Five Year Forecast FY 2014 THROUGH FY 2018

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1 Five Year Forecast FY 2014 THROUGH FY 2018

2 Purpose TO FORECAST THE OUTCOMES OF EXISTING LAWS, POLICIES, GUIDANCE, AND TRENDS TO EXPLORE WHAT THOSE OUTCOMES WILL LIKELY MEAN TO CITY/SCHOOL FINANCES TO PROVIDE INFORMATION TO THE CITY COUNCIL AND SCHOOL BOARD TO GUIDE POLICY DECISIONS 2

3 Economy 3

4 Risks in the Next Five Years Fiscal Cliff Federal Deficit Sequestration Tax Hikes States ability to support transportation and education funding requirements European Debt Crisis Global Economy & Banking 4

5 Real Gross Domestic Product 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% Source: US Bureau of Economic Analysis Year-Quarter 5

6 Consumer Confidence Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 > 90 indicates stable economy < 50 indicates contracting economy Source: The Conference Board 6

7 Consumer Price Index 6.0% 5.0% 4.0% 3.0% 2.0% Projected 1.0% 0.0% -1.0% -2.0% All Items Core CPI Source: Bureau of Economic Analysis and the Congressional Budget Office Note: Core inflation does not include energy or food 7

Metropolitan Statistical Area Virginia United States

8 Comparison of Unemployment 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Calendar Year Virginia Beach Virginia Beach Metropolitan Statistical Area Virginia United States Source: US Bureau of Labor Statistics and the Congressional Budget Office 8

9 Labor Force in the Military 12.0% 11.0% 8.0% 4.0% 5.0% 5.9% 2.8% 2.7% 2.9% 4.1% 4.4% 0.0% Source: US Census Bureau, American Community Survey 9

10 Median Household Income $80,000 $60,000 $58,545 $61,333 $61,462 $65,776 $59,298 $64,212 $64,614 $40,000 $20,000 $ Calendar Year United States State of Virginia Virginia Beach - MSA Virginia Beach Source: US Census Bureau, American Community Survey 10

Residential Building Permits 3,000 2,500 2,000 Permits Issued 1,500 1,000 500

11 Residential Building Permits 3,000 2,500 2,000 Permits Issued 1,500 1, Through September Source: Virginia Beach Planning Department Calendar Year 11

12 Revenues 12

13 Conditions for Next Five Years Favorable Consumer confidence State budget ended with a surplus last two years Housing market trends Tourism continues to strengthen Local employment is improving Economy-based local taxes are improving Dedicated Real Estate taxes for education and road construction Unfavorable Defense spending Federal cuts to social programs Potential for Federal tax increases Potential for relocation of Naval units/ships Continued reduction in State support to education and localities 13

14 Change in Assessed Values 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% Source: Real Estate Assessor s Office Fiscal Year 14

15 Estimated Months of Supply of Short Sales & REOs Existing Homes Based on Average Sales in the Last 12 Months in Hampton Roads: * Months of Supply- Short Sales Months of Supply- REOs Source: Real Estate Information Network and Old Dominion University Economic Forecasting Project. Information deemed reliable but not guaranteed. *Data are through September

16 Average Price of Existing Short Sale, REOs, and Non- Distressed Residential Homes Sold Hampton Roads: * Year Non- Distressed Sales Short Sales REO Sales Short Sale price as a Percent of Price of Non- Distressed Sales REO Price as a Percent of Price of Non- Distressed Sales 2006 $250,254 $241,666 $120, $261,723 $237,897 $163, $255,852 $239,110 $184, $243,902 $239,913 $164, $251,572 $231,211 $151, $236,358 $212,967 $135, * $238,886 $188,852 $135, Source: Real Estate Information Network and Old Dominion University Economic Forecasting Project. Information Deemed Reliable But not Guaranteed. REOs represent Bank Owned Homes. * Information provided here is for YTD September

Real Estate Revenue $520.0 $500.0 $480.0 $460.0 Millions $440.0 $420.0 $400.0 $380.

