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

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2 Prince William County, Virginia Fiscal Year Projections of General County Revenue Board of County Supervisors Corey A. Stewart Chairman (at large) Martin E. Nohe Vice Chairman, Coles District Maureen S. Caddigan Potomac District Peter K. Candland Gainesville District W. S. Wally Covington, III Brentsville District John D. Jenkins Neabsco District Michael C. May Occoquan District Frank J. Principi Woodbridge District County Executive Melissa S. Peacor Prepared by the Department of Finance

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4 Revenue Committee Christopher E. Martino Deputy County Executive Steven Ferlotti Tax Administration Division Chief Wade Hugh Director of Development Services Tom Bruun Director of Public Works David S. Cline Associate Superintendent for Finance and Support Services, PWC Schools Steven A. Solomon Director of Finance William B. Hoffman Senior Administrative Manager Michelle Casciato Budget Director Tracy Gordon Assistant to the County Executive Ray Utz Planning Division Chief John Wallingford Director of Financial Services, PWC Schools Finance Department Staff Project Manager Lillie Jo Krest Financial Analyst III Allen Scarbrough Treasury Manager Michelle Attreed Deputy Director of Finance Carl W. Hampton Fiscal Services Manager Susan Rodeheaver Management and Fiscal Analyst III Richard Talomie Financial Analyst II Allison Lindner Real Estate Assessments Division Chief Kerem Oner Real Estate Assessments Coordinator Bill Vaughan Chief Economist and Demographer Debra McMahon Administrative Support FY Revenue Estimates - page iii

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6 The Revenue Committee Expresses Its Appreciation to the 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 Representatives from the Prince William Association of Realtors: Forest Odend hal President Long and Foster Real Estate, Inc Kathleen Kennedy Supervising Broker, Kennedy Realty, LLC Long and Foster Real Estate, Inc Representatives from the Northern Virginia Building Industry Association: Sherman Patrick Planner, Compton & Duling, LC J. Truett Young President Engineering Manager, Stanley Martin Homes Jason Dalley Manager, Land Acquisitions, NVR Homes Mike Garcia President, Mike Garcia Construction Coleman Rector President & Principal Broker, Weber Rector, Inc. FY Revenue Estimates - page v

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8 COUNTY OF PRINCE WILLIAM FINANCE DEPARTMENT 1 County Complex Court, Prince William, Virginia (703) Metro , ext FAX (703) Steven A. Solomon Director of Finance June 5, 2012 TO: FROM: Melissa S. Peacor County Executive Steven A. Solomon Director of Finance RE: Revenue Committee Report, Fiscal Year I am pleased to present the FY 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 sought input from public and private sector representatives associated 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. A real estate tax rate of $1.209 was adopted for FY 2013 in order to achieve an average 3.2% increase in the average, existing residential tax bill. This revenue policy directive was approved by the Board of County Supervisors on April 24, Average residential real estate values grew by 2.77% in calendar year 2011 while commercial values showed moderate improvement increasing 3.6%. Personal property tax revenue is expected to increase in FY 2013 due to an increase in the number and assessed values of vehicles. Other revenue sources such as Sales Tax and Business, Professional, and Occupational License (BPOL) tax revenue have continued to show consistent revenue increases since February and are forecasted to continue through FY As the Federal Reserve maintains record low target interest rates (less than 0.25%), the County s Investment Income revenue will continue to be well below historic amounts. Risks of volatile interest rates and ultimately inflation will be areas around which the portfolio must be managed. I recommend these revenue estimates be used in preparing the 2013 Fiscal Plan, the Capital Improvement Plan for FY , and other financial plans. FY Revenue Estimates - page vii

9 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 viii

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11 TABLE OF CONTENTS INTRODUCTION... 1 Review of the Economy in 2011 and Outlook for HISTORY OF THE REAL ESTATE TAX RATE FY 2013 Proposed Real Estate Tax Rate and Average Tax Bill MAJOR REVENUE SOURCES AND KEY ASSUMPTIONS Real Estate Revenue Real Estate Taxes 010 / Residential Real Estate Residential Market Value Changes Apartments Market Value Change Residential New Construction Units Residential Values Per New Unit Commercial Real Estate Real Estate Exonerations Public Service Taxes Real Estate Tax Deferrals Land Redemption Real Estate Penalties Personal Property Revenue Personal Property Tax on Vehicles 071 / 079 / Car Tax Relief Business Personal Property Tax Personal Property Prior Year Personal Property Deferrals Personal Property Penalties - Current Year Local Sales Tax Consumer Utility Revenue Consumer Utility Tax Electricity and Gas Revenue Growth Communications Sales and Use Tax Communications Sales and Use Tax Revenue BPOL Revenue BPOL Tax Revenue Investment Income Investment Income FY Revenue Estimates - page x

