ESTIMATE of GENERAL REVENUE

Transcription

1 FINANCE DEPARTMENT PRINCE WILLIAM COUNTY, VIRGINIA ESTIMATE of GENERAL REVENUE ADOPTED FY

2 Prince William County BOARD OF COUNTY SUPERVISORS Corey A. Stewart - At-Large Chairman Maureen S. Caddigan - Potomac District Vice-Chairman Pete Candland - Gainesville District John D. Jenkins - Neabsco District Jeanine Lawson - Brentsville District Michael C. May - Occoquan District Martin E. Nohe - Coles District Frank J. Principi - Woodbridge District Melissa S. Peacor County Executive Adopted FY 2016 FY 2020 Estimate of General County Revenue

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4 This Report Prepared By: Department of Finance One County Complex Court Prince William, VA Michelle L. Attreed Director of Finance Timothy M. Leclerc Deputy Finance Director Revenue Committee Christopher E. Martino, Deputy County Executive Michelle Casciato, Budget Director Tom Bruun, Director of Public Works Wade Hugh, Director of Development Services Chris M. Price, Planning Director Steven Ferlotti, Tax Administration Division Chief Tracy Gordon, Assistant to the County Executive Jeffrey A. Kaczmarek, Executive Director, Economic Development David S. Cline, Associate Superintendent for Finance and Support Services, PWC Schools John M. Wallingford, Director of Financial Services, PWC Schools Revenue Committee Project Team Lillie Jo Krest, Project Manager Lynn Bailey Mark Hinman Allison Lindner Kerem Oner Susan Rodeheaver Allen Scarbrough Bill Vaughan

5 The Revenue Committee Expresses Its Appreciation to the Public and Private Sector Business Community Who Assisted in the Development of this Report John Layman Chief Economist Virginia Department of Taxation Ann Battle Macheras Regional Research Vice President The Federal Reserve Bank of Richmond Steven Szakaly Chief Economist The National Automobile Dealers Association Representatives from I-95 Business Parks Management, LLC: Bill Lynch Owner Traci Morris-Cole Director of Leasing & Business Development Representatives from the REALTOR Association of Prince William: Liz Hernandez President April McMillian Chief Executive Officer Representatives from the Northern Virginia Building Industry Association: Sherman Patrick Planner, Compton & Duling, LC J. Truett Young President Engineering Manager, Stanley Martin Homes Coleman Rector President & Principal Broker, Weber Rector, Inc. Mark Granville-Smith CEO, Classic Concept Builders

6 COUNTY OF PRINCE WILLIAM FINANCE DEPARTMENT 1 County Complex Court, Prince William, Virginia (703) Metro , ext FAX (703) Michelle L. Attreed Director of Finance May 22, 2015 TO: FROM: Melissa S. Peacor County Executive Michelle L. Attreed 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. Average residential real estate values grew by 6.3% in calendar year 2014 while commercial values increased 4.1%. Personal property values are up 0.5% for fiscal year 2015 and sales tax revenues are projected to increase 3%. As the Federal Reserve maintains record low target interest rates (less than 0.25%), the County s investment income revenue will continue to be below historic amounts. The assumptions determined by the Revenue Committee provide the capacity to reduce the real estate tax rate by two cents in FY 2016 from $1.148 to $ A real estate tax rate of $1.122 was adopted for FY 2016 and generates an average residential tax bill of $3,722, a 3.88% increase over the FY 2015 average tax bill. This revenue policy directive was approved by the Board of County Supervisors on April 23, I recommend these revenue estimates be used in preparing the 2016 Fiscal Plan, the Capital Improvement Plan for FY , and other financial plans. I would like to thank the members of the Revenue Committee, the participants from the business community, and all others who contributed to the preparation of this report.

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8 TABLE OF CONTENTS INTRODUCTION 1 Review of the Economy in 2014 and Outlook for Calendar Year HISTORY OF THE REAL ESTATE TAX RATE. 12 FY 2016 Adopted Real Estate Tax Rate and Average Tax Bill. 12 MAJOR REVENUE SOURCES AND KEY ASSUMPTIONS. 14 Real Property Revenue 16 Residential Real Estate 16 Commercial Real Estate.. 19 Public Service Taxes Personal Property Revenue. 23 Local Sales Tax Revenue 26 Consumer Utility Revenue.. 27 Communications Sales and Use Tax Revenue 28 BPOL Revenue 29 Investment Income.. 31 All Other Revenue Sources. 34 Interest on Taxes. 34 Motor Vehicle License Fee. 34 Recordation Tax.. 35 Tax on Deeds Daily Rental Equipment Tax 37 Bank Franchise Tax. 37 BPOL Taxes-Public Service 37 Transient Occupancy Tax 37 Interest Paid to Vendors.. 37 Interest Paid on Refunds. 37 Rolling Stock Tax 37 Passenger Car Rental Tax 38 Manufactured (formerly Mobile) Home Titling Tax Payments in Lieu of Taxes (PILT).. 38 APPENDIX A GENERAL PROPERTY TAX RATES... 39

9 REVIEW OF THE ECONOMY IN 2014 AND OUTLOOK FOR CALENDAR YEAR 2015 The County s revenues are affected, in varying degrees, by economic conditions at the national, state and local levels. Because of its proximity to the federal government and military employment centers, the local economy has some degree of insulation from the severity of cyclical downturns. The following narrative presents an economic assessment of the nation, the Commonwealth of Virginia, and Prince William County and highlights the relevant trends in place as we look forward to FY National Real Gross Domestic Product (GDP) is the broadest measure of economic activity in the United States and is a reliable indication of the overall strength and performance of the national economy. 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-overquarter). Slow to moderate growth has proceeded since, with improvement as 2013 progressed, despite federal sequestration and a government shutdown. An unusually severe winter during the first quarter of calendar 2014 is partly responsible for a decline during that quarter, but since then, GDP growth has strengthened, with third quarter growth the strongest since GDP for the 2014 year was as follows: -2.1%, 4.6%, 5.0% and 2.2% -- signs of an expanding economy fueled by continued consumer activity. 1

10 Other parts of the economy also moved in the right direction over the course of the year, many appearing to pick up momentum towards the end of the year. The stock market and related indexes have been marked by volatile but steady growth since the depths of the Great Recession. The S&P 500 Index, peaked at 1, in May 2008, lost over half its value in ten months, and ended with an average of on March 2, Since then, however, the S&P has more than tripled its value, ending 2014 at 2, S&P 500 Index Source: Yahoo.com/Finance Unemployment rates, considered a lagging indicator of sorts, moved below 7.0% in late 2013, and dropped below 6.0% during the fourth quarter of In December 2014 unemployment stood at 5.6%, a marked improvement over the previous December s 6.7%. Job creation, which declined severely during the recession, continued an expanding trend throughout 2014, approaching pre-recession levels of employment. In two years, from December 2007 until December 2009, a net of over 8.5 million jobs were lost as the economic contraction took hold -- a loss of 5.8%. Since that time, however, a net total of 9.43 million jobs have been added (through December 2014) -- an increase of 6.5% in 60 months. For 2014, non-farm payrolls added 2.77 million net new jobs; easing the unemployment rate nationally. Expectations going forward are for continued job growth and further reduction in the national unemployment rate as 2015 progresses. Also at the national level the homebuilding sector continued on a mostly stable, upward trend, though there is still much ground to be made up to return to a more normal activity level and overall, signs point to a slowing rate of growth towards the end of the year. Home affordability measures remain near all-time highs, even as younger first-time buyers seem reluctant or unable to take on home-ownership, indications that the national residential market continues a slow, but steady improvement. Across the nation, some 1,028 million housing starts were reported in November 2014, a 5.8% decrease from one year earlier. November 2014 permits totaled 1,035 million -- a 2.8% increase, year-over-year. Retail activity, despite some economic uncertainty with regards to the federal budget, continued on a general strengthening trend as the year progressed and correlates with an improving job market, and perhaps some pent-up demand. However, growth rates in wages, an important element of consumer activity, have generally remained flat for much of At first glance, declining retail sales volume in November and December might be cause for concern, as retail activity is so important to the nation s economy. The lion s share of that decline, however, came from rapidly falling gasoline prices in the last two months of U.S. retail and food services sales for December 2014 were down 0.9% from the previous month, but were up 3.2% from one year earlier. Gasoline sales declined by 6.5%, even as consumers were driving more. Clearly, rapidly falling prices in gasoline sales, which typically account for six to eight percent of total retail sales, are accounting for declines in overall retail sales volume, but are probably not an indication of consumer sentiment. In fact, as prices continue to decline, the average consumer may begin to use 2

