelter at home.
“We were probably heading into a record year,” Secretary of Finance Aubrey Layne said ruefully on Tuesday. “Now, we’re trying to meet the dangers from these [business] closings.”
Northam said the revenue report released Tuesday “reflected our strong economy,” but he warned that April will tell a much different story.
“The most important thing to focus on right now is the health and safety of all Virginians, and we expect April results will be disappointing,” he said in announcing the “final pre-COVID-19 revenue report.”
Layne predicts Virginia will come up $1 billion short in expected revenues in the last three months of the fiscal year, on which the state depends for about 30% of the revenues it needs to pay for spending in its budget, with the biggest chunk going to local governments to help pay for public education.
Payment of estimated state taxes has been delayed until June 1, although the extended deadline for final tax returns is Nov. 1. The state has waived penalties on unpaid taxes, but it needs approval from the General Assembly when it reconvenes April 22 for the authority to eliminate interest.
Northam has frozen state hiring, eliminated discretionary spending and proposed to suspend about $2 billion in spending in the two-year budget the assembly adopted on April 22, including compensation for state employees and teachers, as well as money to moderate higher education tuition and provide dental benefits to Medicaid recipients.
“We have to go into a crisis budget situation,” said Ron Carlee, a former Arlington County manager who is now an assistant professor of public administration at Old Dominion University. “The hopes and dreams of what they wanted to accomplish are vanishing.”
Carlee led Arlington in the aftermath of the attack on the Pentagon on Sept. 11, 2001, and through the recession that began at the end of 2007, forcing local governments to make deep cuts in spending and lay off employees.
“This is a huge financial transformation for all of us,” he said in a phone interview from the Outer Banks, where he is sheltering in isolation with his family. “We have to instill the most severe economic discipline we’ve ever imposed on ourselves, and we’re not used to that.”
The fallout for local government became clearer on Tuesday when Henrico County projected that it faces a revenue shortfall of almost $100 million for the next fiscal year.
“In just a few weeks, COVID-19 has dramatically changed how we work and has spurred a global economic downturn,” Henrico County Manager John Vithoulkas said in a statement announcing the shortfall.
State and local government officials hope for a big boost from the stimulus package adopted by Congress and signed by President Donald Trump at the end of March. But they remain uncertain about how they will be allowed to spend the money because of restrictions that prevent the aid from replacing revenue losses from plummeting tax collections.
Virginia relies on income and sales taxes for the bulk of its revenues, especially in the fourth quarter of the fiscal year.
“We live by payroll and sales taxes,” Layne said. “We’re going to suffer for that.”
Payroll income taxes, which account for 62% of state revenues, fell by 0.4% in March as the effects of the COVID-19 epidemic “began to shut down businesses,” he said in his March revenue letter to Northam.
Sales taxes rose 7.9% in March, entirely from online sales, but Layne said “an unknown number” of retailers have taken advantage of the state’s offer to delay remittance of sales taxes collected in February that normally would be due in March. “April revenues will begin to reveal the impact of COVID-19 on general fund revenue collections,” he told the governor.
For local governments, cuts in the state budget inevitably will fall on them.
“Localities will have to deal with the program services repercussions resulting from the cuts,” Virginia Municipal League Executive Director Michelle Gowdy said in a letter to the state last week.
“And we’ll be doing so even as local revenues from business taxes, sales taxes, meals taxes, hotel/motel taxes, and personal property taxes all decline,” Gowdy wrote Erik Johnston, director of the Virginia Department of Housing and Community Development.
The league, representing cities, towns and nine counties, also appealed to the state and members of Virginia’s congressional delegation to include local governments in efforts to “jointly develop a strategic plan to maximize and effectively target the highest and best use of federal dollars.”
The CARES Act includes about $1.8 billion for the state and $1.5 billion for local governments, but only Fairfax County has the population to qualify for direct aid from the stimulus package, or about $200 million, Layne estimated.
“We believe that direct funding for more of Virginia’s larger localities will put the federal dollars to work more quickly than waiting for the state to play its role as the ‘middle-man,’ ” Gowdy said in a letter to the congressional delegation last week.
The municipal league also had asked Northam to recognize the new economic reality for local governments by delaying enactment of almost a dozen bills adopted this year, including an increase in the minimum wage and permission for localities to engage in collective bargaining with public employees.
The governor signed both bills but recommended delaying enactment by four months, until May 1, 2021.
“We were grateful he was willing to put off the collective bargaining and minimum wage bills,” Gowdy said in an interview on Monday. “We’re disappointed it wasn’t longer.”