RICHMOND — Virginia finished its fiscal year with $439 million less in revenue than expected, marking the first time that the state’s collections have dropped outside of a national downturn.
The state, which rode out the Great Recession with relative ease thanks to a hefty defense sector, saw revenue collections drop by 1.6 percent in the fiscal year that ended June 30, Gov. Terry McAuliffe (D) announced Thursday. The commonwealth had projected 1 percent growth.
The drop was largely attributed to a one-time spike in capital gains tax collections that budget forecasters in Virginia and elsewhere mistakenly took for a long-term trend. Virginia budget officials have been warning of the shortfall since May, but at that time, they expected it to be $300 million.
Even with the higher shortfall, the state — which by law must pass a balanced budget — is not in the red. The budget that just concluded included sufficient unappropriated balances to cover the unexpected deficit of income.
But the lower revenue will be felt in the two-year budget that began July 1, since the money used to cover the deficit would have been rolled over into the current spending plan.
The loss of that rollover money, combined with adjusted projections for capital gains tax revenue over the next two years, led state budget officials to project a $1.5 billion shortfall for the current budget.
State budget writers reworked the spending plan, and in June, the General Assembly passed a substantially leaner budget than the House and Senate had approved earlier in the process. The budget holds most spending at current levels, eliminating raises for teachers and state employees that had been included in earlier versions.
In addition, the state can dip into its rainy day fund to offset about half of the shortfall.
The problem had its start with the fiscal cliff of 2012, as nervous investors cashed out stocks. States saw capital gains tax collections spike and, not realizing it was a one-time windfall, expected revenue to keep rolling in at that level the next year. It did not.
Payroll withholding and sales tax collections, which account for more than 80 percent of revenue and are considered the best indicators of economic activity, also fell short. They came in $78.9 million, 0.6 percent, below forecast.