1 Economic & Fiscal Outlook For Municipal Finances
2 FY2010 State Outlook Recession continues thru first 6 monthsRecovery is tepid during second 6 months Energy prices bottom out-$50/ton for coal Estimate is 4% below FY2009 revenues Income tax correction continues Sales tax collections grow slowly over time
3 Recession Symptoms Lower Consumer & Business SpendingReduced Industrial Output Lower Incomes – Financial Stress Lower Employment-Higher Unemployment Lower Tax Collections
4 WV Coal Production Falls in FY2009 Decrease Accelerates in April-June Period to 13.3% Source: Energy Information Administration Global recession results in lower demand for both metallurgical coal and steam coal. Trend to lower coal production intensified over the past 6 months.
5 Spot Price of Appalachian Coal is Falling From $50/ton in October 2007 to $150/ton in August 2008 to $40-$55 Source: Energy Information Administration After peaking at $150 per ton in July 2008, spot prices declined rapidly to between $40 and $55 per ton. Prices are generally stabilizing at a level above $40 per ton.
6 Electricity Production Falls in Jan-Apr 2009 Coal Stocks at WV Power Plants Double to 6.3 million tons Source: Energy Information Administration WV electric power production fell by 22% during the first 4 months of this year. Demand for coal falls in response to higher coal stocks. The sharp drop is due to recession & the loss of significant demand by industrial users (e.g., Kaiser Aluminum) WV exports 2/3rds of its power to other states
7 Reduced Electricity Sales Jan-Apr Kilowatt-hour Sales Down 7Reduced Electricity Sales Jan-Apr Kilowatt-hour Sales Down 7.3% in WV Source: Energy Information Administration The decrease in electric power sales intensified from January to April. The bulk of the decline in sales is due to sales to industrial customers.
8 Earnings Growth by Quarter WV Lags U. SEarnings Growth by Quarter WV Lags U.S. Trends Following Energy Boom in 2008 Source: U.S. Bureau of Economic Analysis West Virginia caught the recession virus much later than the rest of the country. Earnings growth partially tied to a strong energy sector rose to a peak growth rate of 2.5% in the 3rd quarter of 2008 and then softened to a decline of 0.5% by the 1st quarter of 2009.
9 Income Tax by Component Total Collections Fall by $77 Million (3Income Tax by Component Total Collections Fall by $77 Million (3.8%) in FY2009 Non-Resident Withholding Gain due to Revenue Accounting Change Gross PIT – personal income tax collections includes all receipts except non-resident withholding tax Up to $30 to $40 million in non-resident withholding tax payments credited as Personal Income Taxes are likely Business Franchise Tax payments of pass-through entities. Prior to FY2008, these payments were counted as Business Franchise Tax revenue for purposes of the Corporation Net Income Tax. Total income tax refunds, personal & corporate were $40 million higher in FY2009.
10 WV Payroll Employment Falls by 3WV Payroll Employment Falls by 3.2% (24,200) Number of Unemployed Nearly Doubles from 35,000 to 68,500 Source: WorkForce West Virginia – Seasonally Adjusted Employment declined significantly beginning in January 2009 with a loss of more than 24,000 jobs (3.2%) as of May. The unemployment rate will likely rise above 10% over the next few months.
11 The gains will likely begin in the service and construction sectors.WV Employment Forecast-Gradual Slow Improvement After Sharp Downturn in 1st Half of Forecast by IHS Global Insight – July 2009 Forecast Global Insight’s regional forecast as of July 2009 predicts gradual but slow improvement in employment markets with small increases by no later than the second quarter of 2010. The gains will likely begin in the service and construction sectors.
12 Income Withholding Tax Growth Slows Due to Recessionary Job Losses Over Last 6 MonthsIncome withholding tax patterns generally mirror changes in earnings growth in the State. Collection growth slowed to near 0% during the final 3 months of FY2009. Expect negative collection growth during the first half of FY2010.
13 Percentage of Adjusted Gross Income Attributable to Retirement Income in 2007 Source: IRS Statistics of Income West Virginia enjoys some advantage over other states during recessions. Senior citizens/retirees account for a larger share of personal income than in other states. These sources of income are somewhat immune from recessionary downturns. The senior/retiree factor will soften the overall downturn in the economy.
14 FY2008-2009 Revenue Growth Collections were 0.7% Lower Than Last YearThe two biggest gains in the other revenue category were: Lottery Transfers: $50.0 million Miscellaneous: $18.6 million Abandoned & unclaimed property transfers account for most of the miscellaneous revenues.
