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 Steven S. Ferlotti Assistant Director of Finance Nimet Soliman Deputy Planning Director David S. Cline School Finance Director Melissa S. Peacor Assistant County Executive David L. Tyeryar Budget Director Dana C. Fenton Assistant to the County Executive Tom Bruun Assistant Director, Public Works Bill Vaughan Sr. Research Manager/IT Rep. Economic Development Finance Department Staff Project Manager Dave Sinclair Financial Analyst Bill Brogdon Treasury Manager Michelle Attreed Accounting Division Chief Robert A. Willard Investment Manager Mark Hinman Senior Accountant Allison Lindner Real Estate Assessments Division Chief Kerem Oner Real Estate Assessments Coordinator Allen Scarbrough Financial Analyst Carl W. Hampton Fiscal Services Manager Debra McMahon Administrative Support 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 Representatives from the Prince William Association of Realtors: Anthony Giglio President, Prince William Association of Realtors Coldwell Banker Residential Brokerage Sally DiMiero President-Elect, Prince William Association of Realtors Long and Foster Real Estate John Peterson Director, Prince William Association of Realtors Coldwell Banker Residential Brokerage John DiBiase Government Affairs Director, Prince William Association of Realtors Judy Haller Prince William Association of Realtors American Home Mortgage 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 May 19, 2006 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 FY07-11 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 fiscal year 2007 real estate tax rate by 15.2 cents from $0.910 to $ 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 2007 Fiscal Plan, the Capital Improvement Plan for fiscal years 2007 to 2012, 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 2005 and Outlook for Performance of the Tax Rate Reduction Plan MAJOR REVENUE SOURCES AND KEY ASSUMPTIONS Real Estate Revenue Real Estate Taxes 010 / Residential Real Estate Residential Market Value Changes Apartments Market Value Change Residential New Construction Units Residential Values Per New Unit Commercial Real Estate Exonerations Public Service Taxes Real Estate Tax Deferrals Land Redemption Real Estate Penalties Personal Property Revenue Personal Property Tax on Vehicles 071 / 079 / Car Tax Relief Business Personal Property Tax Personal Property Prior Year Personal Property Deferrals Personal Property Penalties - Current Year Local Sales Tax Revenue Local Sales Tax Population Growth Consumer Utility Revenue Consumer Utility Tax Housing Units BPOL Revenue BPOL Tax Revenue Investment Income Investment Income ALL OTHER REVENUE SOURCES FY Revenue Estimates - page ix

10 Revenue Sources Over $1.5 Million Interest on Taxes Vehicle Decals / Recordation Tax Tax on Deeds Cable Franchise Tax Revenue Sources Under $1.5 Million 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 INDEX OF TABLES AND FIGURES FY Revenue Estimates - page x

11 INTRODUCTION The past year was one of healthy economic growth for most areas of the nation s economy in spite of the hurricanes that devastated the city of New Orleans and coastal areas of Louisiana and Mississippi. Job growth, consumer spending, corporate profits, and Gross Domestic Product (GDP) were all at healthy levels. Notwithstanding the positive economic performance in 2005, there exist a number of risk factors for the economy looking forward. The booming real estate market, which has provided a large proportion of the job growth in recent years, began to show signs of slowing late in the year. Energy prices continue to be volatile and highly subject to the geo-political environment. And rising short-term interest rates have resulted in a flattened yield curve causing some pundits to express concern about a recession in the near future. While there is clearly more forward risk in the economy than in the recent past, the economy enters 2006 in good stead. Prince William County s economic outlook is a positive one. The County compared favorably to both the Virginia and the nation coming out of the recent recession and throughout That success was due to the insular effects of federal spending and employment, a vigorous housing market, record job growth and growing retail sales. The factors that have resulted in the County s positive results have not changed dramatically, but signs of a cooling real estate market, higher short-term interest rates and continuing high energy prices may serve to moderate the County s economic performance over the near term. FY Revenue Estimates - page 1