17 Real Estate Revenue $520.0 $500.0 $480.0 $460.0 Millions $440.0 $420.0 $400.0 $ Fiscal Year Real Estate - General Fund Delinquencies & Interest TIF's & SSD's Public Service Source: Department of Management Services and the City Real Estate Assessor s Office 17

18 Personal Property Revenue $180.0 $160.0 $140.0 $120.0 $100.0 $80.0 Millions $60.0 $40.0 $20.0 $ Delinquent and Interest on Delinquent PP/Other Business Equipment Personal Property Vehicles Machinery & Tools Public Service Personal Property Personal Property Paid By the Commonwealth Source: Commissioner of the Revenue and Department of Management Services 18

19 General Sales $100.0 Beginning in September 2013, Amazon has agreed to collect state sales tax on its Virginia customers. $80.0 Millions $60.0 $40.0 $20.0 $ Fiscal Year Source: Department of Management Services 19

20 Utility Taxes $60.0 $50.0 $40.0 Millions $30.0 $20.0 $10.0 $ Fiscal Year Source: Department of Management Services and the Virginia Department of Taxation 20

21 Business License (BPOL) $60.0 $50.0 $40.0 Millions $30.0 $20.0 $10.0 $ Source: Department of Management Services Fiscal Year 21

22 Cable Franchise Revenue $10.0 $8.0 Millions $6.0 $4.0 $2.0 $ Source: Department of Management Services Fiscal Year 22

23 Automobile License Revenue $12.0 $10.0 $8.0 Millions $6.0 $4.0 $2.0 $ Fiscal Year Source: Department of Management Services 23

24 Cigarette Tax Revenue $15.0 $12.0 $9.0 Millions $6.0 $3.0 $ Fiscal Year Source: Department of Management Services 24

25 Amusement Tax Revenue $8.0 $6.0 Millions $4.0 $2.0 $ Source: Department of Management Services Fiscal Year 25

26 Hotel Tax Revenue $35.0 $30.0 $25.0 $20.0 Millions $15.0 $10.0 $5.0 $ Source: Department of Management Services Fiscal Year 26

27 Restaurant Tax Revenue $80.0 $70.0 $60.0 $50.0 Millions $40.0 $30.0 $20.0 $10.0 $ Fiscal Year Source: Department of Management Services 27

0 2009 2010 2011 2012 2013 2014 2015 2016 2017

28 Use of Fund Balance $60.0 $50.0 $40.0 Millions $30.0 $20.0 $10.0 $ Fiscal Year Source: Department of Management Services City Schools 28

29 Summary of Revenues Real Estate assessments are projected to fall in the early years of the forecast, but growth in all other tax revenues basically make up the lost real estate tax revenue. As the economy strengthens so shall our revenues. How the Federal Budget resolves itself is our biggest threat. 29

30 Budget Drivers 30

31 VRS Reforms Mandated Shift of 1% to employees beginning in FY 2013 and for the next four years offset with mandated 1% pay raise. Unfunded Liability for Teachers pension is estimated at over $800 million and for city employees at over $600 million. General Assembly has been artificially lowering the VRS rate for teachers to aid their budget. VRS Board actuarially sets rate for city employees. Beginning with the FY 2013 CAFR the City must show these unfunded liabilities on our balance sheet. 31

32 Federal Health Care Reform Beginning in January 2014 we must: Cover part-time employees working 30 or more hours per week (the forecast assumes this will add 91 employees to health care coverage). Pick up employees who do not currently have health insurance (the forecast assumes 50% of the roughly 2500 opt-outs will choose city health insurance rather than an exchange). Pay reinsurance fees estimated at $60 per member (estimated to add nearly $2 million to the plan costs). Intended to bring down health care costs and cover more people. 32

