1. Elliott D. Pollack & Company To: GFOAz By: Jim Rounds, Senior Vice President Elliott D. Pollack & Company February 18, 2011 You Heard It Here First: Less Dreadful Times Ahead!

2. Elliott D. Pollack & Company The U.S. Recovery:

3. Elliott D. Pollack & Company U.S. Y/Y Job Losses - Recent Recessions Duration in Months - BLS 1980/81 1974 2001 1991 January

4. Elliott D. Pollack & Company US Employment* Source: Bureau of Labor Statistics Sectors in Decline Construction -2.5% Information-1.1% Financial Activities-0.8% Government-1.3% Sectors Improving Natural Resources & Mining 10.3% Education & Health Services 2.0% Trade 0.6% Prof. & Bus. Services2.3% Leisure & Hospitality 0.8% Transp., Warehousing & Utilities 1.6% Manufacturing3.4% Other Services2.0% *January 2011/January 2010

5. Elliott D. Pollack & Company U.S. Unemployment Rate 1980 – 2011* Source: Bureau of Labor Statistics *Data through January 2011 Recession Periods USELESS!!!!!

6. Elliott D. Pollack & Company U.S. Leading Indicators 1971 – 2010 (through December) Source: The Conference Board Recession Periods

7. Elliott D. Pollack & Company Select Recession Indicators: Real GDP Real Income Employment Industrial Production Wholesale – Retail Sales

8. Elliott D. Pollack & Company Real Gross Domestic Product Percent Change Quarter Ago, Annualized 1971 – 2010 * Source: Bureau of Economic Analysis * Data through 4th quarter 2010 Recession Periods Half of growth Q4 & Q1 was from inventory corrections. The softening in Q2 is from an increase in imports.

9. Elliott D. Pollack & Company Real Personal Income Net of Government Transfers Percent Change Quarter Ago, Annualized 1971 – 2010 * Source: Bureau of Economic Analysis * Data through 4th quarter 2010 Recession Periods

10. Elliott D. Pollack & Company National Employment Percent Change Month Ago, Annualized (S/A) 1981 – 2011* Source: U.S. Bureau of Labor Statistics *Data through January 2011 Recession Periods Flat after adjusting for Census employment

11. Elliott D. Pollack & Company Industrial Production Percent Change Year Ago 1973 – 2010* Source: The Conference Board *Data through December 2010 Recession Periods

12. Elliott D. Pollack & Company Real Retail Sales U.S. Percent Change Year Ago 1973 – 2010* Source: Federal Reserve *Data through December 2010 **Three-month moving average Recession Periods

13. Elliott D. Pollack & Company Recession Indicators Summary: Real GDP Real Income Employment Industrial Production Wholesale – Retail Sales

14. Elliott D. Pollack & Company Why is this Important? Things won’t be getting WORSE… But, when will they be getting SIGNIFICANTLY BETTER?

15. Elliott D. Pollack & Company Consumers

16. Elliott D. Pollack & Company Household Net Worth Percent Change Year Ago 1970 – 2010* Source: Federal Reserve Equals assets less debt; data through third quarter 2010. Recession Periods

17. Elliott D. Pollack & Company Household Net Worth ($$$) 1970 – 2010* Source: Federal Reserve Data through third quarter 2010. Recession Periods ( $ in trillions)

18. Elliott D. Pollack & Company Financial Obligation Ratio** 1980 – 2010 Source: Federal Reserve *Data through third quarter 2010 **Ratio of mortgage and consumer debt (including auto, rent and tax payments) to disposable income. Recession Periods

19. Elliott D. Pollack & Company Savings Rate 1973 – 2010* Source: Federal Reserve *Data through December 2010 Recession Periods

20. Elliott D. Pollack & Company Consumer Confidence 1978 – 2011* Source: The Dismal Scientist *Data through January 2011 Recession Periods 1985 Benchmark = 100

21. Elliott D. Pollack & Company Lots of pressure on the consumer. Situation is improving but VERY slowly. Wealth is an issue. Less pent up demand than typical for a recovery. Consumer Recap

