FINANCE DEPARTMENT. Estimate of General Revenue Proposed FY

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1 FINANCE DEPARTMENT Estimate of General Revenue Proposed FY

2 Prince William County BOARD OF COUNTY SUPERVISORS Corey A. Stewart - At-Large Chairman Pete K. Candland - Gainesville District Vice-Chairman Maureen S. Caddigan - Potomac District John D. Jenkins - Neabsco District Jeanine M. Lawson - Brentsville District Ruth M. Anderson - Occoquan District Martin E. Nohe - Coles District Frank J. Principi - Woodbridge District Christopher E. Martino Acting County Executive Proposed FY 2017 FY 2021 Estimate of General County Revenue

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4 This Report Prepared By: Department of Finance One County Complex Court Prince William, VA Michelle L. Attreed Director of Finance Timothy M. Leclerc Deputy Finance Director Revenue Committee Christopher E. Martino, Acting County Executive Michelle Casciato, Budget Director Tom Bruun, Director of Public Works Wade Hugh, Director of Development Services Chris M. Price, Planning Director Tracy Gordon, Legislative and Intergovernmental Affairs Director Jeffrey A. Kaczmarek, Executive Director, Economic Development David S. Cline, Associate Superintendent for Finance and Support Services, PWC Schools John M. Wallingford, Director of Financial Services, PWC Schools Revenue Committee Project Team Lillie Jo Krest, Project Manager Lynn Bailey Steve Ferlotti Rene Gapasin Veronica Gulliksen Carl Hampton Mark Hinman Melissa Korzuch Allison Lindner Kerem Oner Susan Rodeheaver Allen Scarbrough

5 The Revenue Committee Expresses Its Appreciation to the Public and Private Sector Business Community Who Assisted in the Development of This Report John Layman Chief Economist Virginia Department of Taxation Ann Battle Macheras Regional Research Vice President The Federal Reserve Bank of Richmond Steven Szakaly Chief Economist The National Automobile Dealers Association Representatives from the REALTOR Association of Prince William: Liz Hernandez Realtor, Keller Williams Michael Hill Associate Broker, Coldwell Bankers April McMillian Chief Executive Officer Representatives from the Northern Virginia Building Industry Association: Sherman Patrick Planning and Land Use Consultant, Compton & Duling, LC J. Truett Young Vice President of Land Acquisition, Stanley Martin Homes Coleman Rector President & Principal Broker, Weber Rector, Inc. Mike Garcia President, Mike Garcia Construction Jason Dalley Land Market Manager, NVR Homes

6 COUNTY OF PRINCE WILLIAM FINANCE DEPARTMENT 1 County Complex Court, Prince William, Virginia (703) Metro , ext FAX (703) Michelle L. Attreed Director of Finance February 16, 2016 TO: FROM: Christopher E. Martino Acting County Executive Michelle L. Attreed Director of Finance RE: Revenue Committee Report, Fiscal Year I am pleased to present the Proposed FY 2017 FY 2021 Estimate of General Revenue. This report was prepared in accordance with the County s Principles of Sound Financial Management as part of the responsibility to citizens to carefully plan for the funding of programs and services, including the provision and maintenance of public facilities. During the development of the revenue forecast, the Revenue Committee sought input from public and private sector representatives knowledgeable with the County s major revenue sources. These discussions assisted the Committee in identifying and interpreting important local, state, and national economic conditions and trends. Average residential real estate values grew by 1.8% while commercial values increased 1.5% during calendar year 2015 (tax year 2016) while personal property values are flat. Sales tax and Business, Professional and Occupational License (BPOL) tax revenues are both projected to increase 3%. In December 2015, after months of speculation, the Federal Reserve increased the target fed funds rate from 0.25% to 0.50%. The pace of future increases remains uncertain. It is projected that the County s investment income revenue will gradually improve but continue to be below historic levels when interest rates were higher. A real estate tax rate of $1.145 is proposed for FY 2017 consistent with the policies contained in the adopted Fiscal Year Five-Year Plan. This revenue policy directive was approved by the Board of County Supervisors on December 15, I recommend these revenue estimates be used in preparing the FY 2017 Fiscal Plan, the Capital Improvement Plan for FY , and other financial plans. I would like to thank the members of the Revenue Committee, the participants from the business community, and all others who contributed to the preparation of this report.

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8 TABLE OF CONTENTS REVIEW of the ECONOMY in 2015 and OUTLOOK for CALENDAR YEAR REAL ESTATE TAX RATE AND MAJOR REVENUE SOURCES.. 11 FY17 Proposed Real Estate Tax Rate and Average Tax Bill.. 11 Major Revenue Sources Key Assumptions. 12 Real Property Revenue 13 Residential Real Estate 13 Commercial Real Estate.. 16 Public Service Taxes Personal Property Revenue. 20 Local Sales Tax Revenue 23 Consumer Utility Revenue.. 24 Communications Sales and Use Tax Revenue 25 BPOL Revenue 26 Investment Income.. 28 All Other Revenue Sources. 30 Interest on Taxes. 30 Motor Vehicle License Fee. 30 Recordation Tax.. 31 Tax on Deeds Daily Rental Equipment Tax 33 Bank Franchise Tax. 33 BPOL Taxes-Public Service 33 Transient Occupancy Tax 33 Interest Paid to Vendors.. 33 Interest Paid on Refunds. 34 Rolling Stock Tax 34 Passenger Car Rental Tax 34 Manufactured (formerly Mobile) Home Titling Tax Payments in Lieu of Taxes (PILT).. 34 APPENDIX A GENERAL PROPERTY TAX RATES... 35

