FIVE YEAR FORECAST FY 2012 Through FY 2016

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Myles Robbins
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1 November 16, 2010 City of Virginia Beach The future ain t what it used to be ~ Yogi Berra FIVE YEAR FORECAST FY 2012 Through FY 2016

2 Overview Instant Voting Economic Indicators Revenue Forecast Capital Improvement Program School Forecast City Forecast Combined Forecast 2

3 Instant Voting This voting system is anonymous. At the end of this presentation are a series of questions that will test certain assumptions and change the forecast. Wait until I say voting is open. Press the number on your keypad that corresponds to your answer (the keypad will turn on when you push the button). You can only select one answer. We will let you know when voting is closed. The results will display up here on the screen. 3

4 Warm Up Question #1 I have been on the School Board or City Council for: 1. 0 to 2 years 47% 2. 2 to 4 years 3. 5 to 10 years to 15 years 24% 5. Over 15 years 6. I can t remember 12% 6% 12% 0%

5 Warm Up Question #2 Last year s forecast indicated the recession would have a very slow recovery as indicated by the graph below. Where do you think we are on the graph today? 1. We are still falling 2. At the bottom, but beginning recovery 3. Definitely in recovery 65% 18% 18%

6 Warm Up Question #3 How likely is a double-dip recession? 0% 1. Very likely in the next 12 months 6% 2. Less likely every month 29% 3. Depends upon policies from 65% Washington D.C. 4. Not likely at all 6

7 Economic Indicators

8 Economic Outlook Regionally and nationally this will be a slow recovery There is general agreement that by the end of this forecast we will be seeing a return to growth patterns of 2007: Retail sales by the end of next summer Commercial rents and vacancies in the next 12 to 18 months Non-farm related jobs should recover by 2013 Existing housing prices should begin to recover value by 2015 Individual net worth by

9 Consumer Price Index (CPI) vs. State- Local Price Index (SLPI) 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% State-Local Price Index CPI 0.0% Source: Bureau of Labor Statistics Bureau of Economic Analysis Congressional Budget Office 9

10 Consumer Confidence Feb-00 Jun-00 Oct-00 Feb-01 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 Feb-03 Jun-03 Oct-03 Feb-04 Jun-04 Oct-04 Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 > 90 indicates stable economy < 50 indicates contracting economy Source: The Conference Board 10

11 Unemployment Rate Unemployment continues to plague the City, State and Country, but Virginia Beach is doing better than most 10.0% 8.0% National 6.0% 4.0% Virginia Beach 2.0% 0.0% Calendar Year VB HR VA US (DOE) US (CBO) Source: Virginia Employment Commission and Bureau of Labor Statistics Projections are from the Congressional Budget Office (CBO) and Department of Energy (DOE) 11

Employment Gains and Losses in Virginia Beach - 2000 to 2009 Increasing Decreasing -36.0% Agriculture, Forestry, Fishing & Hunting -23.

60% Real Estate and Rental and Leasing Accommodation and Food Services Finance and Insurance Arts, Entertainment, and Recreation

12 Employment Gains and Losses in Virginia Beach to 2009 Increasing Decreasing -36.0% Agriculture, Forestry, Fishing & Hunting -23.9% -22.9% Information Construction -9.60% Real Estate and Rental and Leasing Accommodation and Food Services Finance and Insurance Arts, Entertainment, and Recreation Professional and Technical Services 6.5% 12.7% 15.1% 21.3% Health Care and Social Assistance 39.5% -40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% Source: Virginia Employment Commission, Quarterly Census of Employment and Wages 12

13 Age Distribution 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Today, the average age in Virginia Beach is 34.3 years, up from the 1990 Census of 28.9 years. If this continues, by 2016 the average age will be 36.3 years. Under to to to and Over Source: US Census Bureau, American Community Survey 13

14 Income Inflow Compared to Income Outflow in Virginia Beach 100.0% 95.0% In 2008, people moving into Virginia Beach made up only 93% of those moving out. 90.0% 85.0% 80.0% Source: Internal Revenue Service Calendar Year 14

15 Total Federal Budget Deficit (in Billions) Projected $ $200 -$400 -$600 -$800 -$1,000 -$1,200 -$1,400 -$1,600 Source: Congressional Budget Office 15

16 Estimated Direct Department of Defense Spending in Virginia Beach $16 $14 Projections assume a 10% reduction in DOD spending each year beginning in 2011 through Billions $12 $10 $8 $6 $4 $2 $ Fiscal Year Source: US Census Bureau, Consolidated Federal Funds Report and the Department of Management Services 16

