SJR 350

Commission on the Commonwealth's Planning and Budget Process

July 30, 1997, Richmond

The commission was established to examine whether the Commonwealth would benefit from a planning horizon extending beyond the two-year window of its biennial budget. State government is in the process of implementing a performance budgeting system that includes strategic planning and a performance measurement system. Integrating a six-year expenditure forecast with the existing six-year revenue forecasts may provide a tool for effective long-range planning.

The commission is charged with examining (i) the feasibility of providing an integrated six-year budget projection for major budget drivers with each biennial budget, (ii) methods for preparing and presenting such a budget projection, and (iii) mechanisms to evaluate the effect of proposed legislation on the budget and the projections.

Previous JLARC Studies

The most recent analysis of the Commonwealth's budgeting process was conducted by the Joint Legislative Audit and Review Commission (JLARC) through a series of four studies in the early and mid-1990s. The study of revenue forecasting in the executive branch (1991) concluded that while the state's revenue forecasting model could be improved, it was sound overall. Legislative involvement in the revenue forecasting process was modest compared to other states. Forecasts were about as accurate as those of other states and the federal government.

To provide a buffer against revenue forecasting errors, the General Assembly chose to establish a revenue stabilization fund. The proposal for a "rainy day" fund was the subject of the second of the JLARC studies released in 1991. Following ratification by voters in November 1992, a constitutional amendment to establish a revenue stabilization fund became effective January 1, 1993. As of June 30, 1997, $156.6 million was in the fund. Nearly $339 million is expected to be in the fund by June 30, 1999. The General Assembly may withdraw money from the rainy day fund only to compensate for one-half of a shortfall in revenue forecasts in any year that the projected shortfall exceeds two percent of income and sales tax revenues from the previous fiscal year.

JLARC's third study, a review of the executive budget process, was completed in November 1991. The report concluded that the process was basically sound and largely reflects and meets the needs of the Commonwealth's executive and legislative institutions and a citizen legislature. In 1995, JLARC completed its study of the concept of benchmarking for the future government operations. After examining best practice benchmarking, strategic planning, and performance measurement initiatives in the public and private sectors, JLARC concluded that benchmarking efforts went beyond those of the other states studied.

This report was followed by a legislative directive that the Department of Planning and Budget develop guidelines and processes for performance measurement of new programs and performance measures for selected programs on a pilot basis. In 1994, the General Assembly directed the Department of Planning and Budget to develop a plan for statewide strategic planning. The Allen administration has made performance measurement and strategic planning a priority. All executive branch agencies are required to conduct performance measurement and strategic planning for a six-year period. Performance measures continue to evolve with support from the executive and legislative branches.

Experiences with Expenditure Forecasting

The Commonwealth has attempted to conduct long-range expenditure forecasting. The Revenue Resources and Economic Study Commission released several six-year revenue and expenditure projections in the 1970s. This commission cautioned that long-range projections are generally less accurate than short-run forecasts. It also noted that its methodology for expenditure projections has an upward bias by assuming that current programs will continue at baseline levels or be expanded for improvements in scope and quality.

In the same legislation adopted in 1975 that required the executive branch to develop six-year revenue forecasts, the General Assembly required all agencies to provide the legislature and the Governor with estimates of anticipated capital expenditures embracing their activities for six years beyond the current biennium. While the requirement for six-year revenue forecasting still exists, the duty of agencies to prepare six-year expenditure projections was repealed in 1978.

In 1993, the General Assembly amended § 2.1-394 of the Code of Virginia to require agencies to submit to the Governor an estimate of the amount needed for the three following biennia. This provision is still in effect, though copies of the estimates have not been provided to the legislature.

Virginia's Economic and Revenue Estimating Process

Virginia's tax commissioner briefed the members on the state's revenue estimating process. Key elements of the process include the involvement of the Governor's Advisory Board of Economists in recommending economic forecasts and the Governor's Advisory Council on Revenue Estimates in developing revenue forecasts based on economic scenarios.

The Department of Taxation's success in implementing the revenue forecasting process has been cited in the Commonwealth's consistent ratings as one of the nation's best financially managed states by Financial World magazine. Three barriers to the planning process were noted. Accurate forecasting requires staying on the leading edge in technology and forecasting methodologies. Data provided by the Internal Revenue Service for use in forecasting tax collections is one and one-half years old when received. Finally, the current process focuses on the short term, with long-term forecasts being extrapolated from the short-term outlook and assuming moderate-term growth forecasts.

Overview of the Commonwealth's Budget

The Commonwealth's 1996-98 budget consist of $16.8 billion in general fund revenues and $18.5 billion in non-general fund revenues. The director of the Senate Finance Committee staff noted that aid to localities and aid to individuals, primarily Medicaid, comprise about two-thirds of the general fund budget. The state payroll, most of which is in six large institutional systems, consumes another quarter of the general fund budget.

Over the past decade, growth in the state budget has been driven largely by four programs and activities: Medicaid; adult and juvenile corrections; public education; and, in the 1990s, debt service. Spending increases required for public education, Medicaid, and corrections are generally regarded as non-discretionary, and multi-year forecasts in these area are either nonexistent or have not proven to be accurate. Any effort to look at the Commonwealth's long-range budget prospects will have to focus first on these areas.

Next Meeting

The commission plans to hold its next meeting in late August. At that time, the commission hopes to hear from the Department of Planning and Budget on the budgeting process and strategic planning aid performance measures program and from the state agencies responsible for major budget drivers regarding their long-range expenditure projection efforts.