Comprehensive Annual Financial Report For Fiscal Year .

INTRODUCTORY SECTIONComptroller’s Letter of Transmittal to the GovernorCertificate of Achievement for Excellence in Financial ReportingOrganization of Executive Branch of GovernmentOrganization of Government – Selected Government Officials – Executive BranchOrganization of the Department of AccountsCommonwealth of Virginia5

COMMONWEALTH of VIRGINIADAVID A. VON MOLL, CPACOMPTROLLEROffice of the ComptrollerP. O. BOX 1971RICHMOND, VIRGINIA 23218-1971December 15, 2020The Honorable Ralph S. NorthamGovernor of the Commonwealth of VirginiaState CapitolRichmond, Virginia 23219Dear Governor Northam:It is my pleasure to present the Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30, 2020, inaccordance with Section 2.2-813 of the Code of Virginia. This report consists of management’s representations concerning theCommonwealth of Virginia’s finances. Management assumes full responsibility for the completeness and reliability of all informationpresented. This report reflects my commitment to you, to the citizens of the Commonwealth, and to the financial community tomaintain our financial statements in conformance with accounting principles generally accepted in the United States of America(GAAP) as established by the Governmental Accounting Standards Board (GASB). Data presented in this report is believed to beaccurate in all material respects, and all disclosures that are necessary to enable the reader to obtain a thorough understanding ofthe Commonwealth’s financial activities have been included.The 2020 CAFR is presented in three sections. The Introductory Section includes this transmittal letter and organization chartsfor state government. The Financial Section includes the State Auditor’s Report, management’s discussion and analysis (MD&A),audited government-wide and fund financial statements and notes thereto, required supplementary information other than MD&A,and the underlying combining and individual fund financial statements and supporting schedules. The Statistical Section sets forthselected unaudited economic, financial trend, and demographic information for the Commonwealth on a multi-year basis.The Commonwealth’s management is responsible for the establishment and maintenance of internal accounting controls thatensure assets are safeguarded and financial transactions are properly recorded and adequately documented. To ensure that thecosts of controls do not exceed the benefits obtained, management is required to use cost estimates and judgments to attainreasonable assurance as to the adequacy of such controls. The Commonwealth’s established internal controls fulfill theserequirements and provide reasonable, but not absolute assurance, that the accompanying financial statements are free of materialmisstatement.In accordance with Section 30-133 of the Code of Virginia, the Auditor of Public Accounts has audited the Commonwealth’sfinancial statements for the year ended June 30, 2020. The audit was conducted in accordance with auditing standards generallyaccepted in the United States of America and Government Auditing Standards issued by the Comptroller General of the UnitedStates. The auditor’s opinion is included in the Financial Section of this report. Audit testing for compliance with the U. S. Office ofManagement and Budget Compliance Supplement and the related Uniform Administrative Requirements, Cost Principles and AuditRequirements for Federal Awards, is performed at the statewide level. The Commonwealth’s Single Audit Report will be issued at alater date. I would like to acknowledge the Auditor of Public Accounts’ staff for their many contributions to the preparation of thisreport.GASB Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and LocalGovernments, requires that management provide a narrative introduction, overview and analysis to accompany the basic financialstatements in the form of MD&A. This letter of transmittal is designed to complement the MD&A and should be read in conjunctionwith it. In addition to the financial analysis addressing the Commonwealth’s governmental and business-type activities, the MD&Afocuses on the Commonwealth’s major funds: General, Commonwealth Transportation Special Revenue, Federal Trust SpecialRevenue, Literary Special Revenue, Virginia Lottery, Virginia College Savings Plan, and Unemployment Compensation. TheCommonwealth’s MD&A can be found on page 27 immediately following the independent auditor’s report.6Commonwealth of Virginia

