Download The *Art* of Municipal Revenue Forecasting in Arizona

The “Art” of Municipal Revenue
Forecasting in Arizona
Thursday, August 25, 2016
2:30PM –4:00 PM
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Pat Walker, Pat Walker Consulting LLC
Tom Duensing, Assistant City Manager,
City of Glendale
Presentation Objectives
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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
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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
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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
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Types of Revenue Forecasts
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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”
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What goes into revenue forecasting?
Best Practices
Professional
Judgement
Economic Forecasts
Historical Trends
Policy Restrictions
Revenue Estimate
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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
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Revenue Forecasting
Take Albert Einstein’s advice
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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
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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
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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)
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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:
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(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
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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
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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
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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
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Sales Tax Forecasting
• Utilities
– Proposed rate increases
– Population increases
– New homes/businesses
– Weather
– Most consistent sales tax source
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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
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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
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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
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Other Revenues
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Building permits
Fines and forfeitures
Recreation and park fees
Library fees
Highway User (gas tax)
Other Finance Sources
• Bonds
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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
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Glendale - 2013
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Short History
Financial Forecast & It’s Purpose
What goes into a forecast?
Revenue Forecasts
– Science vs. Art
• Where are we at today?
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Glendale – WSJ (Nov. 1, 2013)
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Glendale – Az Republic (Apr. 11, 2014)
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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
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Identify the Problem
• Structural Deficit
• Ongoing Revenues
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Ongoing Expenditure
Identify the Problem
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Identify the Problem
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Identify the Problem
• Choices
– Reduce Services/Absorb Revenue Reduction
– Maintain Services/No Revenue Reduction
– Combination of the Above
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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
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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
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Messages in 2013
• Tend to Lean Toward Conservative Revenue
Estimates
• Apply Technical Modeling
– Econometric
– Trends Analysis
• Apply Professional Judgement
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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
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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)
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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
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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
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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?
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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
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Major Revenues
• Sales Tax
– Dependent upon:
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Local and state economies
Retail sales
Development activity
Inflation
– Growth assumptions (average increase 2.5% per year)
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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
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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
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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
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Where are we at today?
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Did it work?
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Did it work?
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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
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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?
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Questions?
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Contact Information
Pat Walker – [email protected]
Tom Duensing – [email protected]
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