11 those savings on other purchases, like automobiles and light trucks, for example. Total sales of automobiles and light trucks, including foreign, were reported at 16.9 million in December 2014, down from a strong 17.2 million sold in November but 9.7% higher than December Expectations are for auto sales to continue at a robust pace in Virginia John Layman, Chief Economist and Director of Revenue Forecasting for the Virginia Department of Taxation, addressed the Revenue Committee on November 14, 2014, and presented a summary of the economic outlook for the Commonwealth. Mr. Layman noted that while the national economy performed generally as expected, the Virginia economy stalled during the last half of fiscal year 2013, due primarily to federal budget cuts. Wages and salaries across the Commonwealth grew at an annual rate of 1.1%, significantly lower than forecast. Jobs in the Commonwealth grew by a meager 0.4% during the fiscal year, with gains in finance, education and health services, and leisure and hospitality. Gains were largely offset by the drag from professional and business services and the federal government sectors. While these particular sectors underperformed expectations, most others, namely financial services, education and health services and leisure and hospitality, grew ahead of the forecasted rates. The statewide unemployment rate stood at 4.5% in December 2014, compared to 4.8% one year earlier. Personal income in the Commonwealth, forecast to grow by 2.9% during fiscal year 2014, actually grew by only 1.6% year-over-year. The Commonwealth s individual income tax non-withholding collections were $401.1 million below the annual estimate for fiscal year 2014 or down 13.7%. Payroll withholding tax collections fell short of the annual estimate by $66.0 million for the same time period, down 0.6%. This shortfall was largely attributed to slower than expected employment growth -- particularly in key sectors like professional and business services, which are keenly sensitive to changes in federal expenditures. The Commonwealths August 2014 interim revenue forecast is based on the updated economic outlook for Virginia as approved by the Joint Advisory Board of Economists (JABE) and the Governor s Advisory Council on Revenue Estimates (GACRE). In the JABE Pessimistic Forecast, Virginia will continue to underperform the national economy; employment and income growth are not expected to approach modestly stronger rates until fiscal year 2016; fiscal year 2015 is forecast to remain subdued. Employment growth in the Commonwealth over the next two years is expected to be below that of previous economic recoveries. Wages and salaries growth, which historically have an average annual rate of 5.0%, are expected to remain below that average, with a 2.3% average annual growth rate predicted over the next two years. Despite weak job growth, withholding gains have been picking up across the Commonwealth as has sales tax revenue. The expectations are for continued economic growth in fiscal years 2015 and 2016, albeit at a slower pace. Prince William County In 2014, Prince William County s economy, even with concerns over the effects of federal sequestration and budgetary complications, continued to show signs of strengthening in many aspects -- improving unemployment and job creation, and very hearty household incomes. Retail and auto sales continued at a healthy pace through much of the year, an indication of increasing 3

12 consumer confidence and buying power. During 2014, the local economy appears to have continued a generally positive momentum, with some challenges remaining. Chief among these will be the economic impacts, if any, of decisions on federal budget, debt, and sequestration issues. Population and Cost of Living Prince William County s population was estimated at 425,972, on December 31, 2014, an increase of 1.3% year-over-year. The County population is estimated to have grown by 23,970 persons (5.96%) since April 1, 2010 when the population was 402,002. The Metropolitan Washington Council of Governments projects in its Round 8.3 Cooperative Forecast: Employment, Population and Households that Prince William County will grow to over 479,000 persons by 2020 or 19.4%, and to 535,629 by the year 2030 or 33.4% from Labor Force The Prince William County civilian labor force, as reported by the Virginia Employment Commission was 234,134 in December 2014, an increase of 767 (0.3%) since December 2013 and a five-year increase of 27,187 (13.1%). Employed persons in the labor force (224,601) increased by 1,430 (0.6%) since December 2013 and by 29,940 (15.4%) in the last five years. Unemployed persons in the County (9,523) decreased by a 663 (-6.5%) since December 2013 and by 2,753 (- 22.4%) since December The December 2014 unemployment rate for Prince William County was 4.1%, compared to 4.4% just one year earlier. 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 national, state and regional economies in business and job growth over the last five years but has lagged behind the state and region for at-place average weekly wage growth since 2009 as well as during the last year. The 2013 American Community Survey indicates that 63.8% of the Prince William County labor force commutes outside the county for work; 12.4% actually worked outside the Commonwealth. 4

13 On the average, Prince William County workers continue to face long commute times. The average travel time to work among Prince William County workers in 2013 was 37.8 minutes -- the fifteenth longest commute among the largest 828 counties in the United States. In 2014, (Q2) there were 8,133 employment establishments reported in Prince William County, a growth rate of 3.5% year-over-year and 13.9% since By comparison, Northern Virginia establishments grew by 1.2% in one year and 6.1% since Statewide, establishments grew by 1.7% in the last year and 4.6% since At-place employment in the County (120,630 in Q2 2014) increased by 2.2% year-over-year and by 17.4% since By comparison, Northern Virginia employment declined by 0.4% in the last year while increasing 4.3% since Employment in Virginia grew by 0.5% in the last year, and increased 3.2% since At-Place Establishments, Jobs and Weekly Wages One and Five Year Growth Source: Virginia Employment Commission The average weekly wage in the County ($822 in Q2 2014) grew by 0.5% year-over-year and 6.6% since At-place average weekly wages in Northern Virginia ($1,322) declined by 0.4% in the last year but grew by 7.0% since In Virginia, weekly wages ($976) grew by 0.8% year-over-year and 8.6% since

14 Residential Housing Prince William County depends heavily on residential housing and consumer spending to maintain its prosperity and levels of local government services. In January 2014, all residential properties (including apartments) were valued at $41.3 billion--an increase of over $3.5 billion, or 9.4% from January Residential properties (including apartments) currently account for 83% of the total land book value. Prince William County Ten-Year Land Book Mix Source: Prince William County Real Estate Assessments Office Representatives from the REALTOR Association of Prince William (PWAR), addressing the Revenue Committee, reflected on conditions in the market during the year, noting continued low levels in inventory, with moderate increases in market price and sales numbers as the year progressed. They noted a leveling off in terms of prices as the year waned and expressed some concern for conditions going forward. According to data from Metropolitan Regional Information Systems (MRIS), home sales in 2014 (single family, townhouses and condominiums) in the County totaled 6,052, a 3.3% decrease from the 6,256 units sold in 2013, but a 30.4% increase over the trough year of 2007 when only 4,642 homes were sold. Over the seven-year period 2001 to 2007 an average of 8,269 homes were sold annually in the County. In the (Source: MRIS) seven-year period 2008 to 2014, an average of 6,635 homes were sold annually (approximately 80% of the 2001 to 2007 average). The average sale price of homes sold in 2014 was $349,334 an increase of over $15,000, or 4.6%, 6

