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Local Governments and the 2007-2009 Recession Jeffrey H. Dorfman The University of Georgia January 25, 2009 Outline How We Got Here Where Are We? How Bad Will It Be? Is Help Coming? What to Do to Prevent this in the Future How We Got Here Mortgage / Real Estate Mess Real estate bubble started with dot-com bust. Free markets mean booms and busts. US Housing Starts 3000 2500 2000 1500 1000 500 0 6/11/1968 12/2/1973 5/25/1979 11/14/1984 5/7/1990 10/28/1995 4/19/2001 10/10/2006 Source: St. Louis Federal Reserve How We Got Here Consumer Debt 3000 Billion $ 2500 2000 Revolving Non-Rev Total 1500 1000 500 0 2003 2004 2005 2006 2007 2008.1 2008.2 Source: Federal Reserve How We Got Here State Government Role Spending has increased a good bit last few years. States have not been raising taxes. States used poor economic forecasts and waited too long to see this slowdown coming (GA ex.). States are limiting local government revenue. Where Are We? Economy Retail Sales Real Estate Values Consumer Confidence Manufacturing State and Muni Borrowings Where Are We - Economy GDP dropped 0.5% in Q3. This is after it grew 2.8% in Q2, mostly due to stimulus checks. Q4 has not been released yet, but looks like it was -3 or -4%. US unemployment up to 7.2% (from 4.8% one year ago). Job losses 554,000 last month. Georgia worse than U.S. Where Are We – Retail Sales This is $4 trillion / year and very important to states since it translates directly to sales tax collections. Georgia sales tax collections are down 0.9% so far in the first 6 months of FY09. Distributions to local governments are down 5.7%. Second half comparisons will be easier. Sources: US Census Bureau and GA Dept of Revenue Where Are We – Real Estate Nationwide 20% price drop (Case-Shiller) Gwinnett SF Bldg Permits 1,000 900 800 GA price drop is 10%. 700 600 500 400 300 10-14 million homeowners now have zero or negative home equity. 200 100 1995 1997 1999 2001 2003 2005 2007 2009 Gwinnett Foreclosures Georgia has 4% of mortgages seriously delinquent. 1600 1400 1200 1000 prime = 3% subprime = 23% (5% of market) Up about 50% 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Sources: Atlanta Federal Reserve Bank and Gwinnett County Board of Commissioners 008 /1/ 2 11 08 /20 9/1 08 /20 7/1 08 /20 5/1 08 /20 3/1 08 /20 1/1 07 007 /1/ 2 11 /20 9/1 07 /20 7/1 07 /20 5/1 07 /20 3/1 07 /20 1/1 006 /1/ 2 11 06 /20 9/1 06 /20 7/1 06 /20 5/1 06 /20 3/1 06 /20 1/1 Where Are We - Consumers 120 100 80 60 40 20 0 Consumer Confidence Source: Conference Board Where Are We – Manufacturing 65 60 55 50 PMI 45 40 35 30 97.1 98.1 99.1 00.1 01.1 02.1 03.1 04.1 05.1 06.1 07.1 08.1 Source: Institute for Supply Management Where Are We – State Borrowings California is having trouble borrowing $7-20B and may not be able to pay its bills. Hartsfield Airport may delay a new international terminal because it cannot sell bonds. Road and school projects have been delayed in Boise, MD, AZ, TN, VA, NC, NJ. Where Are We – Muni Borrowings Municipal bond market should be back to “normal” in a few months. Any hints of higher income tax rates will help the muni bond market (no hint yet). Credit should be there once markets settle down a little bit more. How Bad Will It Be? Look at 4 sources of revenue and economic growth: Consumer Spending Personal Income Corporate Profit and Investments Government Spending How Bad Will It Be? - Consumers Consumer spending will be slowed by Wealth effect from stock market decline - $100B Wealth effect from home value decline - $60B Spending drop from drop in refinancings - $200B That means we should see 6% drop in retail sales. How Bad Will It Be? – Income Unemployment up 3% and climbing. Capital gains will be very low in 2008-09. Raises and bonuses will be low. Interest and dividends will be down. Total effect could be 7% drop. How Bad Will It Be? - Government Federal spending is increasing State and local government spending will drop. Stimulus, plus all other programs Probably enough to boost GDP 5% or more May be offset for federal govt, may be more. Federal dollars for infrastructure may head to local governments soon, maybe within 6 months. How Bad Will It Be? - Summary Estimated changes in Sales taxes: Income taxes: Property taxes: Federal dollars: -6% -6% anywhere from level to -10% ???? Many local governments will see a 2-10% revenue drop depending on their sales/property tax mix and property values in your area. Will Stimulus/Govt Programs Work? Bailouts slow reallocation, make recession longer. Consumers reducing debt, more spending unlikely. Can stabilize banks and real estate. Local gov’t relief & infrastructure spending is good. Should leave the remainder alone. Future Improvements for Recessions Project revenues by category. Realize that different tax sources have different stability properties. Sales tax, property tax, fees, etc. Try to pair more variable revenue sources with programs that can be cut quickly. Set revenue target at lower limit of 95% CI. Future Improvements for Recessions The idea for revenue forecasting would be that 95% of the time, you would end up with extra Predicted Gov't Revenues revenue. 0 2 4 6 8 10 12 Future Improvements for Recessions Make sure you keep a 2+ month reserve so that your bonds get the highest possible rating. Going forward safety will be important to investors, so weigh revenue versus G.O. bonds. Conclusions We are in a recession. It will be a reasonably severe one with high and long lasting unemployment. I’m glad I’m not an elected official or city/county manager right now.