17 Revenues

18 Total Revenue $1,840 $1,800 $1,760 Millions $1,720 $1,680 $1,640 $1, Fiscal Year 18

19 Change in Real Estate Assessments (Combined Residential and Commercial) 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% Fiscal Year Source: Virginia Beach Real Estate Assessor s Office 19

Home Foreclosures and Bankruptcies 10,000 8,000 6,000 4,000 2,000 0 2006 2007 2008 2009

0 Bankruptcies Foreclosures Hampton Roads Virginia Beach 1998 1999 2000 2001 2002 2003 2004

20 Home Foreclosures and Bankruptcies 10,000 8,000 6,000 4,000 2, Source: US Bankruptcy Court, Eastern District of Virginia 1,400 1,200 1, Bankruptcies Foreclosures Hampton Roads Virginia Beach Source: Commissioner of Revenue *2010 data is through September 20

21 Real Estate Taxes $550 $500 Millions $450 $400 $350 Percent of Total Revenue = 27.2% Change Between FY 2011 and FY 2012 = - 2.6% Change Between FY 2011 and FY 2012 = - $12.4 Million $ Fiscal Year 21

Average Age of Vehicles and Used Vehicles as a Percentage of Levies 9.0 8.5 8.0 7.5 7.0 6.5 6.0 90.0% 80.

0% Average Age of Vehicles Registered in Virginia Beach 1995 1996 1997 1998 1999 2000 2001 2002 2003

22 Average Age of Vehicles and Used Vehicles as a Percentage of Levies % 80.0% 70.0% Average Age of Vehicles Registered in Virginia Beach Fiscal Year Used Car Values as a Percentage of Total Levies 60.0% 50.0% Source: Commissioner of Revenue Fiscal Year Data N/A 22

23 Personal Property Taxes $170 Percent of Total Revenue = 7.3% Change Between FY 2011 and FY 2012 = 3.6% Change Between FY 2011 and FY 2012 = $4.3 Million $150 Millions $130 $110 $ Fiscal Year 23

24 General Sales Tax $60 $55 Millions $50 $45 Percent of Total Revenue = 3.1% Change Between FY 2011 and FY 2012 = 3.9% Change Between FY 2011 and FY 2012 = $2.0 Million $ Fiscal Year 24

25 Utility Tax, Telecommunications Tax, and Cable Franchise Fee $58 $56 Millions $54 $52 $50 Percent of Total Revenue = 3.1% Change Between FY 2011 and FY 2012 = - 1.2% Change Between FY 2011 and FY 2012 = - $0.6 Million $ Fiscal Year 25

26 Business License (BPOL) $60 $55 Percent of Total Revenue = 2.5% Change Between FY 2011 and FY 2012 = 2.6% Change Between FY 2011 and FY 2012 = $1.1 Million $50 Millions $45 $40 $35 $ Fiscal Year 26

27 State and Federal Revenue $600 State Revenue Millions $500 $400 $300 $ Fiscal Year Federal Revenue $140 Millions $120 $100 $ Fiscal Year 27

28 Capital Improvement Program

Federal Revenue Other $250 $200 Millions $150 $100 $50 $0

29 Capital Improvement Program Funding Debt Financing Operating Budget CIP Allocations Fund Balance State and Federal Revenue Other $250 $200 Millions $150 $100 $50 $ Fiscal Year Projected 29

30 Operating Budget CIP Allocations (Pay-as-you-Go Financing) $80.0 $70.0 $60.0 Millions $50.0 $40.0 $30.0 $20.0 $10.0 $ Fiscal Year 30

2008 2009 2010 2011 2012 2013 2014 2015 2016

31 Net Debt Per Capita $2,700 Debt per capita Standard $2,400 $2,100 $1,800 $1, Fiscal Year Source: Department of Management Services 31

32 School Forecast

33 School Forecast $950 Expenditures Revenue $900 $850 Millions $800 $750 $700 $ Fiscal Year Projected 33

34 Key School Revenue Assumptions Student enrollment is estimated to stop declining and to flatten out. Revenues are based on March 31 st Average Daily Membership (ADM). Federal Impact Aid/Department of Defense funding will remain flat in the first three years and decrease in the last two years. State share Sales Tax projected to increase of 3.9% each year. No changes in any of the components of State funding % annual growth No changes are projected in the SOQ standards. No Changes to the City/Schools Revenue Sharing Formula Policy. 34

$1,000 $800 Millions $600 $400 $200 $0 2007 2008 2009

35 School Revenues Revenue Sharing Formula State Revenue Federal Revenue Other Local Revenue Fund Balance $1,000 $800 Millions $600 $400 $200 $ Fiscal Year Projected 35

