Local Governments and the

2007-2009 RecessionJeffrey 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

0

500

1000

1500

2000

2500

3000

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

0

500

1000

1500

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Bil

lion

$

2003 2004 2005 2006 2007 2008.1 2008.2

Consumer Debt

RevolvingNon-RevTotal

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)

GA price drop is 10%.

10-14 million homeowners now have zero or negative home equity.

Georgia has 4% of mortgages seriously delinquent.

prime = 3% subprime = 23% (5% of market) Up about 50%

Gwinnett SF Bldg Permits

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100

200

300

400

500

600

700

800

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1,000

1995 1997 1999 2001 2003 2005 2007 2009

Gwinnett Foreclosures

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400

600

800

1000

1200

1400

1600

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Sources: Atlanta Federal Reserve Bank and Gwinnett County Board of Commissioners

Where Are We - Consumers

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20

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120

1/1/

2006

3/1/

2006

5/1/

2006

7/1/

2006

9/1/

2006

11/1

/200

61/

1/20

073/

1/20

075/

1/20

077/

1/20

079/

1/20

0711

/1/2

007

1/1/

2008

3/1/

2008

5/1/

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7/1/

2008

9/1/

2008

11/1

/200

8

Consumer Confidence

Source: Conference Board

Where Are We – Manufacturing

30

35

40

45

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55

60

65

97.1 98.1 99.1 00.1 01.1 02.1 03.1 04.1 05.1 06.1 07.1 08.1

PMI

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

Stimulus, plus all other programs Probably enough to boost GDP 5% or more

State and local government spending will drop. 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: -6% Income taxes: -6% Property taxes: anywhere from level to -10% Federal dollars: ????

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.

Sales tax, property tax, fees, etc.

Realize that different tax sources have different stability properties. 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 revenue. Predicted Gov't Revenues

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.