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

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1 Prince William County, Virginia Fiscal Year Projections of General County Revenue Board of County Supervisors Sean T. Connaughton Chairman (at large) Maureen S. Caddigan Vice-chairman, Dumfries District Hilda M. Barg Woodbridge District W. S. Wally Covington, III Brentsville District John D. Jenkins Neabsco District Martin E. Nohe Coles District Corey A. Stewart Occoquan District John T. Stirrup Gainesville District County Executive Craig S. Gerhart Prepared by the Department of Finance

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3 Revenue Committee Christopher E. Martino Director of Finance William B. Hoffman Assistant Director of Finance Nimet El Alaily Deputy Planning Director David S. Cline School Finance Director Melissa S. Peacor Assistant County Executive David L. Tyerar Budget Director Robert W. Wilson Director, Public Works Tom Bruun Assistant Director, Public Works Finance Department Staff Project Manager Dave Sinclair Financial Analyst Steve Ferlotti Assistant Director of Finance Robert A. Willard Investment Manager Mark Hinman Accountant Bill Brogdon Treasury Manager Allen Scarbrough Financial Analyst Debra McMahon Administrative Support Allison Lindner Real Estate Assessments Division Chief Susan D. Schager Real Estate Assessments Coordinator Bill Vaughan Sr. Research Manager/IT Rep. Economic Development Carl W. Hampton Fiscal Services Manager Vivian McGettigan Accounting Division Chief FY Revenue Estimates - page iii

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5 The Revenue Committee Expresses Its Appreciation to the Business Community Who Assisted in the Development of this Report Dr. Christine Chmura President Chmura Economics Patricia Erney Managing Editor National Automobile Dealers Association (NADA) John Layman Chief Economist Virginia Department of Taxation Lonnie Plaster President, Prince William Association of Realtors Broker, Long and Foster John Weber Weber & Associates Realty, Inc. FY Revenue Estimates - page v

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7 COUNTY OF PRINCE WILLIAM 1 County Complex Court, Prince William, Virginia (703) Metro ext. 6700, FAX FINANCE DEPARTMENT Christopher E. Martino Director of Finance July 1, 2004 TO: FROM: Craig S. Gerhart County Executive Christopher E. Martino Director of Finance RE: Revenue Committee Report, Fiscal Year I am pleased to present the FY05-09 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 and national economic conditions and trends. The assumptions determined by the Revenue Committee provide the capacity to reduce the real estate tax rate by nine cents from $1.16 to $1.07 in fiscal year 2005 and by three cents in fiscal year 2006, one cent in fiscal year 2007, and by yet another cent in fiscal year 2008 to $1.02. The final revenue projections are greater than the prior year five-year forecast. This increase is due to the continued high levels of activity in the real estate market and continued growth in Prince William County. Accordingly, I recommend the updated revenue estimates be used in preparing the 2005 Fiscal Plan, the Capital Improvement Plan for fiscal years 2005 to 2010, and for other strategic financial planning purposes. I would like to thank the members of the Revenue Committee, the participants from the business community, and all others who contributed to the preparation of this report. FY Revenue Estimates - page vii

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9 TABLE OF CONTENTS INTRODUCTION...1 Review of the Economy in 2003 and Outlook for TAX REDUCTION PLAN...10 Revenue Increases Not Triggering a Tax Reduction...10 Implementing the Tax Reduction Plan...12 Performance of the Tax Reduction Plan...13 MAJOR REVENUE SOURCES AND KEY ASSUMPTIONS...14 Real Estate Revenue...16 Real Estate Taxes - 010/ Residential Real Estate...17 Residential Market Value Changes...17 Apartments Market Value Change...18 Residential New Construction Units...19 Residential Values Per New Unit...19 Commercial Real Estate...20 Exonerations...23 Public Service Taxes Real Estate Tax Deferrals Land Redemption Real Estate Penalties Personal Property Revenue...27 Personal Property Tax on Vehicles - 071/079/ Individual Personal Property Tax...28 Business Personal Property Tax...31 Personal Property Prior Year Personal Property Deferrals Personal Property Penalties - Current Year Local Sales Tax Revenue...34 Local Sales Tax Population Growth...35 Consumer Utility Revenue...36 Consumer Utility Tax Housing Units...38 BPOL Revenue...41 BPOL Tax Revenue Investment Income...42 FY Revenue Estimates - page ix

10 Investment Income ALL OTHER REVENUE SOURCES...46 Revenue Sources Over $1.5 Million...46 Interest on Taxes Vehicle Decals / Recordation Tax Tax on Deeds Cable TV Fees Revenue Sources Under $1.5 Million...51 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 ABC Profits State Wine Tax Rolling Stock Tax Passenger Car Rental Tax Mobile Home Titling Tax Federal Payment in Lieu of Taxes Appendix A - General Property Tax Rates...54 INDEX OF TABLES AND FIGURES...55 FY Revenue Estimates - page x

