Prince William County, Virginia. Fiscal Year Projections of General County Revenue

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1 Prince William County, Virginia Fiscal Year Projections of General County Revenue Board of County Supervisors Sean T. Connaughton Chairman (at large) Ruth T. Griggs Vice-chairman, Occoquan District Hilda M. Barg Woodbridge District Maureen S. Caddigan Dumfries District Mary K. Hill Coles District John D. Jenkins Neabsco District L. Ben Thompson Brentsville District Edgar S. Wilbourn, III Gainesville District County Executive Craig S. Gerhart Prepared by the Department of Finance

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3 Revenue Committee Christopher E. Martino Director of Finance William B. Hoffman Assistant Director of Finance Eric Mays Building Official, Public Works Nimet El Alaily Deputy Planning Director David Tyerar Budget Director Robert W. Wilson Director, Public Works Tom Bruun Assistant Director, Public Works David S. Cline School Finance Director Finance Department Staff Project Manager Laura E. Morrison Financial Analyst Steve Ferlotti Assistant Finance Director Rusty Watts Taxpayer Services Manager Robert A. Willard Portfolio Manager Mark Hinman Accountant J. Robert Pugh Financial Analyst Allison Lindner Real Estate Division Manager Susan D. Schager Assessments Coordinator Bill Vaughan Sr. Research Manager Economic Development Carl W. Hampton Fiscal Services Manager FY Revenue Estimates - page iii

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5 The Revenue Committee Expresses Its Appreciation to the Business Community Who Assisted in the Development of this Report Jason Altman Economist N.A.D.A. Official Used Car Guide Ed Byrne Vice President of Planning KSI Christine Chmura, Ph.D President and Senior Economist Chmura Economics & Analytics Jay Norman Associate Broker Norman Realty Ann Battle Senior Economist Virginia Economic Development Partnership Michael Capretti Vice President of Land Miller and Smith Land, Inc. Frank Cowles Owner & President Cowles Nissan Chrysler Plymouth Ray E. Owens, III Senior Economist and Research Officer Federal Reserve Bank of Richmond Kevin Runey General Manager Cowles Nissan Chrysler Plymouth U.S. Chamber of Commerce National Chamber Foundation Economic Outlook with The Honorable Chairman Greenspan November 14, 2001 Graphic courtesy of Michael Delahay U.S. Chamber of Commerce FY Revenue Estimates - page v

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7 COUNTY OF PRINCE WILLIAM 1 County Complex Court, Prince William, Virginia (703) Metro ext. 6700, FAX FINANCE DEPARTMENT Christopher E. Martino Director of Finance February 26, 2002 TO: FROM: Craig S. Gerhart County Executive Christopher E. Martino Director of Finance RE: Revenue Committee Report, Fiscal Year I am pleased to present the FY03-07 Projections of General County Revenue. This report was prepared in accordance with the County s Principles of Sound Financial Management as part of our responsibility to citizens to carefully plan for the funding of services, including the provision and maintenance of public facilities. During the development of the revenue forecast, the Revenue Committee again sought input from private sector representatives associated with the County s major revenue sources. These discussions assisted the Committee in identifying and interpreting important local and national economic conditions and trends. The assumptions determined by the Revenue Committee provide the capacity to reduce the real estate tax rate by seven cents in fiscal year 2003 from $1.30 to $1.23, and by 1 cent in fiscal years , and by yet another 1 cent in fiscal year to $1.21. This plan allows the Board of County Supervisors to exceed their goal of reducing the tax rate to $1.28 by fiscal year 2010 a full seven years early and five cents more. The final projections are $237 million greater than the prior year forecast for the same period. This increase is due to the continued high levels of activity in the real estate market and the continued growth of Prince William County. Accordingly, I recommend the updated revenue estimates be used in preparing the 2003 Fiscal Plan, the Capital Improvement Plan for fiscal years 2003 to 2008, and for other strategic financial planning purposes. 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. FY Revenue Estimates - page vii

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9 TABLE OF CONTENTS INTRODUCTION...1 Local Business Representatives...1 Tax Reduction Plan...2 Revenue Increases Not Triggering a Tax Reduction...2 Revenue Increases Triggering a Reduction in the Tax Rate...3 Performance of the Tax Reduction Plan...5 GENERAL ECONOMIC CLIMATE...7 PRIOR YEAR FORECAST ASSUMPTIONS...7 CURRENT ECONOMIC CLIMATE...8 Consumer Confidence...9 Employment...10 Residential Real Estate...11 VIRGINIA - NORTHERN VIRGINIA PROFILE...13 Employment...13 Residential Real Estate...15 Retail Spending...16 OUTLOOK IS FOR SLOWER GROWTH...17 MAJOR REVENUE SOURCES AND KEY ASSUMPTIONS...19 Real Estate Revenue...21 Real Estate Taxes - 010/ Residential Real Estate...22 Commercial Real Estate...27 Retail...27 Hotels...29 Office Buildings...29 Technology Services...29 Exonerations...30 Public Service Taxes Real Estate Tax Deferrals Land Redemption Real Estate Penalties Personal Property Revenue...36 Personal Property Tax on Vehicles - 071/079/ Individual Personal Property Tax...37 Business Personal Property Tax...38 Personal Property Prior Year Personal Property Deferrals Personal Property Penalties - Current Year FY Revenue Estimates - page ix

