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Forecasting Revenues in an Uncertain Environment Kent Olson Assistant City Manager City of Coral Gables May 6, 2012 1 Topics To Discuss “It’s the Economy, Stupid” Legislative Impacts Societal/Technological Impacts Revenue Projections Long Range Forecasts Final Thoughts 2 “It’s the Economy, Stupid” When did this phrase originate, and by whom or what organization? 3 “It’s the Economy, Stupid” “I feel your pain” 4 An Economist’s Focus 5 An Accountant’s Focus 6 An Economist’s Focus 7 An Accountant’s Focus 8 An Economist’s Focus 9 An Accountant’s Focus 10 Importance of the Business Cycle Recession, Depression, Recovery, Expansion What phase are we in now? Why is that important? Length of the business cycle 11 Macroeconomic Indicators Gross Domestic Product (GDP) Retail Sales Inflation Consumer Price Index (CPI) Interest Rates Bond yields, yield curve, and spreads Unemployment Rate/Job Growth Real Estate Market 12 Retail Sales: What to Focus On Note which segments report improving sales and which are reporting slumps sales – if higher, likely related to price, not volume Luxury goods Home improvement Restaurants Leisure Travel Gasoline 13 Retail Sales: What to Focus On (cont.) Note which retailers report improving sales and which are reporting declines Target, Walmart, Kohl’s Macy’s, Nordstrom’s, Saks, Neiman Marcus Gap and TJMaxx vs. Talbot’s Limited Brands McDonald’s vs. Five Guys Scandinavian Design vs. IKEA Home Depot and Lowe’s 14 Probable Leading Indicators Inverted yield curve Inflation trend CPI: Core vs. overall Commodity prices Oil vs. Natural Gas Stock prices Real Estate Markets 15 Real Estate Markets Residential construction drivers Commercial market (vacancies) Historical price patterns Real estate conditions Up north Locally 16 Sources of Macroeconomic Data Federal Government State Government Business periodicals Newspapers Television programs Radio programs Websites 17 “They’re the Federal Government, They’re Here to Help” U.S. Department of Labor, Bureau of Labor Statistics (www.bls.gov) CPI-U Department of Commerce, Bureau of Economic Analysis (www.bea.gov) GDP Retail Sales 18 “They’re the State Government, They’re Here to Help” Revenue Estimating Conference Published on Office of Economic and Demographic Research’s website Typically updates in March, August and November State-wide estimates of a wide range of revenue sources Office of Economic and Demographic Research also provides other reports and data(www.edr.state.fl.us) 19 Office of Economic and Demographic Research Provide monthly actual data Long-Range Financial Outlook with substantial economic and financial analysis Under “Economy”, provide county and city economic and demographic data Census data Projections as well Economic Estimating Conferences also provide a wealth of information 20 Revenue Conference Estimates County Property Tax values State General Revenues Sales Tax Documentary Stamp Tax Beverage Taxes & Licenses Communications Services Tax Transportation Revenues (Fuel Taxes) Article V Fees & Transfers 21 State Department of Revenue Revenue estimates Formerly done by the Legislative Committee on Intergovernmental Relations Now compiled by the Office of Economic and Demographic Research Available beginning in mid-June Covers various revenues Sales taxes revenue sharing fuel taxes communications services tax 22 Some Free Website Sources Wall Street Journal (wsj.com) MSNBC.com CNN.com Bloomberg.com Reuters.com Foxbusiness.com 23 Microeconomic Factors Local economic conditions New business openings Business expansions Business closings Layoffs Identify Major Industries/Employers Tourism Manufacturing Medical Finance/Banking Government 24 Microeconomic Data Sources Local newspapers and business periodicals Planning/Building & Zoning Department Building permits Local developments in the planning stages Local Realtor’s Association Property Appraiser 25 Legislative Impacts - State State targets Property taxes Communications services tax Business taxes (occupational licenses) Red light cameras Fire assessment fees 26 Legislative Impacts - Federal Ban on Internet taxation Deficit closing efforts Elimination of deductibility of state and local taxes Loss of grant funding Location of Armed Forces bases and personnel 27 Societal/Technological Changes - Telecommunications Impact of cell phones Watching TV on the computer Cable and Satellite services losing customers Prevalence of wireless access More households giving up land line phones Fewer customers need cable lines to access