11 INTRODUCTION As this revenue forecast takes shape in early 2004, the United States is preparing for a presidential election just nine months away. The national economy, in the beginning stages of a recovery, seems to have shaken off the recession, and most economic indicators are trending positive, some dramatically so. Large tax cuts and low interest rates have clearly been a major catalyst for the renewed business vigor evidenced by a 20-year high in the nation s third quarter Gross Domestic Product (GDP) growth. Much of the war-related uncertainty that prevailed at this time a year ago has been assuaged, but only to be replaced with important, new questions. The nation must still manage its homeland defense, the commitment to Iraq, and domestic economic issues as well as endure a level of uncertainty that will remain until election results are determined. Amid this backdrop, the business sector has seen a healthy increase in activity, but more importantly top business executives are beginning to make positive, forward-looking statements something we have not seen in any abundance since before the beginning of the recession. Numerous Wall Street Journal articles from January 2004 make this point. Intel commented in mid-january that information technology spending was on the mend. In step with Intel s comments, John Joyce, CFO of International Business Machines noted that the technology spending environment is steadily improving. In the banking sector, L. Phillip Humann, CEO of SunTrust Bank feels more upbeat about the Atlanta institution's outlook than he did last year and expressed the expectation for steady earnings gains. In spite of the improved business outlook, firms have been cautious in adding staff. While the overall unemployment rate has fallen, there has not been a lot of job creation, and this one area of the economy is a subject of concern. Prince William County s economic outlook can be described as optimistic. The County compared positively to both the Virginia and the nation during the recent recession. That success was due to the insular effects of federal spending and employment, a robust housing market, and growing retail sales. The factors that have resulted in the County s positive results have not changed, and this revenue forecast takes that into account. The forecast also presumes any political changes that may occur as a result of the election to be benign. FY Revenue Estimates - page 1

12 REVIEW OF THE ECONOMY IN 2003 AND OUTLOOK FOR 2004 The United States Real Gross Domestic Product (GDP), the broadest measure of economic activity, showed that the United States emerged from recession in Growth continued at a sluggish pace during 2002 and the early part of The GDP accelerated in the third and fourth quarters of 2003, in large measure, due to the stimulating effects of a low Federal Funds rate and tax cuts. The following graph presents the projected 2004 rate of growth as estimated by Dr. Christine Chmura, President and Chief Economist of Chmura Economics and Analytics. Dr. Chmura addressed the Prince William County Revenue Committee in November of 2003 and outlined her view of the economy. Figure 1. United States Gross Domestic Product 8 6 Annual Percent Rate of Change Projected Source: U.S. Dept. of Commerce Dr. Chmura is forecasting a continuing favorable business environment through 2004 and predicts modest declines in unemployment, continued low interest rates (but anticipates a rate increase in 2004), continued strength in consumer spending and an increase in business investment. Virginia The outlook for the Commonwealth of Virginia s economy in the next year is positive, according to John Layman, the Chief Economist and Director of Revenue Forecasting in Virginia s Department of Taxation. Mr. Layman addressed the Prince William County Revenue Committee in November of 2003 and presented a summary of the economic outlook for the Commonwealth. Mr. Layman noted that a number of positive factors and trends are beginning to have an impact on business growth. Since January 2002, over 43,000 new jobs have been announced, Federal procurement spending in the Washington D.C. area is increasing dramatically, job growth has been positive for the past six months, and revenue collections for the Commonwealth are tracking ahead of forecasts. Mr. Layman also pointed out that the Commonwealth s job mix is increasingly moving away from manufacturing and more toward professional and business services. Virginia is projected to rank 14 th nationally for employment growth during the period FY Revenue Estimates - page 2

13 Prince William County In 2003, Prince William County s economy, by almost all measurements, was better than the nation and Virginia. Looking forward to 2004 and beyond, the County appears poised to continue its strong economic performance. The County s relative prosperity, driven by a robust housing market and a stable job environment, should continue and even strengthen as the national economy begins its own recovery. Prince William County s close proximity to the federal government and affiliated contractor industries has largely isolated it from the more severe economic woes other regions of the country have suffered. Not only has this relationship provided some insulation from inevitable business cycle troughs, but it has provided the County with a demand base for its housing and retail trade. The County depends heavily on residential housing and consumer spending to maintain its prosperity and levels of local government services. These two sectors have fared well during the recent recession and subsequent national recovery as homebuyers and consumers kept the economy moving. Residential Housing Real estate taxes, primarily residential real estate, constitute the majority of Prince William County s general revenues. The residential property sector has performed vigorously for the past few years and this strength shows no signs of abating. As neighboring counties to the north approach the point of build-out, the appeal of Prince William County abundant undeveloped land and lower home prices becomes a magnet for new home buyers. This local economic advantage plus the continuing favorable interest rate environment bodes well for the County s real estate sector in 2004, though expected interest rate increases could serve to moderate the sector s growth late in the year. According to data from Metropolitan Regional Information Systems (MRIS), home sales in Prince William County totaled nearly 10,000 units in The average price of those homes sold grew to $256,432 in 2003 from $224,559 in 2002 and $190,911 in The following graph illustrates this remarkable growth since FY Revenue Estimates - page 3

