Excellent.
Thank you.
Good morning.
Today is Monday, April 8th, and this is the meeting of the Forecast Council.
This meeting will come to order.
I'm here today with my Forecast Council colleagues.
Council President is excused.
Interim City Finance Director Jamie Carnell, Seattle Mayor's Chief of Staff and General Counsel Jeremy Rock is unable to attend today and I ask that City Budget Office Director Julie Dingley join us as his designee.
Welcome, Director Dingley.
Great to see you as always.
We are also joined today by staff from the Office of Economic and Revenue Forecasts, as well as representatives from the City Budget Office and the City's Council Central staff.
The main purpose of today's meeting is for the forecast council to receive and review the updated economic and revenue forecasts.
This April update is the first of three revenue forecasts that we will be reviewing this year.
We'll return in August and in October to receive the revised forecasts.
Each of these forecasts will be prepared and presented by the Independent Office of Economic and Revenue Forecasts.
This office was established in 2021 and is modeled Based on similar independent forecasting offices operating in King County, Washington State, the main purpose is to increase transparency and accountability around the city's revenue forecasting process and to ensure that there's no political influence on the forecasts themselves, which I believe is happening and it's really a great office.
Thank you for all your work.
Councilmember Nelson, no longer excused, has joined.
Thank you.
Before moving on to the presentation of the revenue of the forecast update, let's begin by formally adopting the agenda for today's meeting.
Do I need to call the roll?
This is a, I'm going to look to you, Ben.
In the past, it has just been, are there any objections, if you will, to adoption of the agenda?
And if not, move on similarly with the meetings.
FAIR.
WELL, I SEE EVERYONE IS PRESENT.
LET THE RECORD REFLECT THAT EVERYONE IS PRESENT.
SO I WILL MOVE TO ADOPT THE AGENDA.
IS THERE A SECOND?
SECOND.
IT HAS BEEN MOVED AND SECONDED TO ADOPT THE AGENDA.
TODAY'S AGENDA IS BEFORE THE FORECAST COUNCIL AND AT THIS TIME THIS IS THE OPPORTUNITY FOR MEMBERS TO MOVE TO AMEND THE AGENDA TO ADD AN ITEM.
ARE THERE ANY PROPOSED AMENDMENTS?
HEARING NO AMENDMENTS.
IF THERE ARE NO OBJECTIONS, THE AGENDA WILL BE ADOPTED.
Hearing no objection, today's agenda is adopted.
Moving on to item one, a copy of the minutes from the February 16th meeting of the forecast council has been circulated to the members and posted online.
I would move to seek and seek a second for the approval of the minutes.
Is there a second?
Second.
It has been moved and seconded to approve the minutes of our last meeting.
If there are no objections, the minutes will be approved.
Hearing no objection, the minutes are approved.
Moving on to item 2, presentation of the 2024 economic and revenue forecasts.
Moving directly into the main item on today's agenda, the presentation of the economic and revenue forecast led by staff from the forecast office.
To ensure the forecast council is fully informed and able to have a full range of questions addressed, staff from the city council central staff and city budget office will also participate in this briefing I am going to just take a pause to say I'm a bit of a formal person I also understand the benefit of a more organic conversation and so I want us to feel like we can just have an organic conversation I do request that you raise your hand or signal that you would like to be called upon so that we can just So it allows me to facilitate the meeting.
So please be organic and formal.
We can do both.
It's an eclipse.
We can do both.
The Forecast Office will present three economic and revenue scenarios, baseline, pessimistic, and optimistic.
The Office will then provide a recommendation about which of these scenarios should become the formal forecast.
We will then have the opportunity to discuss this recommendation and whether to affirm the recommendation or consider a different forecast scenario.
With that, I will now turn this over to the Forecast Office to present the April forecast.
Jan, welcome.
The floor is yours.
Thank you very much, Chair Strauss.
Good morning for .
Let's start.
Michael Strauss- Council President, you have a question?
I apologize.
I just wanted to apologize for being tardy to the roll call.
Thank you.
Michael Strauss- Thank you.
All right, so this is the outline of our presentation here today for the April update of the economic and revenue forecast.
We'll start first reviewing the recent economic development both for the national and regional economy before we move on to forecasts themselves.
Then we'll look at the economic forecast first before moving to the revenue forecasts.
So this is economic situation update, but the first slide is actually on revenue.
Here's the reason why we want to provide some additional context and how the economy forecast links to our revenue forecast.
In April, by the time we are working on this April forecast, we have very little information about the revenue collection for this current year.
The revenue that's coming in in January and February for most part is obligations for the previous year.
And so at the end of February, it's all accrued back to the previous year.
So for this April forecast, what we are basing it upon is the collection revenue for previous year and the economic outlook for the current year.
And the chart on the right shows how the revenue is then coming in over the year.
Again, in April, we have essentially no revenue information available.
By August forecast depends on the revenue stream.
For some of them, we are somewhere around one quarter.
That's payroll expense tax and business and occupation tax.
About 40 to 50% for sales tax and property tax, about 70% for it.
And then by the October forecast, about half of the overall general fund revenue is in.
So we are still trying to provide the forecast and kind of tries to estimate how much the rest of the general fund, the second half of the general fund revenue would be.
And again, there is a lot of variation different revenue streams are coming in at a different speed.
For REIT, we have about 80% of revenue in by the time of the October forecast.
But for payroll expense tax for 2023 in particular, what we have seen is that there was a large amount of revenue that came in with that last quarter.
And we'll discuss a little bit more when we get to payroll tax, why that is the case.
And so even when we are doing that last forecast update in October, we have less than a half of payroll tax received that come in.
So again, as a summary, we are looking back at the previous year for revenue collection.
We are looking at how the economy has performed and then building on the April forecast that we are presenting here.
2023 started with expectations of a recession.
The chart on the right shows the national forecast from S&P Global from October 2022, so at the time when we are working on the adopted 23 forecast.