12 REVIEW OF THE ECONOMY IN 2005 AND OUTLOOK FOR 2006 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. GDP growth continued at a healthy pace in 2004, totaling 3.7% for the year, and in spite of an anemic 1.1% fourth quarter, caused primarily by the gulf area hurricanes, 2005 GDP growth managed a respectable 3.1% for the year. The following graph presents the projected 2006 rate of growth as estimated by a survey of leading economists by the Federal Reserve Bank of Philadelphia. Figure 1. United States Gross Domestic Product 5 4 Projected Annual Percent Rate of Change Source: U.S. Dept. of Commerce In November of 2005, Dr. Christine Chmura, President and Chief Economist of Chmura Economics and Analytics, addressed the Prince William County Revenue Committee and outlined her view of the economy. Dr. Chmura is forecasting a favorable, but muted business environment through 2006 and predicts modest growth in employment, relatively low, but rising, interest rates, and weaker growth in consumer spending and jobs. In terms of overall economic performance, she believes 2006 will be a good year nationally and noted her expectation that Virginia would perform on par with the nation but that Prince William County would outpace Virginia FY Revenue Estimates - page 2

13 Virginia The outlook for the Commonwealth of Virginia s economy over the next year is very 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 on November 29, 2005 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. New job creation is well ahead of expectations, Federal procurement spending in the Washington D.C. area has been increasing, and revenue collections for the Commonwealth are tracking ahead of forecasts. Mr. Layman identified key variables in the future economic performance of the state as the impact of a slowing housing market and the effects of extended high energy prices. Prince William County In 2005, Prince William County s economy, by nearly every measurement, exceeded that of the nation and Virginia. There have been notable changes to the financial backdrop over the past year, and expectations for 2006 have adjusted accordingly. The primary drivers for the County s performance continue to be job growth, interest rates and home construction, which are the keys to the County s growth prospects. Additionally, energy prices and the strength and velocity of the housing market will be major factors in the County s economic performance for Prince William County s close proximity to the Federal Government and affiliated contractor industries has largely isolated it from severe economic downturns. Not only has this relationship provided some insulation from inevitable business cycle troughs, 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 extremely well of late. Housing production has not kept up with regional job growth, resulting in a demand imbalance for homes, and Prince William County s boom in new home construction helped to stimulate retail sales. The demand imbalance that characterized the local market over the last few years, however, may be waning as the inventory of unsold residential property increased sharply over the last half of 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 but the velocity of the market in terms of unit volume and price acceleration is clearly slowing. That notwithstanding, the County s real estate market continues to enjoy some market advantages. As neighboring counties to the north continue towards the point of build-out, the market appeal of Prince William County available undeveloped land and lower home prices becomes a magnet for new home buyers. Regardless of the relative health of the real estate market, a major regional focal point for new housing construction, for at least the next few years, will be Prince William County. This local economic advantage plus the continuing favorable interest rate environment are distinct positives for the County s real estate sector in 2006, though higher mortgage rates could serve to further moderate the sector s growth later in the year. According to data from Metropolitan Regional Information Systems (MRIS), home sales in Prince William County totaled nearly 12,000 units in The average sale price of those homes sold grew to $426,142 in 2005 up from $333,332 in 2004 and $264,382 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 13,000 12,000 11,000 10,000 9,000 8,000 Source: MRIS 2005 Preliminary Data $450,000 $425,000 $400,000 $375,000 $350,000 $325,000 $300,000 $275,000 Home Sales 7,000 6,000 5,000 4,000 3,000 2,000 1,000 $250,000 $225,000 $200,000 $175,000 $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 Average Price Home Sales Average Price $0 Officials of the Prince William Association of Realtors, addressing the Prince William County Revenue Committee, expected a strong market for 2006, but not a record year. Citing expectations of mortgage rates under 7% and continued strong demand at the lower-priced end of the market, their forecast expected a healthy market with modest price appreciation but a lower volume of sales from The most difficult segment of the market was expected to be the high-priced end of the market (over $700,000) with marketing times averaging 3 months and minor price declines a possibility. Despite the near universal expectation for a real estate slow-down, a slowing market from the frenzied levels of the last two years is viewed as a positive. Home sales are coming down from the mountain peak, but they will level-out at a high plateau a plateau that is higher than previous peaks in the housing cycle, said David Lereah, the National Association of Realtor s chief economist. This transition to a more normal and balanced market is a good thing. 1 The housing market still is fundamentally healthy, said Dave Wilson, president of the National Association of Home Builders. Many builders sense some tapering off of buyer demand because of resistance to high prices and rising interest rates, and many companies have begun offering certain incentives in order to maintain their sales and production. 2 Not inconsistent with that perspective, Prince William County building permits, an indicator of future residential construction, came in at a very healthy 5,293 units in 2005, though down slightly from the previous year. The following chart depicts the annual levels of County building permits since National Association of Realtors Press Release National Association of Home Builders Press Release FY Revenue Estimates - page 4