14 Figure 2. Home Sales and Average Sale Prices in Prince William County 11,000 10,000 Source: MRIS 2003 Preliminary Data $275,000 $250,000 9,000 $225,000 8,000 $200,000 7,000 $175,000 Home Sales 6,000 5,000 $150,000 $125,000 Average Price 4,000 3,000 $100,000 $75,000 Home Sales Average Price 2,000 $50,000 1,000 $25, $- Moreover, building permits, an indicator of future residential construction, set a record of over 6,000 units in Lonnie Plaster, President of the Prince William Association of Realtors, addressing the Prince William County Revenue Committee, indicated that despite the sizable increase in new home construction in the County, a number of builders have buyers on waiting lists because homes cannot be built fast enough to meet buyer demand. FY Revenue Estimates - page 4

15 Figure 3. Residential Unit Building Permits in Prince William County Mr. Plaster expects the Prince William County real estate market to continue to be vibrant during 2004, noting that low interest rates should continue to attract buyers. Mr. Plaster indicated that he did expect rates to begin to rise modestly at some point during the year but would still remain relatively low on a historical basis. Additionally, he commented that federal hiring, particularly for defense-related and Homeland Security positions will bring more new residents from around the country and add to the demand for housing in the Northern Virginia area. Reasons for the current and expected future strength of the housing market include strong demand created by low mortgage interest rates, relatively low unemployment and solid income growth, immigration bringing new home buyers into the market, technological innovations that make mortgage borrowing easier and cheaper, Federal mortgage support through institutions such as Fannie Mae and Freddie Mac, and a steady flow of foreign investment into the U.S. mortgage lending market. On the supply side, builders have been careful not to allow construction to outpace sales. Therefore, they have very little in the way of unsold inventories that would require quick unloading in case of a downturn in demand that would drive prices significantly lower. The lack of adequate housing inventory acts to fuel housing price increases. "We see housing as being strong over the next three years within a strong economy," said Douglas Duncan, chief economist for the Mortgage Bankers Association, the national association representing the real estate finance industry. In a January 22, 2004 press briefing, Duncan went on to say that demand, driven by baby boomer and immigrant buyers, will continue to exceed housing supply. The market for commercial real estate in Northern Virginia and Prince William County is a different story. The tech sector collapse, retrenchment by WorldCom and other firms, and broad pullbacks in corporate spending has substantially increased vacancy rates in the area, particularly in Fairfax County. This has slowed the pace of new construction. That situation, however, appears to be changing in a positive direction. FY Revenue Estimates - page 5

16 John Webber of Webber and Associates Realty, Inc., a Manassas firm specializing in commercial real estate also spoke with members of the Prince William County Revenue Committee. He said that the high vacancy rates in the Tysons Corner and Dulles corridors have had the effect of discouraging any speculative building in Prince William County. With little or no speculative building in the County, commercial supply is not expected to exceed demand. Further, he noted that low interest rates have made commercial real estate a relatively attractive investment from a return on investment standpoint. As long as interest rates remain reasonable and bank credit is available, the commercial market should remain strong for two to three years. 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 twelve-month moving average that shows the annual trend in vehicle additions. As evident in the moving-average line, additions are now averaging over 9,000 vehicles per month. Figure 4. Vehicle Additions in Prince William County 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Pat Erney of the National Automobile Dealers Association addressed the Prince William County Revenue Committee on November 13, Ms Erney is expecting total 2004 new light vehicle sales to come in at 16.5 million, slightly lower than the 16.6 million posted in Going forward Ms. Erney expects new model introductions to accelerate to over 70 by 2006 in comparison to the introductions in recent years. A broader array of consumer choices and continued fierce competition between carmakers are anticipated over the near term. Going forward, Prince William County can expect to see vehicle additions continue in a steady, upward trend driven primarily by population growth. FY Revenue Estimates - page 6

17 Job Market According to data from the U.S. Department of Labor and the Virginia Employment Commission, unemployment in Prince William County remains significantly below that in the nation and Virginia. Of the areas considered in this report, only the Northern Virginia regional unemployment rate was lower than that of the County. The following graph presents a comparison of the unemployment rates in those areas since The 2003 data for Prince William County and the Virginia portion of the Washington D.C. Standard Metropolitan Statistical Area (SMSA) are preliminary. Figure 5. Comparative Rates of Unemployment Percent Rate of Unemployment United States Virginia Virginia Part of Washington MSA Prince William County What the chart does not show is the decline in unemployment rates during the third and fourth quarters of The National unemployment rate at December 2003 was down to 5.7%, and Virginia s rate was down to 3.3%. Prince William County s unemployment rate has fallen in the second half of 2003 as well down to 2.4% as of December With the County s unemployment rate at these low levels, it is unlikely that improving economic conditions will result in anything more than modest reductions from this point. FY Revenue Estimates - page 7

18 Retail Sales Tax Revenue Retail sales tax revenue provides financial resources to the County and serves as an indicator of consumer demand. For the past three years, growth of those revenues in Prince William County has shown remarkable strength, as seen in the twelve-month moving average line in the graph below. The strength came largely in an environment of a weak national economy. The seasonally-adjusted figures show retail sales tax revenue flattened somewhat during the time period of September 2002 through March of 2003 but regained and then accelerated through November The flattening was likely due, in part, to local reaction during the sniper incident in fall 2002 and a consumer pullback coming from the war in Iraq. The consumer now has far more visibility and confidence with regard to the near-term future as reflected in consumer sentiment surveys which stand at recent highs. Figure 6. Retail Sales Tax Revenue FY Revenue Estimates - page 8