Internet iPhones 28 Other Societal/Technological Changes Higher Savings Rate Is this a short-term or long-term phenomenon? Greater Fuel Efficiency of Vehicles Economic growth of China and India E-commerce It’s not just sales tax; think property values 29 About Projections Past performance is not an indicator of future performance All projections are wrong – the only question is by how much Use previous projections versus actual to fine-tune future projections 30 A Tale of Two Forecasters 31 Selected Projection Methods Historical averages Historical growth rates Average Compound Annual Growth Rate (CAGR) Regression analysis Flat 32 Data Example 2005 2006 2007 2008 2009 2010 2011 Revenues 749,500 797,700 856,000 838,200 902,400 937,300 971,400 % Change 6.43% 7.31% -2.08% 7.66% 3.87% 3.64% 33 Assessing Growth Rates Methods Revenues went from $749,500 in 2005 to $971,400 in 2011 Average of the growth rates = 26.82/6 = 4.47% Average growth = (971.4/749.5)=1.296 1.296-1=.296; .296/6 = .0493 = 4.93% CAGR = (971.4/749.5)^(1/6) = 1.04417; 1.04417 – 1 = .04417 = 4.42% Regression – six data points is not going to yield a valid result; need at least 20, preferably closer to 40 or 50 34 Average of the Growth Rates Fault Revenues 749,500 797,700 856,000 795,000 902,400 937,300 971,400 % Change 2005 2006 6.43% 2007 7.31% 2008 -7.13% 2009 13.51% 2010 3.87% 2011 3.64% Total 27.63% Annual Average goes from 4.47% to 4.60% Greater variation causes greater inaccuracy 35 Revenues Property Taxes Elastic Revenues Fluctuate more with the economy Inelastic Revenues Barely affected by changes in economic conditions 36 Property Taxes Need to duplicate the DR420 Estimate changes in assessed value Save Our Homes Nonresidential 10% cap Local real estate market conditions Willingness to change tax rate Project maximum millage calculation also (Form DR420MM or DR420MM-P) need to update numbers 37 DR420, p. 1 DR420 Fiscal Year 2012 (Tax Levy Year 2011) Utopia Beach 1. Current Year Tax Value- Real Property 1,178,512,144 2. Current Year Tax Value - Personal Property 42,155,231 3. Current Year Tax Value - Centrally Assessed Property 13,260,287 4. Current Year Gross Taxable - Operating Purposes 1,233,927,662 5. Current Year Net New Taxable Value 12,268,759 6. Current Year Adjusted Taxable Value 1,221,658,903 7. Prior Year Final Gross Taxable Value (from prior year DR403) 1,257,978,930 8. Number of Tax Increment Value sheets 9. Does the taxing authority levy a voted debt service or millage voted for 2 years or less? 10. Prior Year Operating Millage Levy 11. Prior Year Ad Valorem Proceeds (7) x (10) 12. Amount, if any, paid or applied in prior year as result of a TIF district (sum line (6c) or (7a) for all DR420 TIF forms) 13. Adjusted Prior Year Ad Valorem Proceeds (line 11 - line 12) 1 No 7.7564 9,757,388 836,743 8,920,645 38 DR420, p. 2 14. Dedicated Increment Value (sum of 6b or 7e for all DR420 TIF forms) 15. Adjusted Current Year Taxable Value (line 6 - line 14) 122,483,123 1,099,175,780 16. Current Year Rolled-Back Rate (line 13 divided by line 15) x 1,000 8.1158 17. Current Year Proposed Operating Millage Rate 8.1150 18. Total taxes at proposed millage rate (line 17 x line 4, div. by 1,000) 10,013,323 19. Check Type of Principal Authority Municipality 20. Check Type Taxing Authority Principal 21. Is millage levied in more than one county? No Dependent Special Districts and MSTUs Stop and Sign 22. Total adjusted prior year ad valorem Proceeds of authority, DSDs &MSTUs at rolled-back rate (Line 13 From all DR420s) 23. Curr. Yr. Agg. Rolled Back Rate (line 22 div. by line 15, mult. by 1,000) 8,920,645 8.1158 24. Curr. Yr. Ag. Rolled Back Taxes (line 4 x line 23) 10,014,310 25. Total Oper. Ad Valorem Taxes (line 18 from all DR420's) 10,013,323 26. Curr. Yr. Prop. Ag. Millage Rate (line 25 divided by line 4, x 1,000) 8.1150 27. Curr. Yr. Proposed Rate – as % Chg. Rolled (line 26 divided by line 23) -1, x100 -0.01% 39 Form DR420MM, p. 1 DR-420 MM for FY 2012 (Levy Year 2011): Utopia Beach 1. Has your taxing authority levied ad valorem for < 5 yrs? No 2. Current Year rolled-back rate from Current Year Form DR420, line 16 8.1158 3. Prior Year majority vote maximum rate from 2010 Form DR420MM, line 13 7.9471 4. Prior Year operating millage levy from Current Year Form DR420, line 10 7.7564 If line 4 is equal to or greater than line 3, skip to line 11. If less, continue to line 5. 