9 REVIEW OF THE ECONOMY IN 2015 AND OUTLOOK FOR CALENDAR YEAR 2016 The County s revenues are affected, in varying degrees, by economic conditions at the national, state and local levels. Because of its proximity to the federal government and military employment centers, the local economy has some degree of insulation from the severity of cyclical downturns. The following narrative presents an economic assessment of the nation, the Commonwealth of Virginia, and Prince William County and highlights the relevant trends in place as we look forward to FY National Real Gross Domestic Product (GDP) is the broadest measure of economic activity in the United States and is a reliable indication of the overall strength and performance of the national economy. First quarter GDP for calendar year 2015, was a muted 0.6%, while the second quarter was reported at a more robust 3.9% and 2.0% in the third quarter. The advanced estimate for the fourth quarter of 2015 was 0.7%. Expectations are for moderate growth in Other parts of the economy also moved in the right direction over the course of the year, many appearing to pick up momentum towards the end of the year. The stock market and related indexes have been marked by volatile but steady growth since the depths of the Great Recession. Since the low point in 2009, the S&P has been largely positive and by December 31, 2015, the index stood above 2,000. In December 2015, national unemployment stood at 5.0% down from 5.6% one year earlier. Job creation, which declined severely during the most recent recession, continued an expanding trend in the 4th Quarter 2015 with 951,000 net new jobs reported. In two years, from December 2007 until December 2009, a net of over 8.5 million jobs were lost as the economic contraction took hold -- a loss of 5.9%. Since that time, however, a net 1

10 total of million jobs have been added (through December 2015) -- an increase of 7.6% in 72 months. In 2015 (January-December), non-farm payrolls have added 2.49 million net new jobs. Expectations going forward are for continued job growth and further reduction in the national unemployment rate as 2016 progresses. Also at the national level the homebuilding sector continued on a mostly stable, upward trend, though there is still much ground to be made up to return to a more normal activity level and overall, signs point to a slowing rate of growth towards the end of the year. Home affordability measures remain near all-time highs, even as younger first-time buyers seem reluctant or unable to take on home-ownership, indications that the national residential market continues a slow, but steady improvement. Across the nation, some million housing starts were reported (annualized) in December 2015, a 6.3% increase from one year earlier and December 2015 permits totaled million (annualized) -- a 16.2% increase, year-over-year. A total of 5.46 million existing homes were sold (annualized) in December 2015, a 7.7% annual increase and new sales (annualized) came in at 0.49 million, an increase of 13.6%. Wages and personal savings grew modestly during calendar year 2015, in part due to the impact of falling gas prices on consumers. Savings in fuel prices contributed to a boon to auto and light truck sales in 2015, however on the whole did not translate into increased consumerism in other retail areas. Retail activity, grew only modestly as the year progressed. U.S. retail and food services sales for December 2015 were down 0.1% from the previous month, but were up 0.1% from one year earlier. Gasoline sales declined by 1.1%, even as consumers were driving more. Clearly, rapidly falling prices in gasoline sales, which typically account for six to eight percent of total retail sales, are accounting for declines in overall retail sales volume, but are probably not an indication of consumer sentiment. In fact, as prices continue to decline, the average consumer may begin to use those savings on other purchases, like automobiles and light trucks, for example. Total sales of automobiles and light trucks, including imports, were reported at 17.3 million in December 2015, down from a strong 18.2 million sold in September 2015 but 5.5% higher than December Auto and truck sales during 2015 as a whole were at or near historic levels. Expectations are for auto and truck sales to continue at a robust pace in Virginia John Layman, Chief Economist and Director of Revenue Forecasting for the Virginia Department of Taxation, addressed the Revenue Committee on November 19, 2015, and presented a summary of the economic outlook for the Commonwealth. Mr. Layman noted that during fiscal year 2015 the Virginia economy performed generally near expectations, with considerable improvement over fiscal year Wages and salaries across the Commonwealth, forecast to grow by 3.4%, actually grew by 3.0%. Jobs in the Commonwealth, forecast to grow at 0.9%, actually grew by a 0.8% during the fiscal year, with gains in professional/business services, construction/mining, education and health services, and government. The statewide unemployment rate stood at 4.2% in December 2015, compared to 4.8% one year earlier. Personal income in the Commonwealth, forecast to grow by 3.7% during fiscal year 2015, actually grew by 3.9% year-over-year. 2