33 SPSA Tipping Fee As a part of the City s agreement with SPSA we have had a reimbursement for a capped tipping fee, the value of which has been roughly $10 million annually. Beginning in FY 2015, this cap is eliminated resulting in a loss of revenue to Solid Waste of $10 million. In FY 2018 SPSA as we know it will cease to exist. 33

34 Pay Increases The mandated VRS 1% pay raise and its offset of 1% shift to employees of retirement costs is included in the forecast. The forecast does not include any pay increases, beyond the mandated VRS pay increase for the next five years. The last pay increase for City employees was 2.5% in FY 2012 and for School employees it was 2.0% in FY 2013 (School employees received a ½% pay raise in FY 2012 as well). Prior to these the last increase was in FY

35 Pay-go Funding to the CIP Substantially diverted to the Operating Budget during the recession. The current CIP shows what maybe proving to be too aggressive a schedule to bring it back given the slow economic recovery. City Council dedication of 2 cents of real estate tax rate to shore up funding for road construction which had lost funding due to State budget reductions. 35

36 School Forecast 36

37 School Revenues Local Contribution $500.0 City Council provided one-time funding of $9.2 million from the general fund balance. $400.0 $394.3 $379.4 $365.8 $354.1 $387.4 $374.5 $376.7 $380.1 $385.0 $391.3 $300.0 Millions $200.0 $100.0 $ Source: Department of Management Services Fiscal Year 37

School Revenues State Share Sales Tax $90.0 $80.0 $70.0 $60.0 Millions $50.0 $40.0 $30.0 $20.0 $10.0 $0.

38 School Revenues State Share Sales Tax $90.0 $80.0 $70.0 $60.0 Millions $50.0 $40.0 $30.0 $20.0 $10.0 $ Fiscal Year Source: Virginia Beach City Public Schools 38

School Revenues State Aid and Federal $350.0 $300.0 $250.0 $200.0 Millions $150.0 $100.0 $50.0 $0.

39 School Revenues State Aid and Federal $350.0 $300.0 $250.0 $200.0 Millions $150.0 $100.0 $50.0 $ State Federal Fiscal Year Source: Virginia Beach City Public Schools 39

40 School Expenditures Assumptions VRS Mandated Pay Increase FY FY FY FY FY % 1.0% 1.0% 1.0% 0.0% Other Pay Increase 0.0% 0.0% 0.0% 0.0% 0.0% Mandated VRS Rate Change -1.0% -1.0% -1.0% -1.0% 0.0% Other VRS Rate Change 0.0% 0.0% 0.0% 0.0% 0.0% Health Insurance 9.07% 16.91% 11.85% 8.11% 8.64% Increase in Risk Management 10.0% 7.0% 5.0% 3.0% 2.0% Inflation 2.04% 1.27% 1.28% 1.46% 1.05% Increase in Utility Costs 2.1% 2.1% 2.0% 2.0% 2.0% Increase in Fuel Costs 7.0% 3.0% 2.0% 0.0% 0.0% Change in Staff (Change in FTE s)

School Expenditures Salaries $600.0 $500.0 $400.0 Millions $300.0 $200.0 $100.0 $0.

41 School Expenditures Salaries $600.0 $500.0 $400.0 Millions $300.0 $200.0 $100.0 $ Source: Virginia Beach City Public Schools Fiscal Year 41

42 School Forecast $1,000.0 $950.0 $900.0 FY $23.38 FY $46.46 FY $50.64 Millions $850.0 $800.0 $750.0 FY $35.55 FY $45.61 $ Fiscal Year Expenditures Revenue Source: Virginia Beach City Public Schools 42

43 City Forecast 43

City Revenue Fees and Other Local Revenue $350.0 $300.0 $250.0 $200.0 Millions $150.0 $100.0 $50.0 $0.

