Education Committee Economic Background and Issue Review

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1 Education Committee Economic Background and Issue Review Montpelier, Vermont January 22, 2014 Thomas E. Kavet State Economist and Principal Economic Advisor to the Vermont State Legislature Since 1996 Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting 985 Grandview Road Williamstown, Vermont USA 26 Parker Road Brookline, Vermont USA Telephone: Facsimile: Cellular: Website:

3 Nov-70 Nov-72 Nov-74 Nov-76 Nov-78 Nov-80 Nov-82 Nov-84 Nov-86 Nov-88 Nov-90 Nov-92 Nov-94 Nov-96 Nov-98 Nov-00 Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12 Nov-14 Price Per Barrel - December 2014 Constant U.S. Dollars $150 Epic Oil Price Decline Will Enhance Other Consumer Spending (West Texas Intermediate Crude Oil, PPB in December 2014 Constant Dollars) $140 $130 $120 (June $146 per Barrel) $110 $100 $90 $80 (April $116 per Barrel) $70 $60 $50 $40 $30 $20 $10 $0 (February $44 per (December $59 per Sources: Wall Street Journal, Moody's Analytics, KRA

ctor, Source: U.S. Energy Information Administration Commercial $186.

4 Petroleum-Based Energy Expenditures in Vermont, 2012 Millions of Dollars by Consumption Sector, Source: U.S. Energy Information Administration Commercial $ % Industrial $ % Total All Sectors = $2,229.1 Residential $ % Transportation $1, %

5 Recommended Net Revenue Changes from July 2014 Forecast - Current Law Basis -$10.0 -$18.6 General Fund -$8.1 -$8.0 -$8.6 Transportation Fund FY2015 FY2016 FY2017 FY2018 FY2019 $0.0 $2.7 $3.4 $2.9 $3.1 $1.6 $2.8 Education Fund $3.7 $4.2 $4.6 -$20.0 -$15.0 -$10.0 -$5.0 $0.0 $5.0 $10.0 Millions of Dollars

6 Real Estate Markets have Bottomed Out but Full Recovery is a Long Way Off Real estate markets are characterized by pronounced cyclicality and regional variation For the first time in more than 8 years (since the first quarter of 2006), housing prices increased on a year over year basis in every U.S. state for two consecutive quarters. As of the third quarter of 2014 (the most recent available), 14 states equaled or exceeded their pre-recession peak levels (ND, DC, TX, CO, SD, NE, AK, IA, OK, LA, WY, KY, MT and KS) Exceptionally weak new construction activity over the past 6 years has accelerated absorption of excess building and set the stage for future growth, as rental vacancy rates are at 20 year lows and household formation rebounds Foreclosures have peaked in most states but are still substantial in some markets. Renewed price appreciation will be relatively slow for several years typical of extended real estate cycles Real estate markets attracting international investment especially large US cities - have experienced some of the strongest price appreciation of late The Vermont Property Tax base (Grand List) will not exceed 2009 peak levels until 2017, putting enormous pressure on tax rates to cover rising education costs

7 1984Q3 1985Q3 1986Q3 1987Q3 1988Q3 1989Q3 1990Q3 1991Q3 1992Q3 1993Q3 1994Q3 1995Q3 1996Q3 1997Q3 1998Q3 1999Q3 2000Q3 2001Q3 2002Q3 2003Q3 2004Q3 2005Q3 2006Q3 2007Q3 2008Q3 2009Q3 2010Q3 2011Q3 2012Q3 2013Q3 2014Q3 2015Q3 2016Q3 Vermont Housing Price Declines Are Probably Over, but E-Fund Tax Base Impacts Will Persist (FHFA Vermont Housing Price Index Percent Change Vs. Year Ago, Historical Data - Red, Forecast Data - Green) 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0%

8 Equalized Education Grand List - Billions of Dollars Home Price Index, 1980Q1=100 Macro-Economics Vermont Adjusted Equalized Education Grand List (thick red line) Vs. FHFA Vermont Home Price Index, (Index 1980Q1 = 100) Lagged Five Quarters (thin green line) State Revenues Sources: PVR; FHFA Home Price data; Prepared for the Joint Fiscal Office by Kavet, Rockler & Associates, October 2014