36 Key School Expenditure Assumptions All current educational programs would continue - no additions or expansions. Changes in staffing levels based on enrollment (calculated at 22:1). VRS contributions to increase 10% in year s 2 & 3. Health Insurance increase 7% each year jumps to 12.5% in year 4 due to the Federal Health Care Bill phased in cost increases. 36

37 Key School Expenditure Assumptions (Continued) No Compensation increases included. The VRS life insurance at.059% of payroll throughout the forecast period. Slight increases are projected for fuel and utilities. No changes in Federal or State mandates have been included in the forecast. 37

38 Total Expenditures Per Pupil $14,000 Please Note That Figures For Each Year Include Debt Service $12,000 $10,000 $8, Fiscal Year Source: Virginia Beach School System 38

School Salary Costs $500 $475 Millions $450 $425 $400 2007

39 School Salary Costs $500 $475 Millions $450 $425 $ Fiscal Year 39

40 $200 School Fringe Benefit Costs $180 $160 Millions $140 $120 $ Fiscal Year 40

41 All Other School Operating Costs $200 $190 $180 Millions $170 $160 $150 $ Fiscal Year 41

42 School VRS Rate 20.0% 16.0% 12.0% 8.0% 4.0% 0.0% Fiscal Year 42

43 City Forecast

44 Forecast of City Revenues and Expenses (excludes Water and Sewer) $880 $840 Expenditures Revenue FY 2012 has a deficit of just over $19 million. $800 Millions $760 $720 $680 $ Fiscal Year Projected 44

45 City Revenue Assumptions All current City Council Dedications remain in place. Charges for services have been increased by inflation to continue to cover roughly the same portion of expenditures as in the current budget. City only State Revenue - 1.8% decrease in FY % increase in last four years. This anticipates continued reductions in aid to localities. No change in Federal revenue over the forecast period Hotel, Restaurant Meals and Amusement taxes are projected to increase by 5.2% between FY 2011 and FY No assumption of continued use of fund balance to support the Operating Budget. 45

46 City Revenues Revenue Sharing Formula Federal Revenue Other Local Taxes $900 State Revenue Charges for Service and Other Revenues Fund Balance $800 $700 Millions $600 $500 $400 $300 $200 $100 $ Fiscal Year Projected 46

47 Key City Expenditure Assumptions All current City services and programs continue, though operating costs were held to small inflationary increases through the forecast period. No pay increases are included in any of the five years. Retirement costs are anticipated to increase by 2% every other year beginning in Health Insurance increases 7% each year and jumps to 12.5% in 2014 due to anticipated cost increases related to the Federal Health Care Bill. 47

48 Key City Expenditure Assumptions (Continued) SPSA rates are expected to increase as the City s capped rate increases, however; there is a significant increase in 2016 related to the elimination of the capped rate under the current contract. Debt Service is anticipated to increase based on approved CIP projects Debt is reserved in the last three years of the forecast. City Council policies that drive costs are reflected as currently adopted. 48

49 City Expenditures Per Capita $2,000 $1,500 $1,000 $500 $ Fiscal Year 49

50 City Salary Costs $305 $300 $295 Millions $290 $285 $280 $275 $ Fiscal Year 50

51 City Fringe Benefit Costs $130 $120 $110 Millions $100 $90 $80 $70 $ Fiscal Year 51

52 All Other City Operating Expenditures $350 $300 $250 Millions $200 $150 $100 $50 $ Fiscal Year 52

53 Forecast Bottom Line

54 Combined Forecast (City and Schools) $1,850 Expenditures Revenue $1,800 $1,750 Millions $1,700 $1,650 $1,600 $1,550 $1, Fiscal Year Projected 54

55 Four Key Expenditure Assumptions Driving the Deficit: 1. The City has four new facilities opening during the forecast period. 2. Both City and Schools have increases in retirement costs. 3. Both City and Schools will see increasing health care costs related in part to the Health Care Reform. 4. The costs to dispose of residential trash will significantly increase in the last year of the forecast. 55

56 Threats to the Forecast Federal Budget Decreasing defense spending by 10% Closure of Joint Forces Command (JFCOM) Deficit reduction Elimination of stimulus spending State Budget 6% reduction to State agencies VRS accounting gimmick State elimination of local taxing authority Storm Water Total Maximum Daily Load (TMDL) Health Care Costs Retirement Costs 56

57 Forecast Ways to Modify the Forecast

58 Revenue Question: Over the next 5 years do you believe the economy will: 1. Beat the forecast 6% 25% 31% 38% 2. Remain within forecast assumptions 3. Get worse 4. Unsure 58