19 Conclusions The County is well positioned to have a good year. The nation is in the beginning phase of an economic recovery, the local and national real estate markets are vibrant, there exists a favorable interest rate environment, and consumer confidence is in an upswing. All of these factors bode well for some of the County s major revenue streams - real estate taxes, sales tax revenue, and vehicle registrations. For calendar years 2004 and 2005, look for a continuation of the robust real estate market as long as interest rates remain affordable. Retail sales should grow at a better than average pace due to the influx of new residents into the County, a favorable consequence of the volume of new homes being built. The new residents will also likely keep vehicle additions in the County on a steady upward track. The upcoming election and political uncertainty will certainly be a topic of concern. There may be reluctance for businesses to commit to major expansion or initiate hiring pending clarity on the election results. Those fears and concerns may translate into a tempering of the economic recovery. That notwithstanding, it is unlikely that either party could implement any major initiatives post election that would directly affect the economy much before the beginning of FY2006. FY Revenue Estimates - page 9

20 TAX REDUCTION PLAN On April 14, 1999, the Board of County Supervisors adopted a Tax Reduction Revenue Trigger Plan. This plan states that general revenues in excess of current estimates (the prior year revenue forecast ) generated by real increases in residential or commercial value, provide a trigger(s) to reduce the real estate tax rate. The goal was to reduce the real estate tax rate by eight cents over a ten-year period. A methodology known as the Two-step Trigger was developed to balance tax rate reductions with the need for additional services and infrastructure. The first penny of the tax rate equivalent of additional revenues was applied to reduce the real estate tax rate. The second penny of the tax rate equivalent of additional revenues was applied to County and Schools operating and capital improvements. This Two-step Trigger was implemented during the FY00 budget process for the FY01-05 Five-year Plan. For the FY02-06 and FY03-07 Five-year Plans, the trigger was temporarily modified to a three-step trigger to allow an extra penny to be spent on County personnel compensation and Schools operating and capital improvements. During development of the FY04-08 Five-year Plan, real estate assessments began experiencing double-digit appreciation. Consequently, an enhancement to the trigger plan was developed to more directly associate a residential tax bill increase with the tax trigger. This feature generates additional tax triggers until the average annual residential tax bill increase from the previous year to the forecast year is less than ten percent. For the FY05-09 Five-year Plan, the three-step trigger was returned to the two-step trigger since the additional penny for County compensation and Schools improvements was no longer needed. The ten percent cap on the average annual residential real estate tax bill remains in effect, and generated additional triggers until the tax bill increase was reduced below the ten percent cap to a tax rate of $1.10. Then, during the revenue forecasting process, additional revenue became available due to the improving economy. The additional revenue was applied directly to a real estate tax reduction, which allowed the tax rate to be reduced an additional three cents to $1.07. Revenue Increases Not Triggering a Tax Reduction The trigger plan does not apply to all general revenue increases. Revenue increases beyond those forecasted the previous year can be accompanied by additional costs beyond those included in the Five-year Plan. Revenue increases caused by additional residential units over the prior year estimates and inflation above prior year estimates are accompanied by additional costs and are therefore not available for a tax rate reduction. Approximately $1,279,039 of additional revenue in FY05 is not available for a tax rate reduction or other triggers. The following table summarizes inflation and additional housing units assumed in the FY05-09 forecast as compared to the assumptions in the FY04-08 forecast: FY Revenue Estimates - page 10

21 Table 1. Assumptions Not Triggering a Tax Reduction FY2005 FY2006 FY2007 FY2008 FY2009 Number of Additional Housing Units Base Forecast 4,596 3,543 3,225 3,225 N/A Current Forecast 4,859 4,275 3,650 3,225 3,225 Inflation Base Forecast 3.0% 3.0% 3.0% 3.0% N/A Current Forecast 3.0% 3.5% 4.0% 3.5% 3.0% Revenue Increases Triggering a Reduction in the Tax Rate Revenue increases above the adopted forecast (the prior year forecast ) that are not accompanied by additional costs provide positive fiscal effects and are available for a tax rate reduction. Such revenue increases are caused by additional increases in residential property values, additional commercial square footage, or new revenue sources. The following table compares the assumptions included in the prior year with the current forecast. Revenue increases attributable to these assumptions are available for tax triggers. The FY05-09 forecast then becomes the base year for next year s forecast. Table 2. Tax Triggers FY2005 FY2006 FY2007 FY2008 FY2009 Avg. Value of New Residential Property Base Forecast $344,677 $360,569 $376,375 $391,430 N/A Current Forecast 382, , , ,983 $490,871 Increase in Existing Residential Property Base Forecast 8.00% 4.00% 4.00% 4.00% N/A Current Forecast 16.01% 10.00% 6.00% 4.00% 4.00% Increase in Commercial Value Base Forecast 3.00% 3.00% 3.00% 3.00% N/A Current Forecast 11.88% 3.00% 3.00% 3.00% 3.00% Increase in Commercial Square Feet Base Forecast 688, ,000 1,046, ,000 N/A Current Forecast 1,026,817 1,123,000 1,446, , ,000 FY Revenue Estimates - page 11

