Prince William County, Virginia - Prince William County Government

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May 23, 2014 ... A real estate tax rate of $1.148 was adopted for FY 2015 and generates an average residential tax bill of $3,568, a 4.5% increase over the FY ...
Prince William County, Virginia Fiscal Years 2015 – 2019 Projections of General County Revenue Board of County Supervisors Corey A. Stewart Chairman (At-Large) Michael C. May Vice-Chairman, Occoquan District Maureen S. Caddigan Potomac District Pete Candland Gainesville District W.S. Wally Covington, III Brentsville District John D. Jenkins Neabsco District Martin E. Nohe Coles District Frank J. Principi Woodbridge District

County Executive Melissa S. Peacor Prepared by the Department of Finance

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Revenue Committee Christopher E. Martino Deputy County Executive

Michelle L. Attreed Director of Finance

Steven Ferlotti Tax Administration Division Chief

Vacant Deputy Finance Director

Wade Hugh Director of Development Services

Michelle Casciato Budget Director

Tom Bruun Director of Public Works

Tracy Gordon Assistant to the County Executive

David S. Cline Associate Superintendent for Finance and Support Services, PWC Schools

Ray Utz Planning Division Chief

John Wallingford Director of Financial Services, PWC Schools

Jeffrey A. Kaczmarek Executive Director, Economic Development

Revenue Committee Project Team Project Manager Lillie Jo Krest Financial Analyst III Allen Scarbrough Treasury Manager

Allison Lindner Real Estate Assessments Division Chief

Susan Rodeheaver Management and Fiscal Analyst III

Kerem Oner Real Estate Assessments Coordinator

Carl W. Hampton Fiscal Services Manager

Bill Vaughan Chief Economist and Demographer

Mark Hinman Senior Accountant

Debra McMahon Administrative Support

Cover by Valerie Grayson, Office of Management & Budget

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The Revenue Committee Expresses Its Appreciation to the Business Community Who Assisted in the Development of this Report

John Layman Chief Economist Virginia Department of Taxation Ann Battle Macheras Regional Research Vice President The Federal Reserve Bank of Richmond Bill Lynch Manager I-95 Business Parks Management, LLC Representatives from Clifton Larson Allen LLP: Edward J. Mazur, CPA Senior Advisor Jack Reagan, CPA, CGFM Audit Principal Taylor Powell Assurance Senior Associate Representatives from the Prince William Association of Realtors: Liz Hernandez President April McMillian Chief Executive Officer Representatives from the Northern Virginia Building Industry Association: Sherman Patrick Planner, Compton & Duling, LC J. Truett Young – President Engineering Manager, Stanley Martin Homes Mike Garcia President, Mike Garcia Construction Coleman Rector President & Principal Broker, Weber Rector, Inc.

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COUNTY OF PRINCE WILLIAM

FINANCE DEPARTMENT

1 County Complex Court, Prince William, Virginia 22192-9201 (703) 792-6700 Metro 631-1703, ext. 6700 FAX (703) 792-6882 www.pwcgov.org/Finance

Michelle L. Attreed Director of Finance

May 23, 2014 TO:

Melissa S. Peacor County Executive

FROM:

Michelle L. Attreed Director of Finance

RE:

Revenue Committee Report, Fiscal Years 2015 – 2019

I am pleased to present the FY 2015-2019 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, state, and national economic conditions and trends. Average residential real estate values grew by 7.5% in calendar year 2013 while commercial values increased 2.5%. Personal property values are up 0.5% for FY 2015 and sales tax revenues are projected to increase 3%. As the Federal Reserve maintains record low target interest rates (less than 0.25%), the County’s Investment Income revenue will continue to be below historic amounts. The assumptions determined by the Revenue Committee provide the capacity to reduce the real estate tax rate by four cents in FY 2015 from $1.181 to $1.148. A real estate tax rate of $1.148 was adopted for FY 2015 and generates an average residential tax bill of $3,568, a 4.5% increase over the FY 2014 average of $3,414. This revenue policy directive was approved by the Board of County Supervisors on April 29, 2014. I recommend these revenue estimates be used in preparing the FY 2015 Fiscal Plan, the Capital Improvement Plan for FY 2015-2019, and other financial plans. I would also 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.

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TABLE OF CONTENTS INTRODUCTION .......................................................................................................................... 1 Review of the Economy in 2013 and Outlook for Calendar Year 2014 ..................................... 1 HISTORY OF THE REAL ESTATE TAX RATE....................................................................... 13 FY 2015 Proposed Real Estate Tax Rate and Average Tax Bill....................................... 14 MAJOR REVENUE SOURCES AND KEY ASSUMPTIONS ................................................... 15 Real Estate Revenue.................................................................................................................. 17 Real Estate Taxes .............................................................................................................. 17 Residential Real Estate...................................................................................................... 17 Commercial Real Estate .................................................................................................... 21 Real Estate Exonerations................................................................................................... 23 Public Service Taxes ......................................................................................................... 23 Real Estate Tax Deferrals.................................................................................................. 23 Land Redemption .............................................................................................................. 25 Real Estate Penalties ......................................................................................................... 26 Personal Property Revenue ....................................................................................................... 27 Personal Property Tax on Vehicles ................................................................................... 27 Car Tax Relief ................................................................................................................... 27 Change in Average Vehicle Value and Units Billed......................................................... 28 Business Personal Property Tax ........................................................................................ 28 Personal Property Prior Year ............................................................................................ 29 Personal Property Deferrals .............................................................................................. 30 Personal Property Penalties - Current Year ...................................................................... 31 Local Sales Tax Revenue .......................................................................................................... 32 Consumer Utility Revenue ........................................................................................................ 34 Communications Sales and Use Tax Revenue .......................................................................... 36 BPOL Revenue ......................................................................................................................... 38 Investment Income .................................................................................................................... 40 All Other Revenue Sources ....................................................................................................... 44 Interest on Taxes ............................................................................................................... 44 Motor Vehicle License Fee ............................................................................................... 44 Recordation Tax ................................................................................................................ 46 Tax on Deeds..................................................................................................................... 47 Daily Rental Equipment Tax............................................................................................. 48 Bank Franchise Tax........................................................................................................... 48 BPOL Taxes - Public Service ........................................................................................... 48 Transient Occupancy Tax ................................................................................................. 49 Interest Paid to Vendors .................................................................................................... 49 Interest Paid on Refunds ................................................................................................... 49 Rolling Stock Tax ............................................................................................................. 49 Passenger Car Rental Tax ................................................................................................. 49 Mobile Home Titling Tax ................................................................................................. 49 FY 2015-2019 Revenue Estimate - page vii

Payment in Lieu of Taxes (PILT) ..................................................................................... 49 Appendix A - General Property Tax Rates ............................................................................... 50

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INTRODUCTION – The County’s revenues are affected, in varying degrees, by economic conditions at the national, state and local levels. Because of its proximity to the federal government and military employment centers, the local economy has some degree of insulation from the severity of cyclical downturns. The following narrative presents an economic assessment of the nation, the Commonwealth of Virginia, and Prince William County and highlights the relevant trends in place as we look forward to FY 2015.

REVIEW OF THE ECONOMY IN 2013 AND OUTLOOK FOR CALENDAR YEAR 2014 The United States Real Gross Domestic Product (GDP) is the broadest measure of economic activity in the United States and is a reliable indication of the overall strength and performance of the national economy. Most economists agree that the latest recession/contraction began in the first quarter 2008, and, by accepted definitions, ended during the third quarter 2009, with a 2.2% expansion (quarter-over-quarter). Slow to moderate growth has proceeded since, with improvement as 2013 progressed, despite federal sequestration and a government shutdown in October. GDP for the four quarters of 2013 was as follows: 1.1%, 2.5%, 4.1% and 2.6%, signs of a strengthening economy in spite of the previously mentioned issues. While some progress appears to have been made in forging a budget palatable to both sides of the congressional aisle, future challenges await regarding other budget matters. The following graph presents GDP quarter-to-quarter growth and periods of recession from 1969 to 2013 (4th Quarter). Figure 1. United States Gross Domestic Product

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Other parts of the economy also moved in the right direction over the course of the year, many appearing to pick up momentum towards the end of the year. The stock market and related indexes have been marked by volatile, but steady, growth since the depths of the Great Recession. The S&P 500, which peaked at 1,425.35 in May 2008, lost over half its value in ten months, ending with an average of 683.38 on March 2, 2009. Since then, however, the S&P has nearly tripled its value, ending 2013 at 1,831.37. Figure 2. S&P 500 2009 - 2013

Source: Yahoo.com/Finance

Unemployment rates, considered a lagging indicator of sorts, moved below 8.0% in late 2012, and continued a slow improvement through 2013, although some of the downward momentum is attributed to decreases in the labor force participation rate. In December 2013 unemployment stood at 6.7% down from the previous month’s 7.0% and a marked improvement over the previous December’s 7.8%. Job creation, which declined severely during the most recent recession, continued an expanding trend throughout 2013, though not yet back to pre-recession levels of employment. In two years, from December 2007 until December 2009, a net of over 8.5 million jobs were lost as the economic contraction took hold -- a loss of 5.8%. Since that time, however, a net total of 6.57 million jobs have been added (through December 2013) -- an increase of 4.6% in 48 months. In 2013, non-farm payrolls added 1.37 million net new jobs. These jobs gains have continued to mitigate the unemployment rate in the nation, but elevated unemployment rates, by historic standards, continue to be a major national concern. At the national level, the homebuilding sector continued on a mostly stable, upward trend, though much ground still must be made up to return to normal activity. Home affordability measures remain near alltime highs, and indications are that the national residential market is slowly, but steadily, improving. Across the nation, some 1,091 million housing starts were reported in November 2013, a 28.2% increase from one year earlier. November 2013 permits totaled 1,007 million, an 11.9% increase, year-over-year. Retail activity, despite uncertainty over the federal budget, appeared to strengthen as the year progressed and correlates with an improving job market, and perhaps some pent-up demand. U.S. retail and food services sales for December 2013 were up 0.2% from November reflecting continued consumer activity as the year progressed. Total sales of automobiles and light trucks, including foreign, were reported at 15.4 million in December 2013, up from a relatively strong 12.8 million sold in November and unchanged from December 2012. Many industry analysts are looking for auto sales to reach prerecession levels in 2014. FY 2015-2019 Revenue Estimate - page 2