15 Figure 3. Residential Unit Building Permits in Prince William County Mortgage Bankers Association chief economist & senior vice president of research and business development Douglas Duncan foresees other indicators suggesting a generally positive performance in the real estate markets. Duncan points to large gains in productivity, low unemployment, expectations for continued job growth and the influx of foreign capital as the economic drivers that will result in a good real estate market in The market for commercial real estate in Prince William County during 2005 was a good one. Large population gains over the past several years and robust job growth in the County bolstered demand and resulted in higher prices for both properties and rents. Expectations for 2006 are for similar results, although higher short-term interest rates may serve to moderate price appreciation Vehicles Vehicle additions are important to Prince William County in two ways. First, personally-owned vehicles are the County s primary source of personal property tax revenue. Second, strong increases in the stock of vehicles in the County represent robust local consumer demand. Month-by-month additions tend to be volatile and exhibit seasonal patterns. Therefore, the following graph includes a six-month moving average that shows the annual trend in net vehicle additions. As evident in the moving-average line, net additions are now averaging close to 2,000 vehicles per month. FY Revenue Estimates - page 5

16 Figure 4. Net Vehicle Additions in Prince William County 4000 Source: Va. Department of Motor Vehicles Six-month moving average Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Pat Erney of the National Automobile Dealers Association addressed the Prince William County Revenue Committee on November 30, 2005 to impart her views on the state of the automobile industry. Ms. Erney is expecting total 2006 new light vehicle sales to come in moderately lower than 2005 sales. Higher interest rates and gasoline prices will be factors in the lower sales. Additionally, higher fuel prices have also contributed to a shift in demand toward smaller more fuel efficient vehicles. Going forward, Prince William County can expect to see net vehicle additions continue in a steady, upward trend driven primarily by population growth. 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 FY Revenue Estimates - page 6

17 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 fourth quarter of The National unemployment rate at December 2005 was down to 4.9%, and Virginia s rate was down to 3.0%. Prince William County s unemployment rate fell in the fourth quarter of 2005 as well down to 2.1% 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. 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 robust rate of growth in retail sales has been largely a result of the home building boom and the attendant population growth, extremely low unemployment levels and general positive economic environment. Near term expectations are for this trend to moderate somewhat in conjunction with a less robust real estate market. FY Revenue Estimates - page 7

18 Figure 6. Retail Sales Tax Revenue $4,500,000 (seasonally adjusted) $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Conclusions The County is well positioned to have an economically successful The nation s economy is performing well, producing new jobs and generating solid growth in an environment of low unemployment and relatively low interest rates. Locally the environment is even more accommodating with rock bottom unemployment rates, robust job growth, and a healthy real estate market that has fueled an expanding population growth rate. All of these factors bode well for some of the County s major revenue streams - real estate taxes, sales tax revenue, and vehicle registrations. In spite of the generally positive economic factors, there are signs of change that represent an increased level of economic risk. The real estate market, both nationally and locally is showing signs of slowing. A slowing real estate market may manifest itself in a reduced spending posture for consumers. The extent of the impact of a slowing real estate market remains to be seen; however, this change in character may present challenges going forward. That notwithstanding, Prince William County as part of the Washington D.C. Metropolitan Area, has shown remarkable resilience to the ups and downs of the normal business cycle. Federal Government spending and related job production provides a continuous stimulation to the local economy and largely insulates area jurisdictions from even the severest of downturns. For calendar years 2006, look for a moderating real estate market, in terms of price and volume, continued healthy, but moderating retail sales growth, and population growth that should serve to keep vehicle additions in the County on a steady upward track. FY Revenue Estimates - page 8