12 All other revenue sources Interest on Taxes Motor Vehicle License Fee Recordation Tax Tax on Deeds Daily Rental Equipment Tax Bank Franchise Tax BPOL Taxes - Public Service Transient Occupancy Tax Miscellaneous Business Licenses Interest Paid to Vendors Interest Paid on Refunds Rolling Stock Tax Passenger Car Rental Tax Mobile Home Titling Tax Federal Payment in Lieu of Taxes Appendix A - General Property Tax Rates FY Revenue Estimates - page xi

13 INTRODUCTION The County s revenues are affected, in varying degrees, by the economic environments at the national, state and local levels. Because of this proximity to the Washington D.C. 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 REVIEW OF THE ECONOMY IN 2011 AND OUTLOOK FOR CALENDAR YEAR 2012 The United States 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. Most economists agree that the latest recession/contraction began in the first quarter 2008, and, by accepted definitions, ended during the third quarter 2009, with a 2.2% expansion (quarter over quarter). Slow growth presided throughout 2011: 0.4% in Q1, 1.3% in Q2, 1.8% in Q3, and 2.8% in the 4 th Quarter. Many analysts predict growth to continue at a moderate pace through The following graph presents GDP quarter-to-quarter growth (in the blue bars) and periods of recession (in the shaded areas) from 1969 to 2011 (4 th Quarter). Figure 1. United States Gross Domestic Product FY Revenue Estimates - page 1

14 Virginia John Layman, Chief Economist and Director of Revenue Forecasting in Virginia s Department of Taxation, addressed the Prince William County Revenue Committee on December 1, 2011 and presented a summary of the economic outlook for the Commonwealth. Mr. Layman noted that the Virginia economy performed near expectations during the fiscal year. Productivity increased modestly, while rising inventories supported growth, offsetting modest consumer spending in the face of employment losses and shrinking incomes. Employment in the Commonwealth, forecast to increase by 0.7%, actually increased by 1.2% during Fiscal Year 2011, thanks in part to gains in the high-paying professional and business services sector. Employers in Virginia added jobs in 10 of the last 14 months, with a 0.7 percent annual increase in October Income growth also exceeded expectations. Personal income, forecast to increase by 2.8%, actually grew by 5.0% during the fiscal year while wages and salaries, forecast to increase by 2.6%, actually grew by 3.5%. The Commonwealth s Fiscal Year 2011 revenues and transfers finished $310.7 million or 2.1 % above the annual forecast. Payroll withholding tax collections for small business payers (46% of total payers) increased by 6.1% between FY 10 and FY 11. The overall growth rate for large payers (54% of total payers) was 3.7% year over year. The growth rate for all payers was 5.0% in Fiscal Year 2011, compared to 0.4% one year earlier. Individual income tax non-withholding exceeded the annual estimate by $110.2 Million (5.3%) in FY 11. The large surplus was attributable to a better-than-expected performance in individual final payments (34% increase compared with expectations of 17%). Taken together, total non-withholding collections grew 14.3% in Fiscal Year 2011 compared with the annual estimate of 8.5% growth. Sales and Use Tax collections also exceeded the annual estimate by $43.5 Million (1.5%) in FY 11, with the largest increases coming from small filers. Corporate income tax collections, one of the most volatile revenue sources, increased 2.0 % in FY 11, ahead of the annual forecast of a 4.9 % decline. Looking ahead, Global Insight s outlook as presented to the Governor s Advisory Council on Revenue Estimates (GACRE) in October 2011, suggested a number of trends, including: Global Insight believes that the economy is still growing, but very slowly. Global Insight places the odds of a double-dip recession in the U.S. at 40 percent. Global Insight expects real GDP growth of only 1.1 percent in the first quarter of Growth is not expected to be above 2.0 percent until the first quarter of calendar year The standard forecast also assumes that the 2% payroll tax cut and the emergency unemployment insurance benefits are extended for 2012 and then phased out over several years; and that the super-committee isn t successful, but the automatic sequester doesn t occur. Instead, the forecast assumes that the new Congress and president come up with a package of spending cuts and tax increases that will begin in January 2013; and the Bush tax cuts are extended. FY Revenue Estimates - page 2

15 Prince William County In 2011, Prince William County s economy continued to show signs of strengthening in many aspects: improving unemployment and job creation, and very healthy household incomes. The residential real estate market, which bottomed out in the first quarter of 2009, continued to strengthen throughout 2010 and 2011, with gradual increases in average sale prices. Foreclosures in the County continued to decline throughout the year, but still remained elevated by historic standards. In 2011, a total of 1,408 foreclosures were filed on Prince William County homes. This is a 32.9% reduction, year-over-year (YoY) and the lowest annual total since Retail sales have improved significantly, an indication of increasing consumer confidence and buying power. December 2011 represented the 24th straight month of monthly YoY increases in retail sales tax revenue in Prince William County. During 2011, the local economy appears to have gathered some steam. Population and Cost of Living Prince William County s population was estimated at 411,772, on December 15, 2011, an increase of 1.2% year-over-year. The County population is estimated to have grown by 9,770 persons (2.4%) since April 1, 2010 when the population was 402,002 persons. The Metropolitan Washington Council of Governments projects in its Round 8.0 Cooperative Forecast: Employment, Population and Households that Prince William County will grow to over 479,000 by 2020 (19.4%) and to 535,629 persons by 2030 (33.4%) from Labor Force The Prince William County civilian labor force, as reported by the Virginia Employment Commission was 218,307 in December 2011, an increase of 4,361 (2.0%) since December 2010 and a five-year increase of 19,210 (9.6%). Employed persons in the labor force (207,201) increased by 4,585 (2.3%) since December 2010 and by 12,494 (6.4%) in the last five years. Unemployed persons in the County (11,106) decreased by 223 (-2.0%) since December The December 2011 unemployment rate for Prince William County was 5.1%, compared to 5.3% in December National and state unemployment rates were 8.5% and 6.1%, respectively, in December Figure 2. Prince William County Labor Force FY Revenue Estimates - page 3

