City of Seattle
Department of Finance
Economic & Revenue
Forecast
April 6, 2009

U.S. Economy: The path to the current recession
• Past 20 years has been era of asset bubbles
– Stock market in the 1990s
– Housing in the current decade, also commodities
• Bubble formation has been facilitated by
– Cheap money
• Federal Reserve policies
• Asian savings glut
– Loose lending standards
– Deregulation & lax regulation of financial sector
April 6, 2009 2

• Bubbles have led to:
– Excessive borrowing and debt buildup
– Excessive risk taking
• Housing bubble popped in 2006. With prices falling:
– Loans have gone bad, reducing value of securities
• Leading to financial crisis
– Household wealth has declined
• Leading to drop in consumer spending
• Housing downturn and financial crisis caused recession
– U.S. recession began in December 2007
April 6, 2009 3

U.S. Personal Income and Household Debt: 1980 Q1 = 100
1,200
1,000
Household
800
debt
600
Personal
400
income
200
0
1980 Q1
1985 Q1
1990 Q1
1995 Q1
2000 Q1
2005 Q1
Source: Federal Reserve Board.
• Household debt increased 97% from 2000 to 2008.
April 6, 2009 4

Monthly Change in U.S. Employment
400
200
Thousands of jobs
0
Dec-00
Dec-01
Dec-03
Dec-04
Dec-06
Dec-07
Dec-08
Dec-02
Dec-05
Jun-00
Jun-01
Jun-03
Jun-04
Jun-05
Jun-07
Jun-08
Jun-02
Jun-06
-200
-400
-600
-800
Source: U.S. Bureau of Labor Statistics. Data are seasonally adjusted.
• 5.1 million jobs lost since Dec-07; 3.3 million in past 5 months.
• Unemployment rate hit 8.5% in March; highest since 1983.
April 6, 2009 5

Recent weeks have seen a few positive signs
• Stock market is up over 20% from early March low
• Home sales rose in February: new 4.7%, existing 5.1%
• Single family permits rose 11.0% in February
• U.S. retail sales rose in January and February
measured on month-to-month basis
• Orders for manufactured goods rose 1.8% in February
• Shipping volumes are showing signs of stabilizing
– Rail, truck, container, air freight
April 6, 2009 6

U.S. Economic Forecast
U.S. GDP Forecasts for October 2008 and March 2009
4%
2%
Oct-08
0% Forecast
2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-2%
Mar-09
Forecast
-4%
-6%
-8%
Source: Global Insight.
April 6, 2009 7

Puget Sound Economy: Recent trends
• 2001-03 recession was very severe locally
– Recovery started later here
– Housing bubble cycle was delayed
• Current downturn arrived later here
– Construction peaked in Nov-07 locally
• Compared to Jan-07 for U.S.
– Aerospace employment increased through 2008 Q3
– Software employment increased through 2008 Q4
• Falloff beginning in 2008 Q4 has been very steep
– 53,400 jobs lost from Aug-08 to– Feb-09 in King
& Snohomish Co., a 3.6% decline
April 6, 2009 8

S&P/Case-Shiller Home Price Index, 2000 Q1 = 100
200
180
U.S.
160
140
Seattle
120 Metro
Area
100
80
2000 Q1
2001 Q1
2002 Q1
2003 Q1
2004 Q1
2005 Q1
2006 Q1
2007 Q1
2008 Q1
April 6, 2009 9

Employment: December 2000 =100
106
104
U.S.
102
100
98
Seattle
Metro
96
Area*
94
92
Jan-99
Jan-00
Jan-01
Jan-03
Jan-04
Jan-05
Jan-07
Jan-08
Jan-09
Jan-02
Jan-06
*King & Snohomish Counties. Data adjusted to remove effects of Boeing strikes.
Data are seasonally adjusted non-agricultural wage & salary employment.
April 6, 2009 10

Puget Sound Region Economic Forecast
• Regional forecast is based on Feb-09 U.S. forecast
April 6, 2009 11

Job Losses in the Five Most Recent Puget Sound* Recessions
Percent Decline from pre-Recession Peak
1%
1980
2008-10
2001-03
1990-91 1981-83 Forecast
0%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-1%
-2%
-3%
-4%
-5%
Quarters from pre-recession peak
*King, Kitsap, Pierce, and Snohomish Counties.
April 6, 2009 12