22. Elliott D. Pollack & Company Business Depends on the sector…

23. Elliott D. Pollack & Company Corporate Profit (Billions of Dollars, SA) 1975-2010* Source: Freelunch.com * Data through third quarter 2010 Recession Periods

24. Elliott D. Pollack & Company Corporate Profit By Industry ($Billions) 2010 q3 Source: BEA

25. Elliott D. Pollack & Company Doin’ God’s Work

26. Elliott D. Pollack & Company U.S. Real Exports as a Percent of Real GDP 1971 – 2010* Source: Bureau of Economic Analysis Recession Periods *Data through fourth quarter 2010

27. Elliott D. Pollack & Company Hours Worked Percent Change from Year Ago 1976 – 2010** Source: Bureau of Labor Statistics Recession Periods **Data through fourth quarter 2010

28. Elliott D. Pollack & Company Capacity Utilization Rate 1970 – 2010* Source: The Conference Board *Data through December 2010 Recession Periods This is where investment occurs.

29. Elliott D. Pollack & Company Percentage of Large U.S. Banks Reporting Easier Standards on Business Loans 1997 – 2010* Source: Federal Reserve, Board of Governors Recession Periods * Data as of January 2011 survey.

30. Elliott D. Pollack & Company Profits are high, but… Business spending on plant will be slow. Spending on equipment will be up a little. Hiring will still be relatively slow. Business Recap

31. Elliott D. Pollack & Company U.S. Summary: Recovering but not recovered.

32. Elliott D. Pollack & Company Case Study: Arizona, the recession “poster child.”

33. Elliott D. Pollack & Company It all comes down to supply/demand and pop/employ growth.

34. Elliott D. Pollack & Company A strong rate of growth does not mean we have recovered.

35. Elliott D. Pollack & Company 9 4 1 5 2 10 3 7 Job Growth 2006 11 15 6 22 8 Source: US BLS 13 Jobs growing Jobs declining Top 10

36. Elliott D. Pollack & Company 4 22 2 5 3 1 8 Job Growth 2007 Source: US BLS 11 10 28 36 15 7 20 6 9 45 Jobs growing Jobs declining Top 10

37. Elliott D. Pollack & Company 11 47 1 17 45 6 10 3 8 14 34 46 42 2 4 7 9 15 Job Growth 2008 Source: US BLS 50 Jobs growing Jobs declining Top 10 Hawaii Alaska

38. Elliott D. Pollack & Company 5 49 23 35 45 4 32 8 24 47 50 44 1 16 3 Alaska 2 13 18 30 Job Growth 2009 Source: US BLS 46 Jobs growing Jobs declining Top 10 Hawaii

39. Elliott D. Pollack & Company 16 2010 v 2009 35 43 11 46 10 49 4 45 36 Job Growth Update: Arizona Ranked 35th 50 Hawaii 28 2 21 12 Alaska 3 40 34 31 1 5 6 9 7 8 29 Jobs growing Jobs declining Top 10

40. Elliott D. Pollack & Company Employment Growth: Top 10 States (December M/M) Texas New Hampshire North Dakota (added a Circle K) Oklahoma Massachusetts Wyoming (added 2 Circle K’s) Louisiana Arizona Washington Wisconsin

41. Elliott D. Pollack & Company 15 December 2010 v December 2009 8 6 16 30 7 39 1 46 26 Job Growth Update: Arizona Ranked 8th 50 29 3 4 12 Alaska 36 37 24 9 2 13 31 Jobs growing Jobs declining Top 10 Hawaii 32 5 10

42. Elliott D. Pollack & Company Greater Phoenix Economy

43. Elliott D. Pollack & Company Phoenix-Mesa MSA Employment* Annual Percent Change 1975–2011** Source: Department of Commerce, Research Administration *Non-agricultural wage & salary employment. Changed from SIC to NAICS reporting in 1990. ** 2011 & 2012 forecasts are from Elliott D. Pollack & Co. Recession Periods

44. Elliott D. Pollack & Company Greater Phoenix Y/Y Job Losses - Recent Recessions Duration in Months – BLS - December 1980/81 1974 2001 1991