15 from the previous year, when the average sale price was $334,065. As illustrated in the chart, annual growth rates for average sales price and volume moderated during 2014, from the previous year, but are on a par with averages over the last five years. According to data from MRIS, during December 2014, the average home in Prince William County sold for $365,727. This represents an increase of 9% year-over-year. The number of homes sold in the County in December 2014 was an increase of 23.3% from December The ratio of homes on the market to homes sold was 2.71, compared to 2.48 one year earlier. Average days on the market stood at 66 in December 2014 compared to 44 during the same month of the prior year. Foreclosure activity in Prince William County increased substantially from 2007 to 2008; and while the rate of foreclosure has decreased total numbers are still elevated by historic standards. Foreclosure statistics indicate the severity of the crisis from 2007 through 2011 and the steady improvement since. A total of 541 foreclosures were reported for 2014, a decline of 14% since 2013 and 92% from 2008, the worst year in terms of numbers of foreclosures. Expectations are that the number of foreclosures will continue to decline. The number of permits issued for new housing construction reflects a market for new homes that made modest gains in 2010 as it began to emerge from the most recent real estate downturn. New residential construction lost momentum between 2011 and 2013 but gained some momentum towards the end of 2014, particularly in multi-family units, but still has not approached the levels seen before the downturn. In 2014, a total of 2,104 residential occupancy permits were issued for new homes: 532 single family homes, 334 townhouses and 1,238 multi-family units (including apartments). This represents an increase of 28.1% year-over-year and the largest annual number of occupancy permits since 2010 when there were 2,312 total (Source: Prince William County Department of Public Works) new units. The mix of housing types has shifted in six 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 2014, by comparison, 25.3% of all permits issued were for single family detached, while 15.9% were for townhouses and 58.8% were for multi-family units. A total of 904 permits were issued for rental apartments, accounting for 73.0% of all multi-family permits and 43.0% of all residential occupancy permits issued in Calendar Total Year Foreclosures , , , , ,

16 Commercial Inventory During the course of 2014, the Prince William County commercial inventory saw gradually improving conditions, although new construction continues at a generally reduced level. In so much as the County s commercial inventory is a part of the region s inventory, it is affected by general conditions in the region s economy. Overbuilding during the last economic expansion was in part responsible for an oversupply of office and industrial inventory as the economy began to worsen. Furthermore, in certain types of product -- notably flex, which is often characterized by single large and specific uses -- the movement of one or two tenants can greatly impact vacancy rates. Current conditions suggest that the commercial real estate market continues to be in an absorption phase, particularly in office product. And, there is some evidence that the federal government as with the private sector, may be undergoing a change of sorts as to how and where business is conducted. As baby boomers move out of the labor force, some of the senior positions vacated may be allowed to lapse or be consolidated as younger, more productive and technically savvy workers move in. Furthermore, new ideas such as telecommuting and flex scheduling are gaining traction in the workplace -- all of which will affect the existing commercial inventory in Northern Virginia and Prince William County. With a marked improvement in industrial and flex vacancy rates, it is reasonable to expect demand for this product to increase at the local level. Retail space demand, which is largely population driven, will reflect in part the growth in the local population as well as individuals relative wealth and sense of well-being. Prince William County s close proximity to the federal government and affiliated contractor industries has largely isolated it from severe economic downturns in the past. Not only has this relationship provided some insulation from inevitable business cycle troughs, it has also provided the County with a demand base for its housing and retail trade. As previously noted, this may not hold true in the future. Lingering uncertainty over future federal expenditures may have a negative impact on commercial markets in the area -- particularly in defense-related industries. On the positive side, the Base Realignment and Closing Act (BRAC) designated both Quantico Marine Corps Base and Fort Belvoir Army Base as recipients of additional personnel as the Department of Defense continues consolidation of bases around the nation. Prince William County s location has meant, in the past, an increased demand for office and flex product in the Interstate 95/Potomac Communities corridor, particularly from contractors servicing the bases and the Department of Defense and Department of Homeland Security activities. In an era of declining defense budgets and changing security needs, future demand for this product is uncertain at best. In December 2014, according to CoStar Realty Group (CoStar), Prince William County commercial inventory included 44.5 million square feet (sq. ft.) of space in 1,956 buildings, with 3.01 million sq. ft. of vacant space -- a vacancy rate of 6.8%. Since Commercial Property by Type Property Number of Inventory Vacancy % of Types Parcels (sq. ft.) (sq. ft.) Inventory Office 434 6,532, , % Flex 138 5,079, , % Industrial ,316, , % Retail 1,057 21,616,044 1,188, % 2010, some 1.85 million sq. ft. of commercial space has been added to the inventory, a growth rate of 4.3%. 8

17 Vacancy rates moved lower in all categories since December Total vacancy across all categories in December 2014 was 6.8%, a decrease of 642,991 sq. ft. since December 2013, when the total vacancy rate was 8.3%. Total vacant space has declined by 966,523 sq. ft. since December 2010, when the total vacancy rate was 9.3%. Source: CoStar Realty Group 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. Steven Szakaly, Chief Economist from the National Automobile Dealers Association (NADA), addressed the Revenue Committee in December 2014 regarding national and local trends in vehicle sales. Mr. Szakaly noted that across the nation, sales of automobile and light trucks returned to prerecession levels during 2014, with expectations that this trend will continue in In monitoring sales locally, month-by-month additions tend to be volatile and exhibit seasonal patterns. Therefore, the following graph includes a six-month moving average that shows the annual trend in net vehicle additions. Starting in April 2011, net vehicle additions in Source: Virginia Department of Motor Vehicles Prince William County experienced substantial gains driven by far fewer vehicles relinquished and very strong addition activity. This would suggest that residents are holding on to used vehicles longer even as they and others are buying new ones. Net new gains continued at a robust pace through 2012 and 2013, tailing down towards the end of 2013, before returning to very positive trends as 2014 progressed -- further evidence of strengthening consumer confidence. 9

18 Retail Sales Tax Retail sales tax revenue provides financial resources to the County and serves as an indicator of consumer demand. According to the 2013 American Community Survey, the 2013 median household income in Prince William County was $95,268. This ranks twelfth among the largest counties in the United States, fourth among counties in the Commonwealth, and is an indication of the relative wealth of Prince William County and Source: Prince William County Department of Finance the greater Washington metropolitan region, which included nine 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. Conclusion In conclusion, the 2014 economy at the national and local level exhibited growth that strengthened even in the face of uncertainty regarding the federal budget and continuing political intransigency. As the year progressed, the national economy appeared to be strengthening, led by dramatic reductions in gasoline prices and increased consumer confidence. The housing market, still well below pre-recession levels, continued to grow modestly, while retail and automobile sales strengthened; and unemployment continued in the right direction, with continued healthy job creation. The stock market continued generally on an upward path; while corporate earnings were mixed. Job creation and unemployment, stubbornly entrenched at unhealthy levels throughout 2010 and 2011, improved in 2012 and 2013, and continued that trend during Nationally, the price of gasoline tumbled -- particularly towards the end of the year and consumer confidence appeared to grow modestly. At the local level, retail activity continued apace through much of the year. Core inflation and mortgage rates remained low and home values in the nation continued to improve slowly during 2014, with growth rates moderating towards the end of the year. Locally, home values increased over the course of the year, though new home construction has yet to make substantial headway. The monthly rate of foreclosures continued to ease throughout The County s commercial inventory remained primarily in an absorption phase, with declining vacancy, but little new construction. Retail activity and automobile sales continued to expand, though many consumers were compelled to hold on to their existing vehicles longer. While there is reason for optimism looking forward to 2015, some challenges remain nationally, statewide and locally. Prince William County continues to boast remarkable characteristics that stand it in good stead -- exceptional human capital, a relatively diverse local business community, and the County s enviable position as an integral part of the Northern Virginia region. There are concerns that a 10

19 reduced role by the federal government with regards to job creation and economic expansion in the greater Washington D.C. Metropolitan area will have a broader lasting effect over the long term. In an environment of continued pressure on the federal budget, new challenges may be anticipated on the regional and local economies. Historically, however, Prince William County as part of the Washington D.C. Metropolitan area, and the Northern Virginia economy in particular, has shown remarkable resilience during the ups and downs of the normal business cycle. 11