10 LOCAL Sales Tax Revenue...43 Local Sales Tax Consumer Utility Revenue...48 Consumer Utility Tax Housing Units...50 Number of Businesses...50 Percent Change in Wired Revenue...51 Percent Change in Cellular Phone Revenue...52 BPOL Revenue...53 BPOL Tax Revenue Investment Income...55 Investment Income Portfolio Yield...55 Portfolio Size...58 ALL OTHER REVENUE SOURCES...59 Revenue Sources Over $1.5 Million...59 Interest on Taxes Vehicle Decals / Recordation Tax Cable TV Fees Revenue Sources Under $1.5 Million...63 Daily Rental Equipment Tax Bank Franchise Tax BPOL Taxes - Public Service Additional Tax on Deeds Transient Occupancy Tax Miscellaneous Business Licenses Interest Paid to Vendors Interest Paid on Refunds ABC Profits State Wine Tax Rolling Stock Tax Passenger Car Rental Tax Mobile Home Titling Tax Federal Payment in Lieu of Taxes Appendix A - General Property Tax Rates...67 INDEX OF TABLES AND FIGURES...69 FY Revenue Estimates - page x

11 INTRODUCTION The Revenue Committee is appointed by the County Executive and chaired by the Director of Finance. The Committee met a number of times between October 2001 and December 2001 to review economic data and trends, revenue forecast assumptions, methodologies, and results. One month before the Committee convened, the tragic events of September 11 occurred. As the Committee was meeting, the economy was further impacted by the announcement of a national recession, which began in March, anthrax scares, ongoing military action, and consumer confidence dropped to its lowest level since the gulf war. However, Prince William County s current year revenues remained on track to exceed projections. The Revenue Committee developed forecast assumptions while analyzing such events, as detailed in this report. LOCAL BUSINESS REPRESENTATIVES The Revenue Committee, in addition to performing its own research, consulted members of the local business community and nationally recognized experts to assess national and local economic patterns. The meetings and discussions with the industry experts helped the Committee to identify and interpret important local and national economic conditions and trends. FY Revenue Estimates - page 1

12 TAX REDUCTION PLAN On April 14, 1999, the Board of County Supervisors adopted a Tax Reduction Revenue Trigger Plan. This plan states that general revenues in excess of current estimates (the prior year revenue forecast ) generated by real increases in residential or commercial value provide a trigger(s) to reduce the real estate tax rate. The goal is to reduce the real estate tax rate by eight cents over a ten-year period. The first penny of tax rate equivalent of additional revenues is applied to reduce the real estate tax rate. The second penny of tax rate equivalent of additional revenues is applied to County and Schools capital/operating improvements. The third penny of tax rate equivalent of additional revenues is applied to County compensation and School spending. For additional revenues above the three cents, these options are repeated. Revenue Increases Not Triggering a Tax Reduction Revenue increases beyond those forecasted can be accompanied by additional costs beyond those included in the 5-year plan. Revenue increases caused by additional residential units over the prior year estimates and inflation above prior year estimates are accompanied by additional costs and are therefore not available for a tax rate reduction. Approximately $7,254,000 of additional revenue in FY 2003 is not available for a tax rate reduction. The following table summarizes inflation and additional housing units assumed in the FY03-07 forecast as compared to the assumptions in the FY02-06 Forecast: Table 1. Assumptions Not Triggering a Tax Reduction FY2003 FY2004 FY2005 FY2006 FY2007 Number of Additional Housing Units Base Forecast 3,450 2,900 2,750 2,700 N/A Current Forecast 4,883 3,575 3,305 3,275 3,275 Inflation Base Forecast 2.7% 2.7% 2.7% 2.7% N/A Current Forecast 2.0% 2.5% 3.0% 3.0% 3.0% FY Revenue Estimates - page 2

13 Revenue Increases Triggering a Reduction in the Tax Rate Revenue increases above the adopted base forecast (the prior year forecast ) that are not accompanied by additional costs provide positive fiscal effects and are available for a tax rate reduction. Such revenue increases are caused by additional increases in residential property values, additional commercial square footage, or new revenue sources. The following table compares the assumptions included in the prior year with the current forecast. Revenue increases attributable to these assumptions are available for triggers. The FY03-07 Forecast then becomes the base year for the next years forecast: Table 2. Tax Triggers FY2003 FY2004 FY2005 FY2006 FY2007 Avg. Value of New Residential Property Base Forecast $ 223,487 $ 229,145 $ 237,994 $ 242,754 N/A Current Forecast 284, , , , ,778 Increase in Existing Residential Property Base Forecast 4.5% 3.0% 2.5% 2.0% N/A Current Forecast 16.5% 8.0% 4.0% 4.0% 4.0% Increase in Commercial Value Base Forecast 2.0% 2.0% 2.0% 2.0% N/A Current Forecast 6.8% 5.0% 3.0% 3.0% 3.0% Increase in Commercial Square Feet Base Forecast 1,180,000 1,030,000 1,030,000 1,200,000 N/A Current Forecast 1,401, , , ,400 1,000,000 FY Revenue Estimates - page 3

