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The “Art” of Municipal Revenue Forecasting in Arizona
Thursday, August 25, 20162:30PM –4:00 PM
Pat Walker, Pat Walker Consulting LLCTom Duensing, Assistant City Manager,
City of Glendale1
Presentation Objectives• Introduction/Overview• Overview of Budget Process• What goes into revenue forecasting• Municipal Revenues in Arizona• Forecasting in Glendale, Arizona• Summary• Questions/Discussion
2
Preparation of Budget• Revenue Forecasting• Producing a “balanced budget”• Phantom deficit reductions that will catch up
with you• Unrealistic revenue projections• One-time versus on-going• Ducking the decision
Difference Between Large & Small Cities & Towns
• Processes can be used by large or small communities
• Small communities tend to get into line item but that can cause losing sight of the “big picture”
• Same revenue sources, just at different levels
Difference Between Large & Small Cities & Towns
• Expenditure projection process-departments not as involved
• Can become more political in smaller communities
• Expenditures not of same magnitude but…..can be more than revenues base allows
Revenue Forecasting• Have to know how much you can spend
without anything changing – baseline• Financial forecasting is one of the Finance
Director’s most important tasks• Allows a proactive versus reactive response to
potential imbalances• Long term plans & strategies
9
Revenue Forecasting• Private economy is never 100% so how can
estimates be?
• Financial management without trustworthy projections is not meaningful!
• Dilemma is most cities & towns do not have economists and statisticians on staff
10
Revenue ForecastingForecasts include and are driven by:
Economic indicators – Consumer price index (CPI), unemployment rate, consumer confidence, job growth, etc.
Demographic indicators – Population growth, how much and where
Administrative – Current laws
11
Types of Revenue Forecasts• Extrapolation or Projection• Deterministic Projections• Multiple Regression Equations• Econometric Equation Systems• Microsimulation from Taxpayer files• Judgmental and Subjective
12
Most Widely Used Forecast
Judgmental and Subjective!“Devastatingly accurate and immensely useful”
13
What goes into revenue forecasting?
14
Best Practices
Professional Judgement
Economic Forecasts
Historical Trends
Revenue Estimate
Policy Restrictions
Type of Revenue Forecast• Whatever type you use, it should be easy to
understand, transparent and structured.• Forecast research has found “Statistically
sophisticated or complex methods do not necessarily produce more accurate forecasts than simpler ones.”*
15 *Government Finance Review, “Revenue Forecasting,” October 2012.
Forecast Policies• Two policies but Council must understand
differences in policiesConservative – Under estimates revenues but if
TOO conservative could lead to unnecessary fiscal stress, loss of opportunity costs or layoffs
Objective – Project revenues as accurate as possible but understand risks. Could result in budget cuts/layoffsMust have contingency funds and strong financial
policies16
Key to Revenue Forecasting• Must understand revenue source• Historical data must be clean– Incorrect posting of revenues– Law changes– Inconsistency
• Revenue Fluctuations• Open and transparent process• No one methodology fits all revenues forecasted
18
Key to Revenue Forecasting• Good judgement and experience of forecaster• Too many cooks in the kitchen?• Revenues need to be monitored carefully and
regularly against forecast– Compare against same time periods of prior years– Review reasons not consistent for the next
revenue forecast
19
GFOA Best Practice Steps in Forecasting
1. Define the problem 2. Gather information3. Conduct a preliminary/exploratory
analysis4. Select method(s)5. Implement method (s)
20
21
CITY/TOWN ANYWHEREGENERAL FUND ANALYSIS
2015-16 2016-17 2017-18 2018-19 2019-20 2020-21
Estimated Projected Projected Projected Projected Projected
REVENUES
Revenues (1) 1,355,296 1,552,638 1,578,460 1,604,795 1,608,859 1,609,724
Carryforward FB USED - 260,281 - - - -
TOTAL REVENUES 1,355,297$ 1,812,919$ 1,578,460$ 1,604,795$ 1,608,859$ 1,609,724$
EXPENDITURES
Departmental Expenditures 1,525,133 1,657,655 1,661,598 1,693,083 1,725,984 1,759,544
Contingency Reserve (2) - 155,264 TOTAL EXPENDITURES 1,525,133$ 1,812,919$ 1,661,598$ 1,693,083$ 1,725,984$ 1,759,544$
NET REVENUES OVER/UNDER EXPENSES (169,836)$ (105,017)$ (83,139)$ (88,288)$ (117,126)$ (149,820)$
