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Slide 1: City of Seattle Department of Finance Economic & Revenue Forecast April 6, 2009
Slide 2: U.S. Economy: The path to the current recession • Past 20 years has been era of asset bubbles – Stock market in the 1990s – Housing in the current decade, also commodities • Bubble formation has been facilitated by – Cheap money • Federal Reserve policies • Asian savings glut – Loose lending standards – Deregulation & lax regulation of financial sector April 6, 2009 2
Slide 3: • Bubbles have led to: – Excessive borrowing and debt buildup – Excessive risk taking • Housing bubble popped in 2006. With prices falling: – Loans have gone bad, reducing value of securities • Leading to financial crisis – Household wealth has declined • Leading to drop in consumer spending • Housing downturn and financial crisis caused recession – U.S. recession began in December 2007 April 6, 2009 3
Slide 4: U.S. Personal Income and Household Debt: 1980 Q1 = 100 1,200 1,000 800 600 400 200 0 1980 Q1 1985 Q1 1990 Q1 1995 Q1 2000 Q1 2005 Q1 Household debt Personal income Source: Federal Reserve Board. • Household debt increased 97% from 2000 to 2008. April 6, 2009 4
Slide 5: Monthly Change in U.S. Employment 400 200 Thousands of jobs 0 Dec-00 Dec-01 Dec-03 Dec-04 Dec-06 Dec-07 -200 -400 -600 -800 Source: U.S. Bureau of Labor Statistics. Data are seasonally adjusted. • 5.1 million jobs lost since Dec-07; 3.3 million in past 5 months. • Unemployment rate hit 8.5% in March; highest since 1983. April 6, 2009 5 Dec-08 Dec-02 Dec-05 Jun-00 Jun-01 Jun-03 Jun-04 Jun-05 Jun-07 Jun-08 Jun-02 Jun-06
Slide 6: Recent weeks have seen a few positive signs • Stock market is up over 20% from early March low • Home sales rose in February: new 4.7%, existing 5.1% • Single family permits rose 11.0% in February • U.S. retail sales rose in January and February measured on month-to-month basis • Orders for manufactured goods rose 1.8% in February • Shipping volumes are showing signs of stabilizing – Rail, truck, container, air freight April 6, 2009 6
Slide 7: U.S. Economic Forecast U.S. GDP Forecasts for October 2008 and March 2009 4% 2% 0% -2% -4% -6% -8% Source: Global Insight. 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Mar-09 Forecast Oct-08 Forecast April 6, 2009 7
Slide 8: Puget Sound Economy: Recent trends • 2001-03 recession was very severe locally – Recovery started later here – Housing bubble cycle was delayed • Current downturn arrived later here – Construction peaked in Nov-07 locally • Compared to Jan-07 for U.S. – Aerospace employment increased through 2008 Q3 – Software employment increased through 2008 Q4 • Falloff beginning in 2008 Q4 has been very steep – 53,400 jobs lost from Aug-08 to– Feb-09 in King & Snohomish Co., a 3.6% decline April 6, 2009 8
Slide 9: S&P/Case-Shiller Home Price Index, 2000 Q1 = 100 200 180 U.S. 160 140 120 100 80 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 Seattle Metro Area April 6, 2009 9
Slide 10: Employment: December 2000 =100 106 104 102 100 98 96 94 92 Jan-99 Jan-00 Jan-01 Jan-03 Jan-04 Jan-05 Jan-07 Jan-08 Jan-09 Jan-02 Jan-06 U.S. Seattle Metro Area* *King & Snohomish Counties. Data adjusted to remove effects of Boeing strikes. Data are seasonally adjusted non-agricultural wage & salary employment. April 6, 2009 10
Slide 11: Puget Sound Region Economic Forecast • Regional forecast is based on Feb-09 U.S. forecast April 6, 2009 11
Slide 12: Job Losses in the Five Most Recent Puget Sound* Recessions Percent Decline from pre-Recession Peak 1% 1980 1990-91 0% 0 -1% 1981-83 6 7 8 9 2008-10 Forecast 2001-03 1 2 3 4 5 10 11 12 13 14 15 16 17 18 19 20 -2% -3% -4% -5% Quarters from pre-recession peak *King, Kitsap, Pierce, and Snohomish Counties. April 6, 2009 12