14 Implementing the Tax Reduction Plan The FY02-06 forecast becomes the base year for FY Therefore, revenues in excess of the base year are susceptible to the trigger methodology, or needed to accommodate growth or inflation. The first penny of tax rate equivalent of additional revenues is applied to reduce the real estate tax rate. The second penny of tax rate equivalent of additional revenues is applied to County and Schools capital/operating improvements. The third penny of tax rate equivalent of additional revenues is applied to County compensation and Schools spending. The FY03-07 forecast assumptions triggered a cumulative total of nine tax rate reductions, eight spending triggers, and nine compensation triggers 1. Revenues are forecast for FY03-FY07 trigger and non-trigger revenues as follows: Table 3. Implementing Tax Reduction Plan FY2003 FY2004 FY2005 FY2006 FY2007 Real Estate Tax Rate $ 1.23 $ 1.22 $ 1.22 $ 1.21 $ /17/02 Forecast $456,068,000 $499,742,000 $535,775,000 $573,154,000 $616,476,000 Adopted Budget 423,979, ,460, ,537, ,319,000 Increase in Revenue Forecast $ 32,089,000 $ 52,282,000 $ 62,238,000 $ 72,835,000 $616,476,000 Revenues Associated with Expenditures $ 7,254,000 $ 14,153,000 $ 20,249,000 $ 27,211,000 Revenues Available for Additional Spending ( Trigger Revenues): Spending (2 nd Penny) 11,123,000 17,426,000 18,767,000 20,238,000 Compensation/Spend.(3 rd Penny) 13,347,000 19,916,000 21,447,000 23,129,000 Total Additional Spending $ 24,470,000 $ 37,342,000 $ 40,214,000 $ 43,367,000 Balance (one-time Revenues) 365, ,000 1,775,000 2,258,000 Revenue Increase $ 32,089,000 $ 52,282,000 $ 62,238,000 $ 72,835,000 1 The base forecast assumptions provided the capacity for one additional spending trigger and not an equivalent compensation trigger. The compensation trigger is therefore accomodated in this forecast. FY Revenue Estimates - page 4

15 Performance of the Tax Reduction Plan The assumptions determined by the Revenue Committee provide the capacity to reduce the real estate tax rate as described earlier. The following chart illustrates the performance of the trigger plan as forecast for FY03-07, benchmarked to the original goal adopted April 14, 1999 and to the forecast for FY02-06: $1.36 $1.35 $1.34 $1.33 $1.32 $1.31 $1.30 $1.29 $1.28 $1.27 $1.26 $1.25 $1.24 $1.23 $1.22 $1.21 $1.20 Goal Adopted 4/14/ Forecast Forecast FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Figure 1. Performance of the Tax Reduction Plan FY Revenue Estimates - page 5

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17 GENERAL ECONOMIC CLIMATE PRIOR YEAR FORECAST ASSUMPTIONS For the fiscal year forecast period, the Committee assumed the economy would downshift but not be thrown into reverse, 2 and a recession 3 was unlikely. The survey panel for the National Association of Business Economists did agree that the economic expansion would most likely continue through calendar year Housing values across the country rose faster in calendar 2001 than at any time in the past 12 years. On Oct. 25, 2000 David Lereah of the National Association of Realtors remarked, The current housing market is nothing short of remarkable. Consumer Demand remains remarkably resilient right now and we re not seeing a slowing in housing activity. The monkey wrench right now is the volatile stock market. 5 At that time, there was no excess labor supply in the market. 2 The Kiplinger Letter, Dec. 29, As generally defined as 2 consecutive quarters of negative quarterly annualized growth (a contraction) in real GDP. 4 NABE Outlook, November, Existing-Home Sales Decline Despite Lower Mortgage Rates. [ Oct. 25, FY Revenue Estimates - page 7

18 CURRENT ECONOMIC CLIMATE When the revenue committee was formulating its assumptions for the FY03-FY07 forecast, the United States, its business, and its residents were still enveloped in the aftermath of the 9/11 terrorist attacks. Even prior to September 11, the collapse of the technology spending boom in both the United States and Europe hurt corporate profits and investment returns. The attacks damaged the economy significantly, and may have been an important factor in turning the episode into a recession. 6 When the revenue committee was formulating its assumptions for the FY03-FY07 forecast, a committee of academic economists had just announced that the United States has been in a recession since March The bubble we had in this country was really a global bubble. Now it has popped, according to Mr. Roach of Morgan Stanley. 8 Months later, on January 11, 2002, Alan Greenspan cited there are tentative indications that the recession is nearing an end, but also risks such as weak business investment and profits and the threat to consumer spending from previous losses of stock wealth, and rising unemployment. 9 The following chart shows the change in financial markets through the calendar year 2001, reflecting loss of consumer wealth and reduced business profits over the year. Figure 2. Performance of DJIA, S&P 500, and Nasdaq in Economy Slipped into Recession in March, Panel Says, Washington Post, Nov. 27, Ibid. 8 World s Economy Slows to a Walk in a Rare Lock Step, The New York Times, Aug. 20, 2001, p. A-1. 9 Fed Officials Sound More Upbeat Note on Economy, The Wall Street Journal, Jan. 21, 2002, p. A2. 10 After Two Years of Suffering, Investors Hope for a Rebound, The Wall Street Journal, Jan. 2, 2002, p. R- 1. FY Revenue Estimates - page 8

19 Currently, the stock market has continued to stay above 9/11 levels. Even the high-tech sector has rebounded somewhat. Merrill Lynch technology strategist Steve Milunovich cautioned in a report to clients on January 11 that at today's prices, about 70 percent of the tech stocks we evaluated appear overvalued". Consumer Confidence Stock market prices influence consumer confidence. 11 Consumer confidence also correlates closely with joblessness, inflation, and real incomes. The Consumer Confidence Survey measures the level of confidence that individual households have in the performance of the economy. 12 Although consumer confidence has dropped from its record high, the index is still above 1990 recessionary levels, when it fell below 60. In this current national recession, consumer confidence fell sharply in October to 85.5, the lowest reading since : Figure 3. Conference Board: Consumer Confidence, :1 2001: : : : : : : : : : : : : : : :01 11 Ibid. 12 Survey questionnaires are mailed to a nationwide representative sample of 5,000 households, of which approximately 3,500 respond. Households are asked five questions that include (1) a rating of business conditions in the household s area, (2) a rating of business conditions in six months, (3) job availability in the area, (4) job availability in six months, and (5) family income in six months. The responses are seasonally adjusted. An index is constructed for each response and then a composite index is fashioned based on the responses. (The Dismal Scientist website, [ Jan 21, 2001.) 13 Nov. 16, Major Economic Indicators, Bank of America Securities, Feb. 1, FY Revenue Estimates - page 9