Virginia John Layman, Chief Economist and Director of Revenue Forecasting in Virginia’s Department of Taxation, addressed the Prince William County Revenue Committee on November 14, 2013, and presented a summary of the economic outlook for the Commonwealth. Mr. Layman noted that the Virginia economy performed generally as expected during Fiscal Year 2013 (FY 2013). Productivity, as measured by the Commonwealth’s Gross Domestic Product, increased at 1.9%, in line with the forecasted rate. Employment in the Commonwealth, forecast to grow at 1.2%, actually increased by 1.0% during FY 2013. Professional Business Services and Construction underperformed expectations and Education and Government sectors grew slightly ahead of forecasted rates. Employers in Virginia added jobs during the year, posting a 0.8% annual increase in August 2013, with jobs in Northern Virginia increasing by 1.0%. The statewide unemployment rate stood at 5.6% in August 2013, compared to 6.0% one year earlier. Income in the Commonwealth performed at slightly better than forecasted rates during FY 2013. Personal income in the Commonwealth, forecasted to grow by 3.4%, actually grew by 3.7%, while wages and salaries, grew at the forecasted rate of 3.7% year-over-year. The Commonwealth’s Fiscal Year 2013 revenues and transfers finished $264.3 million or 1.6% above the annual forecast. Payroll withholding tax collections fell short of the annual estimate by $115.0 million (-1.1%) in FY 2013. This shortfall was largely attributed to slower than expected employment growth, particularly in key sectors, like Professional Business Services, which are keenly sensitive to changes in federal expenditures. Payroll withholding tax collections for small business payers (55% of total payers) increased by 1.8% between FY 2012 and FY 2013, compared to 6.5% one year earlier. The overall growth rate for large payers (45% of total payers) was 2.5% year-over-year, compared to 1.6% one year earlier. The growth rate for all payers was 0.5% in FY 2013, compared to 6.7% one year earlier. Sales and Use Tax collections lagged the annual forecast by $29 million (-0.9%) in FY 2013. Corporate income tax collections, one of the most volatile revenue sources, fell 2.9% ($24.2 million) below the annual forecast for FY 2013. Prince William County In 2013, Prince William County’s economy, despite concerns over the effects of federal budgetary problems, continued to show signs of strengthening in many aspects: improving unemployment and job creation, and very healthy household incomes. The residential real estate market continued to strengthen throughout 2013, with moderate increases in average sale prices and declining monthly foreclosures. However, continued sluggishness in sales volume, along with generally reduced inventories and weakness in new construction continue to impact the overall market. Commercial real estate, particularly in terms of vacancy rates, has yet to recover fully from the recent downturn and continues to be primarily in an absorption phase. Retail and auto sales progressed at a healthy pace through much of the year, an indication of increasing consumer confidence and buying power. During 2013, the local economy appears to have maintained a generally positive momentum, with some challenges remaining. Chief among these will be the economic impacts, if any, of decisions on federal budget, and sequestration issues. Population and Cost of Living Prince William County’s population was estimated at 420,465, on December 31, 2013, an increase of 1.1% year-over-year. The County population is estimated to have grown by 18,463 persons (4.59%) FY 2015-2019 Revenue Estimate - page 3

since April 1, 2010, when the population was 402,002. The Metropolitan Washington Council of Governments projects in its Round 8.0 Cooperative Forecast: Employment, Population and Households that Prince William County will grow to over 479,000 by 2020 (19.4%) and to 535,629 by 2030 (33.4%) from 2010. Labor Force The Prince William County civilian labor force, as reported by the Virginia Employment Commission was 230,529 in November 2013, an increase of 925 (0.4%) since November 2012 and a five-year increase of 24,558 (11.9%). Employed persons in the labor force (220,291) increased by 924 (0.4%) since November 2012 and by 22,063 (11.1%) in the last five years. Unemployed persons in the County (10,238) increased by a net of one person since November 2012. The November 2013 unemployment rate for Prince William County was 4.4%, compared to 4.5% in November 2012. National and state unemployment rates for November 2013 were 7.0% and 5.0%, respectively. Figure 3. Prince William County Labor Force

Source: Virginia Employment Commission

Job Market According to data from the U.S. Department of Labor and the Virginia Employment Commission, Prince William County has outpaced regional, state and national economies in business and job growth over the last five years and has nearly matched the state and region for at-place average weekly wage growth since 2007 as well as during the last year In 2013 (2nd Quarter), there were 7,900 employment establishments reported in Prince William County, a growth rate of 2.1% year-over-year and 13.5% since 2008. By comparison, Northern Virginia establishments grew by 1.1% in one year and 6.9% since 2008; statewide, establishments grew by 0.3% in the last year and 3.0% since 2008. At-place employment in Prince William County (117,965 in the 2nd Quarter 2013) increased by 3.9% year-over-year and by 12.5% since 2008. By comparison, Northern Virginia employment grew by 0.5% FY 2015-2019 Revenue Estimate - page 4

in the last year and 2.4% since 2008. Employment in the Commonwealth grew by 0.8% in the last year, but decreased by 0.9% since 2008. The average weekly wage in Prince William County ($819 in the 2nd Quarter 2013) grew by 0.7% yearover-year and 6.9% since 2008. At-place average weekly wages in Northern Virginia ($1,328) grew by 1.9% in the last year and by 9.0% since 2008. In Virginia, weekly wages ($968) grew by 1.7% yearover-year and 9.4% since 2008. nd

Quarter)

nd

Quarter)

Figure 4. At-Place Establishments, Jobs and Wage One Year Growth 2012-13 (2

Source: Virginia Employment Commission

Figure 5. At-Place Establishments, Jobs and Wage Five Year Growth 2008-13 (2

Source: Virginia Employment Commission

Commercial Inventory During the course of 2013, the Prince William County commercial inventory, like that in Northern Virginia, saw gradually improving conditions, although vacancy rates continue to be elevated by historic standards, and new construction continues at a generally reduced level. In so much as Prince William County’s commercial inventory is a part of the region’s inventory, it is affected by general conditions in the region’s economy. Overbuilding during the last economic expansion was in part responsible for an oversupply of Office and Industrial inventory as the economy began to worsen. Furthermore, in certain types of product—notably Flex, which is often characterized by single large and specific uses—the movement of one or two tenants can greatly impact vacancy rates. Current conditions suggest that the Prince William County commercial real estate market continues to be in an absorption phase. 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, it has also provided the County with a demand base for its housing and retail trade. Nevertheless, the outlook for the County’s commercial inventory over FY 2015-2019 Revenue Estimate - page 5

the next few years is muted as the current cycle plays out. Lingering uncertainty over future federal expenditures may have a negative impact on commercial markets in the area—particularly in Defenserelated industries. On the positive side, the Base Realignment and Closing Act (BRAC) designated both Quantico Marine Corps Base and Fort Belvoir Army Base as recipients of additional personnel as the Department of Defense continues consolidation of bases around the nation. Prince William County’s location has meant, in the past, an increased demand for Office and Flex product in the Potomac Communities corridor, particularly from contractors servicing the bases and the Department of Defense and Department of Homeland Security activities. In an era of declining Defense budgets and changing security needs, future demand for this product is uncertain at best. In December 2013, according to Costar Realty Group (Costar), Prince William County commercial inventory included 44.1 million square feet (sq. ft.) of space in 1,928 buildings, with 3.72 million sq. ft. of vacant space—a vacancy rate of 8.4%. Since 2009, 1.45 million sq. ft. of commercial space has been added to the inventory, a growth rate of 3.4%. Table 1. Prince William County Commercial Property by Type

Property Types Office Flex Industrial Retail

Number of Parcels 434 137 318 1039

Inventory (sq. ft.) 6,530,601 4,843,676 11,170,750 21,555,073

Vacancy (sq. ft.) 809,604 736,759 820,144 1,352,553

% of Inventory 12.4% 15.2% 7.3% 6.3%

Commercial space continued to experience moderated growth in calendar year 2013, particularly in Flex product. Vacancy rates moved lower in Office, Flex and Industrial categories, year-over-year, while Retail increased by 0.5% since December 2012. Total vacancy across all categories in December 2013 was 8.4%, a decrease of 229,029 sq. ft. since December 2012, when the total vacancy rate was 9.0%. Total vacant space has declined by 858,632 sq. ft. since December 2009, when the total vacancy rate was 10.7%

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Figure 6. Prince William County Commercial Inventory 2009-2013 (December)

Source: Costar Realty Group

Residential Housing Prince William County depends heavily on residential housing and consumer spending to maintain its prosperity and levels of local government services. In January 2013 all residential properties (including apartments) were valued at $37.98 billion – an increase of over $2.3 billion, or 6.4% from 2012. Residential properties (including apartments) currently account for 82.0% of the total Land Book value. Figure 7. Prince William County Land Book Values

Source: Prince William County Real Estate Assessments Office

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Officials of the Prince William Association of Realtors (PWAR), addressing the Prince William County Revenue Committee, reflected on conditions in the market during the year, noting continued low levels in inventory, with moderate increases in market price and sales numbers as the year progressed. According to data from Metropolitan Regional Information Systems (MRIS), home sales in 2013 (single family, townhouses and condominiums) in Prince William County totaled 6,256, an 8.0% increase from the 5,790 units sold in 2012, and a 34.8% increase over the trough year of 2007 when only 4,642 homes were sold in the County. In the seven-year period 2000-2006 an average of 8,436 homes were sold annually in the County; in the seven-year period 2007-2013, an average of 6,434 homes were sold annually (approximately 76% of the 2000-2006 average). The average sale price of homes sold in 2013 was $334,065—an increase of $31,278, or 10.3%, from the previous year, when the average sale price was $302,787. Figure 8. Home Sales and Average Sale Prices in Prince William County

Source: Metropolitan Regional Information System

According to data from Metropolitan Regional Information Systems (MRIS), during December 2013, the average home in Prince William County sold for $335,403. This represents an increase of 6.1% year-over-year. The number of homes sold in Prince William County in December 2013 was 425—an increase of 6.3% from December 2012. The ratio of homes on the market to homes sold was 2.48, compared to 2.05 one year earlier. Average “days on the market” stood at 39 in December 2013 compared to 49 during the same month of the prior year.

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Figure 9. Ratio of Homes on the Market to Sales in Prince William County 2008- 2013

Source: Metropolitan Regional Information System

Foreclosure activity in Prince William County increased substantially during the 2007-2008 period, and while the rate of foreclosures have subsequently decreased, total numbers are still elevated by historic standards. Table 2. Annual Foreclosures in Prince William County Calendar Year

Total Foreclosures

2006

249

2007

2,805

2008

6,412

2009 2010 2011 2012 2013

3,308 2,083 1,426 959 632

The number of foreclosures in 2013 represents a decline of 34% since 2012 (90% decline since 2008). Any hope for a return to historic notions of a healthy residential real estate market will be predicated on the continued decline of foreclosed properties in the County. Once that goal is reached, prospects for more moderate rates of growth in home prices over the long-term will be enhanced. The number of permits issued for new housing construction reflects a market for new houses that made modest gains in 2010, but lost momentum over the last three years. In 2013, a total of 1,643 residential FY 2015-2019 Revenue Estimate - page 9

occupancy permits were issued for new homes: 756 single family homes, 349 townhouses and 538 multi-family units (including apartments). This represents an increase of 11.9% year-over-year, but well below 2010’s 2,312 total new units. The mix of housing types has shifted in six years, reflecting a changed market. In 2006, 63% of all permits issued were for single family detached, while 25% were for townhouses and 12% for condominiums. In 2013, by comparison, 46.0% of all permits issued were for single family detached, while 21.2% were for townhouses and 32.8% were for multi-family units. A total of 395 permits were issued for apartments, accounting for 73.4% of all multi-family permits and 24.0% of all residential occupancy permits issued in 2013. The chart below depicts the annual levels of Prince William County building permits since 1992. Figure 10. Residential Unit Building Permits in Prince William County

Source: Prince William County Department of Public Works

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. Figure 11. Net Vehicle Additions in Prince William County

Source: Virginia Department of Motor Vehicles

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Starting in April 2011, net vehicle additions in Prince William County experienced substantial gains driven by far fewer vehicles dropped and very strong addition activity. This would suggest that residents are holding onto used vehicles even as they and others are buying new ones. Net new gains continued at a robust pace through 2012 and 2013, further evidence of strengthening consumer confidence. Vehicles sales nationally are expected to return to pre-recession levels during 2014, which should translate to continued growth in net vehicle growth locally. Retail Sales Tax Revenue Retail sales tax revenue provides financial resources to Prince William County and serves as an indicator of consumer demand. According to the 2012 American Community Survey, the 2012 median household income in Prince William County was $93,744. This ranks twelfth among the largest counties in the United States, fifth among jurisdictions in the Commonwealth, and is an indication of the relative wealth of Prince William County and the greater Washington metropolitan region, which included ten of the top twenty counties in the nation for median household income. Prince William County’s high level of household income should contribute to continued growth in sales tax collection going forward. Figure 12. Retail Sales Tax Revenue

Source: Prince William County Department of Finance

Conclusion As 2013 progressed, the national economy appeared to be strengthening, despite a protracted sequestration, and a federal government shutdown in October. The housing market and automobile sales, still well below pre-recession levels, continued to grow modestly. Unemployment appears to be headed in the right direction, but still has a long way to go. Continued sequestration throughout the year, along with concerns over the federal government shutdown and looming debt ceiling crisis may have given the consumer pause, but retail spending continued to grow modestly. The stock market continued on a record setting pace; corporate earnings were mixed and job creation continued at a modest pace. FY 2015-2019 Revenue Estimate - page 11

Job creation and unemployment, stubbornly entrenched at unhealthy levels throughout 2010 and 2011, improved throughout 2012 and continued that trend during 2013. Nationally, consumer consumption continued at a rather healthy clip, and at the local level, retail activity also performed well through much of the year. Core inflation and mortgage rates remain low. Home values nationally continued to improve modestly during 2013, with growth rates moderating towards the end of the year. Locally, home values increased over the course of the year, though new home construction has yet to make substantial headway. The monthly rate of foreclosures continued to ease as the year progressed. The County’s commercial inventory, with the exception of Retail, continued in an absorption phase, with declining vacancy, but little new construction. Retail activity and automobile sales continued to expand, though many consumers feel compelled to get more life out of older purchases. While there is reason for optimism looking forward to 2014, some challenges remain nationally, statewide and locally. Prince William County continues to boast remarkable characteristics that stand it in good stead: exceptional human capital, a relatively diverse local business community, and the County’s enviable position as an integral part of Northern Virginia. In an environment of continued pressure on the federal budget, new challenges may be anticipated on the regional and local economies. Historically, however, Prince William County as part of the Washington D.C. Metropolitan area, and the Northern Virginia economy in particular, has shown remarkable resilience during the ups and downs of the normal business cycle.