5. Prior year final gross taxable value from Current Year Form DR420, line 7 6. Prior year maximum ad val. proceeds with majority vote (3 x 5 div. by 1,000) 1,257,978,903 9,997,284 7. Amount paid or applied in prior year to a TIF district (Form DR420, line 12) 836,743 8. Adjusted prior year ad val. proceeds with majority vote (line 6 minus line 7) 9,160,541 9. Adjusted current year taxable value from Current Year Form DR420, line 15 1,099,175,780 10. Adjusted current year rolled-back rate (line 8 divided by line 9, x 1000) 8.3340 11. Rolled-back rate to be used for maximum millage calculation (line 10, if adjusted, or line 2) 8.3340 12. Change in per capita Florida personal income 1.0055 13. Majority vote maximum millage rate allowed (line 11 x line 12) 8.3798 40 Form DR420MM, p. 2 14. Two-thirds vote maximum millage rate allowed (line 13 x 1.10) 9.2178 15. Current year adopted millage rate 8.1150 16. Minimum vote required to levy proposed millage (check one) 17. The selection on line 16 allows a maximum millage rate of:(enter appropriate rate) 18. Current Year gross taxable value from Current Year Form DR420, line 4 Majority 8.3798 1,233,927,662 19. Current year adopted taxes (line 15 x line 18, div. by 1000) 10,013,323 20. Total taxes levied at the maximum millage rate(line 17 x line 18, div. by 1000) 10,340,067 21. Current year adopted taxes of all dependent special districts & MSTUs (sum of all lines 19 from each district’s Form DR420MM) 0 22. Total current year adopted taxes (line 19 plus line 21) 10,013,323 23. Taxes at the maximum millage of all dependent special districts & MSTUs 0 (the sum of all lines 20 from each district's Form DR420 MM) 24. Total taxes at maximum millage rate (line 20 plus line 23) 25. Are taxes on line 22 < or = to taxes on line 24? 10,340,067 yes 41 Revenue Projection Methods Historical averages Historical growth rates Average Compound Annual Growth Rate (CAGR) Regression analysis Flat 42 Elastic Revenues Sales tax Utility tax/franchise fees State Revenue Sharing 43 Best Possible Methods – Elastic CAGR Average growth rates Regression analysis Caveats Be sure to temper these methods Be sure to factor the business cycle into projections Factor in local conditions 44 Inelastic Revenues Gasoline tax Cigarette tax Ambulance fees 45 Best Methods - Inelastic Historical averages Flat Factor in local conditions 46 Long Range Forecasting “In the long run, we’re all dead.” John Maynard Keynes, 1883-1946 47 Long Range Forecasts Methods identified earlier work for short and long-term projections Fallacy of using a consistent percentage to project over several years 48 Transparency Assumptions accompany the numbers All projections are based upon certain assumptions – spell them out Allows reviewers to revise assumptions Allows for development of alternative scenarios Future Millage Rates Let elected officials see what’s coming Are these politically palatable? 49 The Fudge Factor 50 The Fudge Factor 51 The Fudge Factor Use to moderate inherent biases in forecasts In later years, use a percentage of the projected number (e.g., 98%) 52 Example – Revenue Projections REVENUES FY2012 FY2013 FY2014 FY2015 FY2016 Property Taxes - Net 483,547,576 489,078,711 498,199,141 516,192,915 539,225,842 Utility Service Taxes 127,417,277 128,936,594 130,894,749 132,111,626 133,410,371 1,117,000 1,117,000 1,128,110 1,139,331 1,150,664 40,075,349 41,020,547 41,973,042 42,437,128 42,905,997 7,743,491 7,820,917 7,899,117 7,978,100 8,137,644 101,687,538 104,187,538 106,687,538 109,187,538 111,687,538 Half-cent Sales Tax 73,255,033 75,452,684 77,716,265 80,047,753 82,449,185 City Revenue Sharing 20,625,303 20,978,794 21,489,010 22,013,344 22,552,205 County Revenue Sharing 22,932,040 23,296,184 23,846,492 24,418,163 25,012,252 7,357,965 7,358,885 7,414,978 7,450,400 7,513,936 Ambulance Fees 15,995,768 16,315,683 16,641,997 16,974,836 17,314,333 Other Charges for Services 45,857,972 46,274,365 47,099,488 47,583,789 48,454,814 Fines and Forfeits 3,991,219 3,991,390 4,004,263 4,023,776 4,043,386 Interest Income 9,025,000 9,025,000 9,070,125 9,090,225 9,135,676 15,632,677 15,834,789 16,042,345 16,227,222 16,464,071 9,096,911 8,959,022 8,565,300 8,569,121 8,573,055 985,358,119 999,648,103 1,018,671,960 1,045,445,266 1,078,030,970 Other Taxes Franchise Fees Licenses and Permits JEA Contributions Other Revenue Sharing Miscellaneous Revenue Other Sources TOTAL REVENUES 53 Final Thoughts Adjust your forecasts in subsequent years Compare your prior forecast to actual results Analyze variances Adjust your methodology to improve future forecasts Remember your audience Internal vs. External 54 Additional Resources GFOA FGFOA Other Florida cities/counties Other cities and counties, period 55