16 Source: Virginia Employment Commission Job Market According to data from the U.S. Department of Labor and the Virginia Employment Commission, Prince William County has outpaced regional, state and national economies in business, and job growth over the last five years and has nearly matched the state and region for at-place average weekly wage growth since Year-over-year, the same pattern is evident. In 2011 (2 nd Quarter), there were 7,557 employment establishments reported in Prince William County, a growth rate of 3.8% year-over-year and 17.7% since By comparison, Northern Virginia establishments grew by 2.5% in one year and 11.0% since 2006; statewide, establishments grew by 1.7% in the last year and 6.5% since At-place employment in Prince William County (108,630 in the 2 nd Quarter 2011) increased by 3.5% year-over-year and by 3.3% since By comparison, Northern Virginia employment grew by 1.5% in the last year and 2.0% since Employment in the Commonwealth grew by 0.9% in the last year, but decreased by 1.7% since The average weekly wage in Prince William County ($804 in the 2 nd Quarter 2011) grew by 1.1% yearover-year and 12.4% since At-place average weekly wages in Northern Virginia ($1,308 in the 2 nd Quarter 2011) grew by 2.2% in the last year and 15.9% since In Virginia, weekly wages ($949 in the 2 nd Quarter 2011) grew by 2.2% year-over-year and 15.5% since Figure 3. At-Place Establishments, Jobs and Wage One Year Growth (2 nd Quarter) Figure 4. At-Place Establishments, Jobs and Wage Five Year Growth (2 nd Quarter) FY Revenue Estimates - page 4

17 Source: Virginia Employment Commission Commercial Inventory During the course of 2011, the Prince William County commercial inventory, like that in Northern Virginia, saw gradually improving conditions, although vacancy rates continue to be elevated by historic trends and new construction continues at a generally reduced level. In so much as Prince William County s commercial inventory is a part of the region s inventory, it is affected by general 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. Current conditions suggest that the Prince William County commercial real estate market is in an absorption phase. Prince William County s close proximity to the federal government and affiliated contractor industries has largely isolated it from severe economic downturns. 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. Nevertheless, the outlook for the County s commercial inventory over the next few years is muted as the current cycle plays out. On the positive side, the Base Realignment and Closing Act (BRAC) designated both Quantico Marine Corps Base and Fort Belvoir Army Base as recipients of additional personnel as the Department of Defense consolidates bases around the nation. Some 21,000 additional positions are expected between the two bases. Prince William County s location has meant an increased demand for Office and Flex product in the Potomac Communities corridor, particularly from contractors servicing the bases and the Department of Defense and Department of Homeland Security activities. In December 2011, according to Costar Realty Group (Costar), Prince William County commercial inventory included 44.4 million square feet of space in 1,845 buildings, with 3.85 million square feet of vacant space a vacancy rate of 8.7%. Since 2007, some 3.8 million square feet of commercial space has been added to the inventory, a growth rate of 9.3%. Vacant space (3,845,730 in December 2011), while declining by 130,511 (-3.3%) year-over-year, had an increase of over 1.0 million square feet (39.9%) since Prince William County commercial inventory consisted of: Office:....6,589,694 square feet in 404 buildings; Flex:....4,947,347 square feet in 139 buildings; Industrial:.. 12,141,447 square feet in 335 buildings; and Retail:....20,751,943 square feet in 967 buildings. Commercial space continued to experience moderated growth in CY 2011, particularly in Office and Flex product. Vacancy rates, while elevated, were lower than the prior year (with the exception of Flex space) than one year probably as a result of a slower pace of new building and moderately improved economic conditions during the year. In December 2011, a total of 3.85 million square feet of vacant space (including retail) was reported by Costar, a vacancy rate of 8.7%. This represents a decrease of 130,511 square feet since December 2010, when the total vacancy rate was 9.0%. Costar reported 991,543 square feet of vacant Flex space in Prince William County in December 2011, an increase of 35.8% since The Flex vacancy rate was 20.0% in December 2011, compared to 14.8% the previous year. It is important to note the unique nature of Flex product, which includes large spaces built for specific uses that often cannot be easily subdivided. This, in addition to the relatively small FY Revenue Estimates - page 5