This is what it looked like.
Employment was expected to fall by about half a percent.
Very little nominal growth for retail sale was expected.
Similarly for personal outlays, they were expected to be below inflation, so essentially recession.
in the form of slower employment, in the form of lower consumer spending in real terms.
The overall expectation was that there is about more than 60% chance of a recession sometime during 2023. The economy outperformed those expectations and there was actually a very strong real GDP growth, really resilient labor market and consumer spending were just helping the economy in general.
So the economy avoided the recession, employment grew by 2.3% in the end.
CPI inflation came in around what was expected inflation, Fall 2022, there has been a little bit of revision throughout the year, but in the end, there was a decline of inflation, just as economists were expecting.
So on that side, the expectations back in fall and throughout the year.
And so overall, even though the interest rates were high, those fears of recessions have now essentially faded and seems like the Fed is succeeding in terms of guiding the economy toward the soft landing, lowering the inflation without triggering any recession, without any of those costs on employment or evil spending.
Now, this is how things look like for the regional economy.
we are developing our forecast by starting with the national economy forecast and taking that developed regional economy forecast and then regional economy forecast feeds into our revenue forecast.
So again, it's important to understand all the factors that might be different regional economy compared to the national.
Back to fall 2022 again, expectations were that employment will fall just like in the nation.
In addition, we were expecting inflation to be higher than the national one.
And That turned out to be the case, not as high of an inflation as we were expecting.
We lowered it throughout 2023 to 5.7 and that's where it ended up in the end.
Employment did grow about our expectation from fall 22 and roughly in line with the revised forecast from October 23, 1.3%.
So it outperformed the expectation that we had That's been however modest and employment grows slower than on the national level, about 1% slower, 1.3 versus, as was shown on the previous slide, 2.4 for U.S. as a whole.
And the inflation was 5.7 in region compared to 4.1 on national level.
Yeah, I'll just, if I may, and colleagues, feel free to ask questions as we move along.
I'm just going to, you know, granted taxable sales was, you were closer in the 22 than 23 forecasts, all that said, the accuracy of these forecasts is very impressive.
You are...
Really trying to use a crystal ball here to understand what our economy is going to be doing so that we can build budgets and your accuracy again.
Impressive.
Thank you.
Thank you very much.
Very nice to hear that.
Yeah, so we are, that's one thing that I wanted to briefly comment on and we'll spend more time talking about sales tax and what exactly happened there.
That's the part where the revenue, the part of revenue that grows slower than what we were expecting, 2.5% nominal growth in taxable sales was below our expectations.
And again, there are a couple of reasons that we'll go a little bit more into a little before that.
I want to quickly address that last thing, the missing bar in personal income that's not, I did not mess up the animation here in the slide.
It's really not there because the personal income estimates for 2023 will be only released by the Bureau of Economic Analysis in November 24. So after our last forecast update this year, VA will release estimates for personal income for year 2023. And so that's our starting point to develop estimates for personal income over 24 and then into 25 and 26. Yeah.
Director Dingley.
Question for you, Jan.
Is that just an anomaly for 2024 for the Bureau of Economic Analysis to do that cadence, or is that a new normal that we should expect?
That's what they did before.
That's what they're doing now.
That's what they will be doing.
This is personal income for the region.
So we are talking about Seattle Metropolitan Division area here.
The Seattle area means King and Snohomish counties, Seattle and the area.
And for the really regional level of information, BEA only provides annual updates at the end of November.
For state level data, there is much less of a delay.
Washington state personal income data for the last quarter of 23 was released just recently at the end of March.
So there is about one quarter of a delay there.
Thank you.
And that's essentially what we are doing.
We are taking the Washington state personal income to inform our estimates of personal income in the region based on how employment is changing in the region versus the state.
So yeah, this is just the kind of thing that we are always doing.
Thank you.
All right, so looking a little bit more into the difference in employment growth in nation and region.
The red bar shows that 1.3% total employment growth for Seattle metro area last year compared to the 2.4 employment growth shown by the blue bar for United States.
So about 1% difference.
Now these individual bars below the total show how much of that Total is coming from different sectors.
So if you stack up the individual timing red bars for those industries, you get total red bar for regional economy.
So some of them are Contributing to the growth, some of them, as you can see, in particular, we are looking here at information and professional and business services offsetting the growth.
Those two sectors have been essentially behind the fact that the regional economy underperformed the national one.
We have seen layoffs that started in late 2022 and then and continues throughout 2023 and overall employment in information and professional business sectors have declined.
John, if I may, I'm going to editorialize a little bit here looking at manufacturing and trade.
These two sectors of our business only are able to operate within the industrial sectors of our city, the industrial zones, which is limited in comparison to the rest of our city's zoning.
Just noting for this that while other things have decreased, this has stayed steady, if not increased.
Yeah.
That's a good point.
Manufacturing actually outperform the nation as a whole.
The regional employment in manufacturing was supporting the regional employment growth together with a rather strong and solid role in leisure and hospitality.
They provided some that would still that would counter those tech sector layoffs and going forward, that's where we are expecting more growth together with tech sector stabilizing.
So we'll get to the outlook for employment later on, but still backward looking.
And so the last thing that we want that I want to point out here is that slightly small decrease shown for construction, which kind of hides the overall behavior throughout 2023. The construction sector started to decline, the employment is actually 4.8% lower compared to its peak in summer 2022. There is just less demand for office space.
The interest rates that are at 23 year high levels are cooling the investment in commercial real estate space, in residential.
real estate space, so overall construction activity is muted and will likely remain so for a couple of years as we'll see when we get to the forecast.
There are some good things about the office space in terms of the return to the office.
We have seen some some positive development over the last year.
The chart here shows employees presence at the workplace as measured by Placer AI aggregated anonymized cell phone location data.
