Regional Area Road Fund Maricopa Transportation Excise Tax Fiscal Year 2002 Year-End Report Arizona Department of Transportation Financial Management Services Office of Financial Planning August 2002 REGIONAL AREA ROAD FUND MARICOPA TRANSPORTATION EXCISE TAX EXECUTIVE SUMMARY The Maricopa County Transportation Excise Tax, often referred to as the "1/2 cent sales tax", is levied upon business activities in Maricopa County, including retail sales, contracting, utilities, rental of real and personal property, restaurant and bar receipts, and other activities. The transportation excise tax revenues are deposited in the Maricopa County Regional Area Road Fund (RARF) which is administered by the Arizona Department of Transportation. The revenues deposited into the RARF account are the principal source of funding for the Regional Freeway System in Maricopa County and are dedicated by statute to the purchase of right-of-way, design and construction of controlled access highways. The tax is expected to yield $3.8 billion for the period January 1986 through December 2005. The Maricopa County transportation excise tax collections totaled $267.6 million in FY 2002, an increase of 1.1 percent over the FY 2001 revenue level, but was 4.3 percent below the forecast. FY 2002 revenue growth was the lowest since the inception of the tax. The only bright area was the contracting revenue category which produced a 6.2 percent increase over the FY 2001 revenue level. RARF COLLECTIONS $350.0 $300.0 $250.0 $200.0 $150.0 The second half of FY 2001 experienced a slowdown in economic activity which continued during FY 2002. The weak economy was drastically impacted by the tragic events in September 2001. The loss of jobs in Maricopa County along with the stock market drop and economic uncertainty were all contributors to the slow growth in excise tax collections during FY 2002. PAGE 1 $100.0 $50.0 $0.0 2001 ACT 2002 ACT FISCAL YEAR 2002 EST PERFORMANCE BY CATEGORY RETAIL SALES: FY 2002 retail sales revenue totaled $131.4 million, a decrease of 0.2 percent from FY 2001 and 5.3 percent below the estimate. This represented the first time since the inception of the tax that retail sales revenue had negative growth. The sharp downturn in the economy led to a higher unemployment rate and lower business and consumer spending. Inflation and population growth provide for the annual growth in retail sales collections. This past year experienced lower inflation which contributed to the slower growth in the retail sales collections. Retail sales did experience growth in the motor vehicle sector but was offset by negative growth in other sectors. Maricopa County retail sales are forecasted using three economic indicators, wage and salary employment, personal income and unemployment. The April 2002 Greater Phoenix Blue Chip consensus estimates predict the Maricopa County economy should bottom out in Calendar Year (CY) 2002 while improving slightly in CY 2003. The forecast for wage and salary employment growth estimates show an increase from 1.2 percent in CY 2002 to 3.0 percent in CY 2003. CY 2000 and CY 2001 actual growth was 3.9 and 0.8 percent, respectively. RETAIL SALES 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% 93 94 95 96 97 98 99 00 01 02 FISCAL YEAR WAGE & SALARY EMPLOYMENT GROWTH MARICOPA COUNTY 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 93 94 95 96 97 98 99 00 01 02 03 ACT ACT ACT ACT ACT ACT ACT ACT ACT EST EST Personal income growth is estimated to be 5.1 percent in CY 2002 and 6.4 percent in CY 2003. However, there remains a moderate level of economic uncertainty and Maricopa County personal income PAGE 2 CALENDAR YEAR Source: Greater Phoenix Blue Chip Economic Forecast, July 2001 and April 2002 RETAIL SALES: Continued growth may be further impacted by a continued sluggish economy. The growth in personal income during CY 2000 and CY 2001 was 7.1 and 5.9 percent, respectively. The unemployment rate was sharply impacted over the past twelve months due to layoffs in the manufacturing and service sectors. The tragic events in September 2001 also contributed to significant job losses in the hospitality industry. The Maricopa County unemployment rate is estimated at 4.6 percent in CY 2002 and 4.0 percent in CY 2003. The July 2001 estimate for the CY 2002 unemployment rate was 3.5 percent, which shows the magnitude of the Maricopa