18 size of Flex space inventory overall, means that when a single large Flex user leaves the County, the space it occupied can be difficult to fill and the overall vacancy rate is significantly impacted. Figure 5. Commercial Inventory in Prince William County Source: Costar Realty Group Residential Housing Prince William County depends heavily on residential housing and consumer spending to maintain its prosperity and levels of local government services. During the most recent period of prosperity, Prince William County participated and benefited greatly from the unprecedented run-up in home values. In 2001, all residential properties (including apartments) in the County were valued at $14.48 billion and accounted for 78.4% of the total Land Book value of all properties in the County. By 2006, at the height of the most recent real estate boom, residential properties (including apartments) were valued at $49.56 billion and accounted for 87.0% of total Land Book values. This represented an increase of over 240% in five years. Nonresidential land properties, by comparison, increased during the same period from approximately $3.65 billion in 2001 to $6.98 billion in 2006, an increase of 91.2%. By 2009, residential properties were valued at $31.55 billion a decrease of over one-third (36.3%) the value three years earlier. Despite progress in average sale prices since 2009, the magnitude of the downturn in the housing market has continued to impact annual assessments of real estate. In January 2011 all residential properties (including apartments) were valued at $33.99 billion an increase of over $2.0 billion, or 7.2% from Residential properties (including apartments) currently account for 82.7% of the total Land Book value. FY Revenue Estimates - page 6

19 Figure 6. Land Book Values (in billions) in Prince William County Source: Prince William County Office of Assessments Officials of the Prince William Association of Realtors (PWAR), addressing the Prince William County Revenue Committee, reflected on conditions in the market during the year, noting a rather substantial drop in inventory, with a small increase in market price, but declining sales numbers as the year progressed. According to data from Metropolitan Regional Information Systems (MRIS), home sales in 2011 (single family, townhouses and condominiums) in Prince William County totaled 5,898, a 4.7% decrease from the 6,192 units sold in 2010, but a 16.0% increase over the trough year of 2007 when only 4,642 homes were sold in the County. In the five-year period an average of 9,231 homes were sold annually in the County; in the five year period , an average of 6,598 homes were sold annually (approximately 71% of the average). The average sale price of homes sold in 2011 was $280,620 an increase of over $5,300, or 1.9%, from the previous year, when the average sold price was $275,268. Figure 7. Home Sales and Average Sale Prices in Prince William County Source Metropolitan Regional Information System FY Revenue Estimates - page 7

20 The period can be seen as the high water mark for the most recent housing boom. In December 2004, for example, the inventory of unsold properties averaged 823 homes on the market with an average days on the market of 25. A total of 990 homes were sold that month for an average sale price of $458,627; the ratio of inventory to sales was 0.73, less than one home on the market for every home sold. By December 2007, however, an average of 5,475 homes on the market was reported, with an average days on the market of 140. A total of 354 sales were reported for an average sale price of $349,634, 24% lower than the December 2004 average sale price. The ratio of homes on the market to homes sold stood at in December According to data from Metropolitan Regional Information Systems (MRIS), the average home in Prince William County during December 2011 sold for $271,558. This represents a decrease of 0.7% year-over-year, but an increase of 32.9% since February 2009 s $204,378, the low point to date of the recent downturn. The number of homes sold in Prince William County in December 2011 was 435 a drop of 11.8% from December 2010, suggesting that, while the Prince William County real estate market appears to have stabilized, in general, the market has lost much of its momentum, as reflected in inventory, prices, and sales. In December 2011, the ratio of homes on the market to homes sold was 2.6, compared to 2.8 one year earlier. Average days on the market stood at 60 in December 2011 compared to 48 in December Figure 8. Ratio of Homes on the Market to Sales in Prince William County Source Metropolitan Regional Information System Foreclosure activity in Prince William County increased substantially from and while the rate of foreclosures went down somewhat during 2009 and 2010, total numbers are still elevated by historic standards. A number of factors contributed to the increase since 2006: speculation by investors, particularly towards the end of the recent real estate boom; homeowners (some first-time buyers) leveraging equity and easy credit via adjustable rate mortgages (ARMs) into higher priced housing; a large volume of subprime lending; and purchases by workers in industries closely tied to housing with increased earning and borrowing powers. During the recent market run-up, there was a rush to take FY Revenue Estimates - page 8