22 Implementing the Tax Reduction Plan The FY04-08 forecast is the base year for the FY05-09 forecast. Therefore, revenues in excess of the base year are either susceptible to the trigger methodology or needed to accommodate growth or inflation. Since the existing $1.16 tax rate from FY04 resulted in an increase to the FY05 average annual residential tax bill in excess of the ten percent cap, the first trigger penny was applied to reduce the real estate tax rate by one penny. In order to keep the annual residential tax bill increase below ten percent, the FY05 forecast required a cumulative total of six successive one penny reductions to the FY05 tax rate. In addition, during the revenue forecasting process, additional revenue became available due to the improving economy. The additional revenue was applied directly to a real estate tax reduction, which allowed the tax rate to be reduced an additional three cents to $1.07. As the trigger methodology progressed through the FY05-09 forecast, the ten percent cap on the average residential tax bill was not exceeded again, and there were an additional five spending triggers taken during FYs 06, 07, and 08. Table 3. Implementing Tax Reduction Plan FY2005 FY2006 FY2007 FY2008 Real Estate Tax Rate 1.07% 1.04% 1.03% 1.02% Adopted Budget (FY05-09 Forecast) $572,064,427 $636,087,987 $695,084,761 $748,395,205 Adopted Budget (FY04-08 Forecast) 571,325, ,806, ,857, ,997,153 Increase in General Revenue Forecast $739,048 $17,281,048 $28,227,560 $28,398,052 Revenues Associated with Expenditures $1,279,039 $4,611,843 $6,246,181 $6,471,169 Revenues Available for Additional Spending ("Trigger" Revenues): ($539,991) $12,669,205 $21,981,379 $21,926,884 Spending (2nd Penny) - 11,412,273 20,216,346 20,923,918 Balance (one-time Revenues) ($539,991) $1,256,932 $1,765,033 $1,002,966 General Revenue Increase $739,048 $17,281,048 $28,227,560 $28,398,052 County Share of Revenue (43.25%) $247,417,865 $275,108,055 $300,624,159 $323,680,926 School Share of Revenue (56.75%) $324,646,562 $360,979,933 $394,460,602 $424,714,279 FY Revenue Estimates - page 12

23 Performance of the Tax Reduction Plan The following chart illustrates the performance of the trigger plan as forecast for FY05-09, benchmarked against the original goals the Board of County Supervisors adopted on April 14, 1999 and against the forecast for FY04-08: Figure 7. Performance of Tax Reduction Plan $1.36 $1.34 $1.32 $1.30 $1.28 $1.26 $1.24 $1.22 $1.20 $1.18 $1.16 $1.14 $1.12 $1.10 $1.08 $1.06 $1.04 $1.02 $1.00 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Dotted lines indicate estimates Goals Adopted in 1999 FY04-08 Forecast FY05-09 Forecast FY Revenue Estimates - page 13

24 MAJOR REVENUE SOURCES AND KEY ASSUMPTIONS The following sections of this report contain the key assumptions that were the topic of discussion at one or more Revenue Committee meetings. The comments and insights from private sector participants contributed greatly to the formation of these assumptions. Other references and information sources were used to supplement the assumptions derived in the committee discussions. Major revenue sources are identified as those summarized below: Table 4. Summary of General Revenue Estimates by Major Category (Thousands) Real Estate Tax Rate: 1.16% 1.07% 1.04% 1.03% 1.02% 1.02% % to Total (FY2005) **FY2004 Revised Est. FY2005 FY2006 FY2007 FY2008 FY2009 Real Estate Taxes 62.64% $318,657 $358,364 $397,206 $431,596 $459,153 $491,985 Personal Property Taxes 17.80% 98, , , , , ,953 Sales Tax 7.14% 38,400 40,860 43,820 46,920 49,790 52,570 Consumer Utility Tax 4.40% 22,700 25,153 27,976 31,478 35,883 41,489 BPOL Tax 3.03% 16,750 17,311 18,565 19,878 21,094 22,272 Investment Income 0.80% 4,223 4,570 11,414 13,541 15,416 15,799 All Other 4.19% 24,318 23,984 25,530 27,431 29,252 30,800 Total General Revenue % $523,767 $572,064 $636,088 $695,085 $748,395 $807,868 Increase over Prior Year 9.22% 11.19% 9.27% 7.67% 7.95% School Portion $324,647 $360,980 $394,461 $424,714 $458,465 County Portion 247, , , , ,403 Total General Revenue $572,064 $636,088 $695,085 $748,395 $807,868 ** The FY2004 revised revenue estimate is through the third quarter, and is based on revenues received by the County through March 30, All FY04 revised estimates depicted in this book are based on the third quarter forecast. FY Revenue Estimates - page 14