19 TAX RATE 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. While developing 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 remained in effect, and generated additional triggers until the tax bill increase was reduced below the ten percent target 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. On October 26, 2004, the Prince William Board of County Supervisors adopted a resolution directing that the tax rate will be set so that the average existing residential real estate tax bill would increase by no more than 5.9% from the previous fiscal year. Consistent with this policy, the FY06 real estate tax rate of $0.924 was proposed on February 22, 2005, which resulted in an average residential real estate tax bill increase of 5.9%. Due to concern over steadily increasing real estate appreciation rates and the ability of citizens to pay resulting tax bills, the Board of County Supervisors adopted the FY06 real estate tax rate of $0.91. The adopted real estate tax rate of $0.91 resulted in an average residential real estate tax bill increase of 4.5% from the previous fiscal year. An average tax bill target will be reevaluated each year to ensure a proper balance between providing high levels of service to a growing community, the need to invest in new capital infrastructure, and citizen s ability and willingness to pay. On April 25, 2006, the Board of County Supervisors adopted the FY07 real estate tax rate of $ This rate will generate an average residential real estate tax bill of $3,209, which is a 5.73% increase from the previous fiscal year. FY Revenue Estimates - page 9

20 Performance of the Tax Rate Reduction Plan The following chart illustrates the performance of the tax rate reduction plan as forecast for FY07-11, benchmarked against the original goals the Board of County Supervisors adopted on April 14, 1999 and against the forecast for FY06-10: Figure 7. Performance of Tax Rate Reduction Plan $1.36 $1.32 $1.28 $1.24 $1.20 $1.16 $1.12 $1.08 $1.04 $1.00 $0.96 $0.92 $0.88 $0.84 $0.80 $0.76 $0.72 $0.68 $1.34 $1.30 $1.23 $1.16 $1.07 $0.910 $0.758 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Dotted lines indicate estimates Goals Adopted in 1999 FY06-10 Forecast FY07-11 Forecast FY Revenue Estimates - page 10

21 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 1. Summary of General Revenue Estimates by Major Category (Thousands) Real Estate Tax Rate: $0.910 $0.758 $0.710 $0.696 $0.695 $0.707 % to Total (FY2007) FY2006 Revised Est. FY2007 FY2008 FY2009 FY2010 FY2011 Real Estate Taxes 59.26% $392,984 $431,806 $472,857 $516,616 $562,883 $612,084 Personal Property Taxes 17.08% 113, , , , , ,532 Sales Tax 7.13% 47,900 51,975 56,133 60,624 65,474 70,711 Consumer Utility Tax 4.52% 28,500 32,910 37,060 41,180 44,890 47,920 BPOL Tax 3.33% 21,420 24,280 26,950 29,920 33,210 36,860 Investment Income 2.57% 13,500 18,731 25,489 26,004 27,742 29,198 All Other 6.10% 42,007 44,449 46,681 48,888 51,647 54,571 Total General Revenue % $659,689 $728,637 $803,325 $876,621 $956,285 $1,040,875 Increase over Prior Year 10.26% 10.45% 10.25% 9.12% 9.09% 8.85% School Portion $400,994 $442,795 $484,078 $528,748 $576,197 County Portion 311, , , , ,788 Transportation Fund 16,300 17,060 17,470 18,170 18,890 Total General Revenues $ $728,637 $803,325 $876,621 $956,285 $1,040,875 FY Revenue Estimates - page 11