20 Consumer confidence is considered a leading indicator of employment. Employment During 2001, the unemployment rate rose 1.8% with almost half the increase coming after the 9/11 attacks. The total number of people without jobs who were looking for one increased to 8.3 million in December 2001 from 5.7 million in December In December 2001, for the first time since May 2001, the total number of hours worked in the private, non-farm portion of the economy was stable rather than falling. 15 The US Department of Labor Bureau of Labor and Statistics reported on February 1, 2002 that in January employment continued to decline but the unemployment rate decreased to 5.6% as follows: Figure 4. Unemployment Rate and Payroll Employment Joblessness Rises, but Some Positive Signs Seen, The Washington Post, Jan. 5, 2002., pg. E1. 16 The Employment Situation, United States Department of Labor News, Bureau of Labor Statistics, Feb. 1, FY Revenue Estimates - page 10

21 Residential Real Estate In past recessions, the housing market suffered. Residential overbuilding led the economy into its last recession. This housing market, buoyed by reduced interest rates, continues to support an otherwise recessionary economy. The Federal Reserve cut rates 11 times in 2001 in order to prop the recessionary economy and setting a record for the most cuts in a year. 17 Mortgage rates reached their lowest levels in 30 years. 18 Americans bought 6.15 million houses in 2001, more than ever before, and 1.3% more than the previous record of 6.07 million in 1999, 19 defying an economy in recession and helping to explain why this recession has been mild. 20 Dr. David Lereah, NAR's chief economist, said housing outperformed the expectations of many analysts over the last year. "With the exception of the uncertainty cast by the fallout of September 11, our outlook for the housing market grew brighter as the year progressed." 21 Figure 5. Existing Home Sales, Existing Home Sales seasonally-adjusted annual rate 5,600 5,500 5,400 5,300 5,200 5,100 5,000 4,900 4,800 4,700 4,600 4,500 Units in 000's Dec 2000 Jan 2001 Feb 2001 Mar 2001 Apr 2001 May 2001 Jun 2001 Jul 2001 Aug 2001 Sept 2001 Oct 2001 Nov r 2001 Dec p Fed Cuts rates a quarter point, CNNMoney, Dec. 11, Economic Outlook, Chamber of Commerce, November 14, New Homes Sold at Record Level in US Last Year, The Wall Street Journal, Jan. 29, 2002, p. A2. 20 House Sales Hit Record in 2000, The Washington Post, Jan , p. E1. 21 Housing Market Setting New Records, Feb. 3, Ibid. FY Revenue Estimates - page 11

22 For the year 2001, new home sales rose to a record 900,000 units from 877,000 in 2000, as reported by the Department of Commerce: 23 Figure 6. New Home Sales 24 1,050 United States New Home Sales units in 000's 1, Dec- 00 Jan- 01 Feb- 01 Mar- 01 Apr- 01 May- 01 Jun- 01 Jul-01 Aug- 01 Sep- 01 Oct- 01 Nov- 01 Dec- 01 Near-record levels are expected for calendar year New home sales surge, CNNMoney, Jan. 28, " New Residential Sales in December 2001", US Census Bureau and US Dept of Housing and Urban Development Joint Release, Jan. 28, Housing Market Setting New Records, Feb. 3, FY Revenue Estimates - page 12

23 VIRGINIA - NORTHERN VIRGINIA PROFILE Federal Reserve Economist Ray Owens said to the General Revenue Committee on October 2, 2000 Northern Virginia is unique and performs much stronger than the State. It does not move lockstep with Virginia..... The Federal Government had provided a lot of economic stability. This statement rings true in today s economic climate also. A year later, The Kiplinger Letter, November 16, 2001, reported that the strongest area economy is the Washington, D.C. area, because the dot-com blowup took a smaller toll here than elsewhere, and federal government spending is on the rise. Economic activity in Virginia has not slowed as quickly as that of the nation over the last year, although Virginia is experiencing an acceleration in its slowdown. 26 The following factors overall indicate Northern Virginia s economy is expected to continue to slow in the months ahead and eventually contract despite its current strong growth rate. 27 The effects of the dot-com shakeout were felt strongly for the shortterm, but the increase in defense spending and contracting will dampen those effects. 28, 29 Employment The Commonwealth ranks as the 8 th fastest growing state in the nation, although the pace of employment growth in Virginia was slowing prior to the 9/11 terrorist attacks. 30 Northern Virginia is the fastest growing of the 6 largest metropolitan areas with an employment gain of 3% over 12 months, ending September, thereby reflecting the dot-com shakeout. 31 During recent history the two primary components of the National Capital Region s economy were the federal and technology sectors. In fact, during 2001, a year that most of the technology sector experienced stagnation or decline, technology added 27,336 net new jobs in the Region. However, during 2002, the large information technology and telecommunications (IT&T) and professional management services sectors that define the Region s technology sector are expected to experience only modest growth if any Chmura Economics & Analytics, Virginia Economic Trends, 4 th Quarter Report 2001, p Ibid, p Ibid, p David F. Seiders, Chief Economist, National Association of Homebuilders Breakfast, Sept. 28, Ibid, p Ibid, p Forecasting the Greater Washington Economy: 2002, The Mason Enterprise Center and The Center for Regional Analysis, p. 56. FY Revenue Estimates - page 13