11 The Commonwealth s individual income tax non-withholding collections were $316.4 million (11.6%) ahead of the annual estimate for fiscal year Payroll withholding tax collections exceeded the annual estimate by $140.4 million (1.3%) for the same time period. This was largely attributed to gains in wages and salaries as well as employment gains throughout the Commonwealth. Total sales tax collections during fiscal year 2015 exceeded the forecasts by $17.6 million (1.6%), attributed primarily to the recovering housing market in Virginia during fiscal year The Commonwealths September 2015 Official and Working General Fund Forecast for Fiscal Year 2016 forecasts general funds revenue during fiscal year 2016 will exceed the forecast in the Chapter 665 Revenue Estimate for fiscal year 2016 by $345.5 million or 1.9%. The Governor s Advisory Council on Revenue Estimates (GACRE) met in November, 2015 and issued its interim revenue forecast, based on the updated economic outlook for Virginia as approved by the Joint Advisory Board of Economists (JABE) and GACRE. A majority of JABE members supported the standard outlook, since it was similar to the official forecast. The members also unanimously approved of maintaining a key assumption that Virginia would underperform the nation; however, the gap between the U.S. and Virginia economic performance would be smaller than previously forecast. Employment growth in the Commonwealth over the next two years is expected to be 1.4% and 1.8% respectively. Personal income is forecast to grow by 3.8% and 4.8% in fiscal years 2016 and Wages and salaries growth, are currently forecast to grow by 3.5% and 4.6% during the same time frame. Despite weak job growth, withholding gains have been picking up across the Commonwealth as has sales tax revenue. The expectations are for continued economic growth in fiscal years 2016 and Prince William County The Prince William County economy appears, for the most part, to be healthy and is the primary back drop that frames this outlook (relatively low gas prices, low interest rates, improving job market, and affordable housing relative to neighboring counties) is not expected to change dramatically over the near term. While the residential real estate market appears to have leveled off in terms of average sold price and number of sales, foreclosures continue on a downward pace, approaching levels recorded before the real estate downturn. Unemployment in the County continued to improve over the quarter and is still well below the national rate. Latest at-place employment data from the Virginia Employment Commission (2 nd Quarter 2015) indicate growth, year-over-year, in establishments, employment and average weekly wages in the County. The Prince William County commercial inventory, still elevated in terms of historic vacancy rates, improved from one year earlier. The Prince William economy appears, despite a recent plateau in the housing market, to be healthy, with expectations of continued growth in the coming year. Population and Cost of Living Prince William County s population was estimated at 431,863, on December 31, 2015, an increase of 1.4% year-over-year. The County population is estimated to have grown by 29,861 persons (7.43%) since April 1, 2010, when the population was 402,002. The Metropolitan-Washington Council of Governments projects in its Round 8.4 Cooperative Forecast: Employment, Population and Households that Prince William County will grow 3

12 to over 469,000 persons by the year 2020 or 15.70%, and to 535,629 by the year 2030 or 27.31% from Labor Force The Prince William County civilian labor force, as reported by the Virginia Employment Commission was 230,667 in November 2015, a decrease of 112 (-0.01%) since November 2014 but a five-year increase of 11,235 (5.1%). Employed persons in the labor force (222,458) increased by 1,542 (0.7%) since November 2014 and by 15,531 (7.5%) in the last five years. Unemployed persons in the County (8,209) decreased by a 1,654 (-16.8%) since November 2014 and by 4,296 (-34.4%) since November The November 2015 unemployment rate for Prince William County was 3.6%, compared to 4.3% just one year earlier [Note: December 2015 fell to 3.5%]. Job Market According to data from the U.S. Department of Labor and the Virginia Employment Commission, Prince William County has outpaced national, state and regional economies in business and job growth over the last five years but has lagged behind the state and region for at-place average weekly wage growth since The 2014 American Community Survey indicates that on the average, Prince William County workers continue to face long commute times. Some 24.9% of all County workers travel an hour or more one way to work. This figure is nearly three times the national number of 8.4% and is the fifteenth longest commute among the largest 828 counties in the United States. Of the 20 longest average commutes to work, eight are communities in the greater Washington area. The average travel time to work among Prince William County workers in 2014 was 39.2 minutes, an increase from 36.9 and 36 minutes in 2000 and 1990, respectively. The 2014 American Community Survey also indicated that 75.7% of Prince William County workers drive to work alone; 14.1% carpool to work; 5.1% use public transportation; 5.1% used other means, walked to work or worked at home. 4

13 In 2015 (2nd Quarter), there were 8,489 employment establishments reported in Prince William County, a growth rate of 4.8% year-over-year and 16.7% since By comparison, Northern Virginia establishments grew by 3.8% in one year and 9.1% since 2010; statewide, establishments grew by 4.4% in the last year and 8.5% since At-place employment in Prince William County (122,809 in the 2nd Quarter 2015) increased by 1.8% year-over-year and by 17.0% since By comparison, Northern Virginia employment increased by 1.4% in the last year and 4.8% since Employment in the Commonwealth grew by 1.6% in the last year, and increased by 4.9% since The average weekly wage in Prince William County ($838 in the 2nd Quarter 2015) grew by 1.9% year-over-year and 5.4% since At-place average weekly wages in Northern Virginia ($1,360) grew by 2.9% in the last year and 6.3% since In Virginia, weekly wages ($1,000) grew by 2.5% year-over-year and 7.6% since At Place Establishments, Jobs and Weekly Wages One and Five Year Growth Residential Housing Prince William County depends heavily on residential housing and consumer spending to maintain its prosperity and levels of local government services. In January 2015, all residential properties (including apartments) were valued at $44.8 billion -- an increase of over $3.2 billion, or 7.7% from January Residential properties (including apartments) currently account for 83% of the total land book value. 5

14 Prince William County History of the Real Estate Tax Base Source: Prince William County Real Estate Assessments Office Representatives from the REALTOR Association of Prince William (PWAR), addressing the Revenue Committee, reflected on conditions in the market during the year, noting continued low levels in inventory, with moderate increases in market price and sales numbers as the year progressed. They noted a leveling off in terms of prices as the year waned and expressed some concern for conditions going forward. According to data from Metropolitan Regional Information Systems (MRIS), 2015 home sales (single family, townhouses and condominiums) in the County totaled 6,652, a 3.3% increase from the 6,052 units sold in 2014, but a 43.3% increase over the trough year of 2007 when only 4,642 homes were sold. Over the seven-year period 2000 to 2007 an average of 7,961 homes were sold annually in the County. In the eight-year period 2008 to 2015, an average of 6,638 homes were sold annually (approximately 83% of the 2000 to 2007 average). The average sale price of homes sold in calendar year 2015 was $353, an increase of $2,016, or 0.6%, from the previous year, when the average sale price was $351,915. As illustrated in the chart below, annual growth rates for average sales price moderated while volume increased slightly during 2015, from the previous year, and are on a par with averages over the last five years. (Source: MRIS) 6