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HISTORY OF THE REAL ESTATE TAX RATE During calendar year 2006, the County’s average assessed value of residential properties began depreciating (3.8%) after five consecutive years of double-digit appreciation increases ranging from 17.5% in 2001 to 27.2% in 2005. On April 24, 2007, the Prince William Board of County Supervisors adopted the FY 2008 budget, which was supported by a real estate tax rate of $0.787. Although the real estate tax rate increased nearly three cents ($0.029) from the FY 2007 adopted rate of $0.758, the average residential tax bill was held flat with no increase. As the sub-prime mortgage crisis became evident during calendar year 2007 and foreclosures rose throughout the County (over 2,800 foreclosures), the average assessed value of residential properties depreciated 14.7%. On April 29, 2008, the Board of County Supervisors adopted the FY 2009 budget, which was developed, based on the average residential tax bill increasing by 5.0% from the prior year. The adopted real estate tax rate of $0.97 equalized the 14.7% decrease in average, residential assessed values while increasing the average residential tax bill 5.0%. During calendar year 2008, the U.S. economy spiraled into recession largely through an industry-wide credit crisis that originated with the implosion of sub-prime mortgages. Foreclosures in the County exploded with 6,549 in 2008 -- more than doubling those that occurred in 2007. Due to the foreclosures and subsequent bank sales (approximately 70% of all residential sales were bank sales and another 5% were short sales), residential properties depreciated 30.1% on average during 2008 with properties in some neighborhoods depreciating 50%-60%. The residential real estate market bottomed in 2009 and began to stabilize and strengthen during 2010. This trend continued throughout 2013, with moderate increases in average sales prices and declining monthly foreclosures. During calendar year 2013, the County continued to see an increase in average sales prices, but struggled with limited inventory. The commercial real estate market in Prince William County saw values growing less than expected as the entire region felt the effects of sequestration. On April 23, 2013, the Board of County Supervisors adopted the FY 2014 Fiscal Plan. The adopted FY 2014 real estate tax rate of $1.181 had the following impacts on property owners: 

the “average” real estate tax bill on existing, residential properties increased $98 or 2.96%;



the “average” real estate tax bill on commercial properties increased 2.57%.

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FY 2015 Adopted Real Estate Tax Rate and Average Tax Bill On April 29, 2014, the Board of County Supervisors adopted the FY 2015 Fiscal Plan. The adopted real estate tax rate of $1.148 has the following tax bill impacts on property owners: •

the “average” real estate tax bill on existing, residential properties will increase $154 or 4.5%;



the “average” real estate tax bill on existing, commercial properties will decrease 0.4%.

The following chart illustrates the recent history and five year plan of the County’s real estate tax rate and average residential real estate tax bill: Figure 13. FY 2015-2019 Adopted Real Estate Tax Rates and Average Tax Bill $1.300

$4,400 $1.236

$1.200

$1.154 $1.137

$4,016

$1.100

$3,860

Tax Rate

$4,200

$1.143$1.149 $4,175 $4,000

$3,800

$1.000 $3,710

$0.970

$3,600 $0.910

$3,568

$0.900

$3,437 $3,400 $3,414

$0.800

$3,257 $3,257

$3,316

$0.787 $3,035

$3,200

$3,201

$0.758 $0.700

Average Residential Tax Bill

$1.204 $1.209 $1.181 $1.148

$1.212

$3,110

$3,017

Note: FY 15-19 are projected based on forecast assumptions and preliminary revenue guidance

$0.600

$3,000

$2,800 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Tax Rate

Avg. Tax Bill

The average tax bill is proposed to increase beyond FY 2015 by 4.0% annually in FY 2016-2019.

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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 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 3. Summary of General Revenue Estimates by Major Category

Real Estate Tax Rate: ($ in 000s)

$1.181 % to Total (FY 15)

FY 14 Revised

$1.148

$1.137

$1.143

$1.149

$1.154

FY 15

FY 16

FY 17

FY 18

FY 19

Real Estate Taxes

65.43%

$536,153

$560,992

$590,291

$622,161

$654,559

$688,575

Personal Property Taxes

17.52%

146,610

150,180

158,250

165,820

173,690

181,870

Sales Tax

6.83%

56,825

58,525

60,280

62,090

63,950

65,870

Consumer Utility Tax

1.60%

13,650

13,700

13,910

14,190

14,540

14,900

Communications Sales Tax

2.21%

18,050

18,910

19,290

19,670

20,070

20,470

BPOL Tax

2.85%

23,658

24,427

25,221

26,041

26,887

27,761

Investment Income

0.80%

6,430

6,831

7,247

7,676

8,120

8,578

All Other

2.78%

23,290

23,823

24,421

25,026

25,688

26,357

100.00%

$824,666

$857,388

$898,910

$942,674

$987,504

$1,034,381

3.97%

4.84%

4.87%

4.76%

4.75%

Total General Revenue Increase over Prior Year

School Portion

$468,026

$486,674

$510,337

$535,280

$560,810

$587,507

County Portion

351,559

365,531

383,261

401,949

421,086

441,097

5,081

5,182

5,312

5,445

5,608

5,776

$824,666

$857,388

$898,910

$942,674

$987,504

$1,034,381

Transportation Fund Total General Revenue

On April 23, 2013, the Board of County Supervisors approved an amendment to the County/Schools Revenue Sharing Agreement to transfer 57.23% of all general revenues, excluding recordation tax revenue, to the Schools as support for the annual Schools budget and 42.77% to support the annual County budget in each year of the Five Year Budget Plan.

FY 2015-2019 Revenue Estimate - page 15

Table 4. Revenue Estimates by Category GENERAL REVENUE SOURCE Real Estate Rollback Suppement Real Estate Exonerations SUBTOTAL Real Estate-Public Service Real Estate Tax Deferral Land Redemption Real Estate Penalties TOTAL REAL ESTATE

FY 15 Forecast

OL3 10

$

20 41 21 25 160 $

FY 16 Forecast

FY 17 Forecast

585,523,000 $ 100,000 (14,055,000) 571,568,000 17,420,202 (500,000) 315,000 1,488,000 590,291,202 $

617,819,000 $ 650,609,000 $ 100,000 100,000 (14,830,100) (15,617,000) 603,088,900 635,092,000 17,687,250 17,957,898 (500,000) (500,000) 315,000 315,000 1,570,000 1,694,000 622,161,150 $ 654,558,898 $

685,105,000 100,000 (16,444,900) 668,760,100 18,216,404 (500,000) 315,000 1,783,000 688,574,504

149,100,000 $ 50,000 (500,000) 1,530,000 150,180,000 $

157,100,000 $ 50,000 (500,000) 1,600,000 158,250,000 $

164,600,000 $ 172,400,000 $ 50,000 50,000 (500,000) (500,000) 1,670,000 1,740,000 165,820,000 $ 173,690,000 $

180,500,000 50,000 (500,000) 1,820,000 181,870,000

71 72 79 81 170

LOCAL SALES TAX CONSUMER UTILITY TAX COMMUNICATIONS SALES TAX BPOL TAXES - LOCAL BUSINESSES INVESTMENT INCOME

210 220 223 235 510

Interest on Taxes Daily Equipment Rental Tax Bank Franchise Tax BPOL - Public Service Vehicle Decals Recordation Tax Tax on Deeds Transient Occupancy Tax Interest Paid to Vendors Interest Paid on Refunds Rolling Stock Tax Passenger Car Rental Tax Mobile Home Tilting Tax Federal Payment in Lieu of Taxes Undistributed & Miscellaneous ALL OTHER REVENUE

140 $ 215 230 236 250 260 261 270 520 521 1303 1304 1305 1700 1150 $

1,314,000 $ 246,500 1,500,000 1,258,000 8,240,000 7,005,000 1,742,000 1,446,000 (100,000) (55,000) 99,000 1,015,000 35,000 70,000 7,000 23,822,500 $

1,384,000 $ 271,500 1,500,000 1,296,000 8,430,000 7,180,000 1,777,000 1,489,000 (100,000) (55,000) 101,000 1,035,000 35,000 70,000 7,000 24,420,500 $

$

857,387,589 $

898,909,702 $

TOTAL GENERAL REVENUE

$ $ $ $ $ $

FY 19 Forecast

555,587,000 $ 100,000 (13,336,500) 542,350,500 17,414,589 (500,000) 315,000 1,412,000 560,992,089 $

Personal Property Personal Property Prior Year Personal Property Exonerations Personal Property Tax Deferral Personal Property Penalties TOTAL PERSONAL PROPERTY

$

FY 18 Forecast

58,525,000 13,700,000 18,910,000 24,427,000 6,831,000

$ $ $ $ $

60,280,000 13,910,000 19,290,000 25,221,000 7,247,000

$ $ $ $ $

62,090,000 14,190,000 19,670,000 26,041,000 7,676,000

$ $ $ $ $

1,459,000 $ 299,000 1,500,000 1,335,000 8,610,000 7,360,000 1,813,000 1,534,000 (100,000) (55,000) 103,000 1,056,000 35,000 70,000 7,000 25,026,000 $

63,950,000 14,540,000 20,070,000 26,887,000 8,120,000

$ $ $ $ $

65,870,000 14,900,000 20,470,000 27,761,000 8,578,000

1,534,000 $ 330,000 1,500,000 1,375,000 8,800,000 7,581,000 1,849,000 1,580,000 (100,000) (55,000) 105,000 1,077,000 35,000 70,000 7,000 25,688,000 $

1,614,000 363,000 1,500,000 1,416,000 8,980,000 7,808,000 1,886,000 1,627,000 (100,000) (55,000) 107,000 1,099,000 35,000 70,000 7,000 26,357,000

942,674,150 $ 987,503,898 $ 1,034,380,504

FY 2015-2019 Revenue Estimate - page 16

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 The real estate tax is the single largest revenue source for Prince William County contributing approximately 65.4% of general revenues (FY15 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, apartments, commercial and industrial, and agricultural and resource land property types. The following tables show a five-year history of this revenue source and the five-year revenue forecast: Table 5. Revenue Summary – Real Estate Taxes Revenue History FY 09 FY 10 FY 11 FY 12 FY 13

% Change $

Current Year Adopted Current Year Revised

493,304,534 459,343,128 458,409,233 474,859,163 496,366,393

12.4% -6.9% -0.2% 3.6% 4.5%

518,558,000

4.5%

516,900,618

4.1%

542,350,500 571,568,000 603,088,900 635,092,000 668,760,100

4.9% 5.4% 5.5% 5.3% 5.3%

Revenue Forecast FY 15 FY 16 FY 17 FY 18 FY 19

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 table above. Residential Real Estate During calendar year 2013 (CY 2013) the residential real estate market continued its appreciation fueled by low inventories and still low mortgage rates. Following a 4.7% increase in values in 2012, the average existing home value increased approximately 7.5% in 2013. Factors contributing to the appreciation of values included continued low mortgage rates, lower foreclosure rates, and low levels of inventory for sale.