Why is 2008-10 forecast not as bad as 2001-03?
• 2001-03 was very bad locally. Employment decline:
-2.0% U.S.
-4.8% Puget Sound Region (4 counties)
-6.6% Seattle Metro Area (King & Snohomish Counties)
• Modest cuts announced by Boeing, Microsoft thus far
– In 2001-03, Boeing cut 27,200 jobs in less than 3 yrs
• Areas of U.S. hardest hit in this recession include:
– Areas with big housing bubbles
– Manufacturing centers, especially auto related
– Financial centers
– Areas dependent on travel, tourism, in-migration
April 6, 2009 13

What has changed since the last revenue forecast?
(which was prepared in Oct. 2008)
• U.S. and local economies have declined steeply
– as has City sales and B&O tax revenue
• Economic forecasts have been revised
– Major recession is now forecast
– Deflation or very low inflation is expected in 2009
– Savings rate forecast has been raised
• Falling wealth = higher savings & weaker spending
– Weaker spending = lower tax revenue
April 6, 2009 14

Forecast of Employment Change: Puget Sound Region*
Quarter-to-Quarter Change
20
15
10
Thousands of jobs
5
0
2007 Q1
2007 Q3
2008 Q1
2008 Q3
2009 Q1
2009 Q3
2010 Q1
2010 Q3
2011 Q1
2011 Q3
-5
-10
-15
-20
-25
-30
*King, Kitsap, Pierce, and Snohomish Counties. Source: Puget Sound Economic Forecaster.
April 6, 2009 15

Billions of dollars
10,000
20,000
30,000
40,000
50,000
60,000
70,000
0
April 6, 2009
1980 Q1
1982 Q1
1984 Q1
1986 Q1
1988 Q1
1990 Q1
1992 Q1
1994 Q1
1996 Q1
U.S. Household Net Worth
1998 Q1
2000 Q1
2002 Q1
2004 Q1
2006 Q1
2008 Q1
16

Change in 2009 Forecast from Sept. 2008 to Feb. 2009
6% 5.6%
5%
4%
3.1% Sep '08
3% Forecast
2%
1.3%
1% 0.4% Feb '09
Forecast
0%
PS Region Employment US PCE Deflator US Savings Rate
-1%
-0.3%
-2%
-2.4%
-3%
Source: Puget Sound Economic Forecaster; Global Insight (savings rate).
April 6, 2009 17

Retail Sales Tax
• Revenue was flat in 2008 (up 0.2% from 2007)
– Sharp deceleration over course of year
– Snowstorm hurt December revenue (-11.4% yr-over-yr)
– Non-current revenue declined $1.4 mil. from 2007
• Performance by industry in 2008:
– Construction was up 10.4%; flat in the 4th quarter
– Retail trade was down 3.1%; flat without auto sales
Motor vehicles & parts fell 20.6%
o
– Finance, insurance, real estate declined 5.0%
– Service industries had modest growth of 1.5%
April 6, 2009 18

Year-over-year growth
-10%
-5%
0%
5%
10%
15%
2001 Q1
April 6, 2009
2001 Q3
2002 Q1
2002 Q3
2003 Q1
2003 Q3
2004 Q1
2004 Q3
2005 Q1
2005 Q3
2006 Q1
2006 Q3
2007 Q1
Growth of Seattle Retail Sales Tax Revenue
2007 Q3
2008 Q1
2008 Q3
19

April 6, 2009 20

Sales Tax Forecast
• Reflects forecast of major regional recession
• Over two-thirds of tax base is in cyclical industries
– Construction, trade, manufacturing, etc.
o Construction’s share of base = 24.4% in 2008
• Forecast of peak-to-trough revenue decline is 10.6%
– Compared to 11.4% drop in 2001-03
– Expect 6.7% decline in 2009; 1.9% drop in 2010
• Construction forecast: real decline of 23.1% over 3 years
– Largest real decline since at least 1975
– Assumes continued public construction
• Motor vehicle sales weakness will continue in 2009
April 6, 2009 21

Construction Cycles: Real* Taxable Retail Sales
80%
70%
60%
50%
40%
30%
20%
10%
0%
1976-79
1979-83
1983-91
1991-95
1995-00
2000-04
2004-08
2008-11
-10%
-20%
-30%
*Inflation adjusted by Seattle CPI.
April 6, 2009 22

B&O Tax
• B&O revenue started 2008 with healthy growth and
ended the year in decline
• From 2007 to 2008 B&O revenue declined by $3.8 mil. (2.3%)
– Non-current revenue declined by $5.3 mil.
– Excluding non-current yields $1.5 mil. gain
• Forecast reflects:
– Severity of downturn
– 50% of B&O base is relatively stable service industries
– Lower expectations for non-current revenue
• Forecast of peak-to-trough revenue decline is 8.1%
– Compared to 8.6% in 2001-03
April 6, 2009 23