County economic slowdown over the past twelve months. UNEMPLOYMENT RATE MARICOPA COUNTY PERSONAL INCOME MARICOPA COUNTY 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 93 94 95 96 97 98 99 00 ACT ACT ACT ACT ACT ACT ACT EST 01 EST 02 EST 03 EST 93 94 95 96 97 98 99 00 01 02 ACT ACT ACT ACT ACT ACT ACT ACT ACT EST CALENDAR YEAR 03 EST CALENDAR YEAR Source: Greater Phoenix Blue Chip Economic Forecast, July 2001 and April 2002 Source: Greater Phoenix Blue Chip Economic Forecast, July 2001 and April 2002 CONTRACTING: The bright spot for FY 2002 was contracting collections which totaled $41.2 million, an increase of 6.2 percent over FY 2001 and 4.1 percent above the estimate. The contracting revenue growth in FY 2002 was a welcomed surprise since local economists have been predicting a slowdown in construction for the past three years. Although the construction sector has begun to experience negative growth in the number of permits, the total dollar value increased 7.7 percent in CY 2001 over CY 2000 according to Arizona Business, March 2002. PAGE 3 CONTRACTING 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 93 94 95 96 97 98 99 FISCAL YEAR 00 01 02 CONTRACTING: Continued Single-family housing permits in Maricopa County increased by 0.7 percent in CY 2000 but then decreased 1.9 percent in CY 2001. With the help of low mortgage rates and the continued influx of new residents, the downturn in the single-family housing sector has been only mild. Single family housing permits are projected to decrease 9.1 percent in CY 2002 and then surprisingly increase 3.4 percent in CY 2003. With further reductions in mortgage rates, the CY 2002 figure may be a bit pessimistic. Multi-family housing permits saw a 3.2 percent increase in CY 2000 and a 10.1 percent decrease in CY 2001. With the multi-family housing sector nearing an overbuilt level, CY 2002 and CY 2003 are expected to see decreases of 18.9 and 7.9 percent, respectively. Apartment vacancy rates are expected to be around 8 to 8.5 percent in CY 2002 and CY 2003. SINGLE FAMILY HOUSING PERMITS MARICOPA COUNTY MULTI-FAMILY HOUSING PERMITS MARICOPA COUNTY 50.0% 250.0% 40.0% 200.0% 30.0% 150.0% 20.0% 100.0% 10.0% 0.0% 50.0% -10.0% 0.0% -20.0% -50.0% 92 93 94 95 96 97 98 99 00 01 02 ACT ACT ACT ACT ACT ACT ACT ACT ACT ACT EST 92 93 94 95 96 97 98 99 00 01 02 03 ACT ACT ACT ACT ACT ACT ACT ACT ACT ACT EST EST CALENDAR YEAR 03 EST CALENDAR YEAR Source: Greater Phoenix Blue Chip Economic Forecast, April 2002 Source: Greater Phoenix Blue Chip Economic Forecast, April 2002 The Federal Reserve lowered interest rates five times during FY 2002. Interestingly, the conventional 30 year fixed rate mortgage was 6.7 percent in both March 2001 and March 2002. The low interest rates have provided for better than expected growth in the Greater Phoenix housing market over the past year. PAGE 4 CONTRACTING: Continued Construction employment is estimated to decrease by 3.6 percent in CY 2002 and then increase by 0.7 percent in CY 2003. These estimates may be a bit pessimistic if interest rates remain low. Stronger than expected residential and commercial construction activity led to modest increases in construction employment in CY 2000 and CY 2001 of 4.8 and 1.5 percent, respectively. CONSTRUCTION EMPLOYMENT MARICOPA COUNTY MORTGAGE INTEREST RATES MARICOPA COUNTY 12 140 120 10 100 80 8 60 40 6 20 0 93 ACT 4 MAR MAR MAR MAR MAR MAR MAR MAR MAR MAR MAR MAR 91 92 93 94 95 96 97 98 99 00 01 02 Source: Arizona Business, May Issues 94 ACT 95 ACT 96 ACT 97 ACT 98 ACT 99 ACT 00 ACT 01 ACT 02 EST 03 EST CALENDAR YEAR Source: Greater Phoenix Blue Chip Economic Forecast, July 2001and April 2002 UTILITIES UTILITIES: 12.0% 10.0% Utility tax collections in FY 2002 totaled $18.4 million, an increase of 3.2 percent over FY 2001 but was 2.5 percent below the estimate. The slower growth in utility tax revenue than forecast was due to slower permit growth in the construction sector along with milder winter and spring temperatures. 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% 93 94 95 96 97 98 99 FISCAL YEAR PAGE 5 00 01 02 RESTAURANT AND BAR: RESTAURANT & BAR Restaurant and bar collections in FY 2002 reached $21.7 million, a slight increase of 1.7 percent over FY 2001. When compared to the forecast, restaurant and bar revenues were 4.2 percent below the estimate. The restaurant and bar revenue category was impacted by fewer tourists and business travelers along with local consumers spending less during the fiscal year. 