24 The following information clearly shows employment growth through November as compared to growth during the last official recession: Figure 7. Nonfarm Employment Growth in Northern Virginia and Virginia Employment growth is slowing, but not to the levels in the last recession. In November, 2001, unemployment in the Washington area dropped slightly, defying the jump nationally. 33 Overall, the job market is not as good as 2000, but then, it s not all that bad, either, said William F. Mezger, chief economist at the Virginia Employment Commission. 34 Northern Virginia regularly outpaces the state, which in turn outpaces the nation. Continued contraction in employment is expected for Virginia, 35 although Northern Virginia may escape as defense spending increases. Prince William s unemployment rate increased from 1.3% to 2.6%. 36 However, this rate is still considered low and is below the unemployment rate for Virginia and the Nation. 33 DC Area s Jobless Rate Fell in November, The Washington Post, Jan. 4, 2002, p. E1. 34 Ibid. 35 Ibid Feb.1, FY Revenue Estimates - page 14

25 Residential Real Estate The real estate market has bouyed the economy through this current downturn. The housing market has remained active in Virginia, and particularly in Prince William County. The last official recession was accompanied by a significant peak and subsequent drop in residential permits, not evident nationally or locally during this recessionary period. Residential permitting has been steady for years, as shown below: Figure 8. Six-Month Moving Average of Single-Family Building Permits in Virginia The local housing market has been strong in spite of the nation s slow down. According to Stephen Fuller, professor of public policy and regional development at George Mason University, the Washington-Metro area only housed 40% of new workers in Simply, supply is exceeding demand for housing in this area. 37 The Washington-Area Economy is on a Different Track, The Alexandria Journal, Dec. 11, 2001, p. 1. FY Revenue Estimates - page 15

26 Retail Spending Retail sales throughout the nation have declined from their record-pace in Industrial production has slowed. Indeed, manufacturers continue to struggle through their own severe recession. As dot-commers became unemployed, spending slowed. 38 Northern Virginia retail spending has also slowed. Prince William County s retail market remains steady. The current slowdown is not near the levels of the last recession, as the red areas in this graph designate recession times. Sales of luxury goods weakened, as did sales at specialty and department stores. In contrast, discount retailers generally experienced stronger sales as consumers sought value. 39 Figure 9. Retail Sales in Virginia 38 The Washington-Area Economy is on a Different Track, The Alexandria Journal, Dec. 11, 2001, p The Federal Reserve Board Beige Book, Summary, Nov. 28, FY Revenue Estimates - page 16

27 OUTLOOK IS FOR SLOWER GROWTH The Federal Reserve will continue to keep inflation at bay as the economy pulls out of a recession during PWC unemployment will remain at its current low level. The lay-offs from high-tech firms will not impact PWC as much as the balance of Northern Virginia. Defense spending and research will increase due to the September 11 attacks, re-employing workers in the tech sector. The technology sector was credited with the longest expansion on record. Mr. Alan Greenspan opines that eventually, the high-tech correction will abate, and these industries will reestablish themselves as a solidly expanding, though less frenetic, part of our economy. When they do, growth in that sector presumably will not return to the outsized 50 percent annual growth rates of last year, but rather to a more sustainable pace. 40 Residential real estate appreciated at record-levels in calendar year 2001 and building permits hit an all-time high in calendar year Appreciation and construction will continue, but not at the record-level pace. Reports through the year demonstrate that the PWC real estate market is rationally exuberant, even from September through October, 2001 and to date. The Prince William County commercial real estate continues to demonstrate attractive fundamentals for local investors. Automobiles will be replaced at sustainable levels instead of the greater rate reflected in FY01 personal property revenue. PWC consumers will continue to spend as they are currently, but not at the same rate as in FY00-FY01. Overall, the revenue forecast reflects continued growth, but not at the same pace as in the previous fiscal years. 40 Testimony of Chairman Alan Greenspan, Federal Reserve Board s Semi-Annual Monetary Policy Report to Congress, July 18, 2001, before the Committee on Financial Services, US House of Representatives. FY Revenue Estimates - page 17

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29 MAJOR REVENUE SOURCES AND KEY ASSUMPTIONS The following sections of this report contain the key assumptions that were the topic of discussion at one or more Revenue Committee meetings. The comments and insights from private sector participants contributed greatly to the formation of these assumptions. Other references and information sources were used to supplement the assumptions derived in the committee discussions. Major revenue sources are identified as those summarized below: Table 4. Summary of General Revenue Estimates by Major Category (Thousands) FY2002 Revised Estimate FY2003 Estimate FY2004 Estimate Real Estate Tax Rate $ 1.30 $ 1.23 $ 1.22 FY2005 Estimate FY2006 Estimate FY2007 Estimate $ 1.22 $ 1.21 $ 1.21 Real Estate Taxes $243,400 $275,737 $305,826 $329,204 $351,993 $379,255 Personal Property Taxes 77,900 83,829 90,477 96, , ,916 Sales Tax 33,700 35,529 37,613 39,973 42,404 44,946 Consumer Utility Tax 18,500 19,609 21,042 22,963 25,232 27,936 BPOL Tax 13,000 13,730 14,563 15,463 16,397 17,380 Investment Income 6,900 8,573 9,983 10,727 10,917 11,126 All Other 19,300 19,061 20,238 21,261 22,525 23,917 Total General Revenue $412,700 $456,068 $499,742 $535,775 $573,154 $616,476 Increase over Prior Year 7.5% 10.5% 9.6% 7.2% 7.0% 7.6% FY Revenue Estimates - page 19