FY 2015-2019 Revenue Estimate - page 17

In CY 2013, there were 632 foreclosures of residential properties compared to 959 in CY 2012, a decrease of 33%. The average number of days on the market decreased from 49 days to 39 days from December 2012 to December 2013. Bank owned properties and short sales made up approximately 14% of all sales through the beginning of December 2013. 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 calendar year 1984 through 2013 and the General Revenue Committee’s estimates thereafter. Figure 14. Average Annual Residential Real Estate Appreciation 30% 27.20%

25% 20%

17.47%

Average Residential Appreciation

15%

13.13%

10%

7.50%

5% 0% -1.79%

-5% -10% -15%

Actual Residential Appreciation Avg. 4.5%: with Forecast, 4.4%

-20% FY15-19 Forecast

-25%

CPI (Balt/Wash metro area), Avg. 3.1%

-30% -29.80%

CY17, FY19

CY16, FY18

CY15, FY17

CY14, FY16

CY12, FY14

CY13, FY15

CY11, FY13

CY10, FY12

CY09, FY11

CY08, FY10

CY07, FY09

CY06, FY08

CY05, FY07

CY04, FY06

CY02, FY04

CY03, FY05

CY01, FY03

CY00, FY02

CY99, FY01

CY98, FY00

CY97, FY99

CY96, FY98

CY95, FY97

CY93, FY95

CY94, FY96

CY92, FY94

CY91, FY93

CY90, FY92

CY89, FY91

CY88, FY90

CY87, FY89

CY86, FY88

CY85, FY87

CY84, FY86

-35%

CY of Value, FY of Revenue

Table 6, on the next page, shows the expected change in market value for residential and apartment properties during the forecast period.

FY 2015-2019 Revenue Estimate - page 18

Table 6. Residential Market Value Changes

Revenue Year FY 15 FY 16 FY 17 FY 18 FY 19

Single-Family, Townhouse and Condominium 7.50% 5.00% 3.50% 3.50% 3.50%

Apartments 5.00% 5.00% 5.00% 5.00% 5.00%

The strengths of the Washington D.C. area include relatively low unemployment (compared to national and state unemployment rates) and stable job growth expectations. The residential market is forecast to continue to see price improvement over the course of the next twelve to twenty-four months depending on how economic uncertainties unfold, although the number of transactions is expected to continue to trail the levels during the boom years. Table 7. Comparison of Estimated Residential Market Value Changes from 2012 to 2013

Prince William Loudoun County County All Residential (Excluding Rental Apartments)

7.50%

4.19%

Fairfax County 6.54%

Arlington County 5.30%

Apartments Market Value Change Apartment values experienced an increase despite an annualized 10 basis point increase in overall capitalization rates according to the Fourth Quarter 2013 Price Waterhouse Cooper Real Estate Investor Survey. The reason for this slight increase in the capitalization rate is the relative saturation of the apartment market. The apartment market has experienced increases in the Net Operating Incomes stemming from higher rents and stable vacancies in Prince William County. Appreciation is projected to continue throughout FY 2016-2019 at a rate of approximately 5%. 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 occurred in calendar year 2013 will be reflected in the County’s January 1, 2014, landbook which provides the basis for real estate tax revenue received in Fiscal Year 2015. The following table on page 20, summarizes the expected number of newly constructed residential units during the forecast period.

FY 2015-2019 Revenue Estimate - page 19

Table 8. Residential Growth – Number of Units

Revenue Year / Calendar Year FY08/CY06 FY09/CY07 FY10/CY08 FY11/CY09 FY12/CY10 FY13/CY11 FY14/CY12 FY15/CY13 FY16/CY14 FY17/CY15 FY18/CY16 FY19/CY17

Total Units 4,420 2,889 1,978 1,957 2,216 1,499 1,433 1,751 3,443 2,278 1,600 1,650

SingleFamily Townhouse 2,556 1,406 1,060 1,112 1,018 860 860 809 800 825 850 875

Condominium

1,135 531 278 293 263 164 158 203 200 225 250 275

278 768 456 552 461 275 187 189 200 200 200 200

Apartments 451 184 184 474 200 228 550 2,243 1,028 300 300

The volume of new home starts is expected to rise slowly as the economy stabilizes and the inventory of foreclosed homes diminishes during the remainder of the forecast period. Construction of new apartment units is expected to go up to over 2,200 units in FY 2016 and gradually decline during the remainder of the forecast period as demand for apartments begins to reflect the increased supply. Residential Values per New Unit The average assessed value of a new home (all types) constructed during CY 2013 was approximately $426,300 a 3.4% increase over the average assessed value of homes built in 2012 which was $412,439. It should be noted that the overall assessed value of a new home is affected by the mix of single family, townhouse, and condominium units constructed in any given year. The average assessed value of a new single family home was approximately $482,600 in 2013. In 2013, the average assessed value of a new condominium unit was approximately $250,900 and the average value of a new townhouse unit was $349,100. Table 9. New Residential Assessed Value per New Unit

Revenue Overall Residential Year (Excludes Apts.) FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19

$427,378 330,995 323,949 342,180 376,736 412,439 426,300 434,400 447,184 460,388 473,946

Single-Family $525,384 387,959 380,728 406,733 436,984 460,530 482,600 497,100 512,000 527,400 543,200

Townhouse $344,824 258,170 262,254 279,724 301,260 334,458 349,100 359,600 370,400 381,500 392,900

Condominium $305,035 242,976 242,317 235,262 233,334 257,161 250,900 258,400 266,200 274,200 282,400

Apartments $106,356 100,505 80,003 88,202 101,256 114,820 136,000 137,400 138,800 140,200 141,600

FY 2015-2019 Revenue Estimate - page 20

Commercial Real Estate Calendar year 2013 market activity in Prince William County resulted in commercial properties appreciating roughly 2.5%. A discussion of commercial property inventory and vacancy rates is available in the Introduction Section on page 5 (Figure 6: Commercial Inventory in Prince William County). Commercial appreciation for FY 2015 is forecast at 2.5% and is projected to continue throughout FY 2016-2019 at a rate of approximately 3.0%. Average assessed values per square foot for FY 2015 are determined based on the added building value resulting from new construction completed during calendar year 2013. 1 These unit values are then adjusted to reflect the general appreciation of commercial properties during the remainder of the forecast period. Table 10. Commercial Market Value Changes

Revenue Year FY 15 FY 16 FY 17 FY 18 FY 19

Commercial 2.50% 3.00% 3.00% 3.00% 3.00%

Commercial properties are categorized into five property types: retail, office, hotel, industrial, and special purpose. For FY 2015 (calendar year 2013 market activity), approximately 832,000 square feet of commercial space was added to the assessment rolls. Retail New construction in the retail sector accounted for approximately 24% of all commercial/industrial growth during CY 2013, adding 198,000 square feet to the tax base. Shopping center capitalization rates remained unchanged in CY 2013. Vacancies and rents were also, for the most part, stable. Industrial Construction of industrial properties accounted for approximately 67% of all new commercial construction during CY 2012, adding approximately 554,000 square feet to the commercial/industrial base. This represents an increase from previous years and is directly linked to the level of inventory. Both rents and occupancy levels of industrial properties increased in 2013 Hotels In CY 2013, one new hotel was added to Prince William County’s hotel inventory. The hotel market valuation for CY 2013 was up slightly. There are currently three hotel projects under way that are expected to add 188,000 square feet for CY 2014.

1

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 2015-2019 Revenue Estimate - page 21

Office Buildings There were no new office buildings added to the inventory in CY 2013. Growth within the office sector is expected to be sustained only at a low rate during the forecast period since there are very few projects in the pipeline. Absorption has been slow for the calendar year 2013. Special Use Properties within the special use category comprise taxable schools, healthcare facilities, and other types of properties that have no foreseeable alternate uses. There were no special use properties built in CY 2013. Late 2013 completion of VA Data facility was accounted for in industrial growth due to the characteristics of the improvements. A summary of commercial growth and assessed values per square foot during the forecast period is shown in Table 11 and Table 12. Table 11. Commercial New Construction Value per Square Foot

Revenue Year FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19

Retail $ $ $ $ $ $ $ $ $ $ $

98 102 105 140 133 133 138 139 140 142 143

Office $ $ $ $ $ $ $ $ $ $ $

110 114 82 91 148 148 149 151 152 154 156

Hotel $ $ $ $ $ $ $ $ $ $ $

108 112 101 121 121 121 122 123 125 126 127

Industrial $ $ $ $ $ $ $ $ $ $ $

89 93 64 33 48 48 75 76 76 77 78

Misc. Properties

$ $ $ $ $ $ $ $ $

n/a n/a 95 132 132 132 133 135 136 137 139

Table 12. New Commercial Construction Square Footage

Revenue Year FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19

Total Commercial 3,572,737 2,833,958 925,785 378,922 436,882 969,175 831,745 743,282 550,000 600,000 720,000

Retail

Office

Hotel

644,119 1,295,731 534,842 156,377 60,559 845,000 198,084 150,000 175,000 200,000 225,000

948,518 276,813 216,832 65,352 93,060 43,900 100,000 100,000 100,000

174,793 56,013 95,362 73,926 45,728 187,684 50,000 50,000 100,000

Industrial 1,623,988 1,175,139 68,557 37,800 154,308 80,275 553,637 150,000 175,000 200,000 225,000

Misc. Properties 181,319 30,262 10,192 45,467 128,955 34,296 50,000 50,000 50,000 50,000

FY 2015-2019 Revenue Estimate - page 22

Real Estate Exonerations Estimated real estate tax exonerations are deducted from the gross local real estate tax revenue to arrive at the net local real estate tax revenue. Exonerations are decreases in revenue due to assessment reductions, changes in tax liability, or tax relief programs. Assessment reductions are typically caused by appeals of assessed values and account for the majority of exonerations. Changes in tax liability occur when a property changes from a taxable to a tax-exempt status. Taxes are also exonerated for properties whose owners qualify for the Tax Relief Program for the Elderly and Disabled or the Tax Relief Program for Disabled Veterans. Public Service Taxes Public service taxes are levied on non-locally assessed properties. The State Corporation Commission (SCC) assesses all telecommunications companies, water companies, intrastate pipeline distribution companies, and electric light and power companies. The Virginia Department of Taxation assesses railroads and interstate pipeline transmission companies. Table 13. Revenue Summary – Public Services Taxes Revenue History FY 09 FY 10 FY 11 FY 12 FY 13

% Change $ 14,275,190 16,518,811 18,129,083 17,703,648 18,400,696

25.20% 15.72% 9.75% -2.35% 3.94%

Current Year Adopted

18,154,000

-1.34%

Current Year Revised

17,737,805

-3.60%

17,414,589 17,420,202 17,687,250 17,957,898 18,216,404

-1.82% 0.03% 1.53% 1.53% 1.44%

Revenue Forecast FY 15 FY 16 FY 17 FY 18 FY 19

Historically, the majority of changes within the public service classification have been attributable to new construction growth. Growth within public service properties is expected to stabilize at a rate of 1.0% per year for Fiscal Years 2015-2019. Public service market values are not subject to the same market changes as other real estate properties. Real Estate Tax Deferrals If unpaid real estate taxes at the end of a fiscal year are less than at the beginning of that fiscal year, the amount of the reduction is recorded as revenue in real estate tax deferrals.