22 Table 2. Revenue Estimates by Category Acct. FY2007 FY2008 FY2009 FY2010 FY2011 Code GENERAL REVENUE SOURCE ESTIMATE ESTIMATE ESTIMATE ESTIMATE ESTIMATE 0010 REAL ESTATE TAXES $427,122,000 $469,594,000 $514,278,000 $561,491,000 $611,161,000 ROLLBACK SUPPLEMENT 1,000, , , , , REAL ESTATE TAX EXONERATIONS (7,685,000) (8,443,000) (9,240,000) (10,083,000) (10,975,000) SUBTOTAL 420,437, ,901, ,538, ,658, ,436, R/E TAXES - PUBLIC SERVICE 9,597,000 9,079,000 8,989,000 9,066,000 9,314, REAL ESTATE TAX DEFERRAL (200,000) (250,000) (200,000) (300,000) (300,000) 0025 LAND REDEMPTION 469, , , , , REAL ESTATE PENALTIES 1,503,000 1,651,000 1,807,000 1,972,000 2,147,000 TOTAL - - REAL ESTATE 431,806, ,857, ,616, ,883, ,084, PERSONAL PROPERTY TAXES 125,060, ,727, ,929, ,842, ,660, P/P - PRIOR YEAR 75,000 75,000 75,000 75,000 75, P/P TAX DEFERRAL ($1,650,000) ($1,825,000) ($2,000,000) ($2,100,000) ($2,100,000) 0170 P/P PENALTIES 1,000,480 1,179,180 1,385,361 1,622,999 1,896,600 TOTAL - - PERSONAL PROPERTY 124,485, ,156, ,389, ,439, ,531, LOCAL SALES TAX 51,975,000 56,133,000 60,624,000 65,474,000 70,711, CONSUMER UTILITY TAX 32,910,000 37,060,000 41,180,000 44,890,000 47,920, BPOL TAXES - LOCAL BUSINESSES 24,280,000 26,950,000 29,920,000 33,210,000 36,860, INVESTMENT INCOME 18,730,749 25,488,533 26,003,649 27,741,607 29,197, INTEREST ON TAXES 1,548,393 1,201,256 1,318,934 1,445,000 1,580, CABLE FRANCHISE TAX 3,870,000 4,220,000 4,580,000 4,950,000 5,330, VEHICLE DECALS - REGULAR 7,062,633 7,559,842 8,092,055 8,661,736 9,271, RECORDATION TAX 22,040,000 23,070,000 23,620,000 24,570,000 25,550, ADDITIONAL TAX ON DEEDS 5,335,000 5,708,000 5,993,000 6,293,000 6,608,000 All OTHER REVENUE OVER $1.5 MILLION 39,856,026 41,759,098 43,603,989 45,919,736 48,339, DAILY EQUIPMENT RENTAL TAX 189, , , , , BANK FRANCHISE TAX 600, , , , , BPOL TAXES - PUBLIC SERVICE 1,332,629 1,432,537 1,518,489 1,609,598 1,706, TRANSIENT OCCUPANCY TAX 1,409,725 1,558,801 1,732,416 1,976,420 2,270, INTEREST PAID TO VENDORS (275,429) (294,261) (311,916) (330,631) (350,469) 0521 INTEREST PAID ON REFUNDS (40,501) (39,608) (41,984) (44,503) (47,174) 1301 ABC PROFITS 160, , , , , STATE WINE TAX 168, , , , , ROLLING STOCK TAX 88,561 92,989 97, , , PASSENGER CAR RENTAL TAX 787, , , , , MOBILE HOME TITLING TAX 60,239 63,251 66,414 69,735 73, FED PAYMENT IN LIEU OF TAXES 109, , , , ,986 MISC. ALL OTHER GENERAL REVENUE 3,768 3,421 3,626 3,844 4,075 ALL OTHER REVENUE UNDER $1.5 MILLION 4,593,289 4,921,549 5,283,648 5,726,780 6,231,302 TOTAL GENERAL REVENUE $728,636,545 $803,325,359 $876,620,647 $956,285,122 $1,040,875,337 FY Revenue Estimates - page 12

23 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 59.3% of general revenues (FY07 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 3. Revenue Summary Real Estate Taxes 010 / 020 Revenue History Tax Rate 3 Actual Revenue Percent Change FY $166,236, % FY ,689, % FY ,632, % FY ,691, % FY ,663, % FY ,638, % FY ,546, % FY ,997, % FY ,048, % Current Estimate Tax Rate Adopted/Revised Revenue Percent Change FY2006 (adopted budget) $0.91 $379,584, % FY2006 (revised estimate) ,100, % Forecast Revenue Tax Rate Revenue Estimate Percent Change FY2007 $0.758 $420,437, % FY ,901, % FY ,538, % FY ,658, % FY ,436, % 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. 3 The real estate tax rate in prior years is as follows: $ $ $ $1.36 FY Revenue Estimates - page 13