15 During December 2015, the average home in Prince William County sold for $351,548, a decrease of 3.88% year-over-year. The number of homes sold in December 2015 was 547, an increase of 4.39% from December The ratio of homes on the market to homes sold was 2.30, compared to 2.71 one year earlier. Average days on the market stood at 66 in December 2015, unchanged from the prior December. Foreclosure activity in Prince William County which increased substantially from 2007 to 2008 has steadily declined; however, the total number of foreclosures are still elevated by historic standards. A total of 506 foreclosures were reported for calendar year 2015, a decline of 6% since 2014 and 92% from 2008, the worst year in terms of numbers of foreclosures. Expectations are that the number of foreclosures will continue to decline. The number of permits issued for new housing construction reflects a market for new homes that made 7 Calendar Total Year Foreclosures , , , , , modest gains in 2010 as it began to emerge from the real estate downturn. New residential construction lost momentum between 2011 and 2013 but gained some traction during 2014 and continued that modest growth in 2015, particularly in multi-family units, but still has not approached the levels seen before the downturn. In 2015, a total of 2,311 residential occupancy permits were issued for new homes: 609 single family homes, 484 townhouses and 1,218 multi-family units (including apartments). This represents an increase of 9.8% year-over-year and the largest annual number since 2010 s 2,312 total new units. The mix of housing types has shifted in ten years, reflecting a changed market. In 2005, 65% of all permits issued were for single family detached, while 29% were for townhouses and 6% for condominiums. In 2015, by comparison, 26.4% of all permits issued were for single family detached, while 20.9% were for townhouses and 52.7% were for multi-family units. A total of 948 permits were issued for rental apartments, accounting for 77.8% of all multi-family permits and 41.0% of all residential occupancy permits issued in Commercial Inventory During the course of 2015, commercial inventory saw gradually improving conditions, although new construction continues at a generally reduced level. In so much as the County s commercial inventory is a part of the region s inventory, it is affected by general

16 conditions in the region s economy. Overbuilding during the last economic expansion was in part responsible for an oversupply of office and industrial inventory as the economy began to worsen. Furthermore, in certain types of product -- notably flex, which is often characterized by single large and specific uses -- the movement of one or two tenants can greatly impact vacancy rates. Current conditions suggest that the commercial real estate market continues to be in an absorption phase, particularly in office product. And, there is some evidence that the federal government as with the private sector, may be undergoing a change of sorts as to how and where business is conducted. As baby boomers move out of the labor force, some of the senior positions vacated may be allowed to lapse or be consolidated as younger, more productive and technically savvy workers move in. Furthermore, new ideas such as telecommuting and flex scheduling are gaining traction in the workplace -- all of which will affect the existing commercial inventory in Northern Virginia and Prince William County. With a marked improvement in industrial and flex vacancy rates, it is reasonable to expect demand for this product to increase at the local level. Retail space demand, which is largely population driven, will reflect in part the growth in the local population as well as individuals relative wealth and sense of wellbeing. Prince William County s close proximity to the federal government and affiliated contractor industries has largely isolated it from severe economic downturns in the past. Not only has this relationship provided some insulation from inevitable business cycle troughs, it has also provided the County with a demand base for its housing and retail trade. As previously noted, this may not hold true in the future. Lingering uncertainty over future federal expenditures may have a negative impact on commercial markets in the area -- particularly in defense-related industries. On the positive side, the Base Realignment and Closing Act (BRAC) designated both Marine Corps Base Quantico and Fort Belvoir Army Base as recipients of additional personnel as the Department of Defense continues consolidation of bases around the nation. Prince William County s location has meant, in the past, an increased demand for office and flex product in the Interstate 95/Potomac Communities corridor, particularly from contractors servicing the bases and the Department of Defense and Department of Homeland Security activities. In an era of declining defense budgets and changing security needs, future demand for this product is uncertain at best. In December 2015, according to Costar Realty Group (Costar), Prince William County commercial inventory included 44.6 million square feet (sq. ft.) of space in 1,982 buildings, with 2.84 million sq. ft. of vacant space -- a vacancy rate of 6.4%. Since 2011, some 1.77 million sq. ft. of commercial space has been added to the inventory, a growth rate of 4.1%. Vacancy rates moved lower in office and industrial products while increasing slightly in flex and retail categories since December Total vacancy across all categories in December 2015 was 6.4%, a decrease of 113,050 sq. ft. since December 2014, when the 8 Source: CoStar Realty Group