FY 2015-2019 Revenue Estimate - page 23

If unpaid real estate taxes at the end of a fiscal year are more than at the beginning of that fiscal year, the amount of the increase is recorded as negative revenue in real estate tax deferrals. Real estate taxes collected after becoming more than three years delinquent are accounted for as land redemption revenue. Table 14. Revenue Summary – Real Estate Tax Deferrals Revenue History FY 09 FY 10 FY 11 FY 12 FY 13 Current Year Adopted Current Year Revised

$

(715,210) 628,146 537,177 278,451 74,276 100,000

Forecast FY 15 FY 16 FY 17 FY 18 FY 19

(500,000) (500,000) (500,000) (500,000) (500,000)

On December 10, 1996, the Board of County Supervisors approved an initiative to decrease the percentage of unpaid property taxes at fiscal year-end. The BOCS has continued to support this initiative and at the end of FY 2013, the percentage of unpaid property taxes compared to the FY 2013 levy was 1.6%. This is the County’s best unpaid property tax rate since data was first collected in 1971. The revenue forecast is made by estimating collections of unpaid personal property taxes up to five years delinquent. This revenue category varies depending on the amount of unpaid taxes at the end of one year compared to the previous year due to: 1. Voluntary payment of taxes, 2. County resources allocated to collection efforts, and 3. The success of those collection efforts.

FY 2015-2019 Revenue Estimate - page 24

Land Redemption Land redemption is the recognition of real estate taxes collected after being more than three years delinquent. The Code of Virginia allows Prince William County to pursue the collection of delinquent real estate taxes for twenty years. Table 15. Revenue Summary – Land Redemption Revenue History FY 09 FY 10 FY 11 FY 12 FY 13

% Change $

Current Year Adopted Current Year Revised

128,418 138,641 256,929 242,634 301,083

-46.0% 8.0% 85.3% -5.6% 24.1%

315,000

4.6%

315,000

4.6%

315,000 315,000 315,000 315,000 315,000

0.0% 0.0% 0.0% 0.0% 0.0%

Forecast FY 15 FY 16 FY 17 FY 18 FY 19

This revenue category varies depending on the amount of unpaid taxes three years and older, and the level of success in collecting these past due amounts. The FY 2015-2019 forecast estimates approximately 25% of the prior year’s unpaid land redemption taxes will be collected annually. A variety of methods is used to enforce the collection of those taxes, including filing suit to force the sale of the property for unpaid taxes. Unpaid land redemption taxes, at the end of each fiscal year, are estimated as follows: Table 16. Unpaid Land Redemption Taxes Revenue History FY 09 FY 10 FY 11 FY 12 FY 13

$

1,411,000 1,357,475 1,265,111 1,314,362 1,325,805

Current Year Adopted

1,325,000

Current Year Revised

1,325,000

Revenue Forecast FY 15 FY 16 FY 17 FY 18 FY 19

1,325,000 1,325,000 1,325,000 1,325,000 1,325,000 FY 2015-2019 Revenue Estimate - page 25

Real Estate Penalties Prince William County assesses a 10% penalty on the late payment of real estate taxes. If taxes are not paid in full by the due date, a late penalty of 10% will be assessed on the unpaid original tax balance. Interest at the rate of 10% per annum is added to any unpaid balance beginning on the first day of the month following the original due date. Table 17. Revenue Summary – Real Estate Penalties Revenue History FY 09 FY 10 FY 11 FY 12 FY 13

% Change $

2,160,303 1,651,847 1,365,811 1,265,550 1,261,388

10.7% -23.5% -17.3% -7.3% -0.3%

Current Year Adopted

1,597,000

26.6%

Current Year Revised

1,200,000

-4.9%

1,412,000 1,488,000 1,570,000 1,694,000 1,783,000

17.7% 5.4% 5.5% 7.9% 5.3%

Revenue Forecast FY 15 FY 16 FY 17 FY 18 FY 19

Revenue from real estate penalties is estimated by applying a fixed percentage (approximately 0.26% 0.30%) to the real estate revenue forecast excluding public service properties.

FY 2015-2019 Revenue Estimate - page 26

PERSONAL PROPERTY REVENUE The personal property tax is assessed on vehicles, mobile homes, and business personal property. Approximately 86% of personal property tax revenue is forecast in FY 2015 to be generated by motor vehicles, trailers, and motor homes. The remaining 14% is forecast to be received from taxes levied on business equipment. Certain classifications of property do not generate tax bills because of their extremely low tax rate, such as farm equipment, vehicles that qualify for elderly tax relief, vanpool vans, handicapped-equipped vehicles, and vehicles owned by certain fire and rescue volunteer company members and fire and rescue volunteer company auxiliary members. In addition, some vehicles and property are tax exempt, such as vehicles used as daily rentals, vehicles owned by certain military personnel, and vehicles or business property owned by non-profit organizations that have been granted specific exemption. Personal Property Tax on Vehicles Personal property tax revenue from vehicles is estimated based on the percentage change in average assessed value per vehicle and the percentage change in the number of units billed. Generally, the assessed value of taxable vehicles is obtained from standard pricing guides. Prince William County uses the clean trade-in values published in the National Automobile Dealers Association (NADA) value guide for new and older vehicles. Table 18. Revenue Summary – Personal Property Tax Revenue History FY 09 FY 10 FY 11 FY 12 FY 13 Current Year Adopted Current Year Revised

$

135,209,127 120,612,512 127,961,926 131,167,427 135,784,664

% Cha nge 0.9% -10.8% 6.1% 2.5% 3.5%

145,210,000

6.9%

145,210,000

6.9%

149,100,000 157,100,000 164,600,000 172,400,000 180,500,000

2.7% 5.4% 4.8% 4.7% 4.7%

Revenue Forecast FY 15 FY 16 FY 17 FY 18 FY 19

Car Tax Relief A portion of the tax due on personal use vehicles is paid by the Commonwealth directly to Prince William County under the Personal Property Tax Relief Act (PPTRA). Through tax year 2005 (fiscal year 2006), the Commonwealth paid the County 70% of the tax due on the first $20,000 of assessed value for qualified vehicles.

FY 2015-2019 Revenue Estimate - page 27

During the 2004 State budget sessions, legislation was enacted that changes how the amount of car tax relief is calculated under the PPTRA. The legislation capped the amount reimbursed to the County, which began in tax year 2006 (Fiscal Year 2007). Capping the car tax at a set dollar amount ($950 million state-wide) will typically reduce the percentage of the tax on qualifying vehicles paid by the Commonwealth in each successive year. To compensate, the County must increase the share of the tax paid by the taxpayer or face declining revenue, and so the five-year revenue forecast assumes the County will increase the share paid by taxpayers as the total assessed value of qualifying vehicles grows so that revenues do not decline. The percentage of tax relief for qualifying vehicles in FY 2015 (tax year 2014) is 51%. Change in Average Vehicle Value and Units Billed The FY 2015 (tax year 2014) forecast assumes an increase of 0.5% in average assessed values. The average assessment fell due to the overall national acceleration in the sale of new autos, which injected additional supply into the used car market, thereby reducing valuations. The forecast for FY 2016-2019 is for the average vehicle value to increase 2.84% per year (the historical average is 2.84%). The FY 2015 (tax year 2014) forecast assumes a 2.43% increase in the number of vehicle units billed. The FY 2016 growth in forecasted units is attributable to the anticipated addition of over 2,200 new apartment units. Table 19. Percent Change in Average Assessed Value and Vehicle Units Billed

Revenue Year

Assessed Value Avg. Value % Change

FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19

$ $ $ $ $ $ $ $ $ $ $

10,371 8,999 9,328 9,626 10,250 10,420 10,472 10,769 11,075 11,390 11,713

-0.78% -13.23% 3.66% 3.19% 6.48% 1.66% 0.50% 2.84% 2.84% 2.84% 2.84%

Billiable Units % Change 2.09% 1.47% 3.25% 3.43% 2.64% 2.90% 2.43% 2.91% 2.31% 2.25% 2.21%

Business Personal Property Tax The business portion of the personal property tax is levied on all general office furniture and equipment, machinery and tools, equipment used for research and development, heavy construction equipment, and computer equipment located in Prince William County as of January 1st of each year. Each business is required to file a return annually declaring the item, its original cost, and year of purchase. Therefore, the assessed value is determined from its original cost, year of purchase, and use of the equipment. The County has three depreciation schedules for the following classes of business equipment: FY 2015-2019 Revenue Estimate - page 28

1. General Business Equipment - Assessed at 85% of its original cost in the year acquired. Thereafter, the percentage decreases by 10% increments. If still held after eight years, its assessed value remains constant at 10% of the original cost. 2. Heavy Equipment - Assessed at 80% of its original cost in the year acquired. Thereafter, the percentage decreases by 15% increments. If still held after five years, its assessed value remains constant at 10% of original cost. 3. Computer Equipment and Peripherals - Assessed at 50% of cost in the first year, 35% the second year, 20% the third year, 10% the fourth year, and 5% the fifth and subsequent years. General business equipment and heavy equipment account for 74% and 6% of taxes on business equipment respectively. Taxes on computer equipment comprise 19% and taxes from machinery and tools account for the remaining 1%. Taxes from business equipment are expected to increase 5.4% in Fiscal Year 2014, with 2.5% increases in FY 2015-2016, followed by 2% increases for the remainder of the five-year plan. Businesses had been deferring purchases of new equipment during the most recent economic recession. Heavy equipment, in particular, had decreased dramatically due to the decline in residential and commercial construction. However, there is some evidence that the economy and the economic condition of local businesses has stabilized. They still are not replacing equipment or adding significant amounts of new equipment, but the downward trend seems to have stopped, thus we are forecasting a modest increase for each of the years in the forecast. Personal Property Prior Year This account records changes to prior year personal property taxes as a result of changes in estimated allowance for uncollectible taxes. These revenues are less than $100,000 a year, and are therefore not addressed in as much detail as the major revenue sources. Table 20. Revenue Forecast – Personal Property Prior Year Revenue History FY 09 FY 10 FY 11 FY 12 FY 13 Current Year Adopted Current Year Revised

$

88,911 46,661 36,876 30,329 48,746

% Cha nge -9.9% -47.5% -21.0% -17.8% 60.7%

50,000

2.6%

50,000

2.6%

50,000 50,000 50,000 50,000 50,000

0.0% 0.0% 0.0% 0.0% 0.0%

Revenue Forecast FY 15 FY 16 FY 17 FY 18 FY 19

FY 2015-2019 Revenue Estimate - page 29

Personal Property Deferrals If unpaid personal property taxes at the end of a fiscal year are less than at the beginning of that fiscal year, the amount of the reduction is recorded as revenue in personal property tax deferrals. If unpaid personal property taxes at the end of a fiscal year are more than at the beginning of that fiscal year, the amount of the increase is recorded as negative revenue in personal property tax deferrals. Table 21. Revenue Summary – Personal Property Deferrals Revenue History FY 09 FY 10 FY 11 FY 12 FY 13 Current Year Adopted Current Year Revised

$

(771,845) 360,212 1,032,739 447,001 (734,041)

100,000 0

Revenue Forecast FY 15 FY 16 FY 17 FY 18 FY 19

(500,000) (500,000) (500,000) (500,000) (500,000)

On December 10, 1996, the Board of County Supervisors approved an initiative to decrease the percentage of unpaid property taxes at fiscal year-end, as compared to the current year levy, from 11% in FY 1996 to 6% in FY 2003. With the adoption of the FY 2002 budget, additional collection resources were provided to the Finance Department and the amount of total unpaid property taxes as a percentage of the total levy was revised to 5.5% by FY 2005. At the end of FY 2013, the percentage of unpaid property taxes compared to the FY 2013 levy was 1.6%, and is the County’s best unpaid property tax rate since data was first collected in 1971. This is an improvement over the FY 2011 and FY 2012 unpaid property tax percentage of 1.8%, and 1.7% respectively. The revenue forecast is made by estimating collections of unpaid personal property taxes up to five years delinquent. This revenue category varies depending on the amount of unpaid taxes at the end of one year compared to the previous year due to: 1. Voluntary payment of taxes, 2. County resources allocated to collection efforts, and 3. The success of those collection efforts.