So, in particular, it compares how much foot traffic there has been in these three neighborhoods, put it in the chart, relative to the foot traffic in the same months in 2019. So, the overall trending up behavior of South Lake Union and Bevel Town can be in particular attributed to the fact that Amazon moved to three days in the office policy last spring, and this foot traffic anonymized cell phone location data shows so much of an impact it had on the presence of employees at the workplace.
So that's a positive development for Seattle downtown, for Seattle as a whole, for tax revenue.
implications, positive development overall.
Some things which are not so great, again, in the office space, we have seen office vacancy rates climb over the last three, four years, starting with the pandemic and coming out of the pandemic.
There had been less demand for the office space.
Remote work is still a significant factor here.
And as you can see, we have still not reached the top.
you're somewhere here in the first quarter of 2024. And the forecast for next year's, the source of that forecast is CoStar, which keeps track of the leases by individual companies when they are expected to expire.
They have some assumption and they will do some modeling in terms of how much of those leases they expect to be renewed.
And with all that information, what they predict now as of the second quarter of 2024, they are expecting those vacancy rates to continue to climb.
for a while and reach, depending on which geographical area we are looking at, for Seattle as a whole, it's around 25%, but within Seattle, the central business district will, according to this forecast by CoStar, see office vacancy rates over 30% by the time when things will start to finally turn around for the better.
And so that again means less construction demand, less demand for office space and less construction than less sales tax revenue and less B&O tax revenue.
In addition, those high vacancy rates lower the assessed value and have some distributional implications for property taxes.
And so this chart here shows, Quickly compares the intake by Seattle, by SDCI in gray figure.
That's firms coming in with a request for some development, requesting a building permit.
There is then the review process where there is usually a couple of rounds of review for those permits before permits is finally issued.
And so that blue line shows the total value of building permits issued after some delay due to that review.
You can see that there are spikes in permit intake.
They are taking place usually before a change in the building code where firms, where developers are trying to invest into the existing building code before a new one is used instead.
And so there was a peak in 2016, there was a peak at the beginning of 2021 before the new building codes were adopted.
And so a lot of variation in business intakes, the business permits issued is smoother in this chart here.
What I want to point out most importantly here is that kind of a decline from the levels of business permits issued back in 2018, we have come down quite substantially.
The overall trend in last year or two has been still a small decline, so it has not steadied out yet.
The outlook is that there's still that negative impact of high interest rates on development and developers are waiting for interest rates to come down before things will make more sense on their side.
So like I said, this has implications for sales tax revenue in particular for the revenue side.
Sales tax is the one that's affected mostly on the red line in the chart shows taxable sales in the construction sector.
does not follow either the gray or the blue line completely.
There is some positive correlation between the behavior of building permits issued and construction activity, but again, it takes time.
Once a building permit is issued, the construction activity takes place over a period of time, and that's when we see those sales tax to start to come in.
Occasionally some projects might be obviously abandoned and or delayed um and so again not a perfect correlation but we have found this to be a useful indicator those building permits issue as you can see the red line did decline and looking at the very end of that red line, there is again a downturn in the construction set, taxable sales, and that negatively affected the revenue collection in 2023. All right, now moving on to the outlook.
Wrapping up where we were in 2023 and moving on to what the first outlook is for the national economy.
So the chart here shows the employment forecast from our national forecast or from S&P Global.
back on that faint red, salmon red line is the September 23 baseline scenario forecast.
That's the last one that was used to develop the revenue forecast last fall.
Now compared to their forecast from From fall 2023, labor market is still growing faster.
In the first quarter, there has been about 1.8% growth year over year in the U.S. as a whole.
It's slightly above that red line, only a small the darker red line that represents the March baseline scenario forecast for employment growth in response to what the S&P Global economists have seen over the last couple of months.
They have revised the employment forecast up.
And so instead of virtually no employment growth over 2024 and actually some small declines entering into 2025, they are now expecting about 1.3% growth for 24 as a whole, then essentially no employment growth starting sometime next summer.
And so overall, improvement for the better.
The S&P Global currently assigned the 55% probability to their baseline scenario, 30% to the pessimistic and 15% to the optimistic scenario.
The pessimistic scenario is still a scenario where a recession occurs or this particular recession, it would be relatively mild one, not a particularly deep and not particularly long recession, but recession nevertheless.
So pessimistic scenario, both the national economic one, the regional one, and the pessimistic revenue forecast scenario have this assumption of a recession built into it.
And because of that, they'll see revenue that's significantly below the baseline scenario.
See you later.
Now, in terms of the development with federal funds rate and inflation forecast, Inflation has been coming down.
It came down quite significantly from the peak in summer 2022. There has been a small revision in the expectations for 2024. Last couple of months, we have seen inflation slightly higher and maybe not declining as fast as some economies and that we're probably hoping for.
still not too much, not too higher to radically change the expectation that Fed is going to pivot to rate cuts.
That said, those rate cuts which are now expected to start appearing in the second half of 2024 can be postponed, can be smaller and can be more spread out if inflation continues to come up slightly higher than expected if labor market continues to show a lot of strength and resilience which will basically make Fed more cautious on the side of keeping the interest rates higher so that they avoid cutting the rates, inflation soaring up again and then having to increase the interest rate again.
So if labor market continues to be resilient and shows actually more more growth than what's forecasted and if the inflation continues to be slightly above the expectations, those rate cuts will be delayed.
And right now, Fed still believes they are on the path to start cutting interest rates in the second half of 2024. Now, pessimistic scenario.
It's a scenario where inflation starts to climb up and economy downturn forcing the Fed to cut the rates actually earlier.
So maybe a little bit counterintuitively, the interest rates would be coming down faster in the pessimistic scenario, but not for the good reason.
It would be a way how to avoid a deeper downturn in employment.
Our economic forecasts, like I said, the regional economic forecasts are developed based on those US national forecasts from S&P Global.
We are looking at data from other forecasters as well to kind of get a sense of how optimistic or pessimistic that US forecast is.