9 North Dakota District of Columbia Texas Colorado South Dakota Nebraska Alaska Iowa Oklahoma Louisiana Wyoming Kansas Montana Kentucky West Virginia Tennessee Indiana Arkansas Vermont Hawaii Pennsylvania Mississippi Missouri North Carolina Alabama Utah Ohio South Carolina Wisconsin Maine Massachusetts New York Oregon Minnesota Virginia Washington Georgia New Mexico Idaho New Hampshire Michigan Illinois Delaware Connecticut New Jersey Maryland California Rhode Island Arizona Florida Nevada -37.2% Real Estate Update: Housing Values Relative to Last Peak (pink) and Trough (grey) Percent Change, 2014Q3 vs. Peak Price by State Reached Between 2005Q3 and 2009Q2 - Pink and 2014Q3 vs. Trough Price Reached Between 2009Q3 and 2014Q3 - Grey Source: FHFA H -31.8% -27.6% -23.7% -21.8% -19.9% -17.0% -17.4% -15.3% -15.5% -13.9% -14.7% -15.1% -11.6% -12.0% -12.1% -12.6% -10.1% -11.1% -8.2% -9.0% -9.0% -7.2% -7.2% -7.3% -7.4% -8.0% -8.0% -6.0% -4.9% -4.9% -5.2% -3.3% -1.6% -1.6% -0.2% -1.0% -40.0% -35.0% -30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 0.7% 1.8% 1.7% 1.4% 2.8% 1.9% 3.3% 2.9% 3.7% 3.6% 3.7% 4.9% 4.3% 5.2% 5.4% 4.7% 5.2% 5.4% 5.3% 5.1% 5.1% 5.2% 4.9% 6.6% 5.9% 6.1% 6.3% 6.3% 6.2% 5.8% 7.4% 7.1% 7.0% 6.8% 6.7% 8.4% 8.1% 7.7% 9.1% 8.7% 9.9% 9.8% 9.7% 9.4% 12.0% 11.8% 11.5% 12.4% 13.0% 15.8% 15.0% 16.7% 16.7% 18.8% 18.2% 19.0% 21.4% 20.5% 22.4% 27.3% 30.9% 33.5% 33.9% 33.9% 40.8%

10 Equalized Education Grand List - Billions of Dollars Home Price Index, 1980Q1=100 Vermont Adjusted Equalized Education Grand List (thick red line, left scale) Vs. FHFA Vermont Home Price Index, (Index 1980Q1 = 100) Lagged Five Quarters (thin green line, right scale) Macro-Economics State Revenues FORECAST Sources: Vermont PVR; U.S. FHFA; Prepared for the Joint Fiscal Office by Kavet, Rockler & Associates, October 2014

11 Number of Dwelling Units 5000 Down 70% and Up 48%? Weak Home Prices Continue to Stall Vermont Residential Construction (Total Housing Starts, 12 Month Moving Totals, Source: F.W. Dodge Division of McGraw-Hill, Kavet, Rockler & Associates, LLC) March 2006 = (-70% vs March 2006) November 2014 = 1143 (+48% vs July 2009) July 2009 = Jul-14 Jul-13 Jul-12 Jul-11 Jul-10 Jul-09 Jul-08 Jul-07 Jul-06 Jul-05 Jul-04 Jul-03 Jul-02 Jul-01 Jul-00 Jul-99 Jul-98 Jul-97 Jul-96 Jul-95 Jul-94 Jul-93 Jul-92 Jul-91 Jul-90 Jul-89 Jul-88 Jul-87

12 Dec-69 Dec-71 Dec-73 Dec-75 Dec-77 Dec-79 Dec-81 Dec-83 Dec-85 Dec-87 Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Millions of Dollars Vermont Construction Markets Will Benefit from Recent Surge in Nonresidential Starts (12 month moving totals) Residential Nonresidential Source: F.W. Dodge/McGraw-Hill

