I am very fond of the Hemmingway character responding to the question, "how did you go bankrupt?"
"Gradually ... then suddenly!"
I don't think that describes the situation for sales tax revenues in Texas, but I do want to focus on the "gradually" part of the story in data before our eyes, often hidden in the noise.
Sales taxes are one of the hardest revenue sources to track. There changes to the taxable base, the rate applied (only up to 2% in total in Texas), audit adjustments, changes in the cutoff periods from one year to the next and others. This doesn't even take into consideration economic cycles, major shifting with region (a new mall opens) or delinquent payers. In short, comparing sales tax revenues on a month-to-month basis is almost impossible without a significant hitch. This is what I mean by noise.
In order to make sense of sale tax revenue for various cities in Texas, an effort has been made to compute an index, a tool that will zoom in on small changes and to help identify trends. This has been accomplished by computing the difference betwee a 12-month average and a 36-month average. One is longer than the other and tends to not move as quickly, to be smoother. For those of you accustomed to stock market analysis, you will realize I am applying a scaled down version of the moving average convergence-divergence (MACD) indicator developed by Gerald Appel in the 1960s.
When the 12-month moving average is above the 36-month moving average, growth is rising as revenue managers for local governments would like to see. When the moving averages rise to the point that the gap is wide, concern should be registered as to the sustainability of such a rise. When the 12-month narrows, touches or finally goes below the 36-month moving average, a yellow flag should turn to red. The city is heading for trouble. At some point the actual revenues collected will decline in absolute turns if the downward trend is steep enough or long enough. Let's zero in on the spread between these two moving averages in the next chart.
The chart below dramatizes the data spread so that the tremors can be better identified, along with the trend, especially when compared to other cities. Or in this case, with the entire State of Texas. The state has only gone negative on these two moving averages in the past 20+ years. Note the red line shows a small decline in the late 1980 real estate bust, even worse than after 9/11.
Dallas, on the other hand, had these two metrics go negative in both of those instances only, much deeper and wider. However, when the state was doing just fine in the early 1990's Dallas had a steep decline result in a small negative calculation before returning to respectable growth levels. However, Dallas has significantly underperformed the statewide average for most of the past three decades.
But for the state and for Dallas, look at the twin peaks with the magnitude for the highs and lows being worse for Dallas. Here is what can be gleaned from this data on the chart below:
The growth rate while positive has been declining since December 2006! A finance official in another city told me this week that he sure wished his city had seen this property tax and sales tax slump coming. Is 2-1/2 years not enough?
The rate of growth in sales tax revenue for the state has declined every single month for the past 31 months except for two. About the same for Dallas, except look what has happened. The two moving average differences sent negative two months ago. That translates into a 12-month total collection for Dallas equal to $5,629,884 LESS than the same 12-month period for 2008.
The fiscal year for most Texas cities in October through September, but the sales tax check received through the first week in November are included in the fiscal year. In other words, most sales tax revenue number used in the financial statements in Texas are from December through November. So, most Texas cities have July-November sales tax checks to go before the story unfolds in their financial documents.
However, there is not a single hint of a recovery. In fact, there is not a single clue here that this very steep declining slope is going to end any time soon.
So, the next thing is to look at how one city is doing in relationship to others. Some Texas cities are doing quite well. To provide a perspective, In the most recent 12-months, Texas local governments (cities, counties, special districts and transit authorities) have received $6.001,879,210. This does not include the 6.25% collected for the state to keep.
Of the $6,001,879,210 collected, $4,029,366,992 is received by cities. Of those cities, $3,875,701,964 belong to cities that receive $1,000,000 or more. There are 317 cities in that category. Those cities receiving over $10,000,000 in the past 12 months totals $3,087,752,430.
Therefore, when you look at the recap on the previous page, you are seeing most of Texas sale tax money.
The attempt is to calculate a rolling 12-month growth rate for the past year followed by a computed slope. To assist in the quick review of the significance of the trend data, the slope of the index goes from dark green for the most positive slopes to dark red for the most negative. You will find that some cities are still at high growth rates but have a decling slope.
Based on the computed slope, an estimate has been made for the number of months left in the case of a declining slope. If the 12-month moving average is already below the 36-month moving average, then the value has been shown as zero. If it appears there is a positive growth as of June 2009 with either a positive slope or a small negative that will prevent a cross over in 24 months or more, then ">24" is shown in the cell. Otherwise, the "Months To Cross-Over" column indicates how many months are remaining before crossover based on current trend data. The significant of this measure can be seen in the recap below:
COUNT 0 60 1 8 2 9 3 5 4 7 5 8 6 3 7 9 8 7 9 3 10 10 11 4 12 4 13 4 14 1 15 3 16 2 17 3 18 4 19 1 20 5 21 1 23 1 24 3 >24 152 LIST TOTAL 317 Of the 317 cities with annual sales tax reveues of $1,000,000 or more, 152 are either on a positive rate of growth slope or are expected to stay positive for the next 24+ months. Sixty of the 317 cities are already to a point where the negative slope has caused the STSI (12-month compared to 36-month moving average) to go negative. Most of these 60 have gone negative in terms of absolute revenues on a trailing 12-month basis 2009 compared to 2008. There 85 are cities in total that are negative in absolute dollar terms year-over-year.
The remaining cities are marching toward negative rate of growth and projected to go negative in 1 to 24 months as shown above unless the current trends are reversed.
You can also see the absolute dollars collected for the most recent 12 months compared to the same 12 months for 2009 with a computed difference in dollars and percentage.
Be aware that there are stories behind every city's numbers. For instance a portion of their sales tax rate may have been lowered to be used for some other special purpose and taken out of their city numbers. To know all of the stories and to write about them here is an impossible task. However, it is believed that the information that has been provided is helpful to see the trends and to see the story about sales taxes in Texas:
1) sales taxes are an enormously important part of the revenue base for local governments;
2) they are trending down in terms of growth with no sign of a bottoming out soont;
3) given the slope is long enough and steep enough, local governments and even the state government will eventually have less revenues in absolute terms from this source;
4) this index will help pinpoint and confirm a turn when the revenue base stabilizes and begins to re-strengthen.
5) this approach to analyzing sales tax revenues can be applied to any revenue or expenditure that might be difficult to otherwise measure the level of strength.
LFM lfm@citybase.net
But wait! There is a positive side to a revenue crunch.