15 Coal Severance Tax RevenueNew Plateau For Severance Tax $381 M Previous Peak in FY1982 at $190 M – Trough in FY1987 at $124 M Coal Severance Tax Revenue Severance Tax collections surge during price upswings Collections tend to plateau during periods of price stability $190 million high in FY1982 $124 million in FY1987 $187 million in FY1998 $381 million in FY2009 Expect a new plateau generally between $250 million and $350 million after 2009
16 Cumulative Severance Tax Growth Rate Slows February-June Collection Growth Rate Falls to -20%This slide illustrates a dramatic change in the energy sector severance tax collection trends. Cumulative collection growth during the first six months was nearly 40%. A 20% decline in revenues between February & June contributed to a cumulative year-end gain of just 8%.
17 Municipal Fiscal OutlookProperty Tax – Generally stable Home prices stable or rising in most markets Business Personal Property – more volatile Inventory Losses – Manufacturing & Retail Auto Other Personal Property Losses - Manufacturing Consumption Taxes Public utility services – modest growth Wine & Liquor – stable Gaming – Lower RVL, Stable LVL, Higher TG ??? B&O (non-utility) Low growth or decline Severance Tax – Significant decline RVL – Racetrack Video Lottery LVL – Limited Video Lottery TG – Table Games
18 Municipal Tax Sources in WVThe local B&O Tax is the dominant source of municipal revenues, especially for larger cities. [Note In addition to utility taxes(7%), the B&O tax on utilities is a major subcomponent of the B&O Tax in most jurisdictions] The Property Tax accounts for just 24% of total tax revenues. Employee user fees are not counted here – not considered to be a tax.
19 Consumption Tax OutlookB&O Tax – Lower Growth or Decline Retail sales decline (Durable Goods-Cars) with slow recovery Service sector sluggish growth Industrial sector in decline Utility sector most stable Public Utility Taxes – Overall Stability Wine & Liquor Taxes – Stable Severance Tax – Expect 30% to 50% Decline in FY2010 Gaming Revenues RVL- Competition reduces Racetrack Video Lottery revenues LVL – Limited Video Lottery revenues have peaked TG – Table Games – Higher revenues if 4th Racetrack added
20 Sales Tax Receipts Decline in FY2009 Auto Sales Down by 11% & Other Sales Unchanged Impact of 1% Tax Reduction on Food Offset by Impact of FY2008 Refunds Refunds declined from $47.3 million in FY2008 to $26.6 million in FY2009. The additional refunds were due to one-time issues associated with prescription drugs. The reduction in sales tax rate on groceries reduced FY2009 revenues by roughly $25 million in comparison with FY2008 revenues.
21 WV Retail Sales Forecast-Gradual But Slow Improvement After Downturn That Began in Second Half of Forecast by IHS Global Insight – July 2009 Forecast In its July 2009 regional forecast, Global Insight expects improvement in retail sales activity by the first quarter of 2010 at the latest.
22 Electricity Sales Revenues Jan-Apr Revenues From Electricity Sales Up 11.5% in WV Source: Energy Information Administration Despite decreases in sales of electric power units (kilowatt-hours), revenues from sales of electricity continue to rise due to price increases related to inputs (coal) and environmental improvements. Municipal tax collections will benefit from rising electric utility bills.
23 Municipal Coal Severance Tax Expect Decrease of 30% or More in FY2010 Department of Revenue ForecastLower coal production & lower coal prices contribute to this change.
24 Municipal Gas & Oil Severance Tax Expect Decrease of 50% or More in FY2010 Department of Revenue Forecast Lower natural gas production and significantly lower natural gas prices are primary factors in an expected decrease in tax receipts.
25 Property Tax Share of Total Municipal Tax Collections Lower in WVSmall municipalities rely more heavily upon property taxes than larger cities. However, the municipal tax structure in West Virginia relies less on property taxes as a source of revenue than municipalities in most other states.
26 Non-Utility InventoryMunicipal Reliance on Inventory Taxes Share of Total Property Taxes Attributable to Inventory Manufacturing Only Brooke 13.3% Wirt % Hancock % Marshall % Harrison % Barbour % State Average 1.5% Non-Utility Inventory Brooke 15.5% Roane 14.8% Nicholas 12.8% Raleigh 12.3% Ritchie 11.9% Marshall 11.1% State Average 6.8% Municipalities with a significant industrial sector or auto dealer presence may experience some decline in property tax receipts. Towns in some counties rely more heavily than average on property taxes from business inventories.
27 FY2010 Municipal Outlook Recession continues thru first 6 monthsRecovery is tepid during second 6 months Sluggish revenues, but better than State Gov Income taxes rebound slower than consumption taxes Significant reliance on utility revenues helps Municipalities with a loss of new car dealer or manufacturing to suffer the most Property taxes fairly stable One year collection lag helps Real property taxes more stable than personal property taxes Inventory taxes most unstable