24 Residential Real Estate The residential real estate market in Prince William County continued its fifth year of swiftly rising home prices with appreciation approaching 27% per year in most parts of the County. The Federal Funds Rate increases of the past twelve months have not significantly affected long-term bond rates or mortgage rates. With interest rates still near their historic lows, despite rising sentiment of pending slow down in appreciation and even a possible correction in the upper range of the housing market, the residential real estate market was strong. Demand for first-time-buyer homes priced less than $400,000 continued to be the strongest sector of the residential market during calendar year The number of homes sold in 2005 increased 2.5% over the prior year as the average number of days on the market increased to 41 days according to the Metropolitan Regional Information System. The inventory of homes on the market increased during calendar year 2005 while demand flattened in the last four months of 2005, leading to lengthier marketing times and less vigorous pricing compared to the first half. Homes priced over $400,000 showed healthy increases in value, although not as high as lower priced homes. 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 2007 and the General Revenue Committee s estimates thereafter. The actual average from revenue years 1982 through 2006 is also reflected: Figure 8. Average Annual Residential Real Estate Appreciation, % 25% Actual Residential Appreciation: Actual Ave. 6.9%, with Forecast, 7.0% Inflation Rate, Annual Ave. 3.7% 22.98% 26.95% 20% 15% 10% 5% CY80-05 Average FY07-11 Forecast 17.47% 7.60% 17.44% 18.30% 13.00% 8.00% 6.00% 0% 4.00% -5% CY80, FY82 CY82, FY84 CY84, FY86 CY86, FY88 CY88, FY90 CY90, FY92 CY92, FY94 CY94, FY96 CY96, FY98 CY98, FY00 CY00, FY02 CY02, FY04 CY04, FY06 CY06, FY08 CY08,FY10 CY of Value, FY of Revenue FY Revenue Estimates - page 14

25 The following table shows the expected change in market value for residential and apartment properties during the forecast period. Table 4. Residential Market Value Changes Revenue Year Single-Family, Townhouse, and Condominium Apartments FY % 5.0% FY % 3.0% FY % 1.0% FY % 0.0% Residential properties in Prince William County are expected to appreciate on average 13% overall for fiscal year Forecasters are predicting a sustained, strong residential market in Key drivers in the Washington area s forecast are low unemployment, strong job growth, shrinking supply of land available for development inside the Capital Beltway, and low mortgage interest rates. At the national level, unemployment is expected to continue its downward trend and the Gross Domestic Product (GDP) is expected to sustain a healthy growth rate in The National Association of Realtors has forecasted a near record level of market activity in All these factors play an important role in the increasing housing shortage the region is experiencing. The forecast for residential appreciation beyond fiscal year 2008 reflects these market insights. Appreciation is expected to moderate to a rate of 8% in fiscal year 2009, 6% for fiscal year 2010, and 4% for fiscal year Forecasters expect strong demand for homes to continue, but not at levels equal to those in fiscal year 2006; rather, appreciation will gradually decline to levels that resemble long-term annual averages due mainly to higher interest rates. Residential appreciation in Prince William County is comparable to neighboring Northern Virginia jurisdictions: Table 5. Comparison of Estimated Residential Market Value Changes from 2005 to 2006 Prince William County Loudoun County Fairfax County City of Alexandria Arlington County All Residential (Excluding Rental Apartments) 26.95% 28.00% 21.60% 19.50% 18.25% Apartments Market Value Change Favorable conditions in the County s apartment market translate into an average increase in market value of approximately 12.0% for fiscal year This increase is largely attributable to higher apartment rents and lower capitalization rates. Demand for apartment units remained strong during calendar year Appreciation is estimated to continue at a lower rate of approximately 5% in fiscal year 2008, 3% in fiscal year 2009, 1% in fiscal year 2010 and 0% in fiscal year FY Revenue Estimates - page 15