B&O Payments by Obligation Quarter
year-over-year growth rate
16%
12%
Current
Obligations
8%
4%
Total
0%
2005 Q1
2005 Q3
2006 Q1
2007 Q1
2007 Q3
2008 Q1
2004 Q1
2004 Q3
2006 Q3
2008 Q3
-4%
-8%
Obligation Quarter
April 6, 2009 24

Combined Sales and B&O Tax Revenue Forecast
350
340
330
Millions of dollars
Nov-08
Forecast
320
310
Apr-09
300 Forecast
290
280
2006 2007 2008 2009 2010
April 6, 2009 25

Utility Business Tax – Natural Gas
• Natural Gas tax revenue is dependent on both weather
and prices
• Natural gas prices rose 27% in 2008 over 2007
• Year-over-year Henry Hub prices were up 49% in the
3rd quarter
• Utility Tax revenue on natural gas was also up 44% in the
3rd quarter
• Natural gas spot prices have plummeted since the summer,
along with other energy commodities
• As a result, receipts are expected to be down 15% for
2009 over 2008, a 24% decrease from the Adopted
2009 Budget
April 6, 2009 26

Utility Business Tax – Natural Gas
Seasonally Adjusted Utility Gas Tax Revenue
4,000,000 100%
3,500,000 80%
Quarterly
3,000,000 60% Receipts
(Left)
2,500,000 40%
Yr/Yr Growth
2,000,000 20% Rate (Right)
1,500,000 0%
1,000,000 -20%
500,000 -40%
- -60%
91
91
91
91
91
91
91
91
91
01
01
01
01
01
01
01
01
01
01
10 1
1
19 0Q
19 1Q
19 2Q
19 3Q
19 4Q
19 5Q
19 6Q
19 7Q
19 8Q
20 9Q
20 0Q
20 1Q
20 2Q
20 3Q
20 4Q
20 5Q
20 6Q
20 7Q
20 8Q
20 9Q
Q
9
19
April 6, 2009 27

Real Estate and REET
• 2008 saw the national housing and property bust come
to Seattle
• Seattle single-family and condo sales plunged
throughout the year
– Single-family sales were down 33% year-over-year in Q408,
28% down for the year
– Condo sales were down 63% for the same period, 42% down for
the year
• Commercial activity also slowed considerably as
financing for large developments has evaporated
• Home sales are expected to pick up at the end of 2009,
as home prices continue to fall during 2010
April 6, 2009 28

Real Estate and REET
Real Value of Seattle Real Estate Sales
Millions of 2000 dollars
6,000
5,000
Comm.
4,000
Condo
3,000
2,000 Resid.
1,000
0
1982
1985
1988
1991
1994
1997
2000
2003
2006
April 6, 2009 29

Real Estate and REET
• The REET forecast expects a 28% decline in average
home prices from peak (3Q07) to trough (4Q10)
• This forecast expects the Seattle market to mimic the
national one
• Foreclosures are expected to rise in the area as the
Seattle market was one of the last to see subprime and
alternative mortgage originations
• Office vacancy rates remain under 10%, a good sign
compared to the national 14.2% rate
• There is limited scope for large property deals and only
downside risk to vacancy rates
April 6, 2009 30

Real Estate and REET
Seasonally Adjusted Seattle Single-family Forecast
600,000 3500
3000
500,000
Sales Fcst
2500
400,000 (right)
2000
Avg Price
300,000 Fcst (left)
1500
200,000
1000
100,000 500
0 0
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 1
20 1
1
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
00
01
02
03
04
05
06
07
08
09
10
11
12
20
April 6, 2009 31

Real Estate and REET
REET Revenue and Forecast by Sector
80,000,000
70,000,000
60,000,000
Residential
50,000,000 Condo
Commercial
40,000,000
30,000,000
20,000,000
10,000,000
0
20 f
f
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
April 6, 2009 32

