Regional Area Road Fund Maricopa Transportation Excise Tax Fiscal Year 2003 Year-End Report Arizona Department of Transportation Financial Management Services Office of Financial Planning August 2003 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. FY 2003 Maricopa County transportation excise tax collections totaled $268.7 million, an increase of 0.4 percent over FY 2002, but 2.5 percent below the forecast. The 0.4 percent growth represents the slowest growth rate since the inception of the tax in FY 1986. The growth was centered in the retail sales, restaurant and bar and rental of real property revenue categories. RARF COLLECTIONS $350.0 $300.0 $250.0 $200.0 $150.0 The economic picture in Maricopa County remained clouded during FY 2003 due to limited job growth and geopolitical issues. Although some new jobs were being created, Maricopa County was hit particularly hard over the last two years with significant job losses in the manufacturing, business services and hospitality sectors. PAGE 1 $100.0 $50.0 $0.0 2002 ACT 2003 ACT FISCAL YEAR 2003 EST PERFORMANCE BY CATEGORY RETAIL SALES: Retail sales revenue amounted to $133.9 million in FY 2003, an increase of 1.9 percent over FY 2002, but 1.2 percent below the forecast. Retail sales rebounded from the FY 2002 negative growth, however, the growth was significantly below the historical average. The weak economy continued to impact consumer and business spending habits leading to the slow growth in FY 2003. Retail sales growth was also influenced by lower inflation and slower population growth in Maricopa County. RETAIL SALES 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% 94 Retail sales in Maricopa County are forecasted using three economic indicators, wage and salary employment, personal income and unemployment. The June 2003 Greater Phoenix Blue Chip consensus estimates show that the Maricopa County economy hit its low point in Calendar Year (CY) 2002 but will improve slightly in CY 2003. However, the CY 2003 estimates may be overly optimistic considering through the first six months the local economy remained stagnate due to the lack of job growth and geopolitical issues. The forecast for wage and salary employment growth shows an increase from 2.5 percent in CY 2003 to 3.4 percent in CY 2004. CY 2001 and CY 2002 actual growth was 1.2 and a negative 0.5 percent, respectively. 95 96 97 98 99 00 01 02 WAGE & SALARY EMPLOYMENT GROWTH MARICOPA COUNTY 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% 94 95 96 97 98 99 00 01 02 03 04 ACT ACT ACT ACT ACT ACT ACT ACT ACT EST EST CALENDAR YEAR Source: Greater Phoenix Blue Chip Economic Forecast, July 2001 and April 2002 PAGE 2 03 FISCAL YEAR RETAIL SALES: Continued Personal income is estimated to grow by 5.6 percent in CY 2003 and 6.4 percent in CY 2004. There remains a level of uncertainty in the estimates for Maricopa County personal income growth for CY 2003. The growth in personal income for CY 2001 and CY 2002 was 5.9 and 4.4 percent, respectively. The Maricopa County unemployment rate remained relatively unchanged during the past twelve months with the June 2003 figure at 5.1 percent according to the Arizona Department of Economic Security. The Maricopa County unemployment rate is estimated at 4.7 percent in CY 2003 and 4.3 percent in CY 2004, per the June 2003 Greater Phoenix Blue Chip. 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% 94 95 96 97 98 99 00 01 ACT ACT ACT ACT ACT ACT ACT EST 02 EST 03 EST 04 EST 94 95 96 97 98 99 00 01 02 03 ACT ACT ACT ACT ACT ACT ACT ACT ACT EST CALENDAR YEAR 04 EST CALENDAR YEAR Source: Greater Phoenix Blue Chip Economic Forecast, June 2003 Source: Greater Phoenix Blue Chip Economic Forecast, June 2003 CONTRACTING: Contracting collections totaled $38.9 million, a decrease of 5.6 percent from FY 2002 and 7.6 percent below the forecast. Local economists had been predicting a slowdown in construction for the last three years that never materialized until CY 2002. The actual slowdown began in the second half of FY 2002 and carried over into FY 2003. The residential construction sector remained strong in Maricopa County but was overshadowed by a sharp decrease in mutli-family, office and retail construction activity. As noted above by the revenue performance, the construction sector experienced a contraction with a 6.9 percent decrease in the value of building permits in CY 2002, according to Arizona Business, March 2003. PAGE 3 CONTRACTING 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 