The chart here shows the S&P Global's forecast in red dots for a couple of main economic indicators and compares it to the forecast from Wall Street Journal of Economic Forecasters.
It's about 16 economies that are surveyed now every three months.
There is going to be another survey coming April in about a week.
chart here shows their last survey from January 2024. So, as you can see at the S&P global forecast, it's not overly either optimistic or pessimistic compared to the rest of the forecasters.
They are very close to the median forecaster in that survey.
They're also quite close to the forecast from Moody's Analytics which is a second main forecaster which we are tracking their forecast and trying to get their sense of where the economy is heading.
So overall, this makes us trust the baseline forecast as the most likely future pass for the economy.
And it's not too optimistic, doesn't seem to be too optimistic or too pessimistic compared to what the rest of the economists believes likely pass forward.
So building on that national forecast, here is how the regional employment forecast for Seattle metro area Looks like starting with the September 23 baseline forecast scenario and building the updated forecast, we have revised our employment up as a result of overall stronger growth in national economy that feeds into the regional forecast.
We have seen, like I went over some declines in some sectors of the economy in 2023, but it looks like the outlook is improving for tech sector and situation stabilizing.
It looks like it has bottom out.
So going forward, there shouldn't be an offsetting force dragging the employment growth down.
In addition to that, The strong growth in manufacturing, the leisure and hospitality overall, that makes us more optimistic about the outlook for employment in Seattle metro area.
Again, it's King plus Snohomish counties, that's what the model is built.
or the main reason why we are not forecasting employment for Seattle as a city is just lack of data there isn't enough of a data on a monthly basis for a city of Seattle or even quarterly basis that would allow us to develop a regional forecast on something that will be more useful for the revenue forecast so we are doing the best we can with the data that's available forecasting model is for Seattle metro area as a whole.
So again, better outlook, overall slightly declining employment grows, not employment itself, but employment goes slightly, going slightly down in 25 and 26 from 1.9% grows in 24 to 1.4% employment grows in 25 and then 1% in 2026. That's the baseline.
The pessimistic scenario, just like the national one, is a recession, employment losses peaking around 2% by first quarter of 2025 before the turnaround and recovery, complete recovery by the beginning of 2026. So not, again, very long recession, nevertheless, employment losses would happen and revenue would be coming down.
All right, there are a couple of additional, the regional forecasting model has several other things that we are forecasting.
We are forecasting employment, not just overall, but broken down by industry.
We have unemployment rate forecast.
We are forecasting personal income, wages.
permits that are then used to inform the construction forecast.
We are usually presenting the employment forecast here for the sake of privacy and because it's a best way how to assess what the overall outlook for the regional economy looks like.
Personal income, we again are facing some issues with data availability.
So there's less of a confidence on that side.
And there's usually bigger revisions or income data is released with quite a bit of a delay and it's quite significant.
So employment is the best indicator of overall health, provides best summary of what we are likely to see in the near future.
So before moving to the forecast for the revenue, this is a quick summary.
I'm kind of hinting ahead what our recommendation will be at the end, which of the scenarios to adopt.
The SFP Global's baseline scenario, I suppose, It's neither optimistic nor pessimistic compared to the rest of the forecasters.
They assigned 55% probability to it, and we have included all the other factors when we developed the employment forecast.
Even with that, we are expecting reasonably strong growth in 2024, but not overly optimistic.
We're neither too worried on being too low or too high with a baseline scenario forecast, it's most likely fast going forward.
But there are some risks to individual revenue streams and we are going to talk about them when we get individual revenue forecasts.
But again, as a conclusion, this is what our forecast will
recommend we are going to recommend the baseline scenario for guests council president i see your hand i was about to jump in and say i think we should finish this presentation we'll come back to the slide to do the recommendation at the end um i'll just make that i am comfortable with the baseline scenario having already reviewed the materials we're about to about to see council president your hand is raised
Thank you.
I just, I didn't hear that sentence when Jan was, Jan said, you said something about there is, there is risk, I think you said, to some of our revenue streams.
Could you just repeat that question?
And then you said, but we'll talk about that.
That's it.
I'm going to interject here.
That is, that is what we are about to hear in the remainder of this presentation.
I just wanted him to repeat his words.
Yeah.
Why don't we just get into the rest of the presentation?
Take it from here, Jan.
Right.
Yeah.
We are going to see that there are risks to some of the revenue streams and they are linked to that downturn.
They're mostly linked to the downturn in the construction sector and the fact that, as this table here shows, the sales tax revenue underperformed our expectations.
The table shows the actuals for 2023 and compares those actuals to our forecast from October 23. Main thing to notice here is there is two starting from all the way at the bottom.
Overall, the revenue came in very close to the forecast.
There is only 0.5% less actual revenue compared to the forecast.
Still $8 million given the size of the general fund, but just 0.5% less than the total forecast.
That said, for some of the revenue streams, and in particular the sales tax, the amount of this revenue stream underperformed is larger, retail sales tax.
in the end came in 2.3% below our forecast, which translates to 8.1 million.
And again, that's due to those risks that talk a little bit more about the construction sector outlook and just the fact how the tax base for retail sales looks like.
So looking into that a little bit closer, here is what what we are slightly worried about.
The sales tax revenue started to deteriorate in fall 2023, about right after we released our forecast.
We saw a couple of months where the sales tax has actually declined year over year.
So that's the part of the black line towards the end where we have the growth negative year over year growth around 2.5%.
So that came after 2022 was a year of very strong growth and those individual colorful bars decompose the total growth into the contributions of individual sectors.
2022, trade, leisure and hospitality sector contributed significantly to the overall growth.
There is a little bit of offsetting force.
If you remember in 2022, there was a concrete driver's strike, which postponed some of the construction and caused construction revenue to be lower.
year over year.
After that was resolved, the rest of the year, in the rest of 2022, construction taxable sales grew year over year.
But then going into 2023, things again started to to soften and overall towards the end of the year, the last four months, so declines in taxable sales in the construction sector year over year and sector dragging down the total revenue collected for sales tax.