26 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 2005 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 six year s activity: Table 6. Residential Growth Number of Units Revenue Year Total Residential Units Single-Family Townhouse Condominium Apartments FY2002(a) 3,659 2,315 1, FY2003(a) 5,051 3, ,008 FY2004(a) 4,824 3,166 1, FY2005(a) 4,859 3,231 1, FY2006(a) 5,894 3,619 1, FY2007(a) 6,408 3,762 1, FY2008 5,000 3,000 1, FY2009 4,425 2,750 1, FY2010 4,200 2, FY2011 4,150 2,485 1, (a) - actual Construction of 5,578 residential units and 830 apartment units was completed during calendar year 2005 which will generate revenue for fiscal year There were 598 more single family, townhouse, and condominium units constructed in 2005 than 2004 while 84 fewer apartment units were constructed. The volume of new home starts is expected to taper off during the forecast period with 4,600 units estimated for fiscal year 2008 down to 4,200, 4,000, and 4,000 units forecast for fiscal years 2009 through 2011 respectively. Construction of new apartment units is forecast to decrease to 400 units for fiscal year 2008 and stabilize at around 200 units for fiscal years 2009 through Construction of a significant number of apartment projects in recent years has been driven by federal tax credit incentives. Residential Values Per New Unit The average assessed value of a new home constructed during 2005 was $551,789, a 23.2% increase over the average assessed value of homes built in 2004 which was $447,974. The average assessed value of a new single family home was $619,570 in 2005, a 25.5% increase over the average assessed value of $493,565 in For fiscal year 2007, the average assessed value of a new condominium unit was $379,075 and the average value of a townhouse unit climbed to $422,883. There has been a trend in recent years toward the construction of larger townhouse style condominium units and luxury waterfront mid-rise condominium units. The average selling price of these units has typically exceeded the average selling price of townhouses. The assessed value per new unit of apartment properties increased to $86,800 per unit for fiscal year 2006 from $84,400 for fiscal year FY Revenue Estimates - page 16

27 Table 7. New Residential Assessed Value per New Unit Revenue Year Overall Residential (Excluding Apts.) Single- Family Townhouse Condominium Apartment FY2002(a) $232,577 $268,562 $157,537 $131,916 $64,300 FY2003(a) 287, , , ,769 68,026 FY2004(a) 327, , , ,565 65,235 FY2005(a) 382, , , ,470 80,000 FY2006(a) 447, , , ,754 84,400 FY2007(a) 551, , , ,075 86,800 FY , , , ,400 91,100 FY , , , ,100 93,800 FY , , , ,000 94,700 FY , , , ,800 94,700 (a) - actual Commercial Real Estate Calendar year 2005 market activity in Prince William County resulted in commercial properties appreciating approximately 17% on average for fiscal year 2007 revenues. The industrial and office sectors experienced the greatest level of appreciation at approximately 18%. Retail properties appreciated approximately 15% while the assessed values of hotels and special purpose properties showed similar increases to general commercial appreciation. The commercial property outlook for fiscal year 2008 is expected to bring 10% appreciation overall. Vacant commercial land, retail and industrial properties are expected to show the highest appreciation rates. Office and hotels will show moderate rates of appreciation. Commercial appreciation for fiscal year 2009 is forecast at 4% and appreciation in fiscal years 2010 and 2011 is expected to be 3% and 2% per year respectively. Average assessed values per square foot for fiscal year 2007 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 8. Commercial Market Value Changes Revenue Year Commercial FY2002(a) 9.7% FY2003(a) 6.7% FY2004(a) 3.8% FY2005(a) 11.9% FY2006(a) 15.1% FY2007(a) 17.3% FY % FY % FY % FY % (a) - actual 4 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 17