25 Table 5. Revenue Estimates by Category Acct. FY2005 FY2006 FY2007 FY2008 FY2009 Code GENERAL REVENUE SOURCE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE 0010 REAL ESTATE TAXES $349,901,000 $389,122,000 $423,631,000 $451,117,000 $484,314,000 ROLLBACK SUPPLEMENT 1,250,000 1,000, , , , REAL ESTATE TAX EXONERATIONS (4,565,000) (4,682,000) (4,668,000) (4,516,000) (4,846,000) SUBTOTAL 346,586, ,440, ,713, ,101, ,718, R/E TAXES - PUBLIC SERVICE 10,299,000 10,185,000 10,188,000 10,190,000 10,292, REAL ESTATE TAX DEFERRAL (300,000) (325,000) (325,000) (250,000) (250,000) 0025 LAND REDEMPTION 540, , , , , REAL ESTATE PENALTIES 1,239,000 1,378,000 1,500,000 1,598,000 1,715,000 TOTAL - - REAL ESTATE 358,364, ,206, ,596, ,153, ,985, PERSONAL PROPERTY TAXES 100,794, ,015, ,771, ,200, ,166, P/P - PRIOR YEAR 75,000 75,000 75,000 75,000 75, P/P TAX DEFERRAL ($560,000) ($1,200,000) ($1,510,000) ($1,600,000) ($1,675,000) 0170 P/P PENALTIES 1,513,000 1,687,000 1,904,000 2,132,000 2,387,000 TOTAL - - PERSONAL PROPERTY 101,822, ,577, ,240, ,807, ,953, LOCAL SALES TAX 40,860,000 43,820,000 46,920,000 49,790,000 52,570, CONSUMER UTILITY TAX 25,153,000 27,976,000 31,478,000 35,883,000 41,489, BPOL TAXES - LOCAL BUSINESSES 17,311,000 18,565,000 19,878,000 21,094,000 22,272, INVESTMENT INCOME 4,570,292 11,413,634 13,540,918 15,416,152 15,799, INTEREST ON TAXES 2,013,210 2,234,048 2,445,680 2,629,357 2,843, VEHICLE DECALS - REGULAR 6,144,996 6,593,752 7,075,310 7,592,024 8,146, RECORDATION TAX 5,770,000 5,913,066 6,515,130 7,075,735 7,268, ADDITIONAL TAX ON DEEDS 3,200,000 3,456,585 3,594,849 3,738,643 3,888, CABLE TV FEES 3,142,244 3,344,658 3,533,553 3,713,527 3,896,686 All OTHER REVENUE OVER $1.5 MILLION 20,270,450 21,542,109 23,164,522 24,749,286 26,043, DAILY EQUIPMENT RENTAL TAX 159, , , , , BANK FRANCHISE TAX 589, , , , , BPOL TAXES - PUBLIC SERVICE 1,060,000 1,123,600 1,191,016 1,262,477 1,338, TRANSIENT OCCUPANCY TAX 1,061,845 1,176,677 1,289,883 1,413,980 1,550, INTEREST PAID TO VENDORS (238,182) (252,473) (267,621) (283,679) (300,699) 0521 INTEREST PAID ON REFUNDS (85,196) (90,308) (95,727) (101,470) (107,559) 1301 ABC PROFITS 240, , , , , STATE WINE TAX 180, , , , , ROLLING STOCK TAX 80,327 81,131 81,942 82,761 83, PASSENGER CAR RENTAL TAX 548, , , , , MOBILE HOME TITLING TAX 54,639 55,185 55,737 56,295 56, FED PAYMENT IN LIEU OF TAXES 51,039 54,101 57,347 60,788 64,436 MISC. ALL OTHER GENERAL REVENUE 11,759 12,464 13,212 14,005 14,845 ALL OTHER REVENUE UNDER $1.5 MILLION 3,713,685 3,988,245 4,266,821 4,502,267 4,755,984 TOTAL GENERAL REVENUE $572,064,427 $636,087,987 $695,084,761 $748,395,205 $807,867,941 FY Revenue Estimates - page 15

26 REAL ESTATE REVENUE Real estate revenues are broken down into the following categories: general real estate tax, public service tax, real estate tax deferral, land redemption, and real estate penalties. Real Estate Taxes - 010/020 The real estate tax is the single largest revenue source for the County contributing approximately 63% of general revenues (FY05 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 ten-year history of this revenue source and the five-year revenue forecast: Table 6. Revenue Summary Real Estate Taxes 010/020 Revenue History Tax Rate 1 Actual Revenue Percent Change FY1995 $1.36 $157,513, % FY ,035, % FY ,236, % FY ,689, % FY ,632, % FY ,691, % FY ,663, % FY ,638, % FY ,546, % Current Estimate Tax Rate Adopted/Revised Revenue Percent Change FY2004 (adopted budget) $1.16 $303,140, % FY2004 (revised estimate) ,000, % Forecast Revenue Tax Rate Revenue Estimate Percent Change FY2005 $1.07 $346,586, % FY ,440, % FY ,713, % FY ,101, % FY ,718, % 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 above table. 1 The real estate tax rate in prior years is as follows: $ $ $ $1.36 FY Revenue Estimates - page 16