In addition to that, a couple of months, um trade revenue from trade sector declined year over year as consumer spending were negatively affected by this persistently high inflation which is coming down but still consumers are or uh are worried about that maintaining that that sort of spending from 2022 as they are accumulated savings from financial stimulus package it's kind of um going away slowly, there is less of a less of excess saving accumulated.
In addition to that, there is a shift from spending on goods to spending on services and the sales tax is not taxing all the services.
It's not imposed on all the services and so the shift of consumer spending from spending on goods to spending on services lowers the taxable sales and
And that's something that we are starting to see and we're slightly worried about.
Thank you, Jan.
Any questions on this slide?
Seeing none, keep taking it away.
I'm just going to kind of jump in a little bit more to help you.
put a period on it, which is unfortunate for the last fall.
Yeah, that's something that surprised us, and not just us, it was a surprise to our colleagues in Office of Economic and Financial Analysis at King County, OEFA, Their forecast or their sales tax revenue underperformed their forecast by 2%, similar sort of outcome or the forecast from the Center of Economic and Business Research at Western Washington University.
Let's see there.
constructing similar forecasts for regional economy and taxable sales that are then used by some smaller municipalities around King County that don't have their dedicated forecasting team but they are relying on the Western Washington University's forecast to develop their revenue forecast based on
So, Jan, it sounds like what you're saying, this is not a downtown Seattle problem.
This is not even a city.
This is a city.
This isn't even a citywide problem.
This is a county and region wide issue that we're experiencing.
Is that correct?
It is certainly not just the problem of a downtown, the overall construction sector downturn.
is happening throughout King County.
It's affecting different parts of King County differently.
The construction, the amount of construction that took place over the last decade in Seattle was just tremendous.
We outpaced the nation.
Yeah, exactly.
So now we are kind of seeing that other side of a hill and it's affecting Seattle, it's affecting King County because Seattle is a big part of King County.
half of the employment in King County, a quarter of the employment, or Washington State, so even Washington State is negatively affected by high interest rates, overall construction slowdown, and a large part of that is occurring in the city of Seattle.
Not just there, but yeah.
Market correction.
Right, so that's that risk that we are talking about.
I mean, the risk is, to the sales tax revenue because of the way how, because of the way how the tax base looks like.
It's more than half of a sales tax revenue that comes from just two sectors.
Construction is about one quarter and then trade sector, retail, trade, that's another third.
So together those two are significant share of tax base for sales tax and not very diversified unlike the business and occupation tax.
Blue bars show how the tax revenue is distributed throughout industries in business and occupation tax.
You can see it's more evenly spread out with professional and business services accounting for a bigger share.
And then the last thing in this chart, the last tax revenue shown here in red bars is the payroll expense tax, where again, it's not particularly diversified tax base.
A large amount of the revenue is coming from just a few companies out of the roughly 500 companies altogether that are paying these tax.
about 90% of the overall revenue is coming from from top 100 companies and it's really, really highly concentrated at the top.
Top 10 companies account for 70% of overall revenue and eight of those companies are in the tech sector.
Director Dooley.
Thank you.
Jan, I wanted to just point out that this is a particularly apt comparison across these three revenue sources because each of them brings in a similar amount of revenue per year.
And so I just wanted to point that out for folks who might be listening that sales and use, B&O, and payroll tax all generally roughly bring in the same amount of revenue.
So we're looking at a good apples to apples here.
Overall amounts are very comparable in 2023, but as you can see, it's very completely different sort of tax base.
So the way how they are affected by economic developments and different things that happen in the economy that makes them move in slightly different direction.
And sales taxing particularly affected by the construction sector downturn.
Essentially no impact there for payroll expense tax.
Construction sector is just not contributing significantly to that revenue stream.
On the other hand, tax sector layoffs and slowdown have affected payroll tax revenue significantly, did not really affect sales tax that much.
So we're moving now to the forecast itself.
The baseline scenario forecast for general fund revenue is shown in this table here.
The first column shows the 2023 actuals.
As Director Dingley mentioned, retail sales and business occupation tax are very similar.
$340 million for retail sales, $356 million in 2023 for business and occupation tax makes them similar in size.
Payroll tax at the very bottom here, that's not the total payroll tax revenue, it's just the obligations for the year 2021. The ordinance directs the obligations for year 2021 to be deposited into general fund.
no matter when they arrive.
That means also that the refunds and late payments will be entering the general fund rather than the dedicated jumpstart payroll expense tax fund.
For that, we have a separate table presented later.
So the very bottom line, that's just the 2020 obligations and refund requests.
So starting from the very, very bottom, the very last row, which takes the total general fund and takes out the grants and transfer, the forecast update April forecast update uh revises down the total revenue by roughly 3.6 million so a small compared to the size of the total revenue relatively small decrease that said it's uh That's not really the case for individual revenue streams.
There are some offsetting forces here, and in particular, again, looking at the retail sales tax forecast, that one has been revised down more substantially because of that information regarding the actual election in 23, the projection for the construction sector employment in 2024, the fact that interest rates are Still high, just bears down on the retail sales tax where we have been compelled to revise the forecast down to take all that into account.
And for business occupation tax, The downward revision of 4.5 million is not really a reflection of some kind of worse outlook for the tax base itself.
It's more of a result of some refunds that were higher than what's usual, what has been seen in the last couple of years.
There have been a couple of refunds that just added up to quite a substantial amount lowered the forecast for business and occupation tax for this year.
But as you can then see for 25 and 26, the business and occupation tax is expected to grow at a very healthy rate above the rate of inflation.
For sales tax, it's a similar sort of story, the outlook.
for 25, 26 is certainly better than near term forecast for 2024. And that also feeds into the overall forecast where we are expecting the general fund without grants and transfers to grow about 2.6% in 25 and 3.2% in 2026.
Thank you, John.