Slide 13: Why is 2008-10 forecast not as bad as 2001-03? • 2001-03 was very bad locally. Employment decline: -2.0% U.S. -4.8% Puget Sound Region (4 counties) -6.6% Seattle Metro Area (King & Snohomish Counties) • Modest cuts announced by Boeing, Microsoft thus far – In 2001-03, Boeing cut 27,200 jobs in less than 3 yrs • Areas of U.S. hardest hit in this recession include: – Areas with big housing bubbles – Manufacturing centers, especially auto related – Financial centers – Areas dependent on travel, tourism, in-migration April 6, 2009 13
Slide 14: What has changed since the last revenue forecast? (which was prepared in Oct. 2008) • U.S. and local economies have declined steeply – as has City sales and B&O tax revenue • Economic forecasts have been revised – Major recession is now forecast – Deflation or very low inflation is expected in 2009 – Savings rate forecast has been raised • Falling wealth = higher savings & weaker spending – Weaker spending = lower tax revenue April 6, 2009 14
Slide 15: Forecast of Employment Change: Puget Sound Region* Quarter-to-Quarter Change 20 15 10 Thousands of jobs 5 0 2007 Q1 2007 Q3 2008 Q1 2008 Q3 2009 Q1 2009 Q3 2010 Q1 2010 Q3 2011 Q1 2011 Q3 -5 -10 -15 -20 -25 -30 *King, Kitsap, Pierce, and Snohomish Counties. Source: Puget Sound Economic Forecaster. April 6, 2009 15
Slide 16: Billions of dollars 10,000 20,000 30,000 40,000 50,000 60,000 70,000 0 April 6, 2009 1980 Q1 1982 Q1 1984 Q1 1986 Q1 1988 Q1 1990 Q1 1992 Q1 1994 Q1 1996 Q1 1998 Q1 2000 Q1 2002 Q1 2004 Q1 2006 Q1 2008 Q1 U.S. Household Net Worth 16
Slide 17: Change in 2009 Forecast from Sept. 2008 to Feb. 2009 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% PS Region Employment US PCE Deflator US Savings Rate 5.6% 3.1% Sep '08 Forecast 1.3% 0.4% Feb '09 Forecast -0.3% -2.4% Source: Puget Sound Economic Forecaster; Global Insight (savings rate). April 6, 2009 17
Slide 18: Retail Sales Tax • Revenue was flat in 2008 (up 0.2% from 2007) – Sharp deceleration over course of year – Snowstorm hurt December revenue (-11.4% yr-over-yr) – Non-current revenue declined $1.4 mil. from 2007 • Performance by industry in 2008: – Construction was up 10.4%; flat in the 4th quarter – Retail trade was down 3.1%; flat without auto sales o Motor vehicles & parts fell 20.6% – Finance, insurance, real estate declined 5.0% – Service industries had modest growth of 1.5% April 6, 2009 18
Slide 19: Year-over-year growth -10% 10% 15% -5% 0% 5% 2001 Q1 2001 Q3 2002 Q1 2002 Q3 2003 Q1 2003 Q3 2004 Q1 2004 Q3 2005 Q1 2005 Q3 2006 Q1 2006 Q3 2007 Q1 2007 Q3 2008 Q1 2008 Q3 April 6, 2009 Growth of Seattle Retail Sales Tax Revenue 19
Slide 20: April 6, 2009 20
Slide 21: Sales Tax Forecast • Reflects forecast of major regional recession • Over two-thirds of tax base is in cyclical industries – Construction, trade, manufacturing, etc. o Construction’s share of base = 24.4% in 2008 • Forecast of peak-to-trough revenue decline is 10.6% – Compared to 11.4% drop in 2001-03 – Expect 6.7% decline in 2009; 1.9% drop in 2010 • Construction forecast: real decline of 23.1% over 3 years – Largest real decline since at least 1975 – Assumes continued public construction • Motor vehicle sales weakness will continue in 2009 April 6, 2009 21
Slide 22: Construction Cycles: Real* Taxable Retail Sales 80% 70% 60% 50% 40% 30% 20% 10% 0% 1976-79 1979-83 1983-91 1991-95 1995-00 2000-04 2004-08 -10% -20% -30% *Inflation adjusted by Seattle CPI. April 6, 2009 2008-11 22
Slide 23: B&O Tax • B&O revenue started 2008 with healthy growth and ended the year in decline • From 2007 to 2008 B&O revenue declined by $3.8 mil. (2.3%) – Non-current revenue declined by $5.3 mil. – Excluding non-current yields $1.5 mil. gain • Forecast reflects: – Severity of downturn – 50% of B&O base is relatively stable service industries – Lower expectations for non-current revenue • Forecast of peak-to-trough revenue decline is 8.1% – Compared to 8.6% in 2001-03 April 6, 2009 23