General Government Revenue
2008 2009 2010
GSF - Item Nov Actuals Act-Nov Nov Mar Mar-Nov Nov Mar Mar-Nov
Property Taxes 238,746,000 238,257,418 (488,582) 246,218,000 245,736,000 (482,000) 251,331,000 249,941,000 (1,390,000)
Business & Sales Taxes 343,592,942 332,699,802 (10,893,140) 340,250,145 313,994,265 (26,255,880) 345,804,743 312,789,344 (33,015,399)
Public Utility Taxes 80,780,000 79,686,308 (1,093,692) 87,349,474 90,984,903 3,635,429 91,808,777 94,375,700 2,566,923
Private Utility Taxes 57,341,000 55,615,966 (1,725,034) 57,981,000 54,852,267 (3,128,733) 58,176,000 55,228,681 (2,947,319)
Other Notable GSF Revenues 55,623,000 56,500,384 877,384 61,420,000 58,095,274 (3,324,726) 67,426,000 61,148,796 (6,277,204)
776,082,942 762,759,879 (13,323,064) 793,218,619 763,662,709 (29,555,910) 814,546,520 773,483,521 (41,062,999)
Subtotal
All Else 76,736,360 86,355,721 9,619,361 79,035,588 78,778,988 (256,600) 80,544,256 80,001,256 (543,000)
852,819,302 849,115,599 (3,703,703) 872,254,207 842,441,697 (29,812,510) 895,090,776 853,484,777 (41,605,999)
GSF - Grand Total
DPR Charter Revenue 38,141,246 37,191,812 (949,434) 39,184,313 37,827,110 (1,357,203) 40,007,170 38,144,348 (1,862,822)
Real Estate Excise Tax 30,889,914 30,313,740 (576,174) 31,814,326 20,762,068 (11,052,258) 35,565,629 22,010,411 (13,555,219)
BTG - Employee Hours Tax 4,781,252 4,448,764 (332,488) 5,261,136 5,261,136 - 5,647,751 5,647,751 -
BTG - Commercial Parking Tax 12,844,000 13,302,260 458,260 17,874,000 17,874,000 - 21,347,000 21,347,000 -
April 6, 2009 33

General Subfund Status
Annual Operating Position
(Revenues minus Expenses)
2009 April
Adopted Budget Forecast Revision
(Nov. 2008) (Apr. 2009) Difference
21,400,000 15,200,000 (6,200,000)
2008
(6,510,000) (40,530,000) (34,020,000)
2009
(14,875,000) (58,851,000) (43,976,000)
2010
April 6, 2009 34

Cumulative Reserve Subfund (REET) Status
2009 Adopted Budget April Forecast Revision
(Nov. 2008) (Apr. 2009)
Resources
2008 Yearend Balance
8,481,000 10,836,000
(includes anticipated abandonments)
2009 Estimated Revenue 31,814,000 20,762,000
2010 Estimated Revenue 35,566,000 22,010,000
Total Resources Available in the Biennium 75,861,000 53,608,000
Biennial Planned Expenditures
2009-10 Debt Service Expenditures 28,013,000 28,013,000
2009-10 Discretionary Expenditures 47,021,000 47,021,000
Total Planned Expenditures in the Biennium 75,034,000 75,034,000
Balance 827,000 (21,426,000)
April 6, 2009 35

Risks to the forecast
• Risks are large and mostly on the downside
– This recession is different, thus harder to forecast
– Housing market uncertainty is great
– Forecasts assume success of stimulus, bank bailout
– Savings rate shift makes it hard to forecast consumption
– Construction outlook is very uncertain
– Potential for more cuts at region’s large employers
• Upside potential
– Federal policies may be more effective than expected
– B&O non-current revenue may bounce back
April 6, 2009 36

Pessimistic Revenue Scenario
• Based on pessimistic U.S. forecast. Assumptions:
–Financial conditions worsen, restricting access to credit
• This leads to reduced spending and investment,
and further weakens the housing market
• The weak housing market further reduces wealth
and damages consumer confidence
• Causing a steeper drop in consumer spending
• Employment falls for 11 consecutive quarters
– Employment growth resumes in 2010 Q4
• Recovery is weak as consumers rebuild savings
April 6, 2009 37

U.S. Employment Forecast Scenarios
140
138
Baseline
136
Millions of jobs
forecast
134
132 Low
scenario
130
128
2007 Q1
2008 Q1
2009 Q1
2012 Q1
2010 Q1
2011 Q1
Source: Global Insight 's March 2009 U.S. forecast.
April 6, 2009 38

General Subfund Revenue Scenarios
895
890
885
Millions
880 Baseline
Low
875
870
865
2008 2009 2010
April 6, 2009 39

Real Estate Excise Tax Scenarios
35
30
25
Millions
20
Base
15
Low
10
5
-
2008 2009 2010
April 6, 2009 40