21 advantage of historically low interest rates and participate in the rapid increase in local property values. Relaxed underwriting by lenders also fueled the buying frenzy. The following foreclosure statistics indicate the severity of the crisis since 2006: 2006: :... 2, :... 6, :... 3, :... 2, :.1,408 The number of foreclosures in 2011 represents a decline of 33% since Any hope for a return to historic notions of a healthy residential real estate market will be predicated on the continued decline of foreclosed properties in the County. And once that goal is reached, prospects are for more moderate rates of growth in home prices over the long-term. The number of permits issued for new housing construction reflects a housing market that made modest gains in 2010, but lost momentum over the last year. In 2011, a total of 1,507 residential occupancy permits were issued for new homes: 842 single family homes, 349 townhouses and 316 multi-family units (including apartments). This represents a decrease of 34.8% year-over-year and the lowest total since The mix of housing types has shifted in five years, reflecting a changed market. In 2006, 63% of all permits issued were for single family detached, while 25% were for townhouses and 12% for condominiums. In 2011, by comparison, 56% of all permits issued were for single family detached, while 23% were for townhouses and 21% were for condominiums. The chart below depicts the annual levels of Prince William County building permits since Figure 9. Residential Unit Building Permits in Prince William County Source: Prince William County Department of Public Works Vehicles Vehicle additions are important to Prince William County in two ways. First, personally-owned 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. 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. FY Revenue Estimates - page 9

22 Figure 10. Net Vehicle Additions in Prince William County Source: Virginia Department of Taxation From May through October 2009, over 2,000 net vehicles were added, boosted, no doubt, by the federal cash-for-clunkers program, which ended in autumn. November and December 2009 moderated with net vehicles at less than 1,500 per month. The first three months of 2010 followed this trend in new vehicles with monthly net additions between 1,300 and 1,500 per month. The numbers increased during the warmer months of the year, with net new vehicles over 2,000 in six out of seven months between April and October. Calendar year 2010 ended with lower net numbers in the last two months, but still in positive territory. In 2011, this moderate trend was continued through the first three months, but in April 2011, net additions experienced huge gains driven by far fewer vehicles dropped and very strong addition activity. This would suggest that residents are holding on to used vehicles even as they and others are buying new ones. Representatives from the National Association of Automobile Dealers (NADA) confirmed this phenomenon in their address to the Revenue Forecast Committee. In addition, the earthquake and tsunami that hit Japan in March, 2011 impacted the auto industry supply of new car and parts resulting in price increases for both new and used vehicles. Indications are that there is a very strong market for both used and new vehicles, a trend borne out at the national level as well. This trend is expected by many industry analysts to continue to strengthen during Retail Sales Tax Revenue Retail sales tax revenue provides financial resources to Prince William County and serves as an indicator of consumer demand. During the five year period (July 2001 June 2006), growth of those revenues in the County exhibited remarkable strength, as seen in the twelve-month moving average line in Figure 11. The robust rate of growth in retail sales was largely a result of population growth, extremely low unemployment levels and a general positive economic environment. In addition, it is believed that part of this growth was driven by decoration of new homes and renovation of existing homes in a booming housing market in the County. Between July 2006 and July 2007, seasonally adjusted sales tax revenues indicated a relatively flat trend from the previous five years of growth. Between August 2007 and January 2010, however, the trend was downward, reflecting economic conditions and concerns. This period included 26 out of 30 months in which declining sales revenue year-over-year was reported. In 2010 and 2011, by contrast, retail activity, FY Revenue Estimates - page 10

23 as reflected in sales revenue generated in Prince William County has strengthened dramatically. In December 2011, $5,118,158 of sales tax revenue, a County record, was generated a 2.4% increase over December Going forward into 2012, retailers are hopeful of continued robust retail activity as the economy and consumer confidence strengthens. According to the 2010 American Community Survey, the 2010 median household income in Prince William County was $92,655. This ranks ninth among the largest counties in the United States, fifth among counties 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. Prince William County s high level of household income should contribute to positive sales tax collection in the future. Figure 11. Retail Sales Tax Revenue Conclusion In 2011, the economy at the national and local level exhibited some growth that moderated during the summer, but gathered strength towards the end of the year. Job creation and unemployment, both stubbornly entrenched at unhealthy levels throughout 2010 and early 2011, appear to be headed in the right direction, both nationally and locally at year s end. Nationally, consumer buying continued to increase moderately, though holiday buying was lower than some predictions; at the local level, retail activity continued apace throughout the year. Core inflation and mortgage rates remain low. Home values in the nation appear to have stabilized finally towards the end of the year. Locally, home values increased modestly over the course of the year, but retreated in the last quarter, as did home sales volume, retail activity has picked up. The monthly rate of foreclosures continued to ease as the year progressed. Nevertheless, 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 FY Revenue Estimates - page 11

24 position as an integral part of Northern Virginia. Historically, the County has outpaced economic growth in the region and in the Commonwealth. 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. Federal government spending and related job production have in the past provided a continuous stimulation to the local economy and largely insulated area jurisdictions from even the severest of downturns. However, the unprecedented rate of growth in valuation of land in the County and the region has come to an end and it should not be anticipated to return at that level for many years. Moderate growth has returned. Some challenges remain in the shortterm, but the County is well-placed for moderate growth in subsequent years. FY Revenue Estimates - page 12