94 95 96 97 98 99 00 FISCAL YEAR 01 02 03 CONTRACTING: Continued Maricopa County single-family housing permits increased by 1.1 percent in CY 2001 and 4.4 percent in CY 2002. With low mortgage rates and average population migration, the local housing market remained strong. Single family housing permits are projected to decrease 2.8 percent in CY 2003 and 4.0 percent in CY 2004. Assuming interest rates stay low, the CY 2003 and CY 2004 estimates may be too pessimistic. Multi-family housing permits declined 10.1 and 22.1 percent in CY 2001 and CY 2002, respectively. The multi-family housing sector is in an overbuilt stage and the low interest rates have lured people to buy instead of rent. Looking forward, the estimates for multi-family housing permits show a decrease of 13.5 percent in CY 2003 and an increase of 4.8 percent in CY 2004. Apartment vacancy rates are expected to be 9.5 percent in CY 2003 and 8.9 percent in CY 2004. SINGLE FAMILY HOUSING PERMITS MARICOPA COUNTY MULTI-FAMILY HOUSING PERMITS MARICOPA COUNTY 25.0% 250.0% 20.0% 200.0% 15.0% 150.0% 10.0% 100.0% 5.0% 0.0% 50.0% -5.0% 0.0% -10.0% -50.0% 94 95 96 97 98 99 00 01 02 03 ACT ACT ACT ACT ACT ACT ACT ACT ACT EST 94 ACT 04 EST CALENDAR YEAR 95 ACT 96 ACT 97 ACT 98 ACT 99 ACT 00 ACT 01 ACT 02 ACT 03 EST 04 EST CALENDAR YEAR Source: Greater Phoenix Blue Chip Economic Forecast, June 2003 Source: Greater Phoenix Blue Chip Economic Forecast, June 2003 The Federal Reserve lowered interest rates two times in FY 2003. The conventional 30 year fixed rate mortgage decreased from 6.7 percent in March 2002 to 5.4 percent in March 2003. The Greater Phoenix new housing starts was on a record pace over the past year due to lower interest rates which allowed more people to buy homes for the first time and existing homeowners to refinance or “move-up”. PAGE 4 CONTRACTING: Continued Construction employment increased 2.3 percent in CY 2001 but decreased 4.0 percent in CY 2002. Although the residential construction sector has remained strong due to the near record level number of single family permits being issued, the commercial and industrial sectors have lagged. Office building vacancy rates have increased sharply since CY 2000 to around 20 percent. Construction employment projections show a slight decrease of 0.8 percent in CY 2003 and no growth in CY 2004. CONSTRUCTION EMPLOYMENT MARICOPA COUNTY MORTGAGE INTEREST RATES MARICOPA COUNTY 12 140 120 10 100 80 8 60 40 6 20 0 94 ACT 4 MAR MAR MAR MAR MAR MAR MAR MAR MAR MAR MAR MAR 92 93 94 95 96 97 98 99 00 01 02 03 Source: Arizona Business, May Issues 95 ACT 96 ACT 97 ACT 98 ACT 99 ACT 00 ACT 01 ACT 02 ACT 03 EST 04 EST 00 01 CALENDAR YEAR Source: Greater Phoenix Blue Chip Economic Forecast, March 2003 UTILITIES UTILITIES: 12.0% 10.0% Utility tax collections amounted to $18.5 million in FY 2003, a modest 0.3 percent increase over FY 2002, but was 2.7 percent below the forecast. 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% 94 95 96 97 98 99 FISCAL YEAR PAGE 5 02 03 RESTAURANT AND BAR: RESTAURANT & BAR One of the bright spots for FY 2003 was the growth in restaurant and bar collections which totaled $22.6 million, an increase of 4.1 percent over FY 2002 and 0.2 percent above the forecast. Although the economy was weak, consumers gave higher priority to dining-out while the hospitality industry experienced some improvement over FY 2002, which was impacted by the tragic events in September 2001. The hospitality industry benefited from the college football national championship game in January and improved attendance at spring training baseball games in March. 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 94 95 96 97 98 99 00 01 02 03 FISCAL YEAR RENTAL OF REAL PROPERTY: Another bright spot for FY 2003 was the rental of real property tax collections which amounted to $25.7 million, an increase of 5.0 percent over FY 2002 and 1.0 percent above the forecast. This revenue category was sharply impacted in FY 2002 by the tragic events in September 2001. The Maricopa County hotel/motel business benefited from the college football national championship game in January and spring training in March, which drew near record crowds. This revenue category was one the hardest hit in FY 2002 after the events in September 2001. 