17 total vacancy rate was 6.7%. Total vacant space has declined by 852,202 sq. ft. since December 2011, when the total vacancy rate was 8.6%. Vehicles Vehicle additions are important to Prince William County in two ways. First, personallyowned vehicles are the County s primary source of personal property tax revenue. Second, strong increases in the stock of vehicles in the County represent robust local consumer demand. Steven Szakaly, Chief Economist from the National Automobile Dealers Association (NADA), addressed the Revenue Committee in December 2015 regarding national and local trends in vehicle sales. Mr. Szakaly noted that across the nation, sales of automobile and light trucks were at or near historic levels during 2015 led by robust sales in light trucks as gas prices continued to plummet as the year progressed. Expectations are that this trend will continue in In monitoring sales locally, month-by-month additions tend to be volatile and exhibit seasonal patterns. Therefore, the following graph includes a six-month moving average that shows the annual trend in net vehicle additions. Starting in April 2011, net vehicle additions in Prince William County experienced substantial gains driven by far fewer vehicles relinquished and very strong addition activity. This would suggest that residents are holding on to used vehicles longer even as they and others are buying new ones. Net new gains continued at a robust pace through 2012 and 2013, tailing down towards the end of 2013, before returning to very positive trends as 2014 progressed and continuing that trend during Source: Virginia Department of Motor Vehicles Retail Sales Tax Retail sales tax revenue provides financial resources to the County and serves as an indicator of consumer demand. According to the 2014 American Community Survey, the 2014 median household income in Prince William County was $92,104 and the 5-year average was $98,514. The County ranks twentieth among the largest communities in the United States, fifth among counties and cities in the Commonwealth, and is an indication of the relative wealth of Prince William County and the greater Washington metropolitan region, which included eleven of the top twenty counties in the nation for median household income. The County s high level of household income should contribute to positive sales tax collection in the future. 9

18 Conclusion In conclusion, the 2015 economy at the national and local level exhibited growth that was somewhat tempered by uncertainty. As the year progressed, the national economy appeared to be strengthening in some areas, notably job creation and automobile sales. Other areas, such as manufacturing, the stock market and non-auto retail sales were volatile and corporate earnings were mixed. The housing market, still well below pre-recession levels, continued to grow modestly, but appeared to moderate towards the end of the year. Job creation and unemployment, stubbornly entrenched at unhealthy levels throughout 2010 and 2011, improved in 2012 and 2013, and continued that trend during 2014 and accelerated in Nationally, the price of gasoline tumbled -- particularly towards the end of the year and consumer confidence appeared to grow modestly. At the local level, retail activity appeared to moderate toward the end of the year. Core inflation and mortgage rates remained low and home values in the nation continued to improve slowly during 2015, with growth rates moderating towards the end of the year. Locally, home values increased modestly over the course of the year, though new home construction has yet to make substantial headway. The monthly rate of foreclosures continued to ease throughout The County s commercial inventory remained primarily in an absorption phase, with declining vacancy, but little new construction. Retail activity and automobile sales continued to expand, though many consumers were compelled to hold on to their existing vehicles longer. While there is reason for optimism in 2016, some challenges remain nationally, statewide and locally. Prince William County continues to boast remarkable characteristics that stand it in good stead -- exceptional human capital, a relatively diverse local business community, and the County s enviable position as an integral part of the Northern Virginia region. There are concerns that a reduced role by the federal government with regards to job creation and economic expansion in the greater Washington D.C. Metropolitan area will have a broader lasting effect over the long term. In an environment of continued pressure on the federal budget, new challenges may be anticipated on the regional and local economies. Historically, however, Prince William County as part of the Washington D.C. Metropolitan area, and the Northern Virginia economy in particular, has shown remarkable resilience during the ups and downs of the normal business cycle. 10

19 REAL ESTATE TAX RATE AND MAJOR REVENUE SOURCES On April 23, 2015, the Board of County Supervisors adopted the FY 2016 Fiscal Plan. The adopted FY 2016 real estate tax rate of $1.122 had the following impacts on property owners: the average real estate tax bill on existing, residential properties increased $149 or 4.16%; and the average real estate tax bill on commercial properties increased 2.45%. FY 2017 Proposed Real Estate Tax Rate and Average Tax Bill On December 15, 2015, the Board of County Supervisors provided budget guidance to staff in preparation for the FY 2017 Fiscal Plan. The proposed real estate tax rate of $1.145 is based upon the policies contained in the Adopted Fiscal Year Five-Year Plan and has the following tax bill impacts on property owners: the average real estate tax bill on existing, residential properties will increase $145 or 3.88%; and the average real estate tax bill on existing, commercial properties will increase 3.58%. The following chart illustrates the recent history and five-year plan of the County s real estate tax rate and average residential real estate tax bill. The average tax bill is proposed to increase by 3.88% annually in FY Major Revenue Sources 1 Real Estate Tax Rate: $1.122 $1.145 $1.166 $1.176 $1.186 $1.196 % to Total FY 16 ($ in 000s) (FY 17) Revised FY 17 FY 18 FY 19 FY 20 FY 21 Real Estate Taxes 66.14% $588,357 $621,237 $651,856 $682,806 $715,567 $749,831 Personal Property Taxes 17.70% 162, , , , , ,590 Sales Tax 6.61% 60,280 62,088 63,953 65,871 67,846 69,882 Consumer Utility Tax 1.52% 13,940 14,240 14,460 14,740 15,040 15,340 Communications Sales Tax 1.86% 17,700 17,430 17,260 17,260 17,260 17,260 BPOL Tax 2.77% 25,286 26,051 26,839 27,785 28,904 30,268 Investment Income 0.78% 6,342 7,297 8,489 9,483 10,594 12,109 All Other 2.62% 24,238 24,629 24,816 25,387 25,973 26,566 Total General Revenue % $898,343 $939,252 $980,123 $1,022,962 $1,068,194 $1,115,846 School Portion 1 $510,001 $533,333 $556,638 $581,069 $606,869 $634,049 County Portion 383, , , , , ,897 Transportation Fund 5,340 5,450 5,560 5,670 5,780 5,900 Total General Revenue $898,343 $939,252 $980,123 $1,022,962 $1,068,194 $1,115,846 1 On April 23, 2013, the Board of County Supervisors approved an amendment to the County/Schools Revenue Sharing Agreement to transfer 57.23% of all general revenues, excluding recordation tax revenue, to the Schools as support for the annual Schools budget and 42.77% to support the annual County budget in each year of the Five-Year Plan. 11