Beginning Fund Balance 1,405,996 1,236,160 975,879 892,740 804,452 687,326 IF CONTINGENCY NOT SPENT FUND BALANCE 1,131,143 892,740 804,452 687,326 537,507 IF CONTINGENCY SPENT Net Available/Deficit 1,236,160$ 975,879$ 892,740$ 804,452$ 687,326$ 537,507$
Contingency Reserve % 9% 0% 0% 0% 0%
NOTES:
(1) Future year revenues were forecast at 1% increase per year, expenditures were forecast at 2% increase per year(2) Percentage of Revenues (Goal is at 11 to 15%)
Where the Money Comes from, Resources
Sales Tax41%
State Shared Revenue24%
Other Revenue18%
Fund Balance
16%
Sales Tax State Shared Revenue Other Revenue Fund Balance
22
Sales Tax Forecasting• Retail– Seasonality fluctuations– CPI– Consumer confidence– New or expanding businesses– Closing of businesses– Tax Law changes
24
Sales Tax Forecasting• Construction– Engineering news record for construction –
western region– One time versus on-going– Housing market, prices go up, construction could
go down– Know the projects in your community– Mortgage rates
25
Sales Tax Forecasting• Hotel/Motel & Restaurant & Bar:– Overall economy– Are you a tourist attraction?– Seasonal fluctuations– Hotels/Motels know # of rooms, rates, vacancy
rates– New businesses/renovations/closures
26
Sales Tax Forecasting• Utilities– Proposed rate increases– Population increases– New homes/businesses– Weather– Most consistent sales tax source
27
Franchise Taxes Permission for utilities to use City/Town’s
right away for underground lines Must be approved by vote of the people Usually based on % of gross sales Cannot exceed 25 years
Property Taxes- Municipal• Primary tax rate can be used for any
municipal purpose• Secondary rate can only be used for
payment of debt service (principal and interest) on bonds approved by voters
Property Taxes• Property Classification• Assessment Ratio• Overlapping Rates• Affected by Economy– Housing Market– Interest Rates
Income Taxes• Estimates are from 2 years ago collections• Influenced by economic activity• Complexity – Tax Exemptions– Tax Credits
• Withholding rates
Enterprise Revenue Forecasting• Financial plan, versus rate study, versus cost of
service studies• How much you need, how you are going to
collect it and from whom you are going to collect it from
• New housing/businesses• Type of business or manufacturing?• Weather34
Other Revenues• Building permits• Fines and forfeitures• Recreation and park fees• Library fees• Highway User (gas tax)
35
Other Finance Sources• Bonds• General Obligation Bonds• Revenue Bonds• Highway User Revenue Bonds• Special Improvement District Bonds• Municipal Property Corporation Bonds• Water Infrastructure Financing Authority (WIFA)
Glendale - 2013• Short History• Financial Forecast & It’s Purpose• What goes into a forecast?• Revenue Forecasts– Science vs. Art
• Where are we at today?
38
Goals - 2013• Identify the Problem – Five-Year Financial
Forecast• Fix the Problem– Communication– Transparency– Focus on the Future and Only Learn from the Past
• Become “Financially Stable” Over a Five-Year Period
• Protect Financial Stability – Financial Policies41
Identify the Problem• Choices– Reduce Services/Absorb Revenue Reduction– Maintain Services/No Revenue Reduction– Combination of the Above
45
Messages in 2013• Forecasting is a Journey…100,000 view– For Glendale, there is a 100% Guarantee the
actual results in five years will be different than the forecast
• Forecasting is the Cornerstone to Financial Planning/Stability
• Decisions are applied to the forecast model first– Revenue/expenditure adjustments
46
Messages in 2013• While Forecasting is a Journey, Revenue is the
Engine to Get You There (i.e. revenues tell you how much you can spend)
• Forecasting Revenue More of an Art than Forecasting Expenditures– Mostly Uncontrollable– Can be unpredictable– Dependent on Economy
• Revenue is not Balancing Tool47
Messages in 2013• Tend to Lean Toward Conservative Revenue
Estimates• Apply Technical Modeling– Econometric– Trends Analysis
• Apply Professional Judgement
48
Glendale’s – Sources for Revenue Forecasting Framework
• Recommended Budget Practices – A Framework for Improved State and Local Government Budgeting
• GFOA Best Practices• Other City Budget/Forecast Documents
49
Best Practices Incorporated• Include Key Assumptions in Our Forecasting Model• “Projections should be available to participants in
the budget process before budgetary decisions are made.”