FY 2015-2019 Revenue Estimate - page 30

Personal Property Penalties - Current Year Prince William County assesses a 10% penalty on the late payment of personal property taxes. The 10% personal property penalty on late payments applies only to the local share of what is delinquent. The penalty is not applied to the portion paid by the Commonwealth. Personal property penalty revenue is projected to increase in each year of the FY 2015-2019 forecast period due to the increase in the estimate of personal property taxes billed each year. Table 22. Revenue Summary – Personal Property Penalties – Current Year Revenue History FY 09 FY 10 FY 11 FY 12 FY 13 Current Year Adopted Current Year Revised

% Change $

1,442,088 1,180,234 1,152,677 1,374,663 1,536,419

17.8% -18.2% -2.3% 19.3% 11.8%

1,450,000

-5.6%

1,350,000

-12.1%

1,530,000 1,600,000 1,670,000 1,740,000 1,820,000

13.3% 4.6% 4.4% 4.2% 4.6%

Revenue Forecast FY 15 FY 16 FY 17 FY 18 FY 19

FY 2015-2019 Revenue Estimate - page 31

LOCAL SALES TAX REVENUE Prince William County, by adopted ordinance, has elected to levy a 1% general retail sales tax. This tax is levied on the retail sale or rental of tangible property, excluding motor vehicle sales and trailers, vehicle rentals, boat sales, gasoline sales, natural gas, electricity, and water, and the purchases by organizations that have received tax exemption. The tax revenue is collected by the Virginia Department of Taxation, and is distributed to the County monthly. There is a two-month lag between the date of sale and the actual receipt of funds. For example, local sales taxes collected by businesses in November must be remitted to the Department of Taxation by the retail business no later than December 30th. The Department of Taxation then remits the sales tax to the locality in the third week of January. Despite the timing lag, sales tax revenues are accrued to the month in which they were collected by the businesses. The four incorporated towns within Prince William County share in the local sales tax based on the ratio of school age population in the towns to the school age population of the entire County based on the latest state-wide school census. The current formula deducts 1.02% from the County’s gross tax to be sent to the four towns. Thus, the County realizes 98.98% of the monthly sales taxes collected. Table 23. Revenue Summary – Local Sales Tax Revenue History FY 09 FY 10 FY 11 FY 12 FY 12 Current Year Adopted Current Year Revised

% Change $

45,055,466 46,155,153 49,554,397 52,002,967 55,169,386

-2.4% 2.4% 7.4% 4.9% 6.1%

57,656,000

4.5%

56,825,000

3.0%

58,525,000 60,280,000 62,090,000 63,950,000 65,870,000

3.0% 3.0% 3.0% 3.0% 3.0%

Revenue Forecast FY 15 FY 16 FY 17 FY 18 FY 19

Prince William County’s sales tax revenue in the first five months of FY 2014 is 3.6% higher than the amount of sales tax revenue that was generated during the same period in FY 2013. On a year-to-date basis, this increase is running slower than the previously anticipated 4.5% sales tax revenue increase that was projected in the FY 2014 adopted forecast. This will be monitored carefully to determine if the remainder of the year’s sales tax will continue to perform at this reduced rate and fall short of the projected FY 2014 sales tax revenue amount. The FY 2015 forecast anticipates a slower, more gradual continued upward trend resulting in a marginally smaller increase in the projected FY 2015-2019 Prince William County sales tax revenue. During the five most recent prior years, the growth in the County’s annual sales tax revenue has ranged between -2.4% and 7.5%. The new projection is for a 3% annual increase in the County’s sales tax revenue. FY 2015-2019 Revenue Estimate - page 32

During calendar year 2013, our neighboring jurisdictions generally experienced a period of irregular growth in sales tax revenue. Prince William County’s three neighboring Northern Virginia jurisdictions’ sales tax revenues reflect very mixed results for the year as provided below: Table 24. Percent of Sales Tax Change in Neighboring Jurisdictions, Compared to Same Period in Prior 2 Year

QTR 1 Prince William County Loudoun County Arlington County Fairfax County

1.91% 9.28% 2.22% 0.80%

Calendar Year 2013 QTR 2 QTR 3 5.31% -12.81% -1.46% 3.43%

0.91% 1.43% -6.87% -2.55%

QTR 4 5.23% -2.99% 0.09% 0.07%

The factors believed to have contributed to the County’s sales tax revenue increase are: •

An improving local economy;



Increase in retail establishments;



High level of household income in the County;



Improving employment picture has increased consumer confidence; and



Continued population growth.

2

Virginia Department of Taxation, Monthly Sales Tax Reports FY 2015-2019 Revenue Estimate - page 33

CONSUMER UTILITY REVENUE Prince William County levies a consumer utility tax on electric and natural gas utilities. The County does not tax water and sewer services. Effective January 1, 2001, the Code of Virginia required Prince William County to convert its existing tax on purchasers of natural gas and electricity from a dollarbased tax to a consumption-based tax. The levy for electricity consumption based on kilowatt hours (kWh) 3 is: Residential users: $1.40 minimum billing charge plus the rate of $0.01509 on each kWh delivered monthly by a service provider not to exceed $3.00 per month. Commercial users: $2.29 minimum billing charge plus the rate of $0.013487 on each kWh delivered monthly to commercial consumers, not to exceed $100.00 monthly.

The levy for natural gas consumption based on 100 units of cubic feet (CCF) 4 is: Residential consumers: $1.60 minimum billing charge plus the rate of $0.06 on each CCF delivered monthly to residential consumers, not to exceed $3.00 per month. Commercial consumers: $3.35 minimum billing charge plus the rate of $0.085 on each CCF delivered monthly to commercial consumers, not to exceed $100.00 monthly.

Since consumer utility taxes are capped, inflation and utility rate increases are not a factor in the five year forecast. Prior to January 1, 2007, Prince William County’s consumer utility tax was also levied on wired and cellular telephone service. With the advent of the Virginia communications sales and use tax (please see page 36 for details), the County’s consumer utility tax is no longer levied on telecommunication services. This change occurred during the second half of FY 2007. Fiscal Year 2008 was the first fullyear the consumer utility tax was levied only on electric and natural gas utilities.

3

Kilowatt hours (kWh) delivered means 1000 watts of electricity delivered in a one-hour period by an electric provider to an actual consumer, except that in the case of eligible customer-generators (sometimes called cogenerators) as defined in Va. Code § 56-594, it means kWh supplied from the electric grid to such customer-generators, minus the kWh generated and fed back to the electric grid by such customer-generators. 4 CCF means the volume of gas at standard pressure and temperature in units of 100 cubic feet. FY 2015-2019 Revenue Estimate - page 34

Table 25. Revenue Summary – Consumer Utility Tax Revenue History

% Change

FY 09 FY 10 FY 11 FY 12 FY 13 Current Year Adopted Current Year Revised

12,595,964 12,839,866 13,190,410 13,075,017 13,489,925

2.0% 1.9% 2.7% -0.9% 3.2%

13,566,000

0.6%

13,650,000

1.2%

13,700,000 13,910,000 14,190,000 14,540,000 14,900,000

0.4% 1.5% 2.0% 2.5% 2.5%

Revenue Forecast FY 15 FY 16 FY 17 FY 18 FY 19

Electricity and Gas Revenue Growth The following chart shows the history of electric and gas utility growth in Prince William County as well as the projected growth rates included in the five year revenue forecast for FY 2015-2019. The growth rates reflect the projected increase in new, residential housing units during the forecast period as well as the belief that the inventory of foreclosed properties will continue to decrease. Table 26. Percent Change in Revenue Growth Rates from Electricity and Gas Utilities

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019

Utilities Electric 1.38% 1.86% 2.95% -0.84% 2.74% 2.50% 2.00% 2.25% 2.25% 2.25% 2.50%

Gas 3.19% 2.46% 2.18% -0.88% 4.18% 2.75% 3.00% 3.00% 3.00% 3.00% 3.00%

FY 2015-2019 Revenue Estimate - page 35

COMMUNICATIONS SALES AND USE TAX REVENUE On April 17, 2006, the Governor of Virginia approved House Bill 568 and revised the taxation of communication services in the Commonwealth. Prior to the new legislation, localities were authorized to levy taxes on landline and wireless telephone services through the consumer utility tax as well as cable television service through cable franchise taxes. The legislation applies a statewide communications sales and use tax to communication and video services. The communications sales and use tax, which became effective on January 1, 2007, is 5% on the following services: Services Previously Taxed Locally: • Landline Telephone Services • Wireless Telephone Services • Cable Television Services

Services Not Previously Taxed: • Satellite Television Services • Voice Over Internet Protocol Services (VOIP) • Paging Services

Due to the Virginia communications sales and use tax, Prince William County no longer has the authority to levy the following taxes and fees: • • •

Local consumer utility tax on landline and wireless telephone service; Cable franchise fees; and Local E-911 tax (please note that E-911 revenue is not included in the general revenue projection)

Similar to general sales tax revenue, telecommunications sales and use tax revenue is collected by the Virginia Department of Taxation and distributed to Prince William County monthly. As enumerated in Section 58.1-662 of the Code of Virginia, the telecommunications revenue will be distributed to localities according to the percentage of telecommunications and cable television tax revenue each locality received relative to the statewide total. It is important to note that the FY 2007 actual represented only a half-year levy of the new communications tax. Fiscal year 2008 represented the first full-year the tax was implemented. In FY 2014, the County received 4.63% of the statewide telecommunications sales and use tax.

FY 2015-2019 Revenue Estimate - page 36

Table 27. Revenue Summary – Communications Sales and Use Tax Revenue History FY 09 FY 10 FY 11 FY 12 FY 13 Current Year Adopted Current Year Revised

% Change 18,770,086 18,893,157 18,878,231 18,377,146 18,536,004

-8.3% 0.7% -0.1% -2.7% 0.9%

19,040,000

2.7%

18,050,000

-2.6%

18,910,000 19,290,000 19,670,000 20,070,000 20,470,000

4.8% 2.0% 2.0% 2.0% 2.0%

Revenue Forecast FY 15 FY 16 FY 17 FY 18 FY 19

During FY 2012, the Department of Taxation refunded three large claims totaling $12.9 million in communication tax refunds. In FY 2013, $3.1 million was refunded due to the collection of non-taxable items. In addition, the Commonwealth reported that Communication Tax Revenue was down approximately 3.5% due to a loss of landline services. Other factors contributing to the decline in this revenue source include the increase in the State Administrative fees charged to localities and the increase in the payment to the Deaf & Hard of Hear Program. These trends contributed to the decrease in the FY 2014 forecast. The FY 2015-2019 forecast was determined by examining actual monthly revenue received over the last twelve months.

