Transcript Talk to Georgia Municipal Association on the

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.