25 HISTORY OF THE REAL ESTATE TAX RATE - During calendar year 2006, the County s average assessed value of residential properties began depreciating (3.8% in 2006) after five consecutive years of double-digit appreciation increases ranging from 17.5% in 2001 to 27.2% in On April 24, 2007, the Prince William Board of County Supervisors adopted the FY 2008 budget, which was supported by a real estate tax rate of $ Although the real estate tax rate increased nearly three cents ($0.029) from the FY 2007 adopted rate of $0.758, the average residential tax bill was held flat with no increase. As the sub-prime mortgage crisis became evident during calendar year 2007 and foreclosures rose throughout the County (over 2,800 foreclosures), the average assessed value of residential properties depreciated 14.7%. On April 29, 2008, the Board of County Supervisors adopted the FY 09 budget, which was developed, based on the average residential tax bill increasing by 5.0% from the prior year. The adopted real estate tax rate of $0.97 equalized the 14.7% decrease in average, residential assessed values while increasing the average residential tax bill 5.0%. During calendar year 2008, the U.S. economy spiraled into recession largely through an industry-wide credit crisis that originated with the implosion of sub-prime mortgages. Foreclosures in the County exploded with 6,549 in 2008 more than doubling those that occurred in Due to the foreclosures and subsequent bank sales (approximately 70% of all residential sales were bank sales and another 5% were short sales), residential properties depreciated 30.1% on average during 2008 with properties in some neighborhoods depreciating 50%-60%. On April 26, 2011, the Board of County Supervisors adopted the FY 2012 Fiscal Plan. The adopted FY 2012 real estate tax rate of $1.204 would provide an average 2.5% increase in the average residential tax bill, provided there were no improvements made to the home that added value such as an addition or finished basement. The adopted real estate tax rate of $1.204 had the following impacts on property owners: the average real estate tax bill on existing, residential properties increased $91 or 2.93%; the average real estate tax bill on commercial properties decreased 1.92%. FY 2013 Proposed Real Estate Tax Rate and Average Tax Bill During CY 2011, the real estate market in the County stabilized in terms of prices but lost momentum as reflected in sales volume and inventory. The commercial real estate market in Prince William County bottomed out during 2010 and saw some improvement in 2011, though vacancy rates continue elevated from historic levels. On April 24, 2012, the Board of County Supervisors adopted the FY 2013 Fiscal Plan. The adopted real estate tax rate of $1.209 has the following tax bill impacts on property owners: the average real estate tax bill on existing, residential properties will increase $102 or 3.2%; the average real estate tax bill on existing, commercial properties will increase 4.0%. FY Revenue Estimates - page 13

26 The following chart illustrates the recent history of the County s real estate tax rate and average residential real estate tax bill: Figure 12. FY Proposed Real Estate Tax Rates and Average Tax Bill $1.300 $1.200 $1.212 $1.236 $1.204 $1.209 $1.221 $1.227 $1.227 $1.221 $3,865 $4,000 $3,800 Tax Rate $1.100 $1.000 $0.900 $0.800 $0.910 $3,257 $3,257 $3,437 $0.970 $3,201 $3,303 $3,436 $3,574 $3,717 $3,600 $3,400 $3,200 Average Residential Tax Bill $0.700 $3,035 $0.758 $0.787 $3,017 $3,110 Note: FY are projected based on forecast assumptions and preliminary revenue guidance $3,000 $0.600 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 $2,800 Tax Rate Avg. Tax Bill The real estate tax rate was moderately increased to $1.209 in FY13. This is an increase of $0.451 from the tax rate of $0.758 adopted in FY07. During that same period, the average residential tax bill will have increased minimally by $46 or 1.41% (from $3,257 to $3,303). The average tax bill is proposed to increase beyond FY 13 based on the projected inflation rates of 4.0% annually in FY FY Revenue Estimates - page 14

27 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 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 1. Summary of General Revenue Estimates by Major Category Real Estate Tax Rate: $1.204 $1.209 $1.221 $1.227 $1.227 $1.221 % to Total FY 2012 ($ in 000s) (FY 2013) Revised Est. FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Real Estate Taxes 65.72% $493,721 $519,369 $548,676 $579,829 $613,012 $647,278 Personal Property Taxes 16.79% 126, , , , , ,670 Sales Tax 6.66% 51,089 52,673 53,990 55,339 56,723 58,141 Consumer Utility Tax 1.74% 13,395 13,740 14,110 14,500 14,890 15,290 Communications Sales Tax 2.39% 18,850 18,850 18,850 18,850 18,850 18,850 BPOL Tax 2.89% 21,960 22,878 23,558 24,258 25,218 26,218 Investment Income 1.14% 7,280 9,011 12,032 15,992 19,841 22,557 All Other 2.67% 21,031 21,092 21,484 21,867 22,348 22,831 Add'l Revenue w/ 3 new FTE's -0.01% - Total General Revenue % $754,051 $790,298 $830,790 $874,075 $919,852 $965,835 Increase over Prior Year 2.29% 4.81% 5.12% 5.21% 5.24% 5.00% School Portion $424,737 $445,308 $468,255 $492,787 $518,701 $544,730 County Portion 325, , , , , ,695 Transportation Fund 4,150 4,150 4,195 4,238 4,322 4,410 Total General Revenues $754,051 $790,298 $830,790 $874,075 $919,852 $965,835 FY Revenue Estimates - page 15

