Financial Management & Budget Reform

Reforming Financial Management

The Warner Administration's top priority for finance has been restoring Virginia's fiscal integrity. When the Governor took office in January 2002, he faced the challenge of making difficult decisions to address what would eventually become a $6.0 billion budget shortfall.

The Administration has minimized the use of one-time budgetary fixes that create shortfalls in future budgets while trying to meet Virginia's basic needs in education, homeland security, job creation and vital social services for Virginia's most vulnerable citizens. By restoring Virginia's fiscal integrity, the Governor has ensured that the Commonwealth will continue to be a model for sound financial management.

Challenges Discovered - Financial Management and Budget Reform

The following critical challenges were identified within state government operations:

• Closing a six billion dollar budget shortfall.
• Developing a six-year financial plan.
• Achieving budget and tax reform.
• Reducing receivables due to the Commonwealth.

Actions Taken - Financial Management and Budget Reform

Addressing a six billion dollar budget shortfall

During the late 1990's, the economy flourished and revenues generated in the Commonwealth increased. As these revenues increased, so did spending commitments. At the same time, the Commonwealth enacted hundreds of millions of dollars in tax cuts and tax preferences. The state government made commitments during the boom times that it could not keep when revenues receded.

When Governor Warner took office, the mix of declining revenues, increased spending commitments, and numerous tax breaks led to a $6 billion shortfall that had to be addressed right away. To address this structural imbalance, Governor Warner took immediate actions including across-the-board cuts, new restrictions on agency hiring, and the initiation of a top-to-bottom review of state government intended to improve efficiency and eliminate redundancy in state services.

These actions balanced the budget in the near term, but additional work was needed to address Virginia's long-term outlook.

Budget Reform and Six-Year Financial Plan

In addition to addressing the record budget shortfall, the Warner Administration developed a statewide six-year financial plan and worked with the General Assembly to enact legislation requiring that such a plan be done regularly. The Governor believed it made no sense that an entity as large as the Commonwealth do only two-year planning. The six-year financial plan will continue to be used as a means to ensure that realistic budget expectations are established on the front-end of budget development.

Additional reforms were aimed at making the finances of the Commonwealth more reliable and predictable, and providing for mandatory early warnings if revenues begin to decline.

These reforms included:

• Requiring a revised comprehensive revenue reforecast by September 1 if actual collections of core revenues are 1 percent or more below the official budget estimate;
• Increasing by 50 percent the deposit into the state's rainy day fund in good economic times to help cushion the Commonwealth in times of fiscal downturn;
• Assessing the long-term (six year) impact of proposed legislation;
• Reviewing the actual cost of new initiatives after such programs have been in place for one year; and
• Including transportation revenues in the Commonwealth's economic analysis.

Tax Reform

In addition to budget reform, Governor Warner proposed a tax reform package that addressed three goals: fairness, funding core services over the long-term and preserving our fiscal integrity and AAA bond rating. The plan included the following specific elements:

• Lower the income tax for most Virginians.
• Reduce the food tax by 1.5 cents, and add one penny to the sales tax.
• Close corporate loopholes.
• Increase Virginia's lowest-in-the-nation state cigarette tax to pay for health care needs.
• End the car tax.
• Eliminate the estate tax for working farms and family-owned businesses.
• End the unfair accelerated sales tax collection from retailers.
• Provide incentives for small businesses to invest.
• Ease the tax burden on military, reservists, and National Guard families.
• Commit Virginia to participation in the bipartisan, multi-state Streamlined Sales Tax Project for internet and catalog purchases.

In 2004, the Virginia General Assembly passed a revenue bill that incorporated the majority of the provisions included in the Governor's tax reform legislation. This is plan will raise more than $1.3 billion in additional revenue over a two-year period and provide much-needed tax reform to lower income Virginians.

Addressing receivables due to the Commonwealth

Establishing a Commission on Government Efficiency and Effectiveness was one of the first initiatives of the Warner Administration. The commission recommended that the Commonwealth incorporate tools to better address the collection of receivables. The commission identified $30 to $45 million in receivables that the Commonwealth could collect with the implementation of new collection strategies. The Department of Taxation has surpassed this goal through a number of initiatives. The 2003 Virginia Tax Amnesty Program generated $98.3 million alone.

Through programs initiated both before and since the commission report, the Tax Department is aggressively pursuing unpaid and un-filed taxes, which will result in millions of dollars of additional tax revenue annually. Initiatives include the many compliance programs improved under the TAX and American Management Systems, Public/Private Partnership, the Tax Amnesty Program, and an Enhanced Compliance Initiative involving the addition of 117 new staff persons. Vendor registration and federal debt set-off will also help reduce receivables due the Commonwealth.

Results Achieved - Financial Management and Budget Reform

Put forward a plan to maintain a AAA bond rating from Fitch, Standard & Poors, and Moody's.

• Virginia is one of seven states receiving the highest bond rating (triple "A") from each of the three major bond-rating agencies - Fitch, Moody's, and Standard and Poor's. This coveted rating not only identifies the Commonwealth as a well-managed state, but also ensures that the state borrows money at the lowest possible cost. The Commonwealth and its localities save millions of dollars due to this prestigious rating.
• In September 2003, Moody's placed Virginia on Credit Watch, an action that usually precedes a downgrade in a state's credit rating. Moody's raised many of the same financial concerns Governor Warner expressed during his first year in office, such as one-time budget fixes and the lack of structural balance. The Warner Administration's persistence in bringing these issues to the public's attention and addressing these issues through budget reform and tax reform helped preserve Virginia's coveted AAA rating, which Moody's reaffirmed on May 27, 2004 (see news release).

Receive A Clean Audit Opinion

• Receiving a "clean" (also referred to as an unqualified) audit opinion from the Auditor of Public Accounts on the Commonwealth's Annual Financial Report is a significant achievement in the area of financial management and budget reform.
• Virginia has received this recognition for 17 consecutive years.

Awards Received - Financial Management and Budget Reform

Tax Department

• The Tax Amnesty campaign garnered prestigious awards from the International Association of Business Communicators (IABC).
• The Tax Department received the 2003 Cost Effectiveness Through Government Award, sponsored by the National Electronic Commerce Coordinating Council.
• The Tax Department received the 2003 4th place award from the Center for Digital Government in the category of Best Government Applications for State General Government, Department of Taxation.

Department of Planning and Budget's Regulatory Town Hall

• The American Association of Law Libraries Public Access to Government Award (2003)
• The Robert J. Colburn, Jr. Innovation Award from the Administrative Code and Registers Section of National Association of Secretaries of State (2002)
• The Governor's Technology Award (2002)
• E-Gov's Trailblazer Award (2002)
• The Center for Digital Government's Best of Breed Award in Management and Administration (2002)
• Virginia Coalition for Open Government's Freedom of Information Award (2001)
• Virginia's performance management system was featured in a national report produced by the U. S. General Services Administration entitled, "Strategic Planning: Aligning Workplace Services Creates Value." The Virginia Results Web site was also featured in a book entitled, Measuring Performance in Public and Nonprofit Organizations, published by Jossey-Bass in May 2003. Additionally, Virginia's performance management system will be featured in a May 2004 article entitled, "Virginia Results" which will be published in conjunction with the American Society for Public Administration's performance management in government series.

Department of Accounts

• Seventeen consecutive "clean" audit opinions from the Auditor of Public Accounts.

More Information

For more information about the Financial Management & Budget Reform, contact: sof-cs@governor.virginia.gov.

You may also contact the Virginia Department of Planning and Budget at: http://dpb.virginia.gov or by phone at 804-786-7455.