• Tried to be Accurate by Explicit About being Conservative
• As Staff, Attempted to Understand Prior Forecasted and Actual Revenues (Historical Trends)
50
Best Practices Incorporated• Developed Revenue Policies– Fees & Charges (e.g. cover “costs” of services
provided)– One-Time Revenue (Including Fund Balance)• Not Used for Recurring Expenditures• Explicitly Define Allowable Uses
• Also Developed a Fund Balance Policy
51
Best Practices Incorporated• Unpredictable Revenue– Subject to Significant Variations (e.g. construction
permits fees, construction sales tax)– Forecasted/budgeted cautiously
• New Revenue– When is it appropriate to include in a
budget/forecast?– We were not necessarily cautious
• Document Revenue Sources– Annual Budget Document
52
Professional Judgement Used• Revenue is Situational– Attempted to Understand the Market• NHL Hockey & Westgate Entertainment District• Super Bowl XLIX – 2008 Results
– Understand the Tax Structure (e.g. items over $5,000)– Policy considerations (e.g. property tax policy
direction)– Is there a time to be more or less conservative
estimating revenue?
53
Professional Judgement Used• Tracked History (Trend Analysis)• Go Back, Measure, & Explain Variations– Helps with future forecasting/budgeting– Glendale’s Sales Tax and State Shared Revenue
data goes back to July 1, 2003 – Represents approximately 80% of total General Fund Revenue
54
Major Revenues
• Sales Tax– Dependent upon:
• Local and state economies• Retail sales• Development activity• Inflation
– Growth assumptions (average increase 2.5% per year)• FY17 3.5%• FY18 3.0%• FY19 3.0%• FY20 2.0%• FY21 1.0%
– Represents 50% of General Fund operating revenue ($102.1 million in FY17)– Based on historic trending taxable sales growth– Consistent with October 2015 Joint Legislative Budget Committee’s (JLBC)
Financial Advisory Committee report
Major Revenues con’t
• State Shared– Average growth rate
• FY17 3.83%• FY18 4.0%• FY19 4.0%• FY20 3.67%• FY21 3.33%
– Represents 29% of General Fund operating revenue ($60.1 million in FY17)
– Base Year estimated from League– Forecast years consistent with projections from the Finance
and Advisory Committee– Assumes no legislative changes– Adjusted for mid-decade census
Major Revenues con’t• Fees– Growth assumptions by category or type• Examples
– Community Development– Municipal Court– Recreation
– Involves detailed analysis through other multiple departments
– Dependent on activity levels and economy – Maybe impacted by statues, legislation and local
mandates
Financial Stability• What did we do since 2013?– Clearly Communicated Our Financial Condition &
Projections– Try to Focus on the Future and Only Learn from the
Past– Lifted the Sales Tax Sunset– Adjusted Fees
58
Financial Stability• What did we do since 2013?– Adjusted Budgeted Contingency– Bond Refunding (General Fund Supported)– Explicit Assumptions for Forecasting– New Arena Management Agreement
• All financial decisions are applied to the forecast
59
Glendale’s Philosophy• Any Decisions Should be Applied to the
Forecast Model• Revenue, Overall– Monitor, monitor, monitor– Understand what drives each revenue source– Understand the “why” of revenue deviations– Detail presented publicly
• Communicate Clearly• Be Transparent63
Summary• Which revenue forecast is implemented,
conservative or objective?• Is the revenue forecast easily understandable
and easily updated from year to year?• Is the forecast tailored to your community?• Is it a transparent process with input from
inside and outside resources?
64
Contact Information
Pat Walker – pwalkerconsulting@aol.com
Tom Duensing – TDuensing@glendaleaz.com
66
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