20 Key Assumptions The following sections of this report contain the key assumptions that were the topic of discussion at the Revenue Committee Meetings. The comments and insights from public and private sector participants contributed to the formation of these assumptions. Other references and information sources were used to supplement the assumptions derived in the committee discussions. FY PRELIMINARY GENERAL COUNTY REVENUE ESTIMATE BY CATEGORY GENERAL REVENUE SOURCE OL3 FY 17 Forecast FY 18 Forecast FY 19 Forecast FY 20 Forecast FY 21 Forecast Real Estate 10 $ 616,378,000 $ 647,122,000 $ 678,432,000 $ 711,591,000 $ 746,282,000 Rollback Suppement 100, , , , ,000 Real Estate Exonerations 20 (16,028,400) (16,827,800) (17,641,800) (18,504,000) (19,405,900) SUBTOTAL 600,449, ,394, ,890, ,187, ,976,100 Real Estate Public Service 41 19,409,045 19,962,669 20,335,214 20,713,214 21,096,740 Real Estate Tax Deferral 21 (500,000) (500,000) (500,000) (500,000) (500,000) Land Redemption , , , , ,000 Real Estate Penalties 160 1,563,000 1,684,000 1,766,000 1,852,000 1,943,000 TOTAL REAL ESTATE $ 621,236,645 $ 651,855,869 $ 682,806,414 $ 715,567,214 $ 749,830,840 Personal Property 71 $ 164,900,000 $ 171,000,000 $ 178,100,000 $ 185,400,000 $ 192,900,000 Personal Property Prior Year 72 50,000 50,000 50,000 50,000 50,000 Personal Property Exonerations 79 Personal Property Tax Deferral 81 (500,000) (500,000) (500,000) (500,000) (500,000) Personal Property Penalties 170 1,830,000 1,900,000 1,980,000 2,060,000 2,140,000 TOTAL PERSONAL PROPERTY $ 166,280,000 $ 172,450,000 $ 179,630,000 $ 187,010,000 $ 194,590,000 LOCAL SALES TAX 210 $ 62,088,000 $ 63,953,000 $ 65,871,000 $ 67,846,000 $ 69,882,000 CONSUMER UTILITY TAX 220 $ 14,240,000 $ 14,460,000 $ 14,740,000 $ 15,040,000 $ 15,340,000 BPOL TAXES LOCAL BUSINESSES 235 $ 26,051,000 $ 26,839,000 $ 27,785,000 $ 28,904,000 $ 30,268,000 INVESTMENT INCOME 510 $ 7,297,000 $ 8,489,000 $ 9,483,000 $ 10,594,000 $ 12,109,000 COMMUNICATIONS SALES TAX 1339 $ 17,430,000 $ 17,260,000 $ 17,260,000 $ 17,260,000 $ 17,260,000 Interest on Taxes 140 $ 1,454,000 $ 1,523,000 $ 1,594,000 $ 1,669,000 $ 1,748,000 Daily Equipment Rental Tax , , , , ,000 Bank Franchise Tax 230 1,500,000 1,200,000 1,200,000 1,200,000 1,200,000 BPOL Public Service 236 1,518,000 1,564,000 1,611,000 1,659,000 1,709,000 Vehicle Decals 250 8,460,000 8,660,000 8,900,000 9,140,000 9,380,000 Recordation Tax 260 7,340,000 7,490,000 7,640,000 7,790,000 7,950,000 Tax on Deeds 261 1,730,000 1,740,000 1,770,000 1,810,000 1,840,000 Transient Occupancy Tax 270 1,400,000 1,428,000 1,457,000 1,486,000 1,516,000 Interest Paid to Vendors 520 (100,000) (100,000) (100,000) (100,000) (100,000) Interest Paid on Refunds 521 (55,000) (55,000) (55,000) (55,000) (55,000) Rolling Stock Tax ,000 90,000 90,000 90,000 90,000 Passenger Car Rental Tax , , , , ,000 Mobile Home Tilting Tax ,000 35,000 35,000 35,000 35,000 Federal Payment in Lieu of Taxes ,000 70,000 70,000 70,000 70,000 Undistributed & Miscellaneous ,000 7,000 7,000 7,000 7,000 ALL OTHER REVENUE $ 24,629,000 $ 24,816,000 $ 25,387,000 $ 25,973,000 $ 26,566,000 TOTAL GENERAL REVENUE $ 939,251,645 $ 980,122,869 $ 1,022,962,414 $ 1,068,194,214 $ 1,115,845,840 12

