Economy - 2010 Budget Message

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According to the National Bureau of Economic Research, the economic recession officially began in December of 2007. Concurrently, many municipalities throughout the United States started to experience the recession’s negative impact on their operating budgets. In the fall of 2008, the Township of Lower Merion began planning for challenging times in 2009 and beyond while facing record high energy prices, inflationary pressures and decreasing revenue. As the Township presented its Proposed 2009 Budget, the worst economic recession in decades began to unfold with higher unemployment, failing businesses, a slumping housing market, increased mortgage defaults and lower consumer spending. At that time, the Township expected its revenue categories with direct links to housing and business (real estate taxes, real estate deed transfer tax, building permits and business taxes) to be negatively impacted, but (as it turns out) not to the extent actually experienced in 2009 to date.

For the most part, the Township has been able to weather the storm with its strong long-range financial planning, prudent fiscal management and some better than expected revenue performance, which offset declining revenue. Nevertheless, the Township is not immune to economic conditions. In 2010, businesses will file their business tax returns and pay taxes on the gross receipts earned in 2009, which have declined compared to 2008 according to recent sales tax receipts information reported by the Pennsylvania Department of Revenue. Slower economic growth means less residential and commercial development, fewer home improvements and therefore lower building permit and zoning and subdivision fee revenue. The housing market decline has led to a decrease in home values, contributing to a significant increase in the number of successful real estate assessment appeals. This, coupled with a slowing of real estate sales, has negatively impacted the Township’s real estate property tax and real estate deed transfer tax revenue.

The Township, which is in the heart of the Philadelphia metropolitan area, generates economic vitality from its service, retail and financial sectors. Some of these sectors have experienced difficulties during this economic recession, but are expected to rebound in 2010 and beyond. The two medical centers within the Township’s borders are among the largest employers in the immediate Philadelphia area, along with several world-renowned universities and colleges and some of the top private schools in the United States. Similar to many other markets throughout the state and nation, education and health services have held their own through these difficult times. However, other businesses, including automobile dealerships, department stores and other consumer-oriented businesses have experienced sales declines during 2009.

A recent survey of 44 professional forecasters released by the National Association for Business Economics found that 80% of the respondents believed the economy was growing again after four straight quarters of declines and that the recession has ended. Still, most of the respondents believe the economic recovery is likely to be more moderate than those typically experienced following steep declines. It appears that the economy is slowly moving in that direction, with recent economic reports indicating an increase in the Gross Domestic Product (GDP) and new housing starts. However, job losses continue to rise and are expected to continue throughout 2009.

Lower Merion Township remains Montgomery County's most affluent and populated municipality with the highest incomes, largest labor force, highest ratio of white collar and professional workers, most households, most single-family detached dwellings, and most married residents (based on 2000 census data). Despite these demographics, the Township will be challenged by a “flat” housing market, a volatile stock market, tight credit and economic uncertainties in 2010 and beyond.

The direction of the current economy suggests the following key economic trends, which will directly impact the Township:

National Trends

  • Real Gross Domestic Product (GDP), which is the output of goods and services produced by labor and property located in the United States, increased at an annual rate of +3.5% in the third quarter of 2009, according to estimates released by the Bureau of Economic Analysis (BEA). By comparison, the second quarter real GDP decreased -0.7%. Most economists are predicting moderate growth for the remainder of 2009 and the first half of 2010.
  • Higher unemployment has been experienced. The national unemployment rate in September 2009 was 9.8%; over the prior twelve months, the number of unemployed persons increased +5.5 million (from 9.6 million to 15.1 million). 
  • New housing starts, reported in September 2009, were up +0.5% from August 2009 but down -28% compared to September 2008. 
  • Existing homes sales were up +6.1% in September 2009 after a +6.4% gain in August 2009 as compared to September 2008, when sales rose +19.8%. It was reported that many buyers accelerated purchases of new homes to take advantage of the Federal government’s $8,000 tax credit before the November 30, 2009 expiration date.
  • State and local government spending across the country is under increased pressure as tax revenues decline. A study by the Center on Budget and Policy Priorities reported that 42 states are currently experiencing a $60 billion budget shortfall this fiscal year, which is 9% of their combined budgets. In 2010, this shortfall is expected to increase to $145 billion. 
  • Monetary policy has generated an excess supply of credit at lower interest rates. 
  • Conservative lending practices have resulted in a tightening of credit for home mortgages, car loans, consumer financing and business and commercial loans.
  • Lower mortgage rates and the new homeowner tax credit are helping residential sales.
  • Stable long-term interest rates are foreseen in the short-term, with upward pressure.
  • The significant drop in short-term interest rates is expected to remain stable over the short-term with upward pressure in the long-term.