28 Table 2. Revenue Estimates by Category OBJ LVL FY 2013 FY 2014 FY 2015 FY 2016 FY GENERAL REVENUE SOURCE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE 0010 REAL ESTATE TAXES $508,061,000 $537,418,000 $568,733,000 $602,196,000 $636,850,000 ROLLBACK SUPPLEMENT $100,000 $100,000 $100,000 $100,000 $100, REAL ESTATE TAX EXONERATIONS (9,274,000) (9,810,000) (10,381,000) (10,992,000) (11,624,000) SUBTOTAL $498,887,000 $527,708,000 $558,452,000 $591,304,000 $625,326, R/E TAXES - PUBLIC SERVICE $17,982,000 $18,342,000 $18,616,000 $18,803,000 $18,898, REAL ESTATE TAX DEFERRAL $0 $0 $0 $0 $ LAND REDEMPTION $315,000 $315,000 $315,000 $315,000 $315, REAL ESTATE PENALTIES $2,185,000 $2,311,000 $2,446,000 $2,590,000 $2,739,000 TOTAL - - REAL ESTATE $519,369,000 $548,676,000 $579,829,000 $613,012,000 $647,278, PERSONAL PROPERTY TAXES $131,410,000 $136,580,000 $141,880,000 $147,350,000 $153,000, P/P - PRIOR YEAR $50,000 $50,000 $50,000 $50,000 $50, P/P TAX DEFERRAL ($85,000) $100,000 $100,000 $100,000 $100, P/P PENALTIES $1,310,000 $1,360,000 $1,410,000 $1,470,000 $1,520,000 TOTAL - - PERSONAL PROPERTY $132,685,000 $138,090,000 $143,440,000 $148,970,000 $154,670, LOCAL SALES TAX $52,673,000 $53,990,000 $55,339,000 $56,723,000 $58,141, CONSUMER UTILITY TAX $13,740,000 $14,110,000 $14,500,000 $14,890,000 $15,290, COMMUNICATIONS SALES TAX $18,850,000 $18,850,000 $18,850,000 $18,850,000 $18,850, BPOL TAXES - LOCAL BUSINESSES $22,878,135 $23,558,135 $24,258,135 $25,218,135 $26,218, INVESTMENT INCOME $9,011,000 $12,032,000 $15,992,000 $19,841,000 $22,557, INTEREST ON TAXES $1,513,000 $1,594,000 $1,681,000 $1,773,000 $1,868, DAILY EQUIPMENT RENTAL TAX 185, , , , , BANK FRANCHISE TAX 1,500,000 1,500,000 1,500,000 1,500,000 1,500, BPOL TAXES - PUBLIC SERVICE 1,185,000 1,221,000 1,258,000 1,296,000 1,335, MOTOR VEHICLE LICENSE FEE $7,770,000 $7,930,000 $8,070,000 $8,220,000 $8,360, RECORDATION TAX $5,615,000 $5,671,000 $5,728,000 $5,842,000 $5,959, TAX ON DEEDS 1,460,000 1,470,000 1,480,000 1,510,000 1,540, TRANSIENT OCCUPANCY TAX 1,250,000 1,265,000 1,280,000 1,300,000 1,325, INTEREST PAID TO VENDORS (350,000) (350,000) (350,000) (350,000) (350,000) 0521 INTEREST PAID ON REFUNDS (55,000) (55,000) (55,000) (55,000) (55,000) 1303 ROLLING STOCK TAX 95,000 97,000 99, , , PASSENGER CAR RENTAL TAX 795, , , , , MOBILE HOME TITLING TAX 27,500 25,000 25,000 25,000 25, FED PAYMENT IN LIEU OF TAXES 94,500 99, , , , UNDISTRIBUTED & MISCELLANEOUS 7,000 7,000 7,000 7,000 7,000 ALL OTHER REVENUE 21,092,000 21,484,000 21,866,750 22,347,750 22,831,000 TOTAL GENERAL REVENUE 790,298, ,790, ,074, ,851, ,835,135 FY Revenue Estimates - page 16

29 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 Prince William County contributing approximately 65.7% of general revenues (FY 13 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, commercial and industrial, and agricultural and resource land property types. The following tables show a five-year history of this revenue source and the five-year revenue forecast: Table 3. Revenue Summary Real Estate Taxes Revenue History Tax Rate Actual Revenue % Change FY 2007 $ ,468, % FY ,809, % FY ,304, % FY ,343, % FY ,409, % Current Estimate Tax Rate Adopted/Revised % Change FY 2012 (Adopted Budget) $1.204 $474,793, % FY 2012 (Revised Estimate) ,114, % Forecast Revenue Tax Rate Estimate % Change FY 2013 $1.209 $498,887, % FY ,708, % FY ,452, % FY ,304, % FY ,326, % 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 in the table above. Residential Real Estate During calendar year 2010, a stable but appreciating residential market was marked by a stronger first half due to the first time home buyer tax credit. In 2011 the residential market was relatively flat despite record low mortgage rates. Following a 5.4% increase in values in 2010, average existing home value increased approximately 2.77% in Factors contributing to the appreciation of values included the continued low mortgage rates, lower foreclosure rates, and low levels of inventory for sale. In 2011, there were 1,408 foreclosures of residential properties compared to 2,078 in 2010, a decrease of 32%. FY Revenue Estimates - page 17