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 93 94 95 96 97 98 99 00 01 02 FISCAL YEAR RENTAL OF REAL PROPERTY: FY 2002 rental of real property tax collections amounted to $24.5 million, an increase of 1.7 percent over FY 2001 but 5.3 percent below the forecast. The slow growth in this revenue category can be attributable to the economic slowdown and the tragic events in September 2001. The Maricopa County hotel/motel business was one of the hardest hit sectors, especially after September 2001. On the positive side, apartment housing and commercial rental properties continued to experience healthy demand. This category includes rental of commercial, residential and transient lodging (hotel/motel) facilities. PAGE 6 RENTAL OF REAL PROPERTY 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 93 94 95 96 97 98 99 FISCAL YEAR 00 01 02 RENTAL OF PERSONAL PROPERTY: Rental of personal property receipts in FY 2002 totaled $13.9 million, a decrease of 3.4 percent from the FY 2001 revenue level and 9.6 percent below the estimate. Like most of the other revenue categories, rental of personal property category was not immune to the economic slowdown. Due to the lower number of tourists and business travelers, demand for rental vehicles fell drastically. Also, spending for leased business equipment fell sharply which more than offset the demand for residential and commercial construction equipment leasing. In addition, auto manufacturer’s attractive financing incentives may have lured consumers to purchasing instead of leasing their new vehicles. RENTAL OF PERSONAL PROPERTY 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% 93 94 95 96 97 98 99 00 01 02 FISCAL YEAR OTHER: "Other" revenues in FY 2002 amounted to $16.3 million, a decrease of 1.2 percent from FY 2001 and 10.4 percent below the estimate. Weighing on this revenue category was the negative growth in the publishing/printing and transporting/towing subcategories. This decline can be directly related to the lower business spending during the fiscal year as a result of the economic slowdown. The remaining subcategories saw little or no growth during FY 2002. The "other" revenue category also includes collections from communications, amusements, and pipelines for oil and gas. PAGE 7 OTHER 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% 93 94 95 96 97 98 99 FISCAL YEAR 00 01 02 REVENUE TREND ANALYSIS MONTHLY RARF REVENUE TREND ANNUAL RARF REVENUE TRENDS 30.000 14.0% 28.000 26.000 12.0% 24.000 10.0% 22.000 8.0% 20.000 18.000 6.0% 16.000 4.0% 14.000 12.000 2.0% 10.000 JUL 0.0% 93 94 95 96 97 98 99 00 01 AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN 02 FY 2002 Actuals FISCAL YEAR FY 2002 Estimate FY 2001 Actuals FY 2002 transportation excise tax collections totaled $267.6 million, an increase of $2.8 million or 1.1 percent over FY 2001. This represents the slowest growth rate since the inception of the tax in FY 1986. Although four of the seven revenues categories posted gains in FY 2002, only the contracting and utilities revenue categories showed average to above average growth rates. The fiscal year saw an already weak economy worsen with the tragic events in September 2001 that led to weaker business spending and higher job layoffs. Consumer spending was mainly limited to basic necessities, however, there was some strength in new home and motor vehicle purchases. On the positive side, Maricopa County has benefited from healthy residential construction activity. The monthly seasonality of excise tax collections continues to follow consistent trends with sharp increases in revenues in the month of January (December collections) due to holiday retail sales. PAGE 8 REVENUE PERFORMANCE MARICOPA COUNTY TRANSPORTATION EXCISE TAX FY 2002 ACTUAL TOTAL= $267.6 MILLION DISTRIBUTIONS SOURCES RENTAL OF PERSONAL PROPERTY $13.9M 5.2% RENTAL OF REAL PROPERTY $24.5M 9.2% REGIONAL PUBLIC TRANSIT SYSTEM $7.4 M 2.7% OTHER $16.3M 6.1% RETAIL SALES $131.4M 49.1% RESTAURANT & BAR $21.8M 8.1% UTILITIES $18.5M 6.9% CONTRACTING $41.2M 15.4% REGIONAL FREEWAY SYSTEM $260.2 M 97.3% PAGE 9 MARICOPA COUNTY REGIONAL AREA ROAD FUND TRANSPORTATION EXCISE TAX REVENUE COMPARISON STATEMENT FY 2002 FY 2001 ACTUAL FY 2002 ACTUAL CHANGE FY 2002 ESTIMATE