44 City Revenue Fees and Other Local Revenue $350.0 $300.0 $250.0 $200.0 Millions $150.0 $100.0 $50.0 $ Non-Revenue Receipts Miscellaneous Revenue Revenue From the Use of Money & Property Fiscal Year Fines and Forfeitures Charges for Services Permits, Privilege Fees, and Licenses Source: Department of Management Services 44

45 City Revenue State and Federal $140.0 $120.0 $100.0 $80.0 Millions $60.0 $40.0 $20.0 $ Source: Department of Management Services State Revenue Federal Revenue Fiscal Year 45

46 City Expenditure Assumption VRS Mandated Pay Increase FY FY FY FY FY % 1.0% 1.0% 1.0% 0.0% Other Pay Increase 0.0% 0.0% 0.0% 0.0% 0.0% Mandated VRS Rate Change -1.0% -1.0% -1.0% -1.0% 0.0% Other VRS Rate Change 0.0% 2.0% 0.0% 2.0% 0.0% Health Insurance (Percentage Change) 5.2% 15.3% 12.4% 8.7% 10.1% Inflation 2.0% 2.0% 2.0% 2.0% 2.0% Pay-As-You-Go (Percentage Change) 45.0% 0.0% 15.0% -3.0% 0.0% 46

47 City Forecast $1,100.0 $1,050.0 FY 15 -$42.14 FY 17 -$55.20 $1,000.0 $950.0 Millions $900.0 $850.0 FY 14 -$22.65 FY 16 -$51.36 FY 18 -$56.79 $800.0 $750.0 $ Fiscal Year Expenditures Revenues Source: Department of Management Services 47

48 Conclusions 48

49 Key Issues Near Term Losses in real estate revenues are nearly made up by increases in other economy driven revenues. Impact of rising health care and VRS rates. Impact of potentially no pay raises. Continued struggle with housing values. Continued reliance on fund balance to maintain services. Slow growth of economy. Long Term Federal Budget, deficit reduction and tax policies. Right sizing of the Navy in terms of number of ships and the size of the ships. The need for the State to partner with localities for transportation and education. 49

50 Sensitivity Analysis - Testing the Assumptions The Big Drivers of the Forecast: Health Care Costs No Pay Increase Sequestration & the Fiscal Cliff Use of Fund Balance What would changing the assumptions staff made mean on the forecast? 50

51 Question 1 State & Federal revenues are held flat due to uncertainty over sequestration. Do you feel that it is more realistic to show revenue growth or loss in FY 2014? 1. I feel it is more realistic that federal and state revenues will decline. 2. I feel that there will be little impact on these revenues. 3. Due to the nature of programs potentially affected, I feel sequestration will be less of an impact and these revenues may increase. 51

52 Question 2 Health Care costs, short of redesigning the plans are beyond our control, but we could ask employees to assume more of the costs by lowering the employer contribution. 1. Employees as direct beneficiaries of the plan should assume a greater percentage of the costs. 2. As employers we should assume a greater percentage of the costs. 3. Would only consider redesigning the coverage offered. 52

53 Question 3: The forecast assumes no pay increase for the City and School employees other than the 1% VRS mandated increase. I disagree with the assumption, we can t go 5 years with no pay increase other than the VRS mandated increase. 53

54 Question 4 The forecast shows a use of fund balance, but lowers the use as the economy improves. Do you agree with that strategy or would you prefer a different strategy? 1. Agree 2. Reduce use by another 50% each year. 3. Disagree with using fund balance in the budget. 54

55 Key Issues Near term Losses in real estate revenues are nearly made up by increases in other economy driven revenues. Impact of rising health care and VRS rates. Impact of potentially no pay raises. Continued decline of real estate tax assessment. Continued reliance on fund balance to maintain services. Slow growth of economy. Long term Federal Budget, deficit reduction and tax policies. Right sizing of the Navy in terms of number of ships and the size of the ships. The need for the State to partner with localities for transportation and education. 55

Five Year Forecast FY 2014 THROUGH FY 2018

Five Year Forecast FY 2014 THROUGH FY 2018 Table of Contents Introduction... 2 Demographic and Economic Indicators... 5 Revenues... 28 City Forecast... 49 School Forecast... 66 Conclusions and Threats...