20 HISTORY OF THE REAL ESTATE TAX RATE During calendar year 2006, the County s average assessed value of residential properties began depreciating (3.8%) 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, with 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 2009 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 industrywide credit crisis that originated with the implosion of sub-prime mortgages. Foreclosures in the County exploded with 6,412 in more than doubling those that occurred in Due to the high number of 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% to 60%. The residential real estate market bottomed in 2009 and finally began to stabilize and strengthen during The market has continued to strengthen since 2011 with moderate increases in average sale prices and declining monthly foreclosures. On April 29, 2014, the Board of County Supervisors adopted the FY 2015 Fiscal Plan. The adopted FY 2015 real estate tax rate of $1.148 had the following impacts on property owners: the average real estate tax bill on existing, residential properties increased $169 or 4.95%; and the average real estate tax bill on commercial properties decreased 0.04%. FY 2016 Adopted Real Estate Tax Rate and Average Tax Bill On April 21, 2015, the Board of County Supervisors adopted the FY 2016 Fiscal Plan. The proposed real estate tax rate of $1.122 has the following tax bill impacts on property owners: the average real estate tax bill on existing, residential properties will increase $139 or 3.88%; and the average real estate tax bill on existing, commercial properties will increase 1.74%. 12

21 The following chart illustrates the recent history and five year plan of the County s real estate tax rate and average residential real estate tax bill. The average tax bill is proposed to increase by 3.88% annually in FY $1.300 $1.236 $4,600 Tax Rate $1.200 $1.100 $1.000 $0.900 $0.800 $0.700 $1.212 $0.970 $0.910 $3,437 $3,257 $3,257 $0.787 $0.758 $3,035 $3,017 $3,105 $1.204 $1.209 $1.181 $1.148 $3,201 $3,414 $3,316 $1.126 $1.130 $1.134 $1.138 $1.122 $4,171 $3,583 $3,722 $3,866 $4,016 $4,332 Note: FY are projected based on forecast assumptions and preliminary revenue guidance $4,400 $4,200 $4,000 $3,800 $3,600 $3,400 $3,200 $3,000 Average Residential Tax Bill $0.600 $2,800 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Tax Rate Avg. Tax Bill 13

22 MAJOR REVENUE SOURCES AND KEY ASSUMPTIONS The following sections of this report contain the key assumptions that were the topic of discussion at the Revenue Committee Meetings. The comments and insights from public and private sector participants contributed to the formation of these assumptions. Other references and information sources were used to supplement the assumptions derived in the committee discussions. Major revenue sources are identified as those summarized below: Real Estate Tax Rate: $1.148 $1.122 $1.126 $1.130 $1.134 $1.138 % to Total FY 15 ($ in 000s) (FY 16) Revised FY 16 FY 17 FY 18 FY 19 FY 20 Real Estate Taxes 65.79% $562,726 $587,002 $617,103 $647,552 $679,587 $713,304 Personal Property Taxes 17.66% 152, , , , , ,250 Sales Tax 6.76% 58,525 60,280 62,090 63,950 65,870 67,847 Consumer Utility Tax 1.56% 13,800 13,940 14,150 14,430 14,720 15,090 Communications Sales Tax 2.08% 18,200 18,600 18,780 18,970 19,160 19,350 BPOL Tax 2.80% 24,485 25,025 25,620 26,345 27,215 28,145 Investment Income 0.71% 5,911 6,342 6,797 7,989 8,456 8,505 All Other 2.64% 22,813 23,545 23,972 24,245 24,850 25,457 Total General Revenue % $858,850 $892,283 $932,622 $975,071 $1,019,119 $1,064,948 Change in Revenue Over Prior Year 3.89% 4.52% 4.55% 4.52% 4.50% School Portion $487,915 $506,976 $529,988 $554,189 $579,301 $605,430 County Portion 366, , , , , ,298 Transportation Fund 4,660 4,750 4,850 4,970 5,090 5,220 Total General Revenue $858,850 $892,283 $932,622 $975,071 $1,019,119 $1,064,948 On April 23, 2013, the Board of County Supervisors approved an amendment to the County/Schools Revenue Sharing Agreement to transfer 57.23% of all general revenues, excluding recordation tax revenue, to the Schools as support for the annual Schools budget and 42.77% to support the annual County budget in each year of the Five-Year Budget Plan. 14

23 GENERAL REVENUE SOURCE FY GENERAL COUNTY REVENUE ESTIMATE BY CATEGORY OL3 FY 16 Forecast FY 17 Forecast FY 18 Forecast FY 19 Forecast FY 20 Forecast Real Estate 10 $ 583,422,000 $ 614,004,000 $ 644,896,000 $ 677,451,000 $ 711,724,000 Rollback Suppement 100, , , , ,000 Real Estate Exonerations 20 (15,171,600) (15,966,700) (16,769,900) (17,616,300) (18,507,400) SUBTOTAL 568,350, ,137, ,226, ,934, ,316,600 Real Estate-Public Service 41 17,357,170 17,593,239 17,832,295 18,074,372 18,319,508 Real Estate Tax Deferral 21 (500,000) (500,000) (500,000) (500,000) (500,000) Land Redemption , , , , ,000 Real Estate Penalties 160 1,479,000 1,557,000 1,679,000 1,763,000 1,853,000 TOTAL REAL ESTATE $ 587,001,570 $ 617,102,539 $ 647,552,395 $ 679,587,072 $ 713,304,108 Personal Property 71 $ 156,400,000 $ 162,900,000 $ 170,300,000 $ 177,900,000 $ 185,800,000 Personal Property Prior Year 72 50,000 50,000 50,000 50,000 50,000 Personal Property Exonerations Personal Property Tax Deferral 81 (500,000) (500,000) (500,000) (500,000) (500,000) Personal Property Penalties 170 1,600,000 1,660,000 1,740,000 1,810,000 1,900,000 TOTAL PERSONAL PROPERTY $ 157,550,000 $ 164,110,000 $ 171,590,000 $ 179,260,000 $ 187,250,000 LOCAL SALES TAX 210 $ 60,280,000 $ 62,090,000 $ 63,950,000 $ 65,870,000 $ 67,847,000 CONSUMER UTILITY TAX 220 $ 13,940,000 $ 14,150,000 $ 14,430,000 $ 14,720,000 $ 15,090,000 COMMUNICATIONS SALES TAX 223 $ 18,600,000 $ 18,780,000 $ 18,970,000 $ 19,160,000 $ 19,350,000 BPOL TAXES - LOCAL BUSINESSES 235 $ 25,024,520 $ 25,619,983 $ 26,345,275 $ 27,215,462 $ 28,144,733 INVESTMENT INCOME 510 $ 6,342,000 $ 6,797,000 $ 7,989,000 $ 8,456,000 $ 8,505,000 Interest on Taxes 140 $ 1,377,000 $ 1,446,000 $ 1,517,000 $ 1,592,000 $ 1,670,000 Daily Equipment Rental Tax , , , , ,900 Bank Franchise Tax 230 1,500,000 1,500,000 1,200,000 1,200,000 1,200,000 BPOL - Public Service 236 1,296,000 1,335,000 1,375,000 1,416,000 1,458,000 Vehicle Decals 250 8,400,000 8,580,000 8,770,000 8,970,000 9,160,000 Recordation Tax 260 6,426,000 6,555,000 6,718,000 6,886,000 7,059,000 Tax on Deeds 261 1,658,000 1,691,000 1,724,000 1,768,000 1,812,000 Transient Occupancy Tax 270 1,589,000 1,537,000 1,583,000 1,630,000 1,679,000 Interest Paid to Vendors 520 (100,000) (100,000) (100,000) (100,000) (100,000) Interest Paid on Refunds 521 (55,000) (55,000) (55,000) (55,000) (55,000) Rolling Stock Tax , , , , ,000 Passenger Car Rental Tax ,035,000 1,056,000 1,077,000 1,099,000 1,121,000 Mobile Home Tilting Tax ,000 35,000 35,000 35,000 35,000 Federal Payment in Lieu of Taxes ,000 70,000 70,000 70,000 70,000 Undistributed & Miscellaneous ,000 7,000 7,000 7,000 7,000 ALL OTHER REVENUE $ 23,545,000 $ 23,972,200 $ 24,244,600 $ 24,850,100 $ 25,456,900 TOTAL GENERAL REVENUE $ 892,283,090 $ 932,621,722 $ 975,071,270 $ 1,019,118,634 $ 1,064,947,741 15