45. Elliott D. Pollack & Company Phoenix-Mesa Employment* Source: Arizona Department of Commerce, Research Administration Sectors in Decline Information-2.9% Financial Activities-2.5% Other Services-3.6% Government Mining -1.8% 0.0% Sectors Improving Construction Education & Health Services 2.2% 4.6% Trade 4.0% Prof. & Bus. Services3.8% Transp. & Utilities2.2% Manufacturing Leisure and Hospitality 0.1% 1.9% *December 2010/December 2009

46. Elliott D. Pollack & Company Employment Levels: Greater Phoenix Back to Peak Before 2015? Source: ADOC Recession Periods Peak

47. Elliott D. Pollack & Company Real estate problems will continue… (principles hold for all areas)

48. Elliott D. Pollack & Company Properties in the Foreclosure Process Maricopa County 2002 – 2011 Source: The Information Market *Data through January 2011. AZ = Approx 50% more; this will stay relatively high for a while!

49. Elliott D. Pollack & Company Investors: 40% of the Market Percent of Non-Owner Occupied Sales of Total Sales Maricopa County Source: DataQuick

50. Elliott D. Pollack & Company How Investors Impact the Market: Temporarily increase housing demand. This puts upward pressure on prices.

51. Elliott D. Pollack & Company Home Prices Indices 2000 – 2010 (October) Source: Macro Markets, LLC; AMLS Recession Periods w/o investors w/ investors

52. Elliott D. Pollack & Company Negative Equity in Homes Affects Ability to Sell or Buy Source: First American Core Logic 51% of homes in Arizona have negative equity. (national average 23%).

53. Elliott D. Pollack & Company But it’s also about supply…

54. Elliott D. Pollack & Company U.S. Single-Family Starts 1978–2010 1/ Source: Census Bureau (Millions) 1/ Through November 2010 Recession Periods Over- supply Under- supply LTA: 1.2

55. Elliott D. Pollack & Company Greater Phoenix Population Annual Percent Change 1976–2011* Source: Arizona State University & Department of Commerce, Research Administration 2009 is an estimate put out by ADOC and may be subject to substantial revision. * 2010 & 2011 forecast is from Elliott D. Pollack & Co. Recession Periods 2008 = 1% 2009 = 0% 2010 = 1%?

56. Elliott D. Pollack & Company Single-Family Permits vs. Population Demand Greater Phoenix 1975–2015 Source: PMHS / RL Brown # Permits Recession Periods * 2011 - 2015 forecast is from Elliott D. Pollack & Co.

57. Elliott D. Pollack & Company Housing Affordability Index 2000 q3 Source: NAHB

58. Elliott D. Pollack & Company Housing Affordability Index 2006 q3 Source: NAHB

59. Elliott D. Pollack & Company Housing Affordability Index 2010 q3 Source: NAHB

60. Elliott D. Pollack & Company Greater Tucson Economy

61. Elliott D. Pollack & Company Greater Tucson MSA Employment* Annual Percent Change 1975–2011** Source: Department of Commerce, Research Administration *Non-agricultural wage & salary employment. Changed from SIC to NAICS reporting in 1990. **2011 & 2012 are forecasts from the University of Arizona Recession Periods

62. Elliott D. Pollack & Company Greater Tucson Employment* Source: Arizona Department of Commerce, Research Administration Sectors in Decline Construction -6.7% Manufacturing-0.4% Information0.0% Other Services-2.8% Financial Activities0.0% Sectors in Growing Mining 0.0% Prof. & Bus. Services 1.1% Trade 1.8% Government Transp. & Utilities -0.0% -1.1% *December 2010/December 2009

63. Elliott D. Pollack & Company Greater Phoenix/Tucson Construction Employment Percent Change Year Ago 2007–2010 Source: Arizona Department of Commerce, Research Administration Recession Periods Can’t look at just one point in time…

64. Elliott D. Pollack & Company Pima County Retail Sales Percent Change Year Ago 2000 – 2010* Source: Arizona Department of Revenue *Data through November 2010 Recession Periods

