The “Art” of Municipal Revenue Forecasting in Arizona - PowerPoint Presentation

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The “Art” of Municipal Revenue Forecasting in Arizona

Thursday, August 25, 20162:30PM –4:00 PMPat Walker, Pat Walker Consulting LLCTom Duensing, Assistant City Manager, City of Glendale

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Presentation Objectives

Introduction/OverviewOverview of Budget ProcessWhat goes into revenue forecastingMunicipal Revenues in ArizonaForecasting in Glendale, ArizonaSummaryQuestions/Discussion

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Project out your revenues

Expenses-One time versus on-goingFund balancesBudget ProcessSlide4

Never Ending CycleSlide5

Preparation of Budget

Revenue ForecastingProducing a “balanced budget”Phantom deficit reductions that will catch up with you

Unrealistic revenue projectionsOne-time versus on-going

Ducking the decisionSlide6

Difference Between Large & Small Cities & Towns

Processes can be used by large or small communitiesSmall communities tend to get into line item but that can cause losing sight of the “big picture”Same revenue sources, just at different levelsSlide7

Difference Between Large & Small Cities & Towns

Expenditure projection process-departments not as involvedCan become more political in smaller communitiesExpenditures not of same magnitude but…..can be more than revenues base allowsSlide8

RevenuesSlide9

Revenue Forecasting

Have to know how much you can spend without anything changing – baselineFinancial forecasting is one of the Finance Director’s most important tasksAllows a proactive versus reactive response to potential imbalancesLong term plans & strategies9Slide10

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 laws11Slide12

Types of Revenue Forecasts

Extrapolation or ProjectionDeterministic ProjectionsMultiple Regression EquationsEconometric Equation SystemsMicrosimulation from Taxpayer filesJudgmental and Subjective

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Most Widely Used Forecast

Judgmental and Subjective!“Devastatingly accurate and immensely useful”13Slide14

What goes into revenue forecasting?

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Best Practices

Professional JudgementEconomic Forecasts

Historical TrendsRevenue Estimate

Policy RestrictionsSlide15

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.Slide16

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 layoffsObjective – 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 advice17Slide18

Key to Revenue Forecasting

Must understand revenue sourceHistorical data must be cleanIncorrect posting of revenuesLaw changesInconsistency Revenue FluctuationsOpen and transparent processNo one methodology fits all revenues forecasted

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Key to Revenue Forecasting

Good judgement and experience of forecasterToo many cooks in the kitchen?Revenues need to be monitored carefully and regularly against forecastCompare against same time periods of prior yearsReview reasons not consistent for the next revenue forecast

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GFOA Best Practice Steps in Forecasting

Define the problem Gather informationConduct a preliminary/exploratory analysisSelect method(s)

Implement method (s)

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Where the Money Comes from, Resources

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Sales Taxes

Major Revenue Categories:Retail

ConstructionUtilities

RentalRestaurant/BarSlide24

Sales Tax Forecasting

RetailSeasonality fluctuationsCPIConsumer confidenceNew or expanding businessesClosing of businessesTax Law changes

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Sales Tax Forecasting

ConstructionEngineering news record for construction – western regionOne time versus on-goingHousing market, prices go up, construction could go downKnow the projects in your communityMortgage rates

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Sales Tax Forecasting

Hotel/Motel & Restaurant & Bar:Overall economyAre you a tourist attraction?Seasonal fluctuationsHotels/Motels know # of rooms, rates, vacancy ratesNew businesses/renovations/closures

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Sales Tax Forecasting

UtilitiesProposed rate increasesPopulation increasesNew homes/businessesWeatherMost consistent sales tax source

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Franchise Taxes

Permission for utilities to use City/Town’s right away for underground linesMust be approved by vote of the peopleUsually based on % of gross sales

Cannot exceed 25 yearsSlide29

Property Taxes- Municipal

Primary tax rate can be used for any municipal purposeSecondary rate can only be used for payment of debt service (principal and interest) on bonds approved by votersSlide30

Property Taxes

Property ClassificationAssessment RatioOverlapping RatesAffected by EconomyHousing MarketInterest RatesSlide31

State Shared Revenues

State Sales taxIncome tax Auto Lieu

Highway User RevenueSlide32

Income Taxes

Estimates are from 2 years ago collectionsInfluenced by economic activityComplexity Tax ExemptionsTax CreditsWithholding ratesSlide33

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Enterprise Revenue Forecasting

Financial plan, versus rate study, versus cost of service studiesHow much you need, how you are going to collect it and from whom you are going to collect it fromNew housing/businessesType of business or manufacturing?Weather

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Other Revenues

Building permitsFines and forfeituresRecreation and park feesLibrary feesHighway User (gas tax)35Slide36

Other Finance Sources

BondsGeneral Obligation BondsRevenue BondsHighway User Revenue Bonds

Special Improvement District BondsMunicipal Property Corporation Bonds

Water Infrastructure Financing Authority (WIFA)Slide37

City of Glendale

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Glendale - 2013

Short HistoryFinancial Forecast & It’s PurposeWhat goes into a forecast?Revenue ForecastsScience vs. ArtWhere are we at today?