30 Table 5. Revenue Estimates by Category Acct. Code General Revenue Source FY2003 Estimate FY2004 Estimate FY2005 Estimate FY2006 Estimate FY2007 Estimate 0010 Real Estate Taxes $265,171,000 $295,658,000 $319,034,000 $341,993,000 $369,344, Real Estate Tax Exonerations (2,652,000) (2,956,000) (3,190,000) (3,419,000) (3,693,000) Subtotal 262,519, ,702, ,844, ,574, ,651, R/E Taxes Public Service 11,100,000 11,009,000 11,230,000 11,249,000 11,361, Real Estate Tax Deferral 200, , , , , Land Redemption 979, , , , , Real Estate Penalties 939,000 1,046,000 1,129,000 1,210,000 1,307,000 Total Real Estate 275,737, ,826, ,204, ,993, ,255,000 Personal Property Taxes-Ind. 68,156,000 73,863,000 80,153,000 87,081,000 94,709,000 Business Tangible 10,349,000 10,763,000 11,193,000 11,641,000 12,106,000 AOL, Both Tangible & C&P 2,293,000 5,626,000 4,500,000 4,500,000 4,500, Subtotal 80,798,000 90,252,000 95,846, ,222, ,315, P/P Prior Year 74,000 75,000 75,000 75,000 75, P/P Tax Deferral 1,583,000 (1,384,000) (1,366,000) (1,366,000) (1,366,000) 0170 P/P Penalties 1,374,000 1,534,000 1,629,000 1,755,000 1,892,000 Total Personal Property 83,829,000 90,477,000 96,184, ,686, ,916, Local Sales Tax 35,529,000 37,613,000 39,973,000 42,404,000 44,946, Consumer Utility Tax 19,609,000 21,042,000 22,963,000 25,232,000 27,936, BPOL Taxes 13,730,000 14,563,000 15,463,000 16,397,000 17,380, Investment Income 8,573,000 9,983,000 10,727,000 10,917,000 11,126, Interest On Taxes 2,060,000 2,298,000 2,470,000 2,651,000 2,862, Vehicle Decals Regular 5,148,000 5,453,000 5,777,000 6,119,000 6,482, Recordation Tax 3,315,000 3,524,000 3,745,000 3,980,000 4,230, Cable TV Fees 3,262,000 3,474,000 3,686,000 3,907,000 4,138,000 All Other Revenue Over $1.5mm 13,785,000 14,749,000 15,678,000 16,657,000 17,712, Daily Equipment Rental Tax 187, , , , , Bank Franchise Tax 520, , , , , BPOL Taxes Public Service 831, , , ,000 1,002, Additional Tax On Deeds 1,000, , , , , Transient Occupancy Tax 1,065,000 1,185,000 1,314,000 1,498,000 1,654, Interest Paid To Vendors (210,000) (220,000) (230,000) (241,000) (253,000) 0521 Interest Paid On Refunds ABC Profits 637, , , , , State Wine Tax 351, , , , , Rolling Stock Tax 89,000 93,000 98, , , Passenger Car Rental Tax 683, , , , , Mobile Home Titling Tax 108, , , , , Fed Payment In Lieu Of Taxes 15,000 15,000 15,000 15,000 15,000 Misc. All Other General Revenue All Other Revenue Under $1.5mm 5,276,000 5,489,000 5,583,000 5,868,000 6,205,000 Total All Other Revenue 19,061,000 20,238,000 21,261,000 22,525,000 23,917,000 Total General Revenue $ 456,068,000 $ 499,742,000 $ 535,775,000 $573,154,000 $616,476,000 FY Revenue Estimates - page 20

31 REAL ESTATE 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 - 010/020 The real estate tax is the single largest revenue source for the County. 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 General Assembly. The revenue summary for the general real estate tax applies only to real property assessed locally which includes residential, commercial and industrial, and agricultural and resource land property types. The following tables show a ten-year history of this revenue source and the five-year revenue forecast: Table 6. Revenue Summary - Real Estate Taxes - 010/020 Revenue History Tax Rate41 Actual Revenue Percent Change FY1993 $ 1.36 $ 161,257,993 (2.2%) FY ,555,991 (3.5%) FY ,513, % FY ,035, % FY ,236, % FY ,689, % FY ,632, % FY ,691, % FY ,663, % Current Estimate Tax Rate Adopted/Revised Revenue Percent Change FY2002 (adopted budget) $ 1.30 $ 224,750, % FY2002 (revised estimate) ,857, % Forecast Revenue Tax Rate Revenue Estimate Percent Change FY2003 $1.23 $262,519, % FY ,702, % FY ,844, % FY ,574, % FY ,651, % 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. 41 The real estate tax rate in prior years is as follows: $ $ $1.38 FY Revenue Estimates - page 21

