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

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• Project out your revenues• Expenses-One time versus on-going• Fund balances

Budget Process

Never Ending Cycle

Preparation

Adoption

ImplementationEvaluation

Audit

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 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

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Types of Revenue Forecasts• Extrapolation or Projection• Deterministic Projections• Multiple Regression Equations• Econometric Equation Systems• Microsimulation from Taxpayer files• Judgmental and Subjective

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Most Widely Used Forecast

Judgmental and Subjective!“Devastatingly accurate and immensely useful”

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What goes into revenue forecasting?

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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

Revenue ForecastingTake 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 information3. Conduct a preliminary/exploratory

analysis4. Select method(s)5. Implement method (s)

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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

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Sales Taxes

• Major Revenue Categories:RetailConstructionUtilitiesRentalRestaurant/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• Property Classification• Assessment Ratio• Overlapping Rates• Affected by Economy– Housing Market– Interest Rates

State Shared Revenues

State Sales taxIncome tax Auto LieuHighway 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?• Weather34

Other Revenues• Building permits• Fines and forfeitures• Recreation and park fees• Library fees• Highway User (gas tax)

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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

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Glendale - 2013• 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 Policies41

Identify the Problem• Structural Deficit• Ongoing Revenues Ongoing Expenditure

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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 Tool47

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:

• 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

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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 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?

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Questions?

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Contact Information

Pat Walker – pwalkerconsulting@aol.com

Tom Duensing – TDuensing@glendaleaz.com

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