24 REAL PROPERTY REVENUE Real estate revenues are broken down into the following categories: general real estate tax, public service tax, real estate tax deferral, land redemption, and real estate penalties. Real Estate Taxes The real estate tax is the single largest revenue source for Prince William County contributing approximately 65.79% of general revenues (FY 2016 forecast). It is levied on all land, improvements, and leasehold interests on land or improvements (collectively called real property ) except that which has been legally exempted from taxation by the Prince William County Code and the Code of Virginia. The revenue summary for the general real estate tax applies only to real property assessed locally, which includes residential, apartments, commercial and industrial, and agricultural and resource land property types. The table shows a five-year history of this revenue source and the five-year revenue forecast. Revenue History % Change FY 10 $ 459,343, % FY ,409, % FY ,859, % FY ,366, % FY ,274, % Adopted 542,350, % Revised 544,021, % 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. Revenue Forecast FY ,350, % FY ,137, % FY ,226, % FY ,934, % FY ,316, % Residential Real Estate During calendar year 2014 (CY 2014) the residential real estate market continued to appreciate. The factors affecting the market were still low interest rates, decreasing inventory of bank owned properties, and somewhat slower pace of sales activity, which was reflected in the increase in Days on Market statistics published by Real Estate Business Intelligence. Following a 7.6% increase in values in 2013, the average existing home value increased approximately 6.3% in In 2014, there were 541 foreclosures of residential properties compared to 632 in 2013, a decrease of 14%. The average number of days on the market increased from 44 days to 66 days from December 2013 to December Bank owned properties and short sales made up approximately 6% of all sales through the end of December The residential real estate market consists of four property types: single-family homes, townhouses, residential condominiums, and apartments. Duplex units are included within the townhouse category. The apartment category consists of units within rental apartment communities and apartment buildings with five or more units. 16

25 Residential Appreciation The following chart shows a history of actual residential appreciation (excluding rental apartments) from calendar year 1984 through 2014 and the General Revenue Committee s estimates thereafter. 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% 13.13% -1.79% Actual Residential Appreciation FY16-20 Forecast 17.47% 27.20% 0.10% 7.66% 4.70% -25% -30% -35% Average Residential Real Estate Appreciation 4.5% CPI (Balt/Wash metro area) % CY84, FY86 CY85, FY87 CY86, FY88 CY87, FY89 CY88, FY90 CY89, FY91 CY90, FY92 CY91, FY93 CY92, FY94 CY93, FY95 CY94, FY96 CY95, FY97 CY96, FY98 CY97, FY99 CY98, FY00 CY99, FY01 CY00, FY02 CY01, FY03 CY02, FY04 CY03, FY05 CY04, FY06 CY05, FY07 CY06, FY08 CY07, FY09 CY08, FY10 CY09, FY11 CY10, FY12 CY11, FY13 CY12, FY14 CY13, FY15 CY14, FY16 CY15, FY17 CY16, FY18 CY17, FY19 CY18, FY20 CY of Value, FY of Revenue Expected changes in appreciation for residential and apartment properties during the forecast period are as follows: Single-Family, Revenue Year Townhouse and Condominium Apartments FY % 2.70% FY % 3.50% FY % 3.00% FY % 3.00% FY % 3.00% 17

26 The strengths of the Washington D.C. Metropolitan area include relatively low unemployment (compared to national and state unemployment rates) and stable job growth expectations. The residential market is forecast to continue to see price improvement over the course of the next twelve to twenty-four months depending on how economic uncertainties unfold, although the number of transactions is expected to continue to trail the levels during the boom years. Comparison of Estimated Residential Market Value Changes Apartments Market Value Change Apartment values experienced an increase despite no change in overall capitalization rates according to the Fourth Quarter 2014 Price Waterhouse Coopers Real Estate Investor Survey. The reason for no change in the capitalization rate is the relative saturation of the apartment market. The apartment market has experienced increases in the net operating incomes stemming from higher rents and stable vacancies in Prince William County as well as newer high end apartment complexes. Appreciation is projected to continue throughout FY 2017 to FY 2020 at a rate of approximately 3.5% in FY 2017 and 3% in FY 2018 through 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 2014 will be reflected in the County s January 1, 2015, land book which provides the basis for real estate tax revenue received in fiscal year The table summarizes the expected number of newly constructed residential units during the forecast period. The volume of new home starts is expected to rise slowly as the economy stabilizes and the inventory of foreclosed homes diminishes during the remainder of the forecast period. Construction of new apartment units is expected to fall below 1,100 units in FY 2017 and decline further during the remainder of the forecast period as the supply of apartments begins to outstrip demand. Residential Values per New Unit Prince William Loudoun Fairfax Arlington County County County County 2013 to 2014 All Residential (Excluding Rental Apartments) 6.30% 2.30% 3.80% 4.90% Residential Growth Revenue Year / Calendar Year Single- Family Townhouse Condominium Apartments Total Units FY16/CY ,593 2,743 FY17/CY ,028 2,278 FY18/CY ,600 FY19/CY ,650 FY20/CY ,700 The estimated average assessed value of a new home (all types) constructed during CY 2014 was approximately $412,704, a 0.58% decrease over the average assessed value of homes built in

27 which was $415,125. 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 estimated average assessed value of a new single family home was approximately $548,600 in In 2014, the estimated average assessed value of a new townhouse and condominium unit was approximately $362,900 and $208,200 respectively. Commercial Real Estate New Residential Assessed Value per New Unit Revenue Year Overall Residential (Excludes Apts.) Single-Family Townhouse Condominium Apartments FY 16 $412,704 $548,600 $362,900 $208,200 $137,400 FY , , , , ,800 FY , , , , ,200 FY , , , , ,600 FY , , , , ,000 Calendar year 2014 market activity in Prince William County resulted in commercial properties appreciating roughly 4.1%. Commercial real estate, particularly in terms of vacancy rates, strengthened as the year progressed but continues to be primarily in an absorption phase. A discussion of commercial property inventory and vacancy rates is available in the Introduction Section. Commercial appreciation for FY is forecast at 3%. Revenue Average assessed values per square foot for FY 2016 are determined Year Commercial based on the added building value resulting from new construction completed during calendar year These unit values are then adjusted to reflect the general appreciation of commercial properties during the remainder of the forecast period. FY % FY % FY % FY % FY % Commercial properties are categorized into five property types: retail, office, hotel, industrial, and special purpose. For FY 2016 (calendar year 2014 market activity), approximately 174,400 square feet of commercial space was added to the assessment rolls. New Commercial Construction Square Footage Revenue Year Total Commercial Retail Office Hotel Industrial Misc. Properties Special Use FY ,367 72, ,701 10,000 - FY ,687 29, ,134 57,816 10, ,000 FY ,000 30,000 70,000 50,000 50,000 10,000 - FY ,000 30,000 50,000 50,000 50,000 10,000 - FY ,000 30,000 50,000 50,000 50,000 10,000-1 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. 19