32 Residential Real Estate The year 2000 produced the healthiest residential real estate market of the last decade in Northern Virginia jurisdictions as well as throughout the nation. Housing values across the country rose faster this year than at any time in the past 12 years. The housing market is reflecting its continued resilience supported by low interest rates, consumer confidence and store of value concerns. Further, declining housing inventories are pushing prices higher. The month s housing supply in January 2002 was the lowest since January of 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. Residential Market Value Changes The following chart shows a history of actual residential appreciation (excluding rental apartments) from fiscal year 1982 through fiscal year 2002 and the Committee s estimates thereafter. The actual average from 1982 through 2002 is also reflected: Figure 10. Overall Residential Appreciation, % Actual, then Forecast Forecast Average 15.0% 10.0% 5.0% 0.0% (5.0%) 42 Commentary on NAR report, Feb. 1, FY Revenue Estimates - page 22 FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 7.6% 16.50% 4.5% FY04 FY05 FY06 FY07

33 Appreciation by type of residential unit from calendar year 1996 (realized in FY98 revenue) through calendar year 2001 (realized in FY03 revenue) is shown below: Figure 11. Residential Appreciation by Unit Type, % Single Family Appreciation Townhouse Appreciation Condo Appreciation Single Family Avg Annual Townhouse Avg Annual Condo Avg Annual 15% Appreciation 10% 5% 6.1% 4.2% 3.1% 0% -5% The following table shows the expected change in market value for residential and apartment properties during the forecast period. Table 7. Residential Market Value Changes Single-Family, Townhouse, and Condominium Apartments FY % 12.0% FY % 4.5% FY % 3.0% FY % 3.0% FY % 3.0% The regional real estate market had another banner year during Both sale prices and the volume of sales exceeded prior year levels. Despite the national recessionary economic climate, average monthly sale prices consistently increased during even after the terrorist attacks on September 11. In fact, seasonally a slight slowdown of monthly appreciation typically occurring in the third quarter of the calendar year, as in 1999 and 2000, yet is clearly absent in Most real estate industry experts hardly expected 2001 activity to surpass market activity during The question remains: when will it end? Stephen Fuller concludes that the Washington-Metro area has a chronic need for housing that is not being met FY Revenue Estimates - page 23

34 for various reasons, notwithstanding transportation issues. Simply, in the Washington-Metro area the demand for homes exceeds the supply. 43 Residential properties in Prince William County appreciated 16.5% overall from the prior year with a range of 8% to 25% within different market areas. Single family, townhouse, and condomium properties all showed average appreciation between 15% and 17% county-wide. This is a significant departure from prior years when townhouse and condominium appreciation lagged significantly behind single family homes. Not only are sale prices higher, but the number of sale transactions is greater. According to the Northern Virginia Association of Realtors, sales volume increased in the County by 16% during calendar year 2001, while the average number of days on the market decreased from an average of 41 days in 2000 to 29 days in The residential appreciation of 16.5% in Prince William County is consistent with other Northern Virginia jurisdictions where the expected average appreciation rates range from 10% to 25%: Table 8. Comparison of Estimated Residential Market Value Changes from 2001 to 2002 All Residential, excluding apartments Prince William County Stafford County Fairfax County Loudoun County % 15.0% 15.0% 10.0% to 25.0% The forecast for residential appreciation beyond fiscal year 2002 reflects these market insights. Appreciation is expected to moderate to a rate of 8% in fiscal year 2004 and 4% per year in fiscal years 2005 through The Revenue Committee expects demands for homes to continue, but not at levels equal to those in fiscal year 2003: rather, appreciation will gradually decline to levels that resemble long-range annual averages. Apartments Market Value Change The Real Estate Assessments Office estimates that the favorable conditions in the County s apartment market translate into an average increase in market value of approximately 12% for fiscal year This increase is largely attributable to higher apartment rents. Taking into consideration the expected small increases in vacancy beyond calendar 2001, appreciation is estimated to continue at a lesser rate of approximately 4.5% in fiscal year 2004, and 3% per year in fiscal years 2005 through Residential New Construction Units 43 Stephen R. Fuller, Forecasting the Greater Washington Economy: 2002, The Mason Enterprise Center and The Center for Regional Analysis, January 24, County of Loudoun News Release, 2002 Real Property Assessments Being Finalized; Notices Redesigned. Dec. 14, 2001 FY Revenue Estimates - page 24

35 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 occurs in calendar year 2001 affects revenues beginning in fiscal year The following table summarizes the expected number of newly constructed residential units during the forecast period, and the previous three year s activity: Table 9. Residential Growth Number of Units Total Residential and Apartments Single-Family Townhouse Condominium Apartments FY2000(a) 3,133 1, FY2001(a) 3,086 2, FY2002(a) 3,659 2,315 1, FY2003 4,883 3, FY2004 3,575 2, FY2005 3,305 2, FY2006 3,275 2, FY2007 3,275 2, (a) - actual Construction of approximately 4,000 new owner-occupied residential units was completed during calendar year 2001 which will generate new revenues in fiscal year 2003, as shown above. In addition to the greatest number of residential units completed in 10 years, other trends have become evident. The number of new townhouses completed was lower than the previous year, while the number of single family homes completed was significantly greater. This shift is attributed to the current development trend toward small-lot village style detached units (single family detached homes on townhouse sized lots). In addition, fewer condominium units have been constructed in recent years, while the number of apartment units completed has increased significantly to 900 units completed in These trends are expected to continue throughout the forecast period. FY Revenue Estimates - page 25