28 Commercial properties are categorized into five property types: retail, office, hotel, industrial, and special purpose. For fiscal year 2007 (calendar year 2005 market activity), a total of 1,732,978 commercial square feet was added to the assessment rolls. Growth is expected to increase slightly in fiscal year 2008 to 1,941,140 square feet and gradually decrease to approximately 845,000 square feet at the end of the forecast period. Commercial real estate is still an attractive investment option despite low capitalization rates (as low as 5%). The return on investment still exceeds those of other investment options. Overall, the commercial/industrial real estate market is expected to remain solid through calendar year 2006 as strong demand and attractive lending options are still present. A 10% increase in assessed value is expected for fiscal year 2008 followed by 4% in fiscal year 2009, 3% in fiscal year 2010 and 2% in Retail New construction in the retail sector accounted for 32.5% of all commercial/industrial growth for fiscal year 2007, adding approximately 564,000 square feet to the tax base. Shopping centers and big box properties comprised most of the new construction. Three new shopping centers Virginia Gateway and Heritage Hunt, and Fortuna Retail Centers were completed along with the new Fortuna Target. Also completed were general retail properties such as banks, restaurants, daycare centers, garages and service stations, miscellaneous retail and additions to existing properties. Growth in retail properties forecast for fiscal years 2008 to 2011 includes several large retail projects. Significant growth in the residential real estate market has spurred corresponding retail construction. In addition, commercial real estate has remained attractive to investors. The retail properties in the County are experiencing strong income growth and low vacancy. Shopping center capitalization rates have been declining and continued to do so in Capitalization rates for premium shopping centers are approximately 6%. Nearly half of the assessed value within the commercial/industrial tax base is within the retail sector. Shopping center properties showed approximately 13% appreciation on average for fiscal The retail sector is anticipated to remain strong throughout the forecast period. Industrial Nearly 60% of commercial/industrial new construction for fiscal year 2007 occurred within the industrial sector adding approximately 1,040,000 square feet to the commercial/industrial base. New construction completed during 2005 within the industrial sector included several new storage and showroom warehouses, multi-tenant and flex space as well as manufacturing buildings and industrial equipment repair facilities. Growth within the industrial sector is expected to remain strong throughout the forecast period with approximately 1,000,000 square feet being added to the tax base for fiscal year Existing industrial properties appreciated approximately 18% for fiscal year This rate of appreciation is expected to level off somewhat, but still remain strong throughout the forecast period as Prince William County continues to be in high demand by transportation-based businesses and support service companies seeking space of 3,000 to 20,000 square feet. Hotels No new hotels were completed during Currently, a Country Inn & Suites near Potomac Mills, a Comfort Inn in Dumfries, a Holiday Inn in Dumfries, and a 101 room Residence Inn in Manassas are under construction. Over the next several years several hotels are planned for Prince William County. These are a FY Revenue Estimates - page 18

29 Hampton Inn in Gainesville, an Extended Stay America in Manassas, and a luxury hotel for the Cherry Hill area. The existing hotel market showed a healthy increase in valuation for Assessed values of hotels are expected to rise moderately during the out-years of the forecast period. Office Buildings Construction of several new office buildings and condominiums completed during calendar year 2005 added approximately 107,000 square feet to the commercial base. The overall appreciation for office buildings was approximately 18%. Growth within the office sector is expected to be sustained during the forecast period with the addition of approximately 200,000 square feet for fiscal year The forecast includes office properties already under construction or planned office properties such as Quantico Center-Buildings 1 & 2, The Glen-Building B, Sudley South Office Park, County Center, Linden Office Park, Northpointe Offices in Town of Dumfries, Quantico Gateway, as well as Potomac Office Park- Building A and, Linden Business Center office condos. Higher office rents are forecast to drive moderate increases in assessed value for office properties for fiscal year The small percentage of speculative building within the office sector is seen as a positive driver toward moderate increases in assessed value over the forecast period as the demand for office space is expected to outpace supply. Special Use Properties within the special use category comprise taxable schools, healthcare facilities, high-technology data center type properties and others that have no foreseeable alternate uses. The technology sector has exhibited a turn-around in the region. The oversupply was, for the most part, absorbed in There were three prominent sales AOL II in Gainesville, and the T-Rex and Cyberfortress buildings in Manassas that indicated a healthy appreciation for the sector. The impact on the revenues is softened by the fact that the purchaser of T-Rex is the Federal Government and therefore the property will no longer be in the tax rolls. No growth is expected within this sector until fiscal year 2008 (calendar year 2006) when construction on the first section of Eli Lilly s insulin manufacturing facility is anticipated to begin. Assessed values are expected to remain stable during the forecast period. Nearly 21,500 square feet of miscellaneous commercial properties such as golf course improvements and taxable schools were constructed in calendar year 2005 (fiscal year 2007). A multi-year forecast of these properties is not included in the revenue forecast since these properties are not constructed on a regular basis. A summary of commercial growth and assessed values per square foot during the forecast period is shown below. FY Revenue Estimates - page 19