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Glendale

– WSJ (Nov. 1, 2013)39Slide40

Glendale – Az Republic (Apr. 11, 2014)

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Goals - 2013

Identify the Problem – Five-Year Financial ForecastFix the ProblemCommunicationTransparencyFocus on the Future and Only Learn from the PastBecome “Financially Stable” Over a Five-Year PeriodProtect Financial Stability – Financial Policies

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Identify the Problem

Structural DeficitOngoing Revenues Ongoing Expenditure42Slide43

Identify the Problem

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Identify the Problem

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Identify the Problem

ChoicesReduce Services/Absorb Revenue ReductionMaintain Services/No Revenue ReductionCombination of the Above45Slide46

Messages in 2013

Forecasting is a Journey…100,000 viewFor Glendale, there is a 100% Guarantee the actual results in five years will be different than the forecastForecasting is the Cornerstone to Financial Planning/StabilityDecisions are applied to the forecast model firstRevenue/expenditure adjustments

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Messages

in 2013While 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 ExpendituresMostly UncontrollableCan be unpredictable

Dependent on EconomyRevenue is not Balancing Tool

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Messages in 2013

Tend to Lean Toward Conservative Revenue EstimatesApply Technical ModelingEconometricTrends AnalysisApply Professional Judgement

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Glendale’s – Sources for Revenue Forecasting Framework

Recommended Budget Practices – A Framework for Improved State and Local Government BudgetingGFOA Best PracticesOther City Budget/Forecast Documents49Slide50

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 ConservativeAs Staff, Attempted to Understand Prior Forecasted and Actual Revenues (Historical Trends)

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Best Practices Incorporated

Developed Revenue PoliciesFees & Charges (e.g. cover “costs” of services provided)One-Time Revenue (Including Fund Balance)Not Used for Recurring ExpendituresExplicitly Define Allowable UsesAlso Developed a Fund Balance Policy

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Best Practices Incorporated

Unpredictable RevenueSubject to Significant Variations (e.g. construction permits fees, construction sales tax)Forecasted/budgeted cautiouslyNew RevenueWhen is it appropriate to include in a budget/forecast?We were not necessarily cautious

Document Revenue SourcesAnnual Budget Document

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Professional Judgement Used

Revenue is SituationalAttempted to Understand the MarketNHL Hockey & Westgate Entertainment DistrictSuper Bowl XLIX – 2008 ResultsUnderstand 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 VariationsHelps with future forecasting/budgetingGlendale’s Sales Tax and State Shared Revenue data goes back to July 1, 2003 – Represents approximately 80% of total General Fund Revenue54Slide55

Major Revenues

Sales TaxDependent upon:Local and state economiesRetail salesDevelopment activityInflationGrowth 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 growthConsistent with October 2015 Joint Legislative Budget Committee’s (JLBC) Financial Advisory Committee reportSlide56

Major Revenues

con’tState SharedAverage 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 LeagueForecast years consistent with projections from the Finance and Advisory CommitteeAssumes no legislative changes

Adjusted for mid-decade census Slide57

Major Revenues con’t

FeesGrowth assumptions by category or typeExamplesCommunity DevelopmentMunicipal CourtRecreation Involves detailed analysis through other multiple departmentsDependent on activity levels and economy

Maybe impacted by statues, legislation and local mandatesSlide58

Financial Stability

What did we do since 2013?Clearly Communicated Our Financial Condition & ProjectionsTry to Focus on the Future and Only Learn from the PastLifted the Sales Tax Sunset

Adjusted Fees58Slide59

Financial Stability

What did we do since 2013?Adjusted Budgeted ContingencyBond Refunding (General Fund Supported)Explicit Assumptions for ForecastingNew Arena Management AgreementAll 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 ModelRevenue, OverallMonitor, monitor, monitorUnderstand what drives each revenue sourceUnderstand the “why” of revenue deviationsDetail presented publiclyCommunicate ClearlyBe 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 – pwalkerconsulting@aol.comTom Duensing – TDuensing@glendaleaz.com

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