28 Retail New construction in the retail sector accounted for approximately 42% of all commercial/industrial growth during CY 2014, adding nearly 73,000 square feet to the tax base. Shopping center capitalization rates remained unchanged in CY Vacancies and rents were also, for the most part, stable. Industrial Construction of industrial properties accounted for approximately 53% of all new commercial construction during CY 2014, adding approximately 91,700 square feet to the commercial/industrial base. This represents a decrease from the previous year and is directly linked to the level of inventory. Both rents and occupancy levels of industrial properties increased in 2014 Hotels In CY 2014, no new hotels were built. There are currently three hotel projects under way that are expected to add 188,000 square feet for CY Office Buildings There were no new office buildings added to the inventory in CY Growth within the office sector is expected to be sustained only at a low rate during the forecast period since there are very few projects in the pipeline. Special Use Properties within the special use category comprise taxable schools, healthcare facilities, and other types of properties that have no foreseeable alternate uses. There were no special use properties built in Real Estate Exonerations Estimated real estate tax exonerations are deducted from the gross local real estate tax revenue to arrive at the net local real estate tax revenue. Exonerations are decreases in revenue due to assessment reductions, changes in tax liability, or tax relief programs. Assessment reductions are typically caused by appeals of assessed values. Changes in tax liability occur when a property changes from a taxable to a tax-exempt status. Taxes are also exonerated for properties whose owners qualify for the Tax Relief Program for the Elderly and Disabled or the Tax Relief Program for Disabled Veterans and Surviving Spouses. 20

29 Public Service Taxes Public service taxes are levied on non-locally assessed properties. The State Corporation Commission (SCC) assesses all telecommunications companies, water companies, intrastate pipeline distribution companies, and electric light and power companies. The Virginia Department of Taxation assesses railroads and interstate pipeline transmission companies. Historically, the majority of changes within the public service classification have been attributable to new construction growth. Public service market values are not subject to the same market changes as other real estate properties. The impact of reducing the tax rate over the next five years will reduce this revenue source. Real Estate Tax Deferrals Revenue History % Change FY 10 $ 16,518, % FY 11 18,129, % FY 12 17,703, % FY 13 18,400, % FY 14 17,737, % Adopted 17,414, % Revised 17,589, % Revenue Forecast FY 16 17,357, % FY 17 17,593, % FY 18 17,832, % FY 19 18,074, % FY 20 18,319, % If unpaid real estate taxes at the end of a fiscal year are less than at the beginning of that fiscal year, the amount of the reduction is recorded as revenue in real estate tax deferrals. If unpaid real estate taxes at the end of a fiscal year are more than at the beginning of that fiscal year, the amount of the increase is recorded as negative revenue in real estate tax deferrals. Real estate taxes collected after becoming more than three years delinquent are accounted for as land redemption revenue. On December 10, 1996, the Board of County Supervisors approved an initiative to decrease the percentage of unpaid property taxes at fiscal year-end. The BOCS has continued to support this initiative and at the end of FY 2014, the percentage of unpaid property taxes compared to the FY 2014 levy was 1.4%. This is the County s best unpaid property tax rate since data was first collected in The revenue forecast is made by estimating collections of unpaid personal property taxes up to five years delinquent. This revenue category varies depending on the amount of unpaid taxes at the end of one year compared to the previous year due to 1) voluntary payment of taxes, 2) County resources allocated to collection efforts, and 3) the success of those collection efforts. Land Redemption Land redemption is the recognition of real estate taxes collected after being more than three years delinquent. The Code of Virginia allows Prince William County to pursue the collection of delinquent real estate taxes for twenty years. This revenue category varies depending on the amount of unpaid taxes three years and older, and the level of success in collecting these past due amounts. The forecast estimates approximately 20%-25% of the prior year s unpaid land redemption taxes will be collected annually. A variety of methods are used to enforce the collection of back taxes, including filing suit to force the sale of the property for unpaid taxes. Unpaid land redemption taxes, as of June 30, 2014 were $1,437,

30 Real Estate Penalties Prince William County assesses a 10% penalty on the late payment of real estate taxes on the unpaid original tax balance. Interest at the rate of 10% per annum is added to any unpaid balance beginning on the first day of the month following the original due date. Revenue from real estate penalties is estimated by applying a fixed percentage (approximately 0.26%) to the real estate revenue forecast excluding public service properties. Revenue History % Change FY 10 $ 1,651, % FY 11 1,365, % FY 12 1,265, % FY 13 1,261, % FY 14 1,199, % Adopted 1,412, % Revised 1,300, % Revenue Forecast FY 16 1,479, % FY 17 1,557, % FY 18 1,679, % FY 19 1,763, % FY 20 1,853, % 22

31 PERSONAL PROPERTY REVENUE The personal property tax is assessed on vehicles, mobile homes, and business personal property. Approximately 85% of personal property tax revenue is forecast in FY 2015 to be generated by motor vehicles, trailers, and motor homes. The remaining 15% is forecast to be received from taxes levied on business equipment. Certain classifications of property do not generate tax bills because of their extremely low tax rate, such as farm equipment, vehicles that qualify for elderly tax relief, vanpool vans, handicappedequipped vehicles, and vehicles owned by certain volunteer fire and rescue company members and auxiliary volunteer fire and rescue company members. In addition, some vehicles and property are tax exempt, such as vehicles used as daily rentals, vehicles owned by certain military personnel, and vehicles or business property owned by non-profit organizations that have been granted specific exemption. Personal Property Tax on Vehicles Personal property tax revenue from vehicles is estimated based on the percentage change in average assessed value per vehicle and the percentage change in the number of units billed. Generally, the assessed value of taxable vehicles is obtained from standard pricing guides. Prince William County uses the clean trade-in values published in the National Automobile Dealers Association (NADA) value guide for new and older vehicles. Revenue History % Change FY 10 $ 120,612, % FY ,961, % FY ,167, % FY ,784, % FY ,835, % Adopted 149,100, % Revised 151,800, % Car Tax Relief A portion of the tax due on personal use vehicles is paid by the Commonwealth directly to Prince William County under the Personal Property Tax Relief Act (PPTRA). Through tax year 2005 (fiscal year 2006), the Commonwealth paid the County 70% of the tax due on the first $20,000 of assessed value for qualified vehicles. Revenue Forecast FY ,400, % FY ,900, % FY ,300, % FY ,900, % FY ,800, % During the 2004 State budget sessions, legislation was enacted that changes how the amount of car tax relief is calculated under the PPTRA. The legislation capped the amount reimbursed to the County, which began in tax year 2006 (fiscal year 2007). Capping the car tax at a set dollar amount ($950 million state-wide) will typically reduce the percentage of the tax on qualifying vehicles paid by the Commonwealth in each successive year. To compensate, the County must increase the share of the tax paid by the taxpayer or face declining revenue, and so the five-year revenue forecast assumes the County will increase the share paid by taxpayers as the total assessed value of qualifying vehicles grows so that revenues do not decline. The percentage of tax relief for qualifying vehicles in FY 2016 (tax year 2015) is 51%. 23

32 Change in Average Vehicle Value and Units Billed The FY 2016 (tax year 2015) forecast assumes a slight increase (0.5%) in average assessed values. The average assessment has flattened for vehicles in Prince William County, proximate with national trends that show used vehicle values up to eight years old 1% higher than in November 2014 versus November 2013 and the seasonally adjusted used vehicle price index equal to the prior year (NADA Guidelines, December 2014). The forecast for FY is for the average vehicle value to increase 2.64% per year (the historical average is 2.64%). The FY 2016 (tax year 2015) forecast assumes a 2.08% increase in the number of vehicle units billed. The FY 2016 growth in forecasted units is attributable to the anticipated continued population and housing growth of approximately 1.5% per year. Revenue Assessed Value Billiable Units Year Avg. Value % Change % Change FY 16 $ 10, % 2.08% FY 17 10, % 2.04% FY 18 10, % 2.29% FY 19 11, % 2.23% FY 20 11, % 2.19% Business Personal Property Tax The business portion of the personal property tax is levied on all general office furniture and equipment, machinery and tools, equipment used for research and development, heavy construction equipment, and computer equipment located in Prince William County as of January 1 st of each year. Each business is required to file a return annually declaring the item, its original cost, and year of purchase. Therefore, the assessed value is determined from its original cost, year of purchase, and use of the equipment. General business equipment and heavy equipment account for 74% and 6% of taxes on business equipment respectively. Taxes on computer equipment comprise 19% and taxes from machinery and tools account for the remaining 1%. Taxes from business equipment are expected to increase 15% in fiscal year 2015, with a 10% increase in FY 2016 followed by 2% increases for the remainder of the five-year plan. The increases in FY 2015 and FY 2016 are from business equipment located in newly completed data centers. There is some evidence that the economy and the economic condition of local businesses has stabilized. While many businesses may still not be replacing equipment or adding significant amounts of new equipment, the downward trend seems to have stopped, thus we are forecasting a modest increase for each of the years in the forecast. Personal Property Prior Year This account records changes to prior year personal property taxes as a result of changes in estimated allowance for uncollectible taxes. These revenues are less than $50,000 a year, and are therefore not addressed in detail as are the other major revenue sources. 24