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% 94 95 96 97 98 99 00 FISCAL YEAR 01 02 03 RENTAL OF PERSONAL PROPERTY: FY 2003 rental of personal property revenues totaled $12.8 million, a decrease of 7.9 percent from FY 2002 and 9.6 percent below the forecast. This revenue category was impacted by the decrease in construction activity which created less demand for commercial construction equipment leasing In addition, with the continued financial incentives being offered by domestic car manufacturers, many consumers have opted to purchase rather than lease new vehicles. Finally, spending on leased business equipment has fallen, thus reducing rental of personal property revenue growth. 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% -8.0% -10.0% 94 95 96 97 98 99 00 01 02 03 FISCAL YEAR OTHER: OTHER "Other" revenues amounted to $16.2 million in FY 2003, a decrease of 0.7 percent from FY 2002 and 2.5 percent below the forecast. The modest decline in revenues was attributable to a sharp decrease in communication revenues which was partially offset by strong gains in the “miscellaneous other” revenue. The "other" revenue category also includes collections from communications, amusements, and pipelines for oil and gas. 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% 94 95 96 97 98 99 00 FISCAL YEAR PAGE 7 01 02 03 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% 94 95 96 97 98 99 00 01 02 AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN 03 FY 2003 Actuals FISCAL YEAR FY 2003 Estimate FY 2002 Actuals Transportation excise tax collections totaled $268.7 million, an increase of $1.2 million or 0.4 percent over FY 2002. This represents the slowest growth rate since the inception of the tax in FY 1986. The revenue categories posting growth over FY 2002 included retail sales, restaurant and bar, and rental of real property. The fiscal year results were dampened by the weak economy and geopolitical issues. Limited job growth in Maricopa County had the greatest impact on the slow growth. On the positive side, consumers did continue to spend on new homes and motor vehicles, which was mainly driven by low interest rates and other financial incentives. 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 2003 ACTUAL TOTAL= $268.7 MILLION DISTRIBUTIONS SOURCES RENTAL OF PERSONAL PROPERTY $12.8M 4.8% RENTAL OF REAL PROPERTY $25.8M 9.6% REGIONAL PUBLIC TRANSIT SYSTEM $7.5 M 2.8% OTHER $16.2M 6.0% RETAIL SALES $133.9M 49.8% RESTAURANT & BAR $22.6M 8.4% UTILITIES $18.5M 6.9% CONTRACTING $38.9M 14.5% REGIONAL FREEWAY SYSTEM $261.2 M 97.2% PAGE 9 MARICOPA COUNTY REGIONAL AREA ROAD FUND TRANSPORTATION EXCISE TAX REVENUE COMPARISON STATEMENT FY 2003 FY 2002 ACTUAL FY 2003 ACTUAL CHANGE FY 2003 ESTIMATE CHANGE RETAIL SALES $131,393,323 $133,922,028 1.9% $135,600,000 -1.2% CONTRACTING 41,217,803 38,893,686 -5.6% 42,100,000 -7.6% UTILITIES 18,431,792 18,484,778 0.3% 19,000,000 -2.7% RESTAURANT & BAR 21,748,268 22,645,998 4.1% 22,600,000 0.2% RENTAL OF REAL PROPERTY 24,529,320 25,747,438 5.0% 25,500,000 1.0% RENTAL OF PERSONAL PROPERTY 13,928,408 12,834,486 -7.9% 14,200,000 -9.6% OTHER 16,314,429 16,192,486 -0.7% 16,600,000 -2.5% TOTAL $267,563,343 $268,720,901 0.4% $275,600,000 -2.5% 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 - 2003 (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 2003 TOTAL $19,244 48,085 51,405 53,927 55,798 56,769 59,108 64,033 72,737 81,546 90,454 96,281 104,073 113,528 124,428 131,608 131,393 133,922 $1,488,339 $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 38,894 $411,710 $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 18,485 $232,986 $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 22,646 $245,856 $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 25,747 $269,771 COMPOUND ANNUAL GROWTH RATE (FY 1987 - FY 2003) = 6.7% *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 12,834 $152,175 $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 16,192 $166,496 $36,986 94,831 99,190 106,250 110,801 113,335 116,496 127,273 142,846 160,318 178,413 192,257 209,263 229,470 248,596 264,722 267,563 268,721 $2,967,333 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% 0.4% ARIZONA TRANSACTION PRIVILEGE TAX EXCISE TAX RATES FY 2003 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 49.84% 14.47% 9.58% 5.00% 5.00% 1.82%* 0.50% 0.50% 0.512% 8.43% 6.88% 4.78% 3.45% 1.11% 0.70% 0.76% 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 Includes operations of restaurants and drinking establishments. RENTAL OF REAL PROPERTY Includes leasing or renting real property, hotels and motels. RENTAL OF PERSONAL PROPERTY OTHER 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