27 Residential Real Estate The residential real estate market in Prince William County continued its third year of swiftly rising home prices with appreciation exceeding 15% per year in most parts of the County. Residential real estate is again being considered an attractive investment with high short-term returns. Demand for first-time-buyer homes priced less than $250,000 continued to be the strongest sector of the residential market during calendar year 2003 even as interest rates increased toward the end of the year. According to data from the Metropolitan Regional Information System, the number of homes sold in 2003 increased 17% over the prior year as the number of days on the market returned to a more stabilized timeframe of 30 days. The supply of homes on the market increased substantially during calendar year 2003 putting an end to many of the very short marketing times and bidding wars seen during calendar year Homes priced over $400,000 showed healthy increases in value, although not as high as lower priced homes, and marketing times increased to approximately 60 days in 2003 an increase from 45 days in The residential real estate market consists of four property types: single-family homes, townhouses, residential condominiums, and apartments. Duplex units are included within the townhouse category. The apartment category consists of units within rental apartment communities and apartment buildings with five or more units. Residential Market Value Changes The following chart shows a history of actual residential appreciation (excluding rental apartments) from fiscal year 1982 through fiscal year 2004 and the General Revenue Committee s estimates thereafter. The actual average from revenue years 1982 through 2004 is also reflected: Figure 8. Average Annual Residential Real Estate Appreciation, % Actual Residential Appreciation: Actual Ave. 4.9%, with Forecast, 5.5% Inflation Rate, Annual Ave. 3.7% 17.47% 17.52% 15% FY05-09 Forecast 16.01% 10% 10.00% CY80/03 Average 7.60% 6.00% 5% 4.00% 0% -5% CY80, FY82 CY81, FY83 CY82, FY84 CY83, FY85 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 CY of Value, FY of Revenue FY Revenue Estimates - page 17

28 The following table shows the expected change in market value for residential and apartment properties during the forecast period. Table 7. Residential Market Value Changes Revenue Year Single-Family, Townhouse, and Condominium Apartments FY % 11.14% FY % 7.0% FY % 4.0% FY % 3.0% FY % 3.0% Residential properties in Prince William County are expected to appreciate on average 16% overall for fiscal year Forecasters are predicting a very strong residential market in 2004 as the Washington area continues to outperform the national real estate market 2. Key drivers in the Washington area s forecast are low unemployment, an increase in job growth, shrinking supply of land available for development inside the Capital Beltway, and historically low mortgage interest rates. The forecast for residential appreciation beyond fiscal year 2005 reflects these market insights. Appreciation is expected to moderate to a rate of 10% in fiscal year 2006, 6% for fiscal year 2007, and 4% per year for fiscal years 2008 and Forecasters expect strong demand for homes to continue, but not at levels equal to those in fiscal year 2005; rather, appreciation will gradually decline to levels that resemble long-term annual averages. Residential appreciation of 16% in Prince William County is comparable to neighboring Northern Virginia jurisdictions where the expected average appreciation rates range from 11% to 17%: Table 8. Comparison of Estimated Residential Market Value Changes from 2003 to 2004 Prince William County Loudoun County Fairfax County City of Alexandria Arlington County All Residential (Excluding Rental Apartments) 16.01% 12% 11.29% 16.9% 15.4% Apartments Market Value Change Favorable conditions in the County s apartment market translate into an average increase in market value of 11.14% for fiscal year This increase is largely attributable to higher apartment rents and slightly lower capitalization rates. Demand for apartment units remained strong during calendar year Taking into consideration the expected small increases in vacancy beyond calendar year 2003, appreciation is estimated to continue at a lower rate of approximately 7.0% in fiscal year 2006, 4% in fiscal year 2007, and 3% per year in fiscal years 2008 and Why Your House Will Be Worth More, Washington Post, Jan. 3, 2004, p. F01. FY Revenue Estimates - page 18

29 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 occurs in calendar year 2003 affects revenues beginning in fiscal year The following table summarizes the expected number of newly constructed residential units during the forecast period, and the previous five year s activity: Table 9. Residential Growth Number of Units Revenue Year Total Residential Units Single-Family Townhouse Condominium Apartments FY2000(a) 3,133 1, FY2001(a) 3,086 2, FY2002(a) 3,659 2,315 1, FY2003(a) 5,051 3, ,008 FY2004(a) 4,824 3,166 1, FY2005 4,859 3,231 1, FY2006 4,275 3,000 1, FY2007 3,650 2, FY2008 3,225 2, FY2009 3,225 2, (a) - actual Construction of 4,481 residential units and 378 apartment units was completed during calendar year 2003 which will generate revenues for fiscal year There were 93 fewer single family, townhouse and condominium homes constructed in 2003 while the number of apartment units increased by 128 units. According to the National Association of Home Builders, the new homes market hit record levels during 2003 with over one million new homes sold nationally. The volume of new home starts is expected to taper off during the forecast period with 4,075 units estimated for fiscal year 2006 down to 3,025 units forecast for fiscal years 2008 and Construction of new apartment units is forecast to stabilize at 200 units per year for fiscal year 2006 through Construction of a significant number of apartment projects in recent years has been driven by federal tax credit incentives. This trend is expected to continue throughout the forecast period. Residential Values Per New Unit The average assessed value of a new home constructed during 2002 was $327,671. Assessed values on average for new homes constructed during 2003 for fiscal year 2005 revenues is expected to increase 16.7% to $382,442. The forecast for residential appreciation of new units in fiscal years 2005 through 2008 is estimated at the same rate of appreciation as existing units. The assessed value per new unit of apartment properties increased to $80,000 per unit for fiscal year 2005 from $65,235 for fiscal year This significant increase in unit value was not driven by appreciation. Rather, it was because in 2002 there were a greater number of smaller one and two bedroom units constructed pulling the average assessed value down. For fiscal year 2005, the average assessed value of a new condominium unit is expected to be $261,470 which is higher than the expected average value of a townhouse unit of $258,473. There has been a trend in recent years toward the construction of larger townhouse style condominium units and luxury waterfront mid-rise condominium units. This difference in value is carried throughout the forecast period. FY Revenue Estimates - page 19