Slide 24: B&O Payments by Obligation Quarter year-over-year growth rate 16% 12% Current Obligations 8% 4% Total 0% 2005 Q1 2005 Q3 2006 Q1 2007 Q1 2007 Q3 2008 Q1 2004 Q1 2004 Q3 2006 Q3 -4% -8% Obligation Quarter April 6, 2009 2008 Q3 24
Slide 25: Combined Sales and B&O Tax Revenue Forecast 350 340 Millions of dollars 330 320 310 300 290 Nov-08 Forecast Apr-09 Forecast 280 2006 2007 2008 2009 2010 April 6, 2009 25
Slide 26: Utility Business Tax – Natural Gas • Natural Gas tax revenue is dependent on both weather and prices • Natural gas prices rose 27% in 2008 over 2007 • Year-over-year Henry Hub prices were up 49% in the 3rd quarter • Utility Tax revenue on natural gas was also up 44% in the 3rd quarter • Natural gas spot prices have plummeted since the summer, along with other energy commodities • As a result, receipts are expected to be down 15% for 2009 over 2008, a 24% decrease from the Adopted 2009 Budget April 6, 2009 26
Slide 27: Utility Business Tax – Natural Gas Seasonally Adjusted Utility Gas Tax Revenue 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 100% 80% 60% 40% 20% 0% -20% -40% -60% Quarterly Receipts (Left) Yr/Yr Growth Rate (Right) April 6, 2009 19 9 19 0Q 91 19 1Q 91 19 2Q 91 19 3Q 91 19 4Q 91 19 5Q 91 19 6Q 91 19 7Q 91 19 8Q 91 20 9Q 01 20 0Q 01 20 1Q 01 20 2Q 01 20 3Q 01 20 4Q 01 20 5Q 01 20 6Q 01 20 7Q 01 20 8Q 01 20 9Q 10 1 Q 1 27
Slide 28: Real Estate and REET • 2008 saw the national housing and property bust come to Seattle • Seattle single-family and condo sales plunged throughout the year – Single-family sales were down 33% year-over-year in Q408, 28% down for the year – Condo sales were down 63% for the same period, 42% down for the year • Commercial activity also slowed considerably as financing for large developments has evaporated • Home sales are expected to pick up at the end of 2009, as home prices continue to fall during 2010 April 6, 2009 28
Slide 29: Real Estate and REET Real Value of Seattle Real Estate Sales Millions of 2000 dollars 6,000 5,000 4,000 3,000 2,000 1,000 0 Comm. Condo Resid. 1982 1985 1988 1991 1994 1997 2000 2003 April 6, 2009 2006 29
Slide 30: Real Estate and REET • The REET forecast expects a 28% decline in average home prices from peak (3Q07) to trough (4Q10) • This forecast expects the Seattle market to mimic the national one • Foreclosures are expected to rise in the area as the Seattle market was one of the last to see subprime and alternative mortgage originations • Office vacancy rates remain under 10%, a good sign compared to the national 14.2% rate • There is limited scope for large property deals and only downside risk to vacancy rates April 6, 2009 30
Slide 31: Real Estate and REET Seasonally Adjusted Seattle Single-family Forecast 600,000 500,000 400,000 300,000 1500 200,000 100,000 0 20 00 Q 20 1 01 Q 20 1 02 Q 20 1 03 Q 20 1 04 Q 20 1 05 Q 20 1 06 Q 20 1 07 Q 20 1 08 Q 20 1 09 Q 20 1 10 Q 20 1 11 Q 20 1 12 Q 1 3500 3000 2500 2000 Sales Fcst (right) Avg Price Fcst (left) 1000 500 0 April 6, 2009 31
Slide 32: Real Estate and REET REET Revenue and Forecast by Sector 80,000,000 70,000,000 60,000,000 Residential 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 Condo Commercial April 6, 2009 09 20 f 10 f 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 08 32