65. Elliott D. Pollack & Company Greater Tucson Single Family Permits 1976–2011* Source: University of Arizona Recession Periods *2010 & 2011 are forecasts from the University of Arizona

66. Elliott D. Pollack & Company Greater Tucson Foreclosures August 2009-December 2010 Source: RealtyTrac

67. Elliott D. Pollack & Company Remainder of Arizona

68. Elliott D. Pollack & Company All the same issues apply, the degree is what varies…

69. Elliott D. Pollack & Company Balance of State Employment* Annual Percent Change 1977–2010 Source: Department of Commerce, Research Administration *Non-agricultural wage & salary employment. Changed from SIC to NAICS reporting in 1990. Recession Periods

70. Elliott D. Pollack & Company Balance of State Population Annual Percent Change 1976–2009 Source: U.S. Census Recession Periods ?

71. Elliott D. Pollack & Company Balance of State Housing Units Authorized Source: ASU Realty Studies YearPermits% chg 2001 2002 2003 11,001 13,448 16,283 19.4% 22.2% 21.1% 2004 2005 2006 2007 2008 2009 23,185 27,177 19,561 13,334 9,398 8,048 42.4% 17.2% -28.0% -31.8% -45.1% -14.4%

72. Elliott D. Pollack & Company Commercial Markets…

73. Elliott D. Pollack & Company Back to Normal Vacancy? Office = 2014 – 2015 Industrial = 2013 – 2015 Retail = 2014 - 2015

74. Elliott D. Pollack & Company Financial Problems…

75. Elliott D. Pollack & Company U.S. Problem Commercial Real Estate Loans Rise Delinquency Rates at Commercial Banks 1991 – 2010* Source: Federal Reserve * Data through third quarter 2010 Recession Periods Temporary before increasing again?

76. Elliott D. Pollack & Company U.S. Commercial 1 Mortgage Maturities 1980–2020* Source: Foresight Analytics 1/ Includes mainly office, retail, industrial and hotels Note: Forecast is from Foresight Analytics Recession Periods Post 2004 - Upside Down? Borrowed Loan Due

77. Elliott D. Pollack & Company How to Manage the Problem? Capital will continue to be relatively scarce. But, very few banks would refinance under current conditions anyway. Banks won’t want to take back the properties. But, “Extend & Pretend” will only work in the short term.

78. Elliott D. Pollack & Company How to Manage the Problem? Not enough cash flow (rents) for many investors to gain interest in participating. Higher quality properties are moving, lower quality not so much.

79. Elliott D. Pollack & Company Additional Risks…

80. Elliott D. Pollack & Company

82. So which influence will be bigger? Population/employment gains may be offset by new leases adjusting for lower rents/less space, at least in 2011. This means the possibility of relatively flat rental rates and vacancy rates in 2011. 2012 should see some improvement though but not fully recovered until 2014-ish.

83. Elliott D. Pollack & Company How does this impact commercial property values? Values through 2010 propped up by: - Owners depleting reserve funds (done); -Extend and Pretend (still pretending?); -Interest rates low (continues); -Multi-year leases (fewer).

84. Elliott D. Pollack & Company Tale of Two Cities? Building values could continue to slip in 2011 despite some improvement in overall economic conditions (except for core product which is in good shape). Commercial foreclosures are not over. When will investors enter the market in force?

85. Elliott D. Pollack & Company Commercial Summary: For 2011, is flat the new up?

86. Elliott D. Pollack & Company Arizona Forecast 2011 – 2012 Source: Elliott D. Pollack & Company Indicator20092010(e)2011(f)2012(f) Population0.9%1.0%2.0%2.3% Employment -7.3%-1.0%2.0%3.5% Retail Sales-9.8%0.0%5.0%8.0% Personal Income-2.2%2.5%4.0%5.0% Building Permits (Single Family) -39.0%-14.7%-12.4%30.4%

87. Elliott D. Pollack & Company AZ Summary: Lagging the US in terms of full recovery; but leading the US in terms of rates of growth.