FY 2015-2019 Revenue Estimate - page 37

BPOL REVENUE The Business, Professional, and Occupational License (BPOL) tax is imposed on commercial and home occupational businesses operating in Prince William County. The County has adopted a multiple tax rate schedule according to the type of business activity subject to the tax. On April 26, 2011, the Board of County Supervisors (BOCS) directed staff to prepare an amendment to the Business Professional and Occupational License Ordinance to change the gross receipts threshold from $100,000 to $200,000 in an effort to support small business development within the County. On November 22, 2011, the BOCS unanimously voted to amend the Prince William County Code and change the license requirement threshold for businesses with gross receipts of $100,000 or higher to businesses with gross receipts of $200,000 or higher. On April 24, 2012, the Board of County Supervisors directed staff to prepare an amendment to the Business Professional and Occupational License Ordinance to further change gross receipts threshold from $200,000 to $250,000 in order to support small business development within the County. On October 2, 2012, the BOCS unanimously voted to amend the Prince William County Code and change the license requirement threshold for businesses with gross receipts of $200,000 or higher to businesses with gross receipts of $250,000 or higher. The BPOL tax is levied on: •

Businesses with annual gross receipts (from the prior calendar year) greater than $250,000;



New businesses based on an estimate if gross receipts are greater than $250,000 for the current year; and



Both full-time as well as part-time businesses, as long as the business meets or exceeds the $250,000 threshold.

The basis for FY 2014 BPOL tax revenue is gross revenue receipts from calendar year 2013. Therefore, forecasting 2014 gross receipts (FY 2015) has a one-year lag in which actual prior year figures on which to base an estimate are unavailable.

FY 2015-2019 Revenue Estimate - page 38

Table 28. Revenue Summary – BPOL Tax Revenue Revenue History FY 09 FY 10 FY 11 FY 12 FY 13 Current Year Adopted Current Year Revised

% Change $

19,930,513 20,268,908 20,965,419 21,724,838 22,913,378

-5.87% 1.70% 3.44% 3.62% 5.47%

23,564,000

2.84%

23,658,000

3.25%

24,427,000 25,221,000 26,041,000 26,887,000 27,761,000

3.25% 3.25% 3.25% 3.25% 3.25%

Revenue Forecast FY 15 FY 16 FY 17 FY 18 FY 19

Approximately 87% of FY 2013 BPOL revenue was generated by four sectors of the County’s local economy: retail, contractors, personal services, and professional services. The following table summarizes the year-over-year change in revenue in each category over the last five fiscal years: Table 29. Change in Revenue by Major BPOL Category

BPOL Category

FY09

FY10

FY11

FY12

FY13

Retail Construction and Contracting Business Services Professional Services

2% -33% 0% 14%

-2% 4% 7% 10%

3% -7% 20% -5%

12% -7% -4% 12%

8% 6% 11% 6%

The forecast model assumes that BPOL revenue will change at the weighted five year average of 3.25% in each year of the forecast. A weighted average is used because it is difficult to project a change in any one category, and difficult to predict changes across years. Even retail, which most would think to be somewhat stable has variability that does not track national or regional economic indicators. This can be explained by shifts between spending categories and by the effects of borrowing (in the case of construction and contracting), so it makes sense to use an aggregate measure and one which smoothes out the effects of spending shifts.

FY 2015-2019 Revenue Estimate - page 39

INVESTMENT INCOME Investment income represents interest receipts, interest accrual, and gains or losses from the sale of investments for Prince William County’s share of earnings on the “general” cash investment portfolio. The general portfolio consists of those funds that are not restricted. The general fund available cash constitutes 55%-58% of the total pooled investments. All funds are invested in accordance with the County’s investment guidelines of legality, safety, liquidity, and yield. Table 30. Revenue Summary – Investment Income Revenue History FY 09 FY 10 FY 11 FY 12 FY 13 Current Year Adopted Current Year Revised

% Change $

18,383,224 16,553,096 11,507,416 8,601,580 8,388,449

-23.8% -10.0% -30.5% -25.3% -2.5%

7,700,000

-8.2%

6,430,000

-23.3%

6,831,000 7,247,000 7,676,000 8,120,000 8,578,000

6.2% 6.1% 5.9% 5.8% 5.6%

Revenue Forecast FY 15 FY 16 FY 17 FY 18 FY 19

To forecast investment income, the average portfolio yield and portfolio size are projected to determine the current or estimated future year’s investment revenue. The general fund share is calculated based on the prior year actual share of cash balances available to invest. Portfolio Yield Prince William County’s portfolio earnings yield is broadly correlated to the Federal Funds Rate. The Federal Open Market Committee (FOMC) reduced the target Federal Funds rate to a range of between 0.00% and 0.25% in December of 2008 and has maintained that target to date. The FOMC has announced its intention to continue this accommodative monetary policy over the short term. It is unlikely that the FOMC will move the target Federal Funds rate higher until there is substantial evidence of sustained economic growth and an unemployment rate below 6.5%. Consequently, it is expected that short term interest rates will remain near current levels, or only marginally higher, over the next year.

FY 2015-2019 Revenue Estimate - page 40

The following graph presents a history of the Fed Funds rate since 1958, when the rate stood at record lows: Figure 15. History of the Federal Funds Rate History of Federal Funds Rate by Month 20.00% 19.00% 18.00% 17.00% 16.00% 15.00% 14.00% 13.00% 12.00% 11.00% Fed Funds Rate currently less than 0.20%

10.00% 9.00%

Fed Funds Rate around 1.00%

8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00%

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

1969

1967

1965

1963

1961

1959

0.00%

Source: http://www.federalreserve.gov/releases/h15/data.htm

The Federal Funds rate trend is a significant driver for the average yield of Prince William County’s portfolio. Additionally, the timing of securities purchases, cash flow requirements, the general interest rate environment at the time of purchasing securities, and the securities’ duration are also major factors affecting the portfolio’s yield. The County’s general portfolio carries an asset mix that is held over a period of time based on yields that were available at the time of the purchases. The County portfolio’s total return changes to reflect swings in the market price of securities and to reflect the replacement, at current market prices and yields, of securities that are sold or mature. The portfolio’s earnings yield is a reflection of interest received, interest accruals, and net gains or losses on securities sales. Changes in market valuation, a component of total return, are not a part of the earnings yield. State laws and the County’s adopted investment policy govern the investment process, how funds can be invested, and which securities can be purchased. The graph on the next page presents a history of the County portfolio’s earnings yield as well as the projected yield for FY 2014-2019 juxtaposed against the Federal Funds average target rate history and a projection through FY 2019.

FY 2015-2019 Revenue Estimate - page 41

Figure 16. Prince William County’s Portfolio Yield Historic and Projected General Portfolio Yield 7.00%

Prince William County's Portfolio Earnings Yield

Federal Funds Rate

6.09%

6.00% 5.25%

Percent

5.00%

4.00%

3.00%

2.00%

1.45%

1.56%

1.25%

1.00% Sources: PWC Dept. of Finance; http://www.federalreserve.gov/releases/h15/data.htm

FY19e

FY18e

FY17e

FY16e

FY15e

FY13

FY14e

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

FY99

FY98

FY97

FY96

FY95

FY94

FY93

0.00%

Fiscal Years

Most forecasting sources provide interest rate projections up to four quarters beyond current dates. Therefore, estimates after the final half of FY 2015 are made without authoritative source data as a basis for the projections. In this environment, short term interest rates should continue low for the near term, however, the low interest rates should have little additional stimulative impact on the economy since this “sub 1% Fed Funds” rate environment has been the status quo for over five years. Long term rates may see some upward pressure depending upon the results of the Federal Reserve’s tapering of its open market purchases of Mortgage Backed Securities and Treasuries. Longer term expectations (beyond five years), are for higher interest rates on both the short and long ends of the interest rate curve. The difficulty, of course, is predicting exactly when interest rates will begin to turn higher. Prince William County’s investment strategy addresses the requirements of legality, safety and liquidity by investing in a diversified portfolio with specific security types, financial institutions, and sufficient liquidity to meet anticipated operating requirements. In addition, the County seeks to match its cash flow needs to the overall maturity structure of the portfolio in order to maximize yield.

FY 2015-2019 Revenue Estimate - page 42

Portfolio Size The average total dollar value of the portfolio is affected by the increase in County revenues and fund balance. Therefore, the revenue forecast itself becomes a key determinate of interest income. The following table shows the forecasted growth in the portfolio. Increases in portfolio size typically come from additions to fund balance as well as a portion of annual revenue growth. Table 31. Average Portfolio Size

Value (in 000s) FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19

$ 807,982 843,023 887,657 896,083 928,996 944,916 965,000 984,000 1,004,000 1,024,000 1,044,000

FY 2015-2019 Revenue Estimate - page 43

ALL OTHER REVENUE SOURCES Interest on Taxes Delinquent personal property and real estate tax accounts incur interest at 10% of the unpaid amount the first year. Subsequent years are incurred at 10% or the Internal Revenue Service (IRS) delinquent tax rate, whichever is greater. Table 32. Revenue Summary – Interest on Taxes Revenue History FY 09 FY 10 FY 11 FY 12 FY 13 Current Year Adopted Current Year Revised

% Change $

1,495,957 1,443,824 1,272,419 1,194,874 1,190,891

1.3% -3.5% -11.9% -6.1% -0.3%

1,328,000

11.5%

1,259,000

5.7%

1,314,000 1,384,000 1,459,000 1,534,000 1,614,000

4.4% 5.3% 5.4% 5.1% 5.2%

Revenue Forecast FY 15 FY 16 FY 17 FY 18 FY 19

The revenue estimate is computed by multiplying the fixed percentage of 0.19% by the combined estimate for gross current year real estate tax revenue and personal property tax revenue (excluding public service revenue). Recent history suggests the collection rate has improved, thereby decreasing interest on taxes revenue in FY 2014. Interest on tax revenue is projected to increase 2.8% in FY 2015 due to an increase in real estate and tax revenue. Motor Vehicle License Fee Section 46.2-752 Code of Virginia Annotated authorizes the County to levy a vehicle license fee. The amount of the license tax cannot be greater than the annual or one-year fee imposed by the Commonwealth on motor vehicles. The adopted, local fee is $24 per year for each passenger car and truck normally garaged or parked in the County. The adopted fee per year for each motorcycle is $12. In May 2009, the Board of County Supervisors eliminated the distribution of vehicle decals to County residents as part of FY 2010 budget reductions. However, the motor vehicle license fee continues to be levied in conjunction with the personal property tax. The license fee revenue forecast is derived by multiplying the decal fee by the estimated billable units in the County.