33 Personal Property Deferrals If unpaid personal property taxes at the end of a fiscal year are less than at the beginning of that fiscal year, the amount of the reduction is recorded as revenue in personal property tax deferrals. If unpaid personal property taxes at the end of a fiscal year are more than at the beginning of that fiscal year, the amount of the increase is recorded as negative revenue in personal property tax deferrals. The revenue forecast is made by estimating collections of unpaid personal property taxes up to five years delinquent. This revenue category varies depending on the amount of unpaid taxes at the end of one year compared to the previous year due to: 1) voluntary payment of taxes, 2) County resources allocated to collection efforts, and 3) the success of those collection efforts. At the end of FY 2014, the percentage of unpaid property taxes FY 19 (500,000) compared to the FY 2014 levy was 1.4%, and is the County s best FY 20 (500,000) unpaid property tax rate since data was first collected in This is an improvement over the FY12 and FY 2013 unpaid property tax percentage of 1.7%, and 1.6% respectively. Personal Property Penalties - Revenue History FY 10 $ 360,212 FY 11 1,032,739 FY ,001 FY 13 (734,041) FY 14 (132,082) Adopted (500,000) Revised (500,000) Forecast FY 16 (500,000) FY 17 (500,000) FY 18 (500,000) Prince William County assesses a 10% penalty on the late payment of personal property taxes. The 10% personal property penalty on late payments applies only to the local share of what is delinquent. The penalty is not applied to the portion paid by the Commonwealth through the PPTRA. Revenue History % Change FY 10 $ 1,180, % FY 11 1,152, % FY 12 1,374, % FY 13 1,536, % FY 14 1,353, % Personal property penalty revenue is projected to increase in each year of the FY forecast period due to the increase in the estimate of personal property taxes billed each year. Adopted 1,530, % Revised 1,540, % Forecast FY 16 1,600, % FY 17 1,660, % FY 18 1,740, % FY 19 1,810, % FY 20 1,900, % 25

34 LOCAL SALES TAX REVENUE Prince William County, by adopted ordinance, has elected to levy a 1% general retail sales tax. This tax is levied on the retail sale or rental of tangible property, excluding motor vehicle sales and trailers, vehicle rentals, boat sales, gasoline sales, natural gas, electricity, and water, and the purchases by organizations that have received tax exempt status. Sales tax revenue is collected by the Virginia Department of Taxation, and is distributed to the County monthly. There is a twomonth lag between the date of sale and the actual receipt of funds by the County. Despite the timing lag, sales tax revenues are accrued to the month in which they were collected by the businesses. The four incorporated towns within Prince William County (Dumfries, Haymarket, Occoquan, and Quantico) share in the local sales tax based on the ratio of school age population in the towns to the school age population of the entire County according to the latest state-wide school census. The current formula deducts 1.02% from the County s gross tax to be sent to the four towns. Thus, the County realizes 99.03% of the monthly sales taxes collected. Revenue History % Change FY 10 $ 46,155, % FY 11 49,554, % FY 12 52,002, % FY 13 55,169, % FY 14 56,510, % Adopted 58,525, % Revised 58,525, % Revenue Forecast FY 16 60,280, % FY 17 62,090, % FY 18 63,950, % FY 19 65,870, % FY 20 67,847, % 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. Beginning in February 2010, however, the trend was reversed, with 41 straight months (through June 2013) of positive monthly year-over-year growth. In July 2013 and September 2013, a slight decrease of 0.2% and 2.1%, respectively was reported, but since then, positive year-over-year growth was reported in 13 out of 14 months. In December 2014, $5,710,736 of sales tax revenue was generated -- a monthly year-over-year increase of 2.7%. Sequestration and continued federal budget uncertainty notwithstanding, the economy and consumer confidence appear to be gaining strength and retailers are hopeful of continued robust retail activity in The new projection is for a 3% annual increase in the County s sales tax revenue for FY 2016 through FY The factors believed to have contributed to the County s sales tax revenue increase are: an improving local economy; an increase in the number of retail establishments; a high level of household income in the County; improving employment and increased consumer confidence; and continued population growth. 26

35 CONSUMER UTILITY REVENUE Prince William County levies a consumer utility tax on electric and natural gas utilities. The County does not tax water and sewer services. Effective January 1, 2001, the Code of Virginia 2 required Prince William County to convert its existing tax on purchasers of natural gas and electricity from a dollar-based tax to a consumption-based tax. Since consumer utility taxes are capped, inflation and utility rate increases are not a factor in the five year forecast. The FY forecast reflects the projected increase in new, residential housing units. The levy for electricity 3 consumption based on kilowatt hours (kwh) is: Residential users: $1.40 minimum billing charge plus the rate of $ on each kwh delivered monthly by a service provider not to exceed $3.00 per month. Commercial users: $2.29 minimum billing charge plus the rate of $ on each kwh delivered monthly to commercial consumers, not to exceed $ monthly. The levy for natural gas 4 consumption based on 100 units of cubic feet (CCF) is: Residential consumers: $1.60 minimum billing charge plus the rate of $0.06 on each CCF delivered monthly to residential consumers, not to exceed $3.00 per month. Commercial consumers: $3.35 minimum billing charge plus the rate of $0.085 on each CCF delivered monthly to commercial consumers, not to exceed $ monthly. Revenue History % Change FY 10 $ 12,839, % FY 11 13,190, % FY 12 13,075, % FY 13 13,489, % FY 14 13,765, % Adopted 13,700, % Revised 13,800, % Revenue Forecast FY 16 13,940, % FY 17 14,150, % FY 18 14,430, % FY 19 14,720, % FY 20 15,090, % Electricity and Gas Revenue Growth The following table shows the five-year history of electric and gas utility revenue growth in Prince William County. Revenue Utilities Year Electric Gas FY % 2.46% FY % 2.18% FY % -0.88% FY % 4.18% FY % 2.54% 2 Code of Virginia Prince William County, VA-Code of Ordinance Sec Prince William County, VA-Code of Ordinance Sec

36 COMMUNICATIONS SALES AND USE TAX REVENUE Under legislation enacted by the 2006 General Assembly, House Bill 568, the Virginia communications sales and use tax, also referred to as the communications sales tax, replaced most of the previous state and local taxes and fees on communications services, effective on January 1, The communications sales tax, which is imposed on the charge for sale of communications services at the rate of 5%, is generally collected from consumers by their service providers and remitted to the Virginia Department of Taxation each month on the following services: Revenue History % Change FY 10 $ 18,893, % FY 11 18,878, % FY 12 18,377, % FY 13 18,536, % FY 14 18,229, % Adopted 18,910, % Revised 18,200, % Revenue Forecast FY 16 18,600, % FY 17 18,780, % FY 18 18,970, % FY 19 19,160, % FY 20 19,350, % Services Previously Taxed Locally: Services Not Previously Taxed: Landline Telephone Services Satellite Television Services Wireless Telephone Services Paging Services Cable Television Services Voice Over Internet Protocol (VOIP) Services Due to the Virginia communications sales and use tax, Prince William County no longer has the authority to levy the following taxes and fees: Local consumer utility tax on landline and wireless telephone service; Cable franchise fees; and Local E-911 tax (Note: E-911 revenue is not included in the general revenue projection) As enumerated in Section of the Code of Virginia, the communications sales and use tax revenue will be distributed to localities according to the percentage of telecommunications and cable television tax revenue each locality received relative to the statewide total. The County s current allocation is 4.63% of the statewide telecommunications sales and use tax. During FY 2014, the Commonwealth reported that communication tax revenue was down approximately 3.5% due to a loss of landline services. Adjustments were made to the revenue forecast to account for this growing trend. The FY forecast was determined by examining actual monthly revenue received over the last twelve months. 5 Fiscal year 2007 actual revenue represented only a half-year levy of the new communications tax. Fiscal year 2008 represented the first full-year the tax was implemented. 28