59 Revenue Question: 26% of all our revenue comes from the State. Do you think that over the forecast period the State will: 1. Increase its financial commitment to Schools and the City 2. Same commitment to Schools and the City as shown in forecast 3. Reduce its financial commitment to Schools and the City 6% 25% 69%

60 Revenue Question: 8% of all our revenue is Federal. Do you think that over the forecast period the Federal Government will: 1. Increase its financial commitment to Schools and the City 2. Same commitment to Schools and the City as shown in forecast 3. Reduce its financial commitment to Schools and the City 56% 39% 6%

61 Expenditure Question: City and Schools continuously improve efficiency. Do you believe that they can continue to do so? 1. Easily, both can save an additional 1% 2. We should set a goal of reducing costs by 2% 3. No, while both should strive to remain efficient both have reached a point where choices among services would have to be made to reduce the budget 0% 53% 47%

62 Expenditure Question: Should the City and School System set aside funding to ensure compensation remains competitive? 1. No additional funding should be provided until the economy improves 2. Set aside 1% of total payroll each year of the forecast 3. Decrease funding for total compensation by 1% each year 4. Need to wait to see what service reductions may need to be made with the Budget 63% 31% 6% 0%

63 Expenditure Question: What single service is likely to experience the most increase in demand over the next 5 years and should be considered for increased funding? 1. Public Safety 11% 2. Education K-12 17% 3. Human Service programs 33% 4. Infrastructure maintenance 39% 63

64 Expenditure Question: Pay-go funding for capital projects continues to decline. What would be a good strategy? 1. Not really a problem, we can address it when the economy recovers 2. City and Schools should provide additional cash funding of $2.5 million each year 3. Both City and Schools should provide additional pay-go funding of $5 million each year 65% 18% 18%

65 Expenditure Question: Overall, expenditures in the forecast are: 1. Too conservative to maintain quality of life and address critical issues. Expenditures need to increase more. 2. Just about right given where the economy is likely to be. 3. Too optimistic, we should be able to reduce expenditures by focusing on core services 4. Unsure 0% 61% 28% 11%

66 Debt Question: Debt per capita is almost at $2,400, to address major School and City construction projects should we consider increasing the limit? 1. Yes, on the theory that spending on infrastructure will generate private sector jobs 2. No, we need to prioritize projects 3. Yes, but only for projects that bring revenues to support the increased debt service costs 4. Would need more information 0% 59% 35% 6%

67 Revenue Question: IF revenues in the City/School Formula had to be increased in order to preserve services, which one might you consider? 11% 6% 6% 50% 28% 1. Real Estate tax rate, but not increase the average taxpayer s bill 2. Consider an increase in Personal Property taxes on vehicles 3. Consider reinstating the boat tax 4. Would not consider any increase 5. Need to wait and see what service reductions may need to be made with the Budget

68 Discussion Question: The most significant threat to the financial position of the City and Schools in the next 18 months is: 39% 22% 0% 11% 0% 28% State Budget reductions due to the slow economy and the loss of the Stimulus funds 2. Reductions in Federal defense spending 3. State elimination of local funding streams (Business License(BPOL) or Machinery and Tools) 4. Storm Water TMDL 5. Health care costs 6. VRS retirement costs 68

69 Discussion Question: What should the City and School System be working on jointly? 1. Form a consolidation committee to look for new opportunities to eliminate duplication between the City and School programs 2. Work together to push for State funding for transportation and Schools 3. Examine debt indicators in terms of City and School long range capital needs 4. Meet together once a quarter to hear briefings of joint interest 5. Jointly form a government reform and restructuring citizens committee, similar to the one formed by the Governor 11% 22% 6% 22% 39%

70 Discussion Question: Overall the forecast is helpful? 0% 0% 1. Helps to set the long term financial picture as we head into budget season. 41% 59% 2. Would like to spend more time discussing long term financial strategies 3. Confirms my own understanding of the economy 4. Not really helpful 70

71 Conclusion The economy is improving although very slowly. There are major threats on the horizon, many beyond our control, and the shock of which could stall any local recovery. We will face tough choices. 71

Five Year Forecast FY 2014 THROUGH FY 2018

Five Year Forecast FY 2014 THROUGH FY 2018 Purpose TO FORECAST THE OUTCOMES OF EXISTING LAWS, POLICIES, GUIDANCE, AND TRENDS TO EXPLORE WHAT THOSE OUTCOMES WILL LIKELY MEAN TO CITY/SCHOOL FINANCES TO PROVIDE