FY 2015-2019 Revenue Estimate - page 44

Table 33. Revenue Summary – Motor Vehicle License Fee Revenue History FY 09 FY 10 FY 11 FY 12 FY 13 Current Year Adopted Current Year Revised

% Change $

6,874,316 7,220,928 7,503,626 7,591,084 7,876,682

3.4% 5.0% 3.9% 1.2% 3.8%

8,060,000

2.3%

8,060,000

2.3%

8,240,000 8,430,000 8,610,000 8,800,000 8,980,000

2.2% 2.3% 2.1% 2.2% 2.0%

Revenue Forecast FY 15 FY 16 FY 17 FY 18 FY 19

FY 2015-2019 Revenue Estimate - page 45

Recordation Tax A recordation tax is levied when a legal instrument regarding real property such as a deed or deed of trust is recorded with the Clerk of the Circuit Court. This tax is charged for transfers in ownership of property, deeds of trust, and mortgage refinancing. On April 28, 2004, the Commonwealth of Virginia increased the State recordation tax rate from $0.15 per $100 of value to $0.25 per $100 of value effective September 1, 2004 (FY 2005). Section 58.1-814 of the Code of Virginia grants Prince William County the authority to levy an optional, local recordation tax rate equal to one-third of the State recordation tax rate. Therefore, the local recordation tax rate increased from $0.05 per $100 of value to $0.083 per $100 of value. The forecast depicted in Table 34 reflects only Prince William County’s share of recordation tax revenue and does not include the state portion of recordation revenue. Table 34. Revenue Summary – Recordation Tax Revenue History FY 09 FY 10 FY 11 FY 12 FY 13 Current Year Adopted Current Year Revised

% Change $

7,975,907 6,065,426 6,021,787 6,508,666 8,617,265

-10.4% -24.0% -0.7% 8.1% 32.4%

6,868,000

-20.3%

6,868,000

-20.3%

7,005,000 7,180,000 7,360,000 7,581,000 7,808,000

2.0% 2.5% 2.5% 3.0% 3.0%

Revenue Forecast FY 15 FY 16 FY 17 FY 18 FY 19

Recordation tax revenue is driven by home sale activity, home sale price appreciation, and refinance activity. Fiscal Year 2014 recordation tax revenue is projected to decrease approximately 20% FY 2013 revenue as a result of a sharp decline in in refinance activity as mortgage rates began to slowly rise above 4% beginning in June 2013. Unit sales decreased 6.8% in calendar year 2013 compared to 2012. The average sales price of the homes sold during that period increased an average of 9.9% compared to average purchase prices a year ago. Thirty-year fixed rate mortgage rates have hovered between 4.0%4.5% and remain historically low, yet still challenging, due to tighter underwriting standards. The FY 2015 forecast reflects the belief that sales prices are moving to a historically normal rate of appreciation. However, home sales activity has been limited by low inventory and that contributes to a conservative projection of revenue in the FY 2015-2019 forecast. On October 26, 2004, the Board of County Supervisors adopted Resolution 04-1034, which earmarks a portion of recordation tax revenues for transportation purposes in the County. Beginning in FY 2006, recordation tax revenues generated by the rate increase of $0.033 in addition to 56.75% of recordation FY 2015-2019 Revenue Estimate - page 46

tax revenues generated from the base rate of $0.05 will be used to improve County roads. The remaining amount of recordation tax revenue is retained by the County government as general revenue. The table below identifies the portion of recordation tax revenues designated for transportation and general revenue use in each year of the forecast. Table 35. Revenue Summary – Recordation Tax Designated for Transportation and General Revenue Use

General County Revenue FY 15 FY 16 FY 17 FY 18 FY 19

Transportation Fund

$1,825,000 1,870,000 1,920,000 1,971,000 2,028,000

$5,180,000 $5,310,000 $5,440,000 $5,610,000 $5,780,000

Total Recordation Tax Revenue $7,005,000 7,180,000 7,360,000 7,581,000 7,808,000

Tax on Deeds The tax on deeds is imposed when real estate deeds of conveyance (not deeds of trust) are recorded with the Clerk of the Circuit Court. The tax on deeds is levied when: • • •

property ownership changes; property ownership is conveyed in any manner; or a legal instrument is recorded with a transfer amount

The tax on deeds rate is $1.00 per $1,000 of value. The State and locality each receive half of the revenue generated by this tax (equal to $0.50 per $1,000 of value). The revenue forecast depicted below reflects only Prince William County’s share of revenues. The FY 2015 forecast represents a slight increase over FY 2014 as home sales activity is limited by inventory. It is important to note that the tax on deeds is not levied on mortgage refinancing. Table 36. Revenue Summary – Tax on Deeds Revenue History FY 09 FY 10 FY 11 FY 12 FY 13 Current Year Adopted Current Year Revised

% Change $

2,692,742 1,747,353 1,540,221 1,505,522 1,659,764

2.4% -35.1% -11.9% -2.3% 10.2%

1,475,000

-11.1%

1,725,000

3.9%

1,742,000 1,777,000 1,813,000 1,849,000 1,886,000

1.0% 2.0% 2.0% 2.0% 2.0%

Revenue Forecast FY 15 FY 16 FY 17 FY 18 FY 19

FY 2015-2019 Revenue Estimate - page 47

Listed below are additional County general revenue sources estimated to be less than $5 million each. Even though these sources sometimes have large changes in revenue on a percentage basis, such changes have an insignificant impact on revenues throughout the forecast period. The forecast and a description of each revenue source follows. Table 37. Miscellaneous Revenue Sources FY 14 Revised

REVENUE SOURCE 0215 0230 0236 0270 0520 0521 1150 1303 1304 1305 1700

DAILY EQUIPMENT RENTAL TAX BANK FRANCHISE TAX BPOL TAXES - PUBLIC SERVICE TRANSIENT OCCUPANCY TAX INTEREST PAID TO VENDORS INTEREST PAID ON REFUNDS UNDISTRIBUTED & MISCELLANEOUS ROLLING STOCK TAX PASSENGER CAR RENTAL TAX MOBILE HOME TITLING TAX FED PAYMENT IN LIEU OF TAXES

TOTAL MISCELLANEOUS REVENUE

FY 15 Forecast

FY 16 Forecast

FY 17 Forecast

FY 18 Forecast

FY 19 Forecast

$

204,000 $ 1,500,000 1,221,000 1,404,000 (100,000) (55,000) 7,000 97,000 995,000 35,000 70,000

246,500 $ 1,500,000 1,258,000 1,446,000 (100,000) (55,000) 7,000 99,000 1,015,000 35,000 70,000

271,500 $ 1,500,000 1,296,000 1,489,000 (100,000) (55,000) 7,000 101,000 1,035,000 35,000 70,000

299,000 $ 1,500,000 1,335,000 1,534,000 (100,000) (55,000) 7,000 103,000 1,056,000 35,000 70,000

330,000 $ 1,500,000 1,375,000 1,580,000 (100,000) (55,000) 7,000 105,000 1,077,000 35,000 70,000

363,000 1,500,000 1,416,000 1,627,000 (100,000) (55,000) 7,000 107,000 1,099,000 35,000 70,000

$

5,378,000 $

5,521,500 $

5,649,500 $

5,784,000 $

5,924,000 $

6,069,000

Daily Rental Equipment Tax The County levies a daily rental tax of 1% on certified short-term rental businesses. The tax applies to businesses that rent items held by users for less than 91 consecutive days. Examples of such businesses include bowling alleys, video rental stores, hardware stores, and equipment rental stores. They are required to collect 1% of the daily rent and remit it to the County quarterly. Bank Franchise Tax The County levies a bank franchise tax on the net capital of each bank, banking association, savings bank, or trust company which operates in the County. The tax is based on 0.8% of the net capital multiplied by the percentage of deposits on hand at that branch compared to its statewide deposits. The Virginia Department of Taxation audits the tax. BPOL Taxes - Public Service The Business, Professional, and Occupational License (BPOL) tax is imposed on public utility companies that operate in the County. The tax of $0.29/$100 of assessed value was identical to the County’s BPOL tax on other businesses, but is authorized under separate statutes. The Commonwealth repealed the tax for electric companies and replaced it with the Corporate Net Income Tax and the declining Consumption Tax. The State set the latter at a maximum of $0.50/$100 of assessed value. If a locality’s rate is below the maximum, the State receives the difference. Therefore, the Board of County Supervisors increased this tax only for electric companies from $0.29/$100 of assessed value to $0.50/$100 of assessed value effective January 1, 2001.

FY 2015-2019 Revenue Estimate - page 48

Transient Occupancy Tax The County levies a transient occupancy tax of 5% of the amount charged for the occupancy of hotels, motels, boarding houses and travel campgrounds. However, charges for rooms rented by the same individual or group for thirty or more days are exempt. This tax also does not apply to miscellaneous charges such as in room telephone usage, movie rentals, etc. The tax is remitted directly to the County on a quarterly basis in August, November, February, and May by hotels, motels and campgrounds. The general revenue share of this tax is 40%. The remaining 60% is budgeted for tourism-related purposes such as the Prince William County/Manassas Convention & Visitors Bureau (CVB). Board appropriation is based on requirements submitted by the CVB. The Transient Occupancy tax is based on forecasts for number of hotel rooms in the County, occupancy rates, and room rates. Interest Paid to Vendors When a vendor with whom the County does business overpays for any reason, or when a performance bond is repaid to a developer, the refunded amount includes interest. This interest is recorded as negative revenue. Interest Paid on Refunds The County must pay interest on taxpayer refunds based on delinquent taxes that were erroneously assessed. This interest is recorded as negative revenue. Rolling Stock Tax The rolling stock of railroads, freight car companies and certified vehicle carriers doing business in the state is taxed at the rate of $1.00 on each $100 of assessed value. This tax is levied in lieu of the personal property tax. Revenues are distributed to counties, cities, and incorporated towns based on: (i) the percentage of track miles located in the locality versus the State-wide total or (ii) vehicle miles operated by a carrier in the locality versus the State-wide total. Passenger Car Rental Tax Automobiles rented on a daily basis are often moved from location to location and have no fixed sites for personal property taxation. In lieu of the local personal property tax, the Department of Motor Vehicles collects a tax for short-term rentals from leasing companies located in the County. The State remits four percent of the rental fee for passenger cars rented for less than twelve months to the County. Mobile Home Titling Tax The Mobile Home Titling Tax is a 3% tax on mobile homes titled in the Commonwealth. The vendor pays the tax to the Department of Taxation who remits it to the locality where the home is registered. Payment in Lieu of Taxes (PILT) Payments in Lieu of Taxes (or PILT) are Federal payments to local governments that help offset losses in property taxes due to nontaxable Federal lands within their boundaries. The formula used to compute this payment is contained in the PILT Act and based on population, receipt sharing payments, and the amount of Federal land within an affected county.

FY 2015-2019 Revenue Estimate - page 49

APPENDIX A Real Property, Personal Property and Special Levies Adopted FY 2014

Adopted FY 2015

(Tax per $100 Assessed Value)

Type of Tax Real Estate Base Rate Fire and Rescue Levy Gypsy Moth Levy Personal Property General Class Heavy Equipment and Machinery Mining and Manufacturing Tools Mobile Homes Programmable Computer Equipment and Peripherals used in a Trade/Business Research and Development Volunteer Fire and Rescue Members’ Vehicle Auxiliary Fire and Rescue Members’ Vehicle Vehicles Modified for Disabled Persons Vanpool Program Vans Farmer’s Machinery and Tools Aircraft (small scheduled and all other aircraft) Watercraft Privately Owned for Recreational Use Privately Owned Recreational Campers, Travel Trailers, Motor Homes, and Horse Trailers Personal Property Owned by Certain Elderly and Handicapped Persons

$1.181 0.0727 0.0025

$1.148 0.0707 0.0025

3.70 3.70 2.00 1.181 1.25

3.70 3.70 2.00 1.148 1.25

1.00 0.00001 0.00001 0.00001 0.00001 0.00001 0.00001 0.00001 0.00001

1.00 0.00001 0.00001 0.00001 0.00001 0.00001 0.00001 0.00001 0.00001

0.00001

0.00001

Business and Other Tax Rates Type of Tax Business, Professional and Occupational Licenses Business, Personal, Repair & Other Services Contractors, Builders & Developers Professional, Financial & Real Estate Services Hotels and Motels Public Utilities- Electric and Natural Gas Public Utilities- All Others Retail Merchant Wholesale Merchant

Other Taxes Transient Occupancy Tax Daily Equipment Rental Tax Heavy Equipment Rental Tax

Adopted FY 2014

Adopted FY 2015

(Tax per $100 Prior Year Gross Receipts-Only on businesses with annual gross receipts greater than $250,000)

$0.21 0.13 0.33 0.26 0.50 0.29 0.17 0.05

$0.21 0.13 0.33 0.26 0.50 0.29 0.17 0.05

(Tax based on % of Gross Receipts)

5.0% 1.0% 1.5%

5.0% 1.0% 1.5%

FY 2015-2019 Revenue Estimate - page 50

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