37 BPOL REVENUE The Business, Professional, and Occupational License (BPOL) tax is imposed on commercial and home occupational businesses operating in Prince William County. The County has adopted a multiple tax rate schedule according to the type of business activity subject to the tax. On April 21, 2015, the Board of County Supervisors (BOCS) directed staff to prepare an amendment to the BPOL Ordinance to change the gross receipts threshold from $250,000 to $300,000 with subsequent $50,000 incremental increases to the threshold over the remaining four years of the fiscal plan. An amendment is scheduled to go before the Board of County Supervisors before the end of calendar year The BPOL tax is levied on: businesses with annual gross receipts (from the prior calendar year) greater than $250,000; new businesses based on an estimate if gross receipts are greater than $250,000 for the current year; and both full-time as well as part-time businesses, as long as the business meets or exceeds the $250,000 6 threshold. The basis for the FY 2015 BPOL tax revenue is gross revenue receipts from calendar year Therefore, forecasting 2015 gross receipts (FY 2016) has a oneyear lag in availability of actual prior year figures on which to base an estimate. The forecast model assumes that BPOL will change at an average close to growth plus inflation for businesses. For FY 2016 and FY 2017, the combined increase of growth and inflation for businesses is assumed to be +3%, marginally lower than the actual for FY 2014 of 3.75% reflecting somewhat slowing inflation. For FY 2018, the change is projected to be 3.5% and FY 2019 and 2020 are projected at 4%. Revenue History % Change FY 10 $ 20,268, % FY 11 20,965, % FY 12 21,724, % FY 13 22,913, % FY 14 23,772, % Adopted 24,427, % Revised 24,485, % Revenue Forecast FY 16 25,024, % An average for all business classifications is used because it is difficult to project a change in any one classification, and difficult to predict changes across years. Even retail, which most would think to be somewhat stable has variability that does not track national or regional economic indicators. This can be FY 17 FY 18 FY 19 FY 20 25,619,983 26,345,275 27,215,462 28,144, % 2.83% 3.30% 3.41% explained by shifts between spending categories and by the effects of borrowing (in the case of construction and contracting), so it makes sense to use an aggregate measure and one which smoothes out the effects of spending shifts. 6 November 22, 2011, PWC Code amended the gross receipts thresh hold for business from $100,000 to $200,000. October 2, 2012, BOCS amended the PWC Code for business with gross receipts from $200,000 to $250,000 or higher. 29

38 Approximately 87% of FY 2014 BPOL revenue was generated by four sectors of the County s local economy: retail, contractors, personal services, and professional services. The following table summarizes the year-over-year change in revenue in each category over the last five fiscal years. Change in Revenue by Major BPOL Classification Revenue Year Retail Merchants Construction & Contracting Other Services Professional Occupations FY 10-2% 4% 7% 10% FY 11 3% -7% 20% -5% FY 12 12% -7% -4% 12% FY 13 8% 6% 11% 7% FY 14 2% 9% 6% -3% 30

39 INVESTMENT INCOME Investment income represents interest receipts, interest accrual, and gains or losses from the sale of investments for Prince William County s share of earnings on the general cash investment portfolio. The general portfolio consists of those funds that are not restricted. The general fund available cash constitutes 55 to 58 percent of the total pooled investments. All funds are invested in accordance with the Board adopted Investment Policy that sets the County s investment guidelines based on the core principles of legality, safety, liquidity, and yield. To forecast investment income, the average portfolio yield and portfolio size are projected to determine the current or estimated future year s investment revenue. The general fund share is calculated based on the prior year actual share of cash balances available Average Portfolio Size to invest. The average total dollar value of the portfolio is affected by the increase in County revenues and fund balance. Therefore, the revenue forecast itself becomes a key determinate of interest income. The table on the right shows the forecasted growth in the portfolio. Increases in portfolio size typically come from additions to fund balance/year-end savings as well as a portion of annual revenue growth. (in 000s) FY 15 $ 930, % FY , % FY , % FY , % FY , % FY , % Revenue History % Change FY 10 $ 16,553, % FY 11 11,507, % FY 12 8,601, % FY 13 8,388, % FY 14 6,834, % Adopted 6,831, % Revised 5,911, % Revenue Forecast FY 16 6,342, % FY 17 6,797, % FY 18 7,989, % FY 19 8,456, % FY 20 8,505, % Prince William County s portfolio earnings yield is broadly correlated to the Federal Funds Rate. The Federal Open Market Committee (FOMC) reduced the target Federal Funds rate to a range of between 0.00% and 0.25% in December of 2008 and has maintained that record low target to date. The FOMC has announced its intention to continue this accommodative monetary policy over the short term. In October of 2014, the FOMC, in keeping with its prior announcements, phased out its monthly purchase of treasury and mortgage assets on the open market. While this action brings an end to active quantitative easing, it does not represent a move toward more restrictive monetary policy. It is expected FOMC will ultimately begin to move the Federal Funds Rate incrementally higher once it is comfortable with the growth level of the economy. Complicating the FOMC s debate on monetary policy, despite generally positive domestic economic data, is the recent plunge in oil prices, the move toward quantitative easing by the European Central Bank (ECB), the continued poor economic performance by the Euro-zone, and concern about the sustainability of a relatively robust Chinese economy. Consequently, it is expected that short-term interest rates will remain near current levels, or only marginally higher, over the next year. 31

40 The following graph presents a history of the Federal Funds Rate since 1965, when the rate stood at 4.0%: The Federal Funds Rate trend is a significant driver for the average yield of Prince William County s portfolio. Additionally, the timing of securities purchases, cash flow requirements, general interest rate environment at the time of purchasing securities, and the securities duration are also all major factors affecting the portfolio s yield. The County s general portfolio carries an asset mix that is held over a period of time based on yields that were available at the time of the purchases. The County portfolio s total return changes to reflect swings in the market price of securities and to reflect the replacement, at current market prices and yields, of securities that are sold or mature. The portfolio s earnings yield is a reflection of interest received, interest accruals, and net gains or losses on securities sales. Changes in market valuation, a component of total return, are not a part of the earnings yield. State laws and the County s Investment Policy govern the investment process, how funds can be invested, and the securities which can be purchased. The graph on the following page presents a history of the County portfolio s earnings yield as well as the projected yield for FY juxtaposed against the Federal Funds Rate history and a projection through FY

41 Most forecasting sources provide interest rate projections up to four quarters beyond current dates. Therefore, estimates after the final half of FY 2016 are made without authoritative source data as a basis for the projections. In this environment, short term interest rates should continue low for the near term, however, the low interest rates should have little additional stimulative impact on the economy since this sub 1% Fed Funds Rate environment has been the status quo for over six years. Long term rates may see some upward pressure depending upon the results of the Federal Reserve s tapering of its open market purchases of Mortgage Backed Securities and Treasuries. Longer term expectations (beyond 5 years), are for higher interest rates on both the short and long ends of the interest rate curve. The difficulty, of course, is predicting exactly when interest rates will begin to turn higher. Prince William County s investment strategy addresses the requirements of legality, safety and liquidity by investing in a diversified portfolio with specific security types, financial institutions, and sufficient liquidity to meet anticipated operating requirements. In addition, the County seeks to match its cash flow needs to the overall maturity structure of the portfolio in order to maximize yield. 33