30 Table 10. New Residential Assessed Value per New Unit Revenue Year Overall Residential (Excluding Apts.) Single- Family Townhouse Condominium Apartment FY2000(a) $181,000 $223,000 $126,000 $100,000 $50,000 FY2001(a) 209, , , ,178 60,000 FY2002(a) 232, , , ,916 64,300 FY2003(a) 287, , , ,769 68,026 FY2004(a) 327, , , ,565 65,235 FY , , , ,470 80,000 FY , , , ,600 85,600 FY , , , ,900 89,000 FY , , , ,100 91,700 FY , , , ,800 94,500 (a) - actual Commercial Real Estate Calendar year 2002 activity in Prince William County resulted in commercial properties appreciated 3.8% on average for fiscal year 2004 revenues. The industrial and office sectors experienced the greatest level of appreciation at approximately 9.5% each. Retail properties appreciated approximately 6% on average while the assessed values of hotels and special purpose properties showed little change in value overall. The outlook for fiscal year 2005 is expected to bring appreciation of 11.9% overall for commercial properties. Retail and industrial properties are expected to show the highest rates of appreciation. Office and vacant commercial land properties are expected to show moderate rates of appreciation while the value of hotels is expected to show some decreases in value. Commercial appreciation for fiscal years 2006 through 2009 is expected to stabilize at approximately 3% per year. Average assessed values per square foot for fiscal year 2005 are determined based on the added building value resulting from new construction completed during calendar year These unit values are then adjusted to reflect the general appreciation of commercial properties during the remainder of the forecast period. Table 11. Commercial Market Value Changes Revenue Year Commercial FY2001(a) 1.8% FY2002(a) 9.7% FY2003(a) 6.7% FY2004(a) 3.8% FY % FY % FY % FY % FY % (a) - actual 3 Note that increases or decreases in dollars per square foot from one year to the next are not indicative of appreciation trends. Unit values are based on the contributory value of the new buildings in a category divided by the added square footage in that category. Building values per square foot vary widely among different building types within each category and the types of new buildings within categories vary from one year to the next. FY Revenue Estimates - page 20

31 Commercial properties are categorized into five property types: retail, office, hotel, industrial, and special purpose. For fiscal year 2005, a total of 1,026,817 commercial square feet is expected to be added to the assessment rolls. Growth is expected to increase in fiscal years 2006 and 2007 to a peak of nearly 1.5 million square feet then return to approximately 760,000 square feet at the end of the forecast period. Moderate growth in commercial new construction over the past few years has put Prince William County s commercial/industrial market in a better position than neighboring jurisdictions where excess supply is causing downward pressure on prices. Commercial real estate is currently a very attractive investment option with low capitalization rates (as low as 6%) and higher yields than certificates of deposit. Overall, the commercial/industrial real estate market is expected to remain solid through calendar year 2005 as strong demand and attractive lending options remain present. A 11.9% increase in assessed value is expected for fiscal year 2005 and 3% appreciation per year is forecast for fiscal years 2006 through Retail New construction in the retail sector accounted for 38% of all commercial/industrial growth for fiscal year 2005 adding nearly 400,000 square feet to the tax base. Two new shopping centers Somerset and Braemar Village were completed along with several general retail properties including restaurants, banks, and other stand-alone type retail uses such as the new Wal-mart store on Liberia Avenue. Growth in retail properties forecast for fiscal years 2006 to 2009 includes large retail projects currently under construction such as the Lowe s and Target stores at Virginia Gateway and Wal-mart at Southbridge. In each year of the forecast, the greatest percentage of the growth square footage occurs within the retail sector. Nearly half of the assessed value within the commercial/industrial tax base is within the retail sector. Shopping center properties show the highest levels of appreciation within the retail sector while general commercial properties show moderate levels of appreciation for fiscal year The retail sector is forecast to remain strong throughout the forecast period. Industrial Nearly half of new construction for fiscal year 2005 occurred within the industrial sector adding 526,000 square feet to the commercial/industrial base. New construction completed during 2003 within the industrial sector includes several new warehouses, temporary construction offices at the Eli Lilly site, manufacturing buildings, and industrial equipment repair facilities. Growth within the industrial sector is expected to remain stable throughout the forecast period with approximately 275,000 square feet added to the tax base for fiscal year 2006 and 250,000 square feet added per year for fiscal years 2007 to Industrial properties show moderate levels of appreciation overall for fiscal year This rate of appreciation is expected to hold through the forecast period as Prince William County continues to show a high demand by transportation based businesses and support service companies seeking space of 3,000 to 5,000 square feet. Hotels Construction of the 29,492 square foot Days Inn at Yorkshire was completed during calendar year Three hotels currently under construction at the intersection of Interstate 95 and the Prince William Parkway comprise the fiscal year 2006 forecast of an additional 198,000 square feet within the hotel sector. Two to FY Revenue Estimates - page 21