Moving on now to other revenue streams.
Parallel expense tax in this table now shows the revenue without the 2021 obligations.
Those are again entering the general fund.
The line here shows the amount that's going into the payroll expense tax fund.
There has been a quite significant upward revision for 2024. And that also leads into significantly higher forecast for 2025 and 2026. There are a couple of reasons for this upwards revision and There are some slides that follow this one that speak more to that part.
For the rest of the revenue streams, there are some small revisions up and down, but nothing particularly major.
We are, of course, happy to address any questions here if there is a question about any of those particular revenue streams.
Colleagues, any questions?
Seeing that, I think this slide and your explanation provides enough detail for us to understand what's going on.
All right, so looking at that payroll expense tax, again, that's the main, the largest revision of all the revenue streams presented today.
Payroll expense tax revenue is to a large extent driven by stock prices.
It's not a very well diversified tax stream.
It's imposed on a relatively small number of companies which are mostly operating in the tax sector.
In addition to this fact, a large of the compensation that's paid to the employees in these sectors in the form of stock grants.
So that means that the amount of compensation goes up and down together with stock prices of those individual companies.
The chart here on the right serves as an illustrative example.
It's not the companies that are the main, those main taxpayers for payroll expense tax.
They are companies that operate in the region, not necessarily in the city of Seattle, but in the region and are good examples of companies where the stock prices have seen really significant increase in 2021 before a correction in 2022. And so that's the same sort of behavior that we have seen in the payroll tax and our preliminary analysis suggests that it's something that's just a part of this tax base.
For 2023, again, the revenue exceeded our expectations in part.
We believe in part because of the overall better outlook for a tax sector.
things that have stabilized and the outlook for individual stocks have been revised up.
And so that kind of improved outlook also carries over into 2024. So the chart on this slide compares the forecast for first 2023 back from October was close to the end of the year.
So actual stock price changes were very close to what has been expected back then.
These are the expectations compiled from Wall Street Journal analysts provide their stock price targets.
It's not referred to as a forecast, but the stock price targets for individual companies.
So you can see that those blue dots move to the right in general, as we are comparing their outlook from October to the actual outcome.
And so Looking then at the 2024 outlook, the purple dots represent the average change expected in stock prices for those individual companies in 2024. The line shows the shows the range from the low to the high price target, not referred as a pessimistic or optimistic scenario, but by these analysts, but low target and the high target And you can see that the range is quite substantial for some companies like Facebook.
The low target would imply about 30% decrease in stock price for Facebook platforms in 2024. The high outlook for the same company implies more than a 50% growth year over year for that company.
less of a degree for some other companies, but even the smallest, shortest line here spreads over 40 to 50% growth for Google, let's say.
The average is somewhere around 25%, but the low target is closer to 5% or to 10%, and the high end is 50% stock price growth in 2024.
Yeah, Director Dingley.
Thanks.
Jan, I had a question.
In prior council meetings, you have highlighted that the payroll tax revenues are correlated with two factors primarily, one being stock breakouts and another being return to office.
I'm curious if over time with our experience with this revenue source, you're seeing that dynamic shift or is that largely staying the case?
Obviously the stock price is peace, but
The stock price and the worker presence at the workplace, employee presence at the workplace are still the two factors that we believe are the strong factors behind the payroll tax performance.
In 2023, the chart at the very beginning showed how Amazon's return to the office for three days a week caused larger food traffic at South Lake Union and overall in downtown.
That would be another contributing factor to the better than expected performance of payroll tax in 23. Great, thank you.
That's still an indicator that we are tracking the ability to forecast.
So there was a little bit of a change between that outlook for those individual companies that faint purple dot and the lines show the outlook from October 23. Since then things have, started to look better for the tech sector as a whole, that range for Facebook significantly shrunk here to just 25% range, somewhere with that average, somewhere around 80 to 90% stock price increase for Facebook.
Similarly, overall improvement for Microsoft, Google, other companies, which are, again, not the main taxpayers here, but they provide some examples, some representative examples of the companies subject to these tax.
Director Carnel.
Yeah, no, I really appreciate this, and I think the stock prices are really interesting, but in my head, I'm going through talk about inflation and the stock price.
So we've seen as inflation hasn't done what we've expected, the stock market seems to always perform better.
So is there a point where if the feds decide to cut rates that this could change as we're going through our forecast because stocks may not perform as well as they have been doing because the interest rates then have changed hopefully for the better?
So I'm just trying to get those two things that are really key pieces of information for us.
And knowing, you know, that may then, I'm just speculating at this point, I am not an economist, that, you know, construction would go up, potentially go up, sales tax would go up, PET would go down.
I feel like we're kind of always going to be in this middle landing space because we don't know what's going to happen with the inflation rates.
We know how these two are very they seem to be very strongly correlated.
So it's just more of an observation of, you know, expecting that we may always kind of be in this balanced side of things, not necessarily great compared to the past years, but it just, it would balance itself into a steady kind of arena for us and revenue.
Fingers crossed.
Fingers crossed.
Yeah.
There's definitely a lot of uncertainty and Fed is facing both rates to go too fast or too slow.
They try to do their best and just the amount of uncertainty is elevated.
And that feeds into uncertainty for stock prices as well.
And you can see just the sheer range of the outlook for some companies and how much it's changed over just a few months.
is really tremendous here.
So because of that, there is going to be a lot of uncertainty regarding the actual outcomes for that particular revenue stream.
This chart now compares the baseline, the optimistic and pessimistic scenario forecast for for the largest revenues or sales tax, B&O tax and payroll tax, which in 2024, we're all somewhere between 320 and 350 million.
Going forward, that can change quite dramatically depending on which of these scenarios becomes the actual future.
And with all that uncertainty, there can be some really dramatic shifts in terms of the size and proportion of the individual income streams in the overall revenue.