Slide 33: General Government Revenue GSF - Item Property Taxes Business & Sales Taxes Public Utility Taxes Private Utility Taxes Other Notable GSF Revenues Nov 238,746,000 343,592,942 80,780,000 57,341,000 55,623,000 2008 Actuals 238,257,418 332,699,802 79,686,308 55,615,966 56,500,384 Act-Nov Nov 2009 Mar 245,736,000 313,994,265 90,984,903 54,852,267 58,095,274 Mar-Nov Nov 2010 Mar 249,941,000 312,789,344 94,375,700 55,228,681 61,148,796 Mar-Nov (1,390,000) (33,015,399) 2,566,923 (2,947,319) (6,277,204) (488,582) 246,218,000 (10,893,140) 340,250,145 (1,093,692) (1,725,034) 877,384 87,349,474 57,981,000 61,420,000 (482,000) 251,331,000 (26,255,880) 345,804,743 3,635,429 (3,128,733) (3,324,726) 91,808,777 58,176,000 67,426,000 Subtotal 776,082,942 762,759,879 (13,323,064) 793,218,619 763,662,709 (29,555,910) 814,546,520 773,483,521 (41,062,999) All Else 76,736,360 86,355,721 9,619,361 79,035,588 78,778,988 (256,600) 80,544,256 80,001,256 (543,000) GSF - Grand Total 852,819,302 849,115,599 (3,703,703) 872,254,207 842,441,697 (29,812,510) 895,090,776 853,484,777 (41,605,999) DPR Charter Revenue 38,141,246 37,191,812 (949,434) 39,184,313 37,827,110 (1,357,203) 40,007,170 38,144,348 (1,862,822) Real Estate Excise Tax 30,889,914 30,313,740 (576,174) 31,814,326 20,762,068 (11,052,258) 35,565,629 22,010,411 (13,555,219) BTG - Employee Hours Tax BTG - Commercial Parking Tax 4,781,252 12,844,000 4,448,764 13,302,260 (332,488) 458,260 5,261,136 17,874,000 5,261,136 17,874,000 - 5,647,751 21,347,000 5,647,751 21,347,000 - April 6, 2009 33
Slide 34: General Subfund Status Annual Operating Position (Revenues minus Expenses) 2009 Adopted Budget (Nov. 2008) 2008 2009 2010 21,400,000 (6,510,000) (14,875,000) April Forecast Revision (Apr. 2009) 15,200,000 (40,530,000) (58,851,000) Difference (6,200,000) (34,020,000) (43,976,000) April 6, 2009 34
Slide 35: Cumulative Reserve Subfund (REET) Status 2009 Adopted Budget (Nov. 2008) April Forecast Revision (Apr. 2009) Resources 2008 Yearend Balance (includes anticipated abandonments) 2009 Estimated Revenue 2010 Estimated Revenue Total Resources Available in the Biennium 8,481,000 31,814,000 35,566,000 75,861,000 10,836,000 20,762,000 22,010,000 53,608,000 Biennial Planned Expenditures 2009-10 Debt Service Expenditures 2009-10 Discretionary Expenditures Total Planned Expenditures in the Biennium 28,013,000 47,021,000 75,034,000 28,013,000 47,021,000 75,034,000 Balance 827,000 (21,426,000) April 6, 2009 35
Slide 36: Risks to the forecast • Risks are large and mostly on the downside – This recession is different, thus harder to forecast – Housing market uncertainty is great – Forecasts assume success of stimulus, bank bailout – Savings rate shift makes it hard to forecast consumption – Construction outlook is very uncertain – Potential for more cuts at region’s large employers • Upside potential – Federal policies may be more effective than expected – B&O non-current revenue may bounce back April 6, 2009 36
Slide 37: Pessimistic Revenue Scenario • Based on pessimistic U.S. forecast. Assumptions: Financial conditions worsen, restricting access to credit • This leads to reduced spending and investment, and further weakens the housing market • The weak housing market further reduces wealth and damages consumer confidence • Causing a steeper drop in consumer spending • Employment falls for 11 consecutive quarters – Employment growth resumes in 2010 Q4 • Recovery is weak as consumers rebuild savings – April 6, 2009 37
Slide 38: U.S. Employment Forecast Scenarios 140 138 Millions of jobs 136 134 132 130 128 2007 Q1 2008 Q1 2009 Q1 2012 Q1 2010 Q1 2011 Q1 Baseline forecast Low scenario Source: Global Insight 's March 2009 U.S. forecast. April 6, 2009 38
Slide 39: General Subfund Revenue Scenarios 895 890 Millions 885 880 875 870 Baseline Low 865 2008 2009 2010 April 6, 2009 39
Slide 40: Real Estate Excise Tax Scenarios 35 30 25 Millions 20 15 10 Base Low 5 2008 2009 2010 April 6, 2009 40