Regional and Local Business Trends

  • Flat to low growth occurring in the local business environment.
  • Flat to declining local employment levels.
  • Significant slowdown of new construction permits in 2009.
  • Flat to low growth in service-sector and retail sales.
  • Conditions deteriorated significantly in late 2008 into 2009 in the region’s manufacturing sector, which now shows signs of recovery and is improving marginally according to firms polled (October 2009) by the Federal Reserve Bank of Philadelphia and reported in the Business Outlook Survey. 
  • Continued plans to address infrastructure and revitalization needs of commercial districts.

Local Residential Trends

  • High expectations and demand for top quality municipal services coupled with the need to balance service costs and the need to raise revenue to pay for them.
  • Excellent, consistent taxpayer compliance; very low delinquencies for taxes and billed services.
  • Minor exposure to upturn in foreclosures experienced nation-wide.
  • Slowing of the local housing resale market, declining home prices, longer residential sales cycle and increased residential home inventory.
  • High compliance with land use and building code regulations.

Lower Merion Township Government Trends

  • Moderate real estate tax millage rate increase (+3.8%) proposed for 2010.
  • Solid waste fee rate increases to provide full cost recovery in the Solid Waste Fund for 2010.
  • Above-market cost for solid waste disposal; major long-term savings generated from good financial performance and cost containment initiatives at the trash-to-steam facility in Plymouth Township.
  • Cost increases for wastewater treatment services, requiring rate increases in Sanitary Sewer rent fees.
  • Good budgetary performance, overall revenue performance better than projected at mid-year (2009) due to better recent business tax performance from a small number of businesses, ongoing cost containment and declining revenue growth projected for the near future.
  • Continued improvement in services through efficiency and technology.
  • No service delivery level increases planned for municipal services.
  • Expenditure reductions and staffing level decreases in certain areas of the government.
  • Continued proactive approach to infrastructure and facility maintenance and reconstruction.
  • Major multi-year economic development initiatives underway with significant impact on the 2010-2015 Capital Improvement Program.
  • Growing partnerships with commercial districts to foster economic redevelopment.
  • Citizenry actively expressing community needs and desires.
  • Continued focus on Township’s delinquent business tax collection program.
  • Recent State legislative changes adversely impacting future spending requirements and tax revenues.
  • The local business economy experienced growth from 2008 to 2009. However, with the economic downturn and declining consumer spending in 2009, business tax revenues are expected to be flat to declining in 2010. These taxes roughly reflect prior year gross sales by Township businesses.

Employment is a key indicator of economic strength. It measures the number of Philadelphia – Metropolitan Area residents employed in non-farm jobs in the counties surrounding Philadelphia. Unemployment has increased significantly both regionally and nationwide. As indicated below, the unemployment rate for the Philadelphia - Metropolitan Area is up since December 2008. The Township of Lower Merion’s September unemployment rate, by contrast, stands at 5.5% as compared to 3.9% in December 2008. Though significantly lower than the state and nation, it represents a significant increase from the December 2008 rate. As a comparison, the Township’s unemployment rate grew to a high of 3.9% at the peak of the 2002 recession. Still, the healthcare and higher education institutions in and around the Township have contributed to the overall lower rate as compared to the national and state rates. Pennsylvania, with an 8.8% unemployment rate in September 2009, is currently in the mid-range of its historical high unemployment rate of 12.9% in March of 1983 and low of 4% in March of 2000.

Unemployment Rates
Year
United States
Pennsylvania
Philadelphia
Metropolitan
Lower Merion
Township
Dec-05
4.8%
4.8%
4.7%
2.5%
Dec-06
4.4%
4.4%
4.5%
2.3%
Dec-07
5.0%
4.4%
4.1%
2.5%
Dec-08
7.2%
6.4%
6.2%
3.9%
* Sep-09
9.8%
*8.8%
*8.8%
*5.5%
 