21 REAL PROPERTY REVENUE Real estate revenues are broken down into the following categories: general real estate tax, public service tax, real estate tax deferral, land redemption, and real estate penalties. Real Estate Taxes The real estate tax is the single largest revenue source for Prince William County contributing approximately 66.14% of general revenues (FY 2017 forecast). It is levied on all land, improvements, and leasehold interests on land or improvements (collectively called real property ) except that which has been legally exempted from taxation by the Prince William County Code and the Code of Virginia. The revenue summary for the general real estate tax applies only to real property assessed locally, which includes residential, apartments, commercial and industrial, and agricultural and resource land property types. The table shows a five-year history of this revenue source and the fiveyear revenue forecast. Revenue History % Change FY 11 $ 458,409, % FY 12 $ 474,859, % FY 13 $ 496,366, % FY 14 $ 515,274, % FY 15 $ 557,365, % Adopted $ 583,522, % Revised $ 584,404, % Revenue Forecast FY 17 $ 616,378, % FY 18 $ 647,122, % FY 19 $ 678,432, % FY 20 $ 711,591, % FY 21 $ 746,282, % Note that public service properties including railroads, utilities, etc. are not assessed locally. Rather, these properties are assessed by the State Corporation Commission and the Virginia Department of Taxation. Therefore, real estate revenues from these properties are not included. Residential Real Estate During calendar year 2015 (CY 2015) the residential real estate market continued to appreciate, albeit slowly due to the softness of the economy. Positive factors affecting the market were relatively low interest rates and strong sales activity. The negative factors such as lackluster wage growth held the market back. Following a 6.2% increase in values in 2014, the average existing home value increased approximately 1.8% in In 2015, there were 506 foreclosures of residential properties compared to 541 in 2014, a decrease of 6%. The average number of days on the market remained stable at 66 days from December 2014 to December Bank owned properties and short sales made up approximately 5% of all sales through the end of December The residential real estate market consists of four property types: single-family homes, townhouses, residential condominiums, and apartments. Duplex units are included within the townhouse category. The apartment category consists of units within rental apartment communities and apartment buildings with five or more units. 13

22 Residential Appreciation The following chart shows a history of actual residential appreciation (excluding rental apartments) from calendar year 1984 through 2014 and the General Revenue Committee s estimates thereafter. 30% 25% 20% 15% 10% 5% 0% -5% 13.13% -1.79% 17.47% 27.20% 0.10% 6.18% 3.00% -10% -15% -20% -25% -30% -35% Actual Residential Appreciation FY17-21 Forecast Average Residential Real Estate Appreciation 4.5% CPI (Balt/Wash metro area) % CY84, FY86 CY85, FY87 CY86, FY88 CY87, FY89 CY88, FY90 CY89, FY91 CY90, FY92 CY91, FY93 CY92, FY94 CY93, FY95 CY94, FY96 CY95, FY97 CY96, FY98 CY97, FY99 CY98, FY00 CY99, FY01 CY00, FY02 CY01, FY03 CY02, FY04 CY03, FY05 CY04, FY06 CY05, FY07 CY06, FY08 CY07, FY09 CY08, FY10 CY09, FY11 CY10, FY12 CY11, FY13 CY12, FY14 CY13, FY15 CY14, FY16 CY15, FY17 CY16, FY18 CY17, FY19 CY18, FY20 CY19, FY21 CY of Value, FY of Revenue Expected changes in appreciation for residential and apartment properties during the forecast period are as follows: Single-Family, Revenue Year Townhouse and Condominium Apartments FY % 2.50% FY % 2.50% FY % 2.00% FY % 2.00% FY % 2.00% 14

23 The strengths of the Washington D.C. Metropolitan area include relatively low unemployment (compared to national and state unemployment rates) and stable job growth expectations. The residential market is forecast to continue to see slow but steady price improvement over the course of the next twelve to twenty-four months depending on how economic uncertainties unfold, although the number of transactions is expected to continue to trail the levels during the boom years. Apartments Market Value Change Apartment values experienced an increase despite no change in base capitalization rates from last year according to the Fourth Quarter 2015 Price Waterhouse Coopers Real Estate Investor Survey. The reason for no change in the capitalization rate is the relative saturation of the apartment market. The apartment market has experienced increases in the net operating incomes stemming from higher rents and stable vacancies in Prince William County as well as newer high end apartment complexes. Appreciation is projected to continue throughout FY 2017 and FY 2018 at a rate of approximately 2.5% and 2% in FY 2019 through FY Residential New Construction Units Growth is defined as the change in assessed value due to the subdivision of land and the construction of new residential units. Construction taking place in one calendar year affects real estate revenues two fiscal years later. For example, construction that occurred in calendar year 2015 will be reflected in the County s January 1, 2016, land book which provides the basis for real estate tax revenue received in fiscal year The table summarizes the expected number of newly constructed residential units during the forecast period. The volume of new home starts is expected to rise slowly as the economy stabilizes and the Residential Growth Revenue Year / Calendar Year Single- Family Townhouse Condominium Apartments Total Units FY17/CY ,028 2,244 FY18/CY ,550 FY19/CY ,550 FY20/CY ,600 FY21/CY ,600 inventory of foreclosed homes diminishes during the remainder of the forecast period. Construction of new apartment units is expected to add just over 1,000 units in FY 2017 and decline further during the remainder of the forecast period as the supply of apartments begins to outstrip demand. Residential Values per New Unit The estimated average assessed value of a new home (all types) constructed during calendar year 2015 was approximately $434,558, a 3% decrease over the average assessed value of homes built in 2014 which was $449,100. It should be noted that the overall 15