36 Residential Values Per New Unit In December 2001, the average sale price of a home in the greater Northern Virginia region was $288,127, according to statistics compiled by the Northern Virginia Association of Realtors. That figure includes Fairfax, Arlington, Prince William, Loudoun and Fauquier Counties, the cities of Alexandria, Falls Church and Fairfax, and the towns of Vienna, Herndon and Clifton. 45 Calendar year 2001 activity for the County shows an average sale price of a new home to be $284,347. The forecast for residential appreciation of new units is based on FY03 value increased at the same rate of appreciation as existing units. Table 10. New Residential Assessed Value per New Unit Overall Residential (Excluding Apts.) Single- Family Townhouse Condominium Apartment FY2000(a) $181,000 $223,000 $126,000 $100,000 $50,000 FY2001(a) 209, , , ,178 60,000 FY2002(a) 232, , , ,916 64,300 FY , , , ,574 61,700 FY , , , ,300 64,500 FY , , , ,200 66,400 FY , , , ,400 68,400 FY , , , ,900 70,500 (a) - actual 45 Program to make buying first home more affordable, Fairfax Journal, Jan. 23, 2002, p.4. FY Revenue Estimates - page 26

37 Commercial Real Estate Nationally, the commercial real estate boom of 2000 is decelerating, but unlike past slowdowns, this one is looking like a ride along a plateau. 46 During calendar year 2001 in Prince William County, each of the commercial sectors experienced overall higher rental rates and stabilized vacancy rates. The average change in commercial assessed value is forecast at 6.8% in fiscal year 2003, 5% in fiscal year 2004 and 3% per year in fiscal years 2005 to Average assessed values per square foot in fiscal year 2003 are determined based on the added building value resulting from new construction that was 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. Table 11. Commercial Market Value Changes Commercial FY2000(a) 2.1% FY2001(a) 1.8% FY2002(a) 9.7% FY % FY % FY % FY % FY % (a) - actual Commercial properties are categorized into five property types: retail, office, hotel, industrial, and technology services. In fiscal year 2003, growth of more than 1.4 million square feet of commercial/industrial space is estimated a 77% increase in square footage completed in the previous year. In later years of the forecast growth is estimated between 800,000 and 1 million square feet. Approximately one third of commercial/industrial square feet completed during 2001 was within the retail sector. Retail A large portion of retail growth was the completion of the new IKEA store at Potomac Mills Mall which added approximately 300,800 square feet. Approximately half of the commercial/industrial tax base is within the retail sector showing average appreciation rates up to 16%. Approximately half of retail value is comprised of shopping centers which appreciated on average approximately 10%. 46 Commercial Real Estate Boom Cools, The Wall Street Journal, June 22, 2000, p.a 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. FY Revenue Estimates - page 27

38 The value per square foot of technology services properties is expected to remain essentially flat during the forecast period. Table 12. Commercial New Construction Value per Square Foot Retail Office Hotel Industrial Technology Services FY2000(a) $ 49 $66 n/a $37 n/a FY2001(a) FY2002(a) FY FY FY FY FY Table 13. New Commercial Construction Square Footage Total Commercial Retail Office Hotel Industrial Technology Services FY2000(a) 635, ,680 50, ,500 0 FY2001(a) 1,354, ,618 63,664 59, , ,465 FY2002(a) 790, , , , ,218 0 FY2003 1,401, ,838 95,849 96, , ,553 FY , , ,000 80, , ,800 FY , , ,000 80, ,000 0 FY , , ,000 80, ,000 86,400 FY2007 1,000, , , , ,000 0 (a) - actual Industrial Industrial growth added over 500,000 square feet to the commercial/industrial base. Within the industrial category, approximately three quarters of the square footage added was for warehouse use. One self-storage facility was completed containing 57,600 square feet. Again during 2001, the supply of industrial land was being absorbed with new construction concentrated in the western part of the county and driving up market prices. Approximately half of the commercial/industrial tax base was within the retail sector showing average appreciation rates up to 16%. FY Revenue Estimates - page 28

39 Hotels Two new hotels were completed during The 56 room Sleep Inn is located on Route 1 in Dumfries and Comfort Suites containing 138 rooms is located on Williamson Blvd. in Manassas. The hotel/motel sector showed moderate levels of appreciation during 2001 as daily room rates continued to increase. Although occupancy levels generally decreased around the time of the terrorist attacks, the mid-range and economy class hotels within the County were impacted to a lesser degree than most luxury and full-service hotels located throughout Northern Virginia. The increase in hotel growth in fiscal year 2007 is attributable to the proposed hotel and conference center planned at Belmont Town Center. Office Buildings Five new office buildings were completed in 2001 for a total of 95,849 square feet. The four new low-rise office buildings range in size from 20,000 to 46,000 square feet. One new medical office building located at Tackett s Mill in Woodbridge contains 8,560 square feet. Appreciation within the office building sector is largely attributed to higher rents and very low vacancy rates. Technology Services Spillover effects from increased federal expenditures in the technology sector are forecast for the Washington-Metro area, thereby creating about 20,000 net new jobs. There are effective options for those outplaced in the IT&T sector in the large federal contract and professional services industries. The Biotech sector of technology is forecast to have the largest growth at 2%. The Washington-Metro minimally attracts this sector when compared with other regions and the Nation. 48 However, the Economic Development Department did succeed in bringing a Biotech firm to a 1,000 square foot office in Tackett s Mill. In Prince William County, market values of technology services properties remained constant for fiscal year The forecast for growth in this category is based on actual information in the Finance Department. Two new technology services buildings were completed in 2001: AOL II containing 227,465 square feet, located on Linton Hall Road. Secondly, New Skies Network containing 20,088 square feet, located in Gainsford Industrial Park in Gainesville. 48 Forecasting the Greater Washington Economy: 2002, The Mason Enterprise Center and The Center for Regional Analysis, p. 57 and Figure 13. FY Revenue Estimates - page 29