88. Elliott D. Pollack & Company Fiscal Topics

89. Elliott D. Pollack & Company Discussion of Rates vs. Levels… (A 100% gain is needed to offset a 50% loss)

90. Elliott D. Pollack & Company

91. Example “Recovery” Models…

92. Elliott D. Pollack & Company How do we deal with this issue? At some point revenue growth RATES will be significant even if full recovery is mid- decade. But, WE DON’T KNOW exactly how/when this will play out. Options?

93. Elliott D. Pollack & Company How do we deal with this issue? Option #1: Assume a normal economic recovery and an immediate/significant boost in growth rates. NO!

94. Elliott D. Pollack & Company Recession Trough Recovery Peak – Typical Back to Normal Growth Rate Revenue Cycle Examples of Forecasted Revenue Recovery - A

95. Elliott D. Pollack & Company How do we deal with this issue? Option #2: Assume less pent up demand than typical, so if trying for a “most likely” scenario be more conservative. Includes some budgeting risk but fewer spending cuts will need to be identified.

96. Elliott D. Pollack & Company Recession Trough Recovery Peak – Less Pent Up Demand Back to Normal Growth Rate Revenue Cycle Examples of Forecasted Revenue Recovery - B

97. Elliott D. Pollack & Company How do we deal with this issue? Option #3: Too much uncertainty; forecast the peak to be no greater than the long term average and be prepared for revenues to eventually exceed the forecast. Less risk to out-year budget, but will need to work harder to find more spending cuts.

98. Elliott D. Pollack & Company Examples of Forecasted Revenue Recovery - C Recession Trough Back to Normal Growth Rate Revenue Cycle Simply wait until we realize the aforementioned growth???

99. Elliott D. Pollack & Company Recession Trough Recovery Peak Back to Normal Growth Rate Revenue Cycle Examples of Forecasted Revenue Recovery - All

100. Elliott D. Pollack & Company Public Policy Topics

101. Elliott D. Pollack & Company Focus on growing or growing well?

102. Elliott D. Pollack & Company

103. Why are incentives, at first glance, low on the list of most desired business location factors?

104. Elliott D. Pollack & Company

105. Competitiveness Map

106. Elliott D. Pollack & Company 9 4 1 5 2 10 3 7 Job Growth 2006 11 15 6 22 8 Source: US BLS

107. Elliott D. Pollack & Company 5 49 23 35 45 4 32 8 24 47 50 Hawaii 44 1 16 3 Alaska 2 13 18 30 Job Growth 2009 Source: US BLS 46

108. Elliott D. Pollack & Company Areas of Policy Focus: Arizona Summary

109. Elliott D. Pollack & Company Basic Principles: Address Where We Are Weak More outreach by leadership. Efficient levels of regulation. More competitive tax policy. Focused incentives when necessary. Physical and intellectual infrastructure. Better marketing/branding. Better coordination.

110. Elliott D. Pollack & Company Have the basic economic development tools. Are competitive in tax rates where it matters. Communities also participate. Red tape is minimal. Marketing of the State and sub-regions is excellent. If somebody calls there is a person that answers the phone and EVERYBODY participates to close the deal. Common Themes: “Best” States

111. Elliott D. Pollack & Company Where is the ball often dropped? Making sure there is a return on the investment.

112. Elliott D. Pollack & Company Other Intangibles?

113. Elliott D. Pollack & Company What do we have going for us compared to other regions? (from my recent trip to the East Coast) My Cabbie. Where I slipped on ice and fell on my butt. My doctor treating my newly developed bronchitis.

114. Elliott D. Pollack & Company My renewed opinion of the Southwest.

115. Elliott D. Pollack & Company For additional economic updates including speeches and publications please follow us on Twitter. We will walk you through the simple registration process on our website: www.arizonaeconomy.com

116. Elliott D. Pollack & Company ELLIOTT D. POLLACK & Company 7505 East Sixth Avenue, Suite 100 Scottsdale, Arizona 85251 480-423-9200 P / 480-423-5942 F / www.arizonaeconomy.com / info@edpco.com Economic and Fiscal Impact Analysis/Modeling Real Estate Market and Feasibility Studies Litigation Support Revenue Forecasting Keynote Speaking Public Finance and Policy Development Land Use Economics Economic Development