*Preliminary data

The Township’s real estate revenue indicators have tracked closely to the downturn in the residential real estate market, with real estate transfer taxes continuing to slide from the 2006 peak. Beginning in 2007, Township property values decreased moderately and in 2008 property values continued to decline in the range of -6%, based on the common level ratio (54.0) calculated for Montgomery County. Despite the real estate slow down after record- breaking years, the demand for homes along the Main Line still appears to have strength. Nevertheless, sales volume has declined with a longer sales cycle that is also being experienced nationwide. The most recent third quarter data released by Prudential Fox & Roach Realtors (HomExpert Market Report) indicates that Main Line median home prices decreased -9.1% to $350,000 in the first nine months of 2009 as compared to same period in 2008 which had stood at $385,000. In addition, total homes sold decreased -15% (from 1,886) to 1,603 in the first nine months of 2009. Further, the average number of days a home remained on the market increased to 80 days in the first nine months of 2009 from 66 days during the same period in 2008. The same data source reported that the median sales price in Lower Merion Township decreased -3% (from $505,000 in the first nine months of 2008) to $490,000 in the same period of 2009. The speculation in the housing market that drove prices to unrealistic levels and spurred the highest level of home loan delinquencies in 20 years did not impact the Philadelphia region as significantly when compared to other areas in the nation. As a result, mortgage defaults (for 2009) in the Township have been minimal and have not affected the revenue base.

Real estate transfer taxes levied on the price of real property sold in the Township were consistently strong in booming years (2004–2006), and peaked in 2006 with record high collections of $4.8 million. Since then, this revenue has declined to $4.2 million in 2007, $3.2 million in 2008 and $2.0 million estimated for 2009. Recent real estate sale volume has increased with the new homeowner federal tax credit and lower housing prices. It is difficult to project if the housing market will stabilize in 2010; however, positive factors, including the national economy, mortgage financing availability and housing affordability will certainly influence the future real estate market.

Short-term interest rates remain at or near the lowest levels in history. The three-month Treasury bill yield of October 2009, decreased by -0.05%, compared to 0.38% one year earlier. This is primarily the result of a 75 basis point Federal Funds Rate decrease since October 2008 (rates decreased from 1%) to 0.25%. At this time, there is no indication as to when or if the Federal Reserve will increase the Federal Funds Rate in 2010. Therefore, short-term interest rates are expected to be flat to minimally increasing over the next twelve months.

Long-term interest rates have changed much less dramatically. The 10-year Treasury Bond yield of October 2009 was 3.4%, compared to 3.9% last year and 4.4% two years ago. Long-term rates are one component influencing decisions that lead to new home construction and sales of existing residences. The current conventional 30-year mortgage interest rate stands at 5.2% in October 2009 compared to 6.4% this same time last year.

The local consumer price index (Philadelphia Urban Wage Earners and Clerical Workers) showed a twelve-month decrease of -1.2% through August 2009, compared to a +5% increase at this time last year. In December 2008, the CPI-Philadelphia Urban Index ended the year at -0.5% and is projected to be flat for December 2009. In recent years leading up to 2009, the Township was impacted negatively by rising inflation with increasing costs for fuel, energy, materials, supplies and services. However, deflation and the sagging economy have presented opportunities to procure materials, services and construction at extremely competitive pricing. The Township has realized significant cost savings for capital projects in 2009 as a result of these economic conditions. Although the price of oil dropped sharply from a high of $145 per barrel (July 2008) to a five-year low of $33 per barrel (January 2009), the Township will be challenged in 2010 and beyond with rising fuel and energy costs. The reduction in oil prices decreased the Township’s cost for gasoline (from $3.54 per gallon in July 2008) to $2.12 per gallon and diesel fuel (from $4.12 per gallon in July 2008) to $2.15 per gallon in October 2009. In 2011, the Township anticipates a +20% increase in the price for electricity as a result of the deregulation of electric utilities in Pennsylvania.

Summary:

Clearly, the Township has felt the effects of the worst recession in many decades. The State’s unemployment rate of 8.8% is the highest level of unemployment since 1984 and is expected to increase over the coming months, though at a much slower rate of increase. The economic recession is primarily attributed to the bursting housing and credit bubbles coupled with sharp declines in consumer spending and increases in consumer saving. However, some positive signs are beginning to surface, such as the demand for real estate in Lower Merion Township, which remains strong. Existing home sales and the inventory of unsold homes have improved from levels experienced between January 2009 and May 2009. Compounding the effects of the economy on the Township’s Budget is the uncertainty surrounding the State Budget and its impact on the Township services. In general, states have been challenged with balancing their budgets and Pennsylvania, in particular, was faced with closing a multi-billion dollar budget gap this year. Some of the budget cuts approved in the Commonwealth of Pennsylvania 2009/2010 Budget are likely to result in the imposition of unfunded requirements upon the Township. As the Township presents the Proposed 2010 Budget, most economists are predicting that the recession has bottomed out, but that the rebound expected to begin in 2010 will be slow. The Township will be challenged with slow growing revenue in the years ahead; particularly, real estate deed transfer taxes, business taxes, building permit fees and investment income. Despite these challenges, the Township will endeavor to provide valued services to our citizens and preserve our community’s quality of life at a reasonable and affordable cost to the taxpayers.

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