24 assessed value of a new home is affected by the mix of single family, townhouse, and condominium units constructed in any given year. The estimated average assessed value of a new single family home was approximately $560,800 in In 2015, the estimated average assessed value of a new townhouse and condominium unit was approximately $366,560 and $286,570 respectively. New Residential Assessed Value per New Unit Overall Revenue Year Residential (Excludes Apts.) Single-Family Townhouse Condominium Apartments FY 17 $434,558 $560,800 $366,560 $286,570 $188,800 FY 18 $437,416 $560,800 $366,600 $286,600 $190,700 FY 19 $450,528 $577,600 $377,600 $295,200 $192,600 FY 20 $453,223 $594,900 $388,900 $304,100 $194,500 FY 21 $466,804 $612,700 $400,600 $313,200 $196,400 Commercial Real Estate Calendar year 2015 market activity in Prince William County resulted in commercial properties appreciating approximately 1.5%. Commercial real estate, particularly in terms of vacancy rates, strengthened as the year progressed but continues to be primarily in an absorption phase. A discussion of commercial property inventory and vacancy rates is available in the Introduction Section. Commercial appreciation for FY 2017 FY 2021 is forecast at 1.5% for the first two years of the Five-Year Fiscal plan gradually increasing to 2.5% by FY Average assessed values per square foot for FY 2017 are determined based on the added building value resulting from new construction completed during calendar year These unit values are then adjusted to reflect the general appreciation of commercial properties during the remainder of the forecast period. Commercial properties are categorized into five property types: retail, office, hotel, industrial, and special purpose. For FY 2017 (calendar year 2015 market activity), approximately 774,000 square feet of commercial space was added to the assessment rolls. 2 Note that increases or decreases in dollars per square foot from one year to the next are not indicative of appreciation trends. Unit values are based on the contributory value of the new buildings in a category divided by the added square footage in that category. Building values per square foot vary widely among different building types within each category and the types of new buildings within categories vary from one year to the next. 16

25 New Commercial Construction Square Footage Revenue Misc. Total Year Retail Office Hotel Industrial Properties Special Use Commercial FY 17 88,884 7, , ,000 10, ,904 FY 18 50,000 20,000 72, ,000 10, ,150 FY 19 50,000 20,000 50, ,000 10, ,000 FY 20 50,000 20,000 50, ,000 10, ,000 FY 21 50,000 20,000 50, ,000 10, ,000 Retail New construction in the retail sector accounted for approximately 12% of all commercial/industrial growth during calendar year 2015, adding nearly 89,000 square feet to the tax base. Shopping center capitalization rates decreased slightly in calendar year Vacancies and rents were also, for the most part, stable. Industrial Construction of industrial properties accounted for approximately 63% of all new commercial construction during calendar year 2015, adding approximately 484,000 square feet to the commercial/industrial base. This represents an increase from the previous year and is directly linked to the level of inventory. Both rents and occupancy levels of industrial properties increased in Hotels In calendar year 2015, two new hotels were built which accounted for 24% of the commercial construction. Office Buildings In calendar year 2015, approximately 7,100 square feet of office space was added in the County. Growth within the office sector is expected to be sustained only at a low rate during the forecast period since there is an inventory overhang and accordingly very few projects in the pipeline. Special Use Properties within the special use category comprise taxable schools, healthcare facilities, and other types of properties that have no foreseeable alternate uses. There were no special use properties built in calendar year Real Estate Exonerations Estimated real estate tax exonerations are deducted from the gross local real estate tax revenue to arrive at the net local real estate tax revenue. Exonerations are decreases in revenue due to assessment reductions, changes in tax liability, or tax relief programs. Assessment reductions are typically caused by appeals of assessed values. Changes in tax liability occur when a property changes from a taxable to a tax-exempt status. Taxes are also exonerated for properties whose owners qualify for the Tax Relief Program for the Elderly and Disabled or the Tax Relief Program for Disabled Veterans and Surviving Spouses. 17

26 Public Service Taxes Public service taxes are levied on non-locally assessed properties. The State Corporation Commission (SCC) assesses all telecommunications companies, water companies, intrastate pipeline distribution companies, and electric light and power companies. The Virginia Department of Taxation assesses railroads and interstate pipeline transmission companies. Historically, the majority of changes within the public service classification have been attributable to new construction growth. Public service market values are not subject to the same market changes as other real estate properties. The impact of reducing the tax rate over the next five years will reduce this revenue source. Revenue History % Change FY 11 $ 18,129, % FY 12 $ 17,703, % FY 13 $ 18,400, % FY 14 $ 17,737, % FY 15 $ 17,589, % Adopted $ 17,357, % Revised $ 18,830, % Revenue Forecast FY 17 $ 19,409, % FY 18 $ 19,962, % FY 19 $ 20,335, % FY 20 $ 20,713, % FY 21 $ 21,096, % Real Estate Tax Deferrals If unpaid real estate taxes at the end of a fiscal year are less than at the beginning of that fiscal year, the amount of the reduction is recorded as revenue in real estate tax deferrals. If unpaid real estate taxes at the end of a fiscal year are more than at the beginning of that fiscal year, the amount of the increase is recorded as negative revenue in real estate tax deferrals. Real estate taxes collected after becoming more than three years delinquent are accounted for as land redemption revenue. On December 10, 1996, the Board of County Supervisors approved an initiative to decrease the percentage of unpaid property taxes at fiscal year-end. The BOCS has continued to support this initiative and at the end of FY 2015, the percentage of unpaid property taxes was 1.4% and the County s best unpaid property tax rate since data was first collected in The revenue forecast is made by estimating collections of unpaid personal property taxes up to five years delinquent. This revenue category varies depending on the amount of unpaid taxes at the end of one year compared to the previous year due to 1) voluntary payment of taxes, 2) County resources allocated to collection efforts, and 3) the success of those collection efforts. Land Redemption Land redemption is the recognition of real estate taxes collected after being more than three years delinquent. The Code of Virginia allows Prince William County to pursue the collection of delinquent real estate taxes for twenty years. This revenue category varies depending on the amount of unpaid taxes three years and older, and the level of success in collecting these past due amounts. The forecast estimates approximately 20% to 25% of 18