30 The average number of days on the market increased from 48 days to 60 days from December 2010 to December The inventory of homes on the market remained around the same level as Bank owned properties and short sales made up approximately 17.3% of all sales in CY 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 calendar year 1981 through 2011 and the General Revenue Committee s estimates thereafter. Figure 13. Average Annual Residential Real Estate Appreciation 30% 25% 22.98% 27.20% 20% 15% CY Average Residential Appreciation 17.47% 18.30% 17.44% 10% 5% 0% 7.60% 0.10% 5.24% 4.50% 4.00% 3.50% 2.77% 3.00% -5% -3.83% -10% -15% -20% -25% Actual Residential Appreciation: Actual Avg. 4.4%, with Forecast, 4.3% Inflation Rate, Avg. 3.3% % -30% -35% FY13-17 Forecast % CY80, FY82 CY82, FY84 CY84, FY86 CY86, FY88 CY88, FY90 CY90, FY92 CY92, FY94 CY94, FY96 CY96, FY98 CY98, FY00 CY00, FY02 CY02, FY04 CY04, FY06 CY06, FY08 CY08, FY10 CY10, FY12 CY12, FY14 CY14, FY16 CY of Value, FY of Revenue The following table shows the expected change in market value for residential and apartment properties during the forecast period. FY Revenue Estimates - page 18

31 Table 4. Residential Market Value Changes Revenue Year Single-Family, Townhouse and Condominium Apartments FY % 14.0% FY % 5.0% FY % 5.0% FY % 5.0% FY % 5.0% The strengths of the Washington D.C. area, which are relatively low unemployment (compared to national and state unemployment rates) and stable job growth expectations, are countered by improving, but still elevated, foreclosure rates in Prince William County and consumer confidence, that while showing improvement, is still at low levels. The residential market is forecast to gradually stabilize as the excess supply of foreclosed properties is absorbed over the course of the next twelve to twenty-four months depending on how economic uncertainties unfold. Residential properties in Prince William County are expected to recover at a slower pace for the foreseeable future. Residential market change in Prince William County is somewhat stronger than neighboring Northern Virginia jurisdictions: Table 5. Comparison of Estimated Residential Market Value Changes from 2010 to 2011 Prince William County Loudoun County Fairfax County City of Alexandria Arlington County All Residential (Excluding Rental Apartments) 2.77% 1.1% 0.71% 1.16% 1.80% Apartments Market Value Change The apartment market has seen increases in both rent and occupancy levels in Prince William County. Apartment values experienced a healthy increase mainly due to an annualized 86 basis point reduction in overall capitalization rates according to the Fourth Quarter 2011 Korpacz Real Estate Investor Survey. The reason for this sharp decline is the relative strength of apartments as investment properties, as well as easier availability of capital. Appreciation is projected to continue throughout FY at a rate of approximately 5%. 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 2011 will be reflected in the County s January 1, 2012, landbook which provides the basis for real estate tax revenue received in FY Revenue Estimates - page 19

32 Fiscal Year The following table summarizes the expected number of newly constructed residential units during the forecast period. Table 6. Residential Growth Number of Units Revenue Year / Calendar Year Total Residential Units Single-Family Townhouse Condominium Apartments FY 2007 /CY 05 6,178 3,780 1, FY 2008 /CY 06 4,420 2,556 1, FY 2009 /CY 07 2,889 1, FY 2010 /CY 08 1,978 1, FY 2011 /CY 09 1,957 1, FY 2012/CY 10 2,216 1, FY 2013 /CY11 (est.) 1, FY 2014 /CY12 1,910 1, FY 2015 /CY13 1,970 1, FY 2016 /CY14 2,030 1, FY 2017/CY 15 2,090 1, Construction of single family, townhouse, and condominium units that were completed during calendar year 2011 will generate revenue for FY 13. The volume of new home starts is expected to rise as the economy stabilizes and the inventory of foreclosed homes diminishes during the remainder of the forecast period. Construction of new apartment units is expected to go up to 310 units in FY 14 and during the remainder of the forecast period as demand for apartments continues. Residential Values Per New Unit The average assessed value of a new home constructed during CY 2011 was approximately $376,736 a 10.0% increase over the average assessed value of homes built in 2010 which was $342,200. It should be noted that the overall assessed value of a new home is affected by the mix of single family, townhouse, and condominium units constructed in any given year. The average assessed value of a new single family home was approximately $436,984 in In 2011, the average assessed value of a new condominium unit was approximately $233,334 and the average value of a new townhouse unit was $301,260. FY Revenue Estimates - page 20