14 Percent Change 80.0% Growth In Real Household Income, By Income Class 1980 to 2013 (Orange) and 1990 to 2013 (Grey) 70.0% 60.0% 1980 to % 1990 to % 30.0% 20.0% 10.0% 0.0% -10.0% Source: U.S. Census Bureau

15 Ratio of Average U.S. Household Income of Top 5% to Lowest 20% (Source: U.S. Census Bureau)

16 Income Class - Thousands of Dollars Percent Change in Adjusted Gross Income in Vermont, 2012 vs by Income Class $1, % $500-$1, % $300-$ % $200-$300 $150-$200 $125-$ % 23.8% 28.4% $100-$ % $75-$ % $60-$75 1.4% $50-$60-0.3% $45-$50 $40-$45 $35-$40 $30-$35 $25-$30 $20-$25 $15-$20 $10-$15 2.1% 3.7% 3.9% 3.7% 2.0% -1.6% -2.3% -2.7% Average Percent Change for All Vermont Residents = 14.6% $5-$10 $0-$5-3.2% -2.6% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% Percent Change Source: Vermont Department of Taxes

18 Number of Pupils 108,000 Vermont Public School Enrollment Declines Not Likely to be Reversed Soon ,000 96,000 17% Decline In Enrollments Between 1997 and % Enrollment Decline Expected Between 1997 and 2025, With Little Prospect of Any Significant Reversal Beyond ,000 84, Sources: Vermont DOE and Consensus Administration and Joint Fiscal Office Projections - October 2014

19 9000 Demographics Vermont Population - Age 0 (Births) State Expenses Source: U.S. Census Bureau, Vermont Legislative Joint Fiscal Office Estimates

20 New Hampshire Vermont Rhode Island Connecticut Massachusetts Maine District of Columbia Pennsylvania Oregon Florida Michigan New York New Jersey Maryland Illinois Alabama North Carolina West Virginia South Carolina Delaware Virginia Wisconsin Colorado Georgia Tennessee Ohio Nevada United States California Washington Mississippi Missouri Indiana Kentucky Minnesota Montana Iowa Louisiana Arkansas Arizona New Mexico Wyoming Texas Oklahoma Hawaii Nebraska Kansas Idaho North Dakota Alaska South Dakota Utah 2012 Fertility Rates (Preliminary data, Source: National Center for Health Statistics U.S. DHHS) Births Per 1000 Females Age

22 Age 85+ Vermont Population by Age - July Number of Persons Source: U.S. Census Bureau

23 Age 85+ Vermont Population by Age - July Number of Persons Source: U.S. Census Bureau

24 Age Vermont Population by Age - July Number of Persons Source: U.S. Census Bureau

25 Age Vermont Population by Age - July Number of Persons Source: U.S. Census Bureau

26 Age Vermont Population by Age - July Age 85+ = 13, Number of Persons Source: U.S. Census Bureau

27 Age The Aging of the Vermont Population - July 1980 (blue) vs. July 2005 (red) Number of Persons Source: U.S. Census Bureau

28 Age The Aging of the Vermont Population - July 1980 (blue) vs. July 2005 (red) vs. July 2020 (clear) Year Population = 16, Number of Persons Source: U.S. Census Bureau

30 Percent Change vs. Year Ago Source: U.S. Department of Commerce, Vermont Joint Fical Office and Administration Consensus Forecasts Cost Pressures Recede, But Revenue Growth Will Still Lag Behind... (Implicit State and Local Government Deflator, Percent Change vs. Year Ago) 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

31 For Further Information, Contact The Joint Fiscal Office or: Thomas E. Kavet State Economist and Principal Economic Advisor to the Vermont State Legislature Since 1996 Kavet, Rockler & Associates, LLC Economic and Public Policy Consulting 985 Grandview Road Williamstown, Vermont USA 26 Parker Road Brookline, Vermont USA Telephone: Facsimile: Cellular: Website:

TABLE C: STATE MANDATES AND FUNDING LEVELS

TABLE C: STATE MANDATES AND FUNDING LEVELS Information was collected from the 2012-2013 State of the States in Gifted Education report. Empty cells indicate no response to the question Hatched cells indicate