So looking at these individual streams individually, looking at sales tax, the pessimistic scenario, like I said, assumes a recession that is not sure, that is not long.
relatively short recession, it's not deep, it's a recession nevertheless and that feeds into a lower revenue that actually declines in 24-5 before things turn around.
Similarly for BNO tax, the recession would significantly lower the revenue collected, it would not result in downturn in nominal terms, but a downturn in real terms.
Adjusting for inflation, there would be a decline in P&O, inflation adjusted revenue.
Then for payroll expense tax, the range really reflects the uncertainty regarding the outlook for the stock prices and the overall uncertainty more broadly.
It's the revenue stream unlike any of the other ones that we are dealing with.
And Jan, I'll editorialize here.
I think it has been difficult for you to forecast the jumpstart payroll expense tax because we are, I believe, only in our, I can't do fiscal math, but going into our fourth year of collection.
It's only fourth year of collection.
And it's a tax that's imposed on annual compensation, which means that throughout the year, we don't really know much until we come to...
the February of the following year, where this particular year, 60% of revenue came in after the true up for annual compensation.
So...
And I know enough about budgeting and forecasting and all of this to be our budget chair.
And one of the, like, highest level pieces of information that i've always used is three-year smoothing and five-year smoothing to better understand the direction that we're going and we're not even able to do five years smoothing on the payroll expense tax because we're only in our fourth year collection We can do three years smoothing, but it's the first three years where I think just as you've described in this presentation that we've begun to continue to dial in our tools, understanding stock market and return to office layer on a global pandemic to the first three years.
I complimented you earlier on your accuracy with these forecasts.
I also, again, compliment you on your accuracy here and just seeing that this wide array from, you know, the pessimistic to the optimistic is your largest spread.
I wanted to add that context, at least from my perspective, as to why that is still an accurate representation in my opinion.
Yeah, thank you very much.
Yeah, that's the, this is, and we'll talk about work program after we wrap up the new forecast, but this particular revenue stream is the one where we expect to spend a lot of time together with Sean developing a better forecasting model to take into account some additional data.
I wonder if we need to proceed.
So this final slide compares the alternative scenarios and shows how The either optimistic or the pessimistic scenario would change the total revenue received in 2024, 2025 and 2026. The main of the difference, the biggest differences are again in retail sales, business and occupation and payroll expense tax, the ones that were shown on the previous chart.
Again, there is some upside for sales tax for B&O tax.
As you can see, the differences between the red and the yellow line are not particularly large.
The biggest risk here would be recession if things go along more closely towards the pessimistic scenario.
That would imply some potentially significant revenue losses revenue underperforming relative to the baseline scenario.
And then for payroll expense tax, it's just a stock market where the S&P Global now forecast about 20% growth for 2024, but essentially no growth for 2025 and 2026. The stock price is in general hard to forecast, so there is likely to be large revisions there as well.
Thank you.
And Jan, if you could take us back to the last slide of part two.
Colleagues, are there any questions right now regarding the forecasts and recommendations from the forecast office before we move on to the adoption of the forecast?
I am seeing no questions.
Jan, as usual, you've done a good job.
With that, if there are no additional questions, I will move us into the adoption of this forecast.
Second.
Yeah, sorry.
Thank you.
Council president.
I'm just catching up on my script.
So it seems that we are going to move into, uh, formally move into item 3. Uh, so that we can adopt this forecast for the ordinance that created the forecast office and the forecast council is the role of the forecast counts to review and approve the forecast in terms of approving the forecast.
We concur with the recommendation.
in the forecast scenario.
So if we concur with the recommendation in the forecast scenario, which is here on slide not numbered, in terms of, so if we all agree, then we don't have to take a vote.
If we have a disagreement, then we do need to take a vote.
The goal of the legislation was to remove any risk of political influence over the forecast and receiving recommendations from a staff of independent experts, and this is the best way to achieve that aim.
That said, we all represent the elected leadership of the legislative and executive branches, and it is also appropriate that we have the authority to override the recommendation of the forecast office should we judge that this is prudent and makes sense.
Per establishing the ordinance, such a decision would require a three-member vote in the affirmative approving an alternative scenario so that's why if we all agree there's no vote and if we uh disagree three member uh three is the number we have to reach to approve so in case there are in the case that there are no objections to the recommended recommendation before us i'm simply going to request that the meeting minutes reflect our concurrence regarding the recommended forecast Uh, that would be the formal step called for in the underlying bylaws as the way we will report receiving their.
The approval of this forecast, so I'll just take a moment to see if.
And the way we'll do this is to see if we have any objections to the recommendation.
Seeing none from counts presidency, none from the table.
that makes that part easier not having heard any objections i'm going to direct the forecast office to record our concurrence with the recommended forecast in the meeting minutes so the motion before us to consider so that's that And I'll just skip through these other parts.
So that's the end of item three.
So we've gone through item one, which was the minutes.
Item two, the presentation.
Item three, the adoption of the forecast.
We will now move into item four, which is the work program.
And so...
Per the ordinance that created the forecast office, each year the forecast council must approve the office's work program.
Director Duras will now present the office's proposed work program, after which we have the opportunity to discuss and potentially approve this proposal.
So I've received your slide deck.
Seems like we've got a lot of information in here.
Let's move rapidly.
Yes.
It's going to be a short presentation summarizing First, just really quickly about the background of the office.
This office was created in 2021. It's structured similarly to the offices in King County Office of Economic and Financial Analysis and Washington State Economic and Revenue Forecast Council.
The main goal was to establish an independent office that would provide nonpartisan confidential analysis and forecast for both legislative and executive executive stuff and over the past two years we have worked I believe very successfully is both the central staff and the CBO and established these working relationships and protocols which I believe in general ensure better accountability and transparency and better access to the information for both sides.
So the plan is pretty much continued with what we have been doing in the last two years.
The Office of Economic Revenue Forecast has a couple of main revenue streams that it's responsible for forecasting, the sales tax, business and occupation, payroll expense tax, and then some smaller but economically driven ones, like real estate excise tax, private duty taxes, admissions tax, business and occupation tax.