CHANGE RETAIL SALES $131,607,841 $131,393,323 -0.2% $138,800,000 -5.3% CONTRACTING 38,820,028 41,217,803 6.2% 39,600,000 4.1% UTILITIES 17,861,545 18,431,792 3.2% 18,900,000 -2.5% RESTAURANT & BAR 21,394,911 21,748,268 1.7% 22,700,000 -4.2% RENTAL OF REAL PROPERTY 24,111,944 24,529,320 1.7% 25,900,000 -5.3% RENTAL OF PERSONAL PROPERTY 14,416,217 13,928,408 -3.4% 15,400,000 -9.6% OTHER 16,509,954 16,314,429 -1.2% 18,200,000 -10.4% TOTAL $264,722,440 $267,563,343 1.1% $279,500,000 -4.3% CATEGORY NOTE: Division of collections to business categories is imputed based upon reported taxable income. PAGE 10 MARICOPA COUNTY REGIONAL AREA ROAD FUND TRANSPORTATION EXCISE TAX REVENUES COLLECTED BY CATEGORY FY 1986 - 2002 (Dollars in Thousands) FISCAL YEAR RETAIL SALES CONTRACTING UTILITIES RESTAURANT & BAR RENTAL REAL PROPERTY 1986 * 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 TOTAL $19,244 48,085 51,405 53,927 55,798 56,769 59,108 64,033 72,737 81,546 90,454 96,281 104,073 113,528 124,428 131,608 131,393 $1,354,417 $5,716 14,849 14,188 13,947 13,286 12,715 11,688 13,385 17,039 21,107 24,284 26,948 30,610 35,632 37,384 38,820 41,218 $372,816 $3,073 8,542 9,535 10,336 10,685 11,353 10,999 11,874 12,680 13,132 14,198 14,583 15,101 15,680 16,437 17,862 18,432 $214,502 $3,682 7,579 8,379 8,795 9,282 9,655 10,280 11,171 12,166 13,291 14,739 15,821 16,917 18,304 20,005 21,395 21,748 $223,210 $1,923 6,822 5,994 8,952 10,808 11,091 11,707 12,993 13,414 14,660 16,822 18,298 19,552 20,266 22,080 24,112 24,529 $244,023 COMPOUND ANNUAL GROWTH RATE (FY 1987 - FY 2002) = 7.2% *The tax became effective January 1, 1986 PAGE 11 RENTAL PERSONAL PROPERTY OTHER TOTAL $1,733 4,172 4,728 4,883 5,289 5,708 6,043 6,672 7,002 8,198 8,734 10,074 11,539 12,787 13,434 14,416 13,928 $139,340 $1,615 4,782 4,961 5,410 5,653 6,044 6,671 7,145 7,808 8,384 9,183 10,252 11,472 13,272 14,827 16,510 16,314 $150,303 $36,986 94,831 99,190 106,250 110,801 113,335 116,496 127,273 142,846 160,318 178,413 192,257 209,263 229,470 248,596 264,722 267,563 $2,698,612 PERCENT CHANGE 4.6% 7.1% 4.3% 2.3% 2.8% 9.3% 12.2% 12.2% 11.3% 7.8% 8.8% 9.7% 8.3% 6.5% 1.1% ARIZONA TRANSACTION PRIVILEGE TAX EXCISE TAX RATES FY 2002 Taxable Activity Retail Sales Contracting Rental of Real Property (including hotels & motels) Restaurants and Bars Utilities Rental of Personal Property Communication Amusements Publishing and Printing Other Mining Wholesale Feed Percent of Total Maricopa County Transaction Privilege Tax Collections Transaction Privilege Tax Rate Transportation Excise Tax Rate 49.11% 15.40% 9.17% 5.00% 5.00% 1.82%* 0.50% 0.50% 0.512% 8.13% 6.89% 5.21% 3.73% 1.12% 0.70% 0.56% 0.00% 0.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 3.125% 0%** 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.3125% 0.00% * In 1990 and 1993, legislation reduced the transaction privilege tax rate for real property rentals, however, for transportation excise tax purposes, the rate was retained at its prior level. ** In 1994, legislation repealed the transaction privilege tax for livestock and poultry feed, salts, vitamins and other additives for livestock and poultry. The tax rate was reduced to zero on July 17, 1994 and then the tax classification was repealed on October 1, 1994. PAGE 12 REVENUE CATEGORY DEFINITIONS RETAIL SALES Includes retail sales of automobiles, durable goods and other general merchandise, apparel, building materials, furniture and other tangible personal property. The tax on food was repealed in July, 1980. CONTRACTING Includes prime contracting and dealership of manufactured buildings and owner-builder operations. UTILITIES Includes producing and/ or furnishing to consumers electricity, natural or artificial gas and water. RESTAURANT AND BAR RENTAL OF REAL PROPERTY RENTAL OF PERSONAL PROPERTY OTHER Includes operations of restaurants and drinking establishments. Includes leasing or renting real property, hotels and motels. Includes leasing or renting tangible personal property such as leased vehicles and construction equipment. Includes operations of amusement places, intrastate telecommunication services, job printing, engraving, embossing and publication, publication of newspapers, magazines and other periodicals, intrastate transportation of persons, freight or property, and intrastate operation of pipelines for oil or natural or artificial gas. PAGE 13