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The “Art” of Municipal Revenue
Forecasting in Arizona
Thursday, August 25, 2016
2:30PM –4:00 PM
1
Pat Walker, Pat Walker Consulting LLC
Tom Duensing, Assistant City Manager,
City of Glendale
Presentation Objectives
•
•
•
•
•
•
•
2
Introduction/Overview
Overview of Budget Process
What goes into revenue forecasting
Municipal Revenues in Arizona
Forecasting in Glendale, Arizona
Summary
Questions/Discussion
Budget Process
• Project out your revenues
• Expenses-One time versus on-going
• Fund balances
Never Ending Cycle
Preparation
Audit
Adoption
Evaluation
Implementation
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
REVENUES
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 Forecasting
Forecasts 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
•
•
•
•
•
•
12
Extrapolation or Projection
Deterministic Projections
Multiple Regression Equations
Econometric Equation Systems
Microsimulation from Taxpayer files
Judgmental and Subjective
Most Widely Used Forecast
Judgmental and Subjective!
“Devastatingly accurate and immensely useful”
13
What goes into revenue forecasting?
Best Practices
Professional
Judgement
Economic Forecasts
Historical Trends
Policy Restrictions
Revenue Estimate
14
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 policies
Conservative – 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/layoffs
Must have contingency funds and strong financial
policies
16
Revenue Forecasting
Take Albert Einstein’s advice
17
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 information
3. Conduct a preliminary/exploratory
analysis
4. Select method(s)
5. Implement method (s)
20
CITY/TOWN ANYWHERE
GENERAL FUND ANALYSIS
2015-16
2016-17
2017-18
2018-19
2019-20
2020-21
Estimated
Projected
Projected
Projected
Projected
Projected
REVENUES
Revenues (1)
Carryforward FB USED
TOTAL REVENUES
$
1,355,296
1,552,638
1,578,460
1,604,795
1,608,859
1,609,724
-
260,281
-
-
-
-
1,578,460
$ 1,604,795
$ 1,608,859
$ 1,609,724
1,661,598
1,693,083
1,725,984
1,759,544
1,661,598
$ 1,693,083
$ 1,725,984
$ 1,759,544
1,355,297
$
1,812,919
$
EXPENDITURES
Departmental Expenditures
1,525,133
Contingency Reserve (2)
TOTAL EXPENDITURES
$
NET REVENUES OVER/UNDER EXPENSES
$
Beginning Fund Balance
IF CONTINGENCY NOT SPENT
FUND BALANCE
IF CONTINGENCY SPENT Net Available/Deficit
Contingency Reserve %
$
1,525,133
1,657,655
$
155,264
1,812,919 $
(169,836) $
(105,017) $
(83,139) $
(88,288) $ (117,126) $ (149,820)
1,405,996
1,236,160
975,879
892,740
804,452
687,326
1,236,160
1,131,143
975,879
892,740
892,740
804,452
804,452
687,326
687,326
537,507
537,507
$
9%
$
0%
NOTES:
21
(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%)
$
0%
$
0%
$
0%
Where the Money Comes from,
Resources
Fund Balance
16%
Sales Tax
41%
Other Revenue
18%
State Shared Revenue
25%
Sales Tax
22
State Shared Revenue
Other Revenue
Fund Balance
Sales Taxes
• Major Revenue Categories:
Retail
Construction
Utilities
Rental
Restaurant/Bar
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
State Shared Revenues
State Sales tax
Income tax
Auto Lieu
Highway User Revenue
Income Taxes
• Estimates are from 2 years ago collections
• Influenced by economic activity
• Complexity
– Tax Exemptions
– Tax Credits
• Withholding rates
33
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?
• Weather
34
Other Revenues
•
•
•
•
•
35
Building permits
Fines and forfeitures
Recreation and park fees
Library fees
Highway User (gas tax)
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)
City of Glendale
37
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
Glendale – WSJ (Nov. 1, 2013)
39
Glendale – Az Republic (Apr. 11, 2014)
40
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 Policies
41
Identify the Problem
• Structural Deficit
• Ongoing Revenues
42
Ongoing Expenditure
Identify the Problem
43
Identify the Problem
44
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 Tool
47
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
FY18
FY19
FY20
FY21
3.83%
4.0%
4.0%
3.67%
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
• Fees
Major Revenues con’t
– 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
Where are we at today?
60
Did it work?
61
Did it work?
62
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 Transparent
63
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
Questions?
65
Contact Information
Pat Walker – [email protected]
Tom Duensing – [email protected]
66