And we are also providing inputs for the property tax forecast for the CBO.
So we are forecasting assessed value and the value of new construction for that forecast.
Now going into looking at 2024 more specifically, the program proposes to update the forecast three times just like in revenue forecast three times in April, August and October.
In addition to that, there is a January forecast, but not a revenue forecast update.
It's a regional economic forecast update.
So we are doing and we are proposing to continue doing four economic forecasts in January, March, July and October.
The forecasts are then presented on April 8th today, then August 5th for the August forecast and October date is still to be determined after the discussion with CBO and central staff.
So it lines up with the overall timeline for the October budget adoption.
We are, in addition to working on forecasts, preparing reports, quarterly revenue reports, which compare the actual revenue with our forecasts.
And we are doing some ongoing monitoring of these individual revenue or income streams and assessing the forecast accuracy and assessing what extent the models need to be refined.
So in between the forecast, our staff works on improving the forecast models.
The plan for 2024 is to spend significant amount of time on payroll expense tax forecasting.
We have three years of revenue data collection.
We have secured access to payroll data from Washington State Employment and Security Department.
So we finally have access to that detailed data for individual employees, which can then be used to inform the forecast for the payroll expense tax.
But we have to spend significant amount of time just understanding the data, cleaning the data, and then developing the forecast model.
take the data on payrolls, not necessarily subject to the tax, filtering out only those, the part of the total payroll that is subject to the tax in Seattle.
We're creating some way how to inform the forecast using this new source of data.
And then depending on just how much time will be available, there is always some improvement that can be made both to the models themselves in terms of their methodology or additional data inputs.
We are particularly likely to look at the sales text and the way how to build additional data sources or improve the forecast, given that that's the one that faces probably high stress right after the payroll expense tax revenue.
Then the last big part of a program is policy analysis and work that supports other departments.
Again, the forecast office is independent and whenever there is a request from any member of a forecast council or when there is a need for some analytical work for a policy proposal, some revenue or economic estimation for legislative or executive stuff.
That's the kind of work our office does.
It's an on-demand sort of work without a particular schedule and the extent to which we have resources to do that, we are always happy to help as much as we can.
In the last point, our office provides support for city finance when the city is presenting to the rating agencies for the limited tax general obligation bond, which will be taking place next month.
And that's pretty much that.
I'm happy to address any questions about the work program or any suggestions in which direction we might be heading.
Fantastic.
I appreciate this.
Colleagues, any questions at this time?
For me, it was very straightforward and a lot of your work is legislated.
You might want to stop sharing the screen.
A lot of your work program is legislated, and then you've taken some additional steps in some appropriate ways, especially additional time with the jumpstart payroll expense tax.
Colleagues, any other questions at this time?
Seeing none, I will move to approve the 2024 Forecast Office's work program as presented by Director Duras.
Is there a second?
SECOND.
THE MOTION HAS BEEN MOVED AND SECONDED.
ARE THERE ANY COMMENTS OR AMENDMENTS BEFORE WE CALL THE FINAL VOTE?
SEEING NONE, DIRECTOR DURAS, WILL YOU PLEASE CALL THE ROLL ON THE ADOPTION OF THE WORK PROGRAM?
DO YOU WANT TO?
DO YOU CALL THE ROLL?
THIS IS NEW IN THIS SCRIPT.
I MEAN, I CAN CALL THE ROLL.
I GUESS SO WE GO.
COUNCIL PRESIDENT NELSON.
Or no, I'm seeing face no from Allie.
So, I'm going to either have Allie or Ben call the roll and we're going to figure this one out for the future.
All right.
Thanks.
So, no?
So, Chair Strauss, sorry, for the record, I'm Allie Panucci of Council Central staff.
has traditionally been the, or the last year's meetings was the director.
It doesn't actually matter, I don't think, procedurally.
So, how are you?
Robert Hopkinson- Great.
Do you have all of our names ready to call?
I'm going to .
I believe I can do that.
Robert Hopkinson- There you go.
Just cheat sheet right there.
Thank you very much.
Robert Hopkinson- With the change for vice chair kind of being present.
Perfect.
All right.
So, Chair Strauss.
Robert Hopkinson- Yes.
Jomana Musmar- Director Dingley.
VICE CHAIR TERRELL- Yes.
Jomana Musmar- Council President Nelson.
VICE CHAIR TERRELL- Council President Nelson, how do you vote?
VICE CHAIR TERRELL- Pardon me?
Jomana Musmar- How do you vote?
VICE CHAIR TERRELL- Vote, aye.
Jomana Musmar- Thank you.
VICE CHAIR TERRELL- Director Colonel.
VICE CHAIR TERRELL- Yes.
SO IT'S FOR, YES, YOUR OWN NOLS.
BOARD FAVOR, NONE OPPOSED.
THE MOTION CARRIES.
THE 2024 FORECAST OFFICES WORK PROGRAM AS PRESENTED BY DIRECTOR DURAS HAS BEEN APPROVED.
THANK YOU, DIRECTOR DURAS.
THANK YOU FOR YOUR WHOLE TEAM.
MOTION CARRIES.
WORK PROGRAM IS ADOPTED.
THAT DOES BRING US TO THE END OF OUR AGENDA, OUR FORMAL AGENDA.
BEFORE ADJOURNING, I WANT TO REMIND EVERYONE THAT WE WILL HAVE TWO ADDITIONAL MEETINGS THIS YEAR, ONE IN AUGUST, ONE IN OCTOBER TO RECEIVE UPDATED FORECASTS.
Scheduled meeting is for Monday, August 5th at 11 a.m.
I will note that we might change that date.
I know that we'll figure it out from here.
But just noting that, especially the proximity to council briefing, some issues here.
So any further questions at this time?
Seeing none, meeting is adjourned.
Thank you for attending the April 8th.
2024 forecast council meeting.
Thank you.