PROFILE OF THE GOVERNMENTReporting EntityFor financial reporting purposes, the Commonwealth’s reporting entity consists of (1) the primary government, (2) componentunit organizations for which the primary government is financially accountable or for which the resources of the component unitprimarily benefit the primary government (blended component units), and (3) other component unit organizations for which thenature and significance of their relationship with the primary government is such that exclusion would cause the reporting entity’sfinancial statements to be misleading or incomplete (discrete component units). The funds and accounts of all agencies, boards,commissions, foundations, and authorities that have been identified as part of the primary government or a component unit havebeen included. Further information can be found in Note 1.B. to the Financial Statements.Section 2100 of the GASB Codification of Governmental Accounting and Financial Reporting Standards describes the criteriafor determining which organizations, functions, and activities should be considered part of the Commonwealth for financial reportingpurposes. The basic criteria include appointing a voting majority of an organization’s governing body, as well as theCommonwealth’s ability to impose its will on that organization, or the potential for the organization to provide specific financialbenefits to, or impose specific financial burdens on, the Commonwealth. The Commonwealth’s discretely presented majorcomponent units are the Virginia Housing Development Authority, Virginia Public School Authority, Virginia Resources Authority,and Virginia College Building Authority.The Commonwealth and its component units provide a wide range of services and funding to its citizens, including elementary,secondary and higher education; health and human services; economic development; environmental and natural resources; publicsafety, corrections, and regulation; transportation; agriculture; and general government services. The financial activities associatedwith these services are reflected in both summary and detail throughout the CAFR.Budgetary ControlIn addition to the internal controls previously discussed, the Commonwealth maintains budgetary controls to ensurecompliance with the legal provisions of the Commonwealth’s Appropriation Act, which reflects the General Assembly’s approval of abiennial budget. The financial transaction process begins with development and approval of the budget, after which budgetarycontrol is maintained through a formal appropriation and allotment system. The budgeted amounts reflected in the accompanyingfinancial statements represent summaries of agency budgets.The Commonwealth’s budget is prepared principally on a cash basis and represents appropriations as authorized by theGeneral Assembly on a biennial basis at the program level. The Commonwealth monitors spending activity to ensure theexpenditures do not exceed the appropriated amounts at the agency level. The State Comptroller maintains a central generalledger that records total appropriations and related expenditures for all agencies and institutions included in the approved budget.Systemic controls are in place to prevent disbursements that exceed authorized appropriations. Additional information regardingthe Commonwealth’s budgetary process can be found in Note 1.E. to the Financial Statements.ECONOMIC REVIEWLocal EconomyIntroductionThis overview of the economy of the Commonwealth of Virginia was prepared by the Weldon Cooper Center for Public Serviceat the University of Virginia. In fiscal year 2020, Virginia’s economy contracted for the first time in 10 years as a result of the onsetof the COVID-19 pandemic. The pandemic resulted in short-term suspension of non-essential business activities, implementationof social distancing measures, consumer avoidance of travel and shopping, and supply-chain bottlenecks that had knock-on effectsfor other sectors. Consequently, employment shrank during the year, and the unemployment rate grew markedly throughout theCommonwealth. Personal income was buoyed, in large part, by federal transfer payments resulting from sizeable federalCOVID-19 relief efforts, but state taxable sales receded for the fiscal year. The housing sector was resilient during the fiscal year,with existing home sales and building permit activity expanding and housing prices increasing. Economic growth is expected torebound in the next fiscal year, although this outlook is predicated on an easing of the pandemic resulting from vaccinedevelopment and distribution, and adoption of appropriate federal fiscal relief policies.Commonwealth of Virginia7

EmploymentVirginia nonfarm payroll employment shrank by 1.3 percent in fiscal year 2020, which was the first drop after 10 years ofeconomic expansion (Figure 1). However, this growth rate was still better than the national rate of -1.9 percent, due in large part toVirginia's concentration in federal government and industries where work-at-home and telecommuting are more feasible, such asprofessional and business services, and lower exposure to vulnerable leisure and hospitality industries.Figure 1Annual Percentage Change in Nonfarm Payroll EmploymentFiscal Years 2015 – 2020VirginiaUnited -2.5%201520162017201820192020Source: U. S. Bureau of Labor StatisticsVirginia nonfarm employment fell below the 4.0 million level in fiscal year 2020 after crossing that threshold for the first time infiscal year 2019. The state lost an estimated 51,100 jobs during the fiscal year, compared to an average of 56,275 jobs created perfiscal year from 2016 to 2019.Figure 2 illustrates changes in Virginia’s nonfarm employment by industry for fiscal years 2015 through 2020, along with theemployment change between fiscal years 2019 and 2020 for Virginia and the U.S. The largest employment decreases occurred inleisure and hospitality (-34,000) and retail trade (-14,300), which have been hit hardest by business shutdowns, social distancingregulations and consumer avoidance. The education and health services sector (-5,300), state and local government (-4,700),manufacturing (-3,900), other services (-3,700), and mining and logging (-200) also saw decreases. Several sectors experiencednet employment gains as a result of job additions prior to COVID-19 and consumer spending substitution during the pandemic.The professional and business services sector led by adding 5,100 jobs, while financial activities gained 3,600 jobs. Other jobcreation sectors were construction (2,100); federal government (1,900); transportation and public utilities (1,800); and information(500). The decrease in retail trade employment partly reflects ongoing shifts to online spending that accelerated during thepandemic. The education and health services sector, which had experienced uninterrupted expansion for at least two decades, sawthis momentum reversed for the first time by COVID-19 protective measures and consumer avoidance.8Commonwealth of Virginia