1 Forecasting Revenues in an Uncertain Environment Kent Olson Assistant City Manager City of Coral Gables May 6, 2012.

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Forecasting Revenues in an Uncertain Environment

Kent Olson

Assistant City Manager

City of Coral Gables

May 6, 2012

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Topics To Discuss

“It’s the Economy, Stupid”

Legislative Impacts

Societal/Technological Impacts

Revenue Projections

Long Range Forecasts

Final Thoughts

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“It’s the Economy, Stupid”

When did this phrase originate, and by whom or what organization?

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“It’s the Economy, Stupid”

“I feel your pain”

An Economist’s Focus

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An Accountant’s Focus

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An Economist’s Focus

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An Accountant’s Focus

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An Economist’s Focus

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An Accountant’s Focus

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Importance of the Business Cycle

Recession, Depression, Recovery, Expansion

What phase are we in now?

Why is that important?

Length of the business cycle

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

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Retail Sales: What to Focus On Note which segments report improving

sales and which are reporting slumpsGasoline sales – if higher, likely related to

price, not volume Luxury goods Home improvement Restaurants Leisure Travel

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Retail Sales: What to Focus On (cont.)

Note which retailers report improving sales and which are reporting declinesTarget, 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. IKEAHome Depot and Lowe’s

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Probable Leading Indicators Inverted yield curve

Inflation trend CPI: Core vs. overallCommodity prices

Oil vs. Natural Gas

Stock prices

Real Estate Markets

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Real Estate Markets

Residential construction drivers

Commercial market (vacancies)

Historical price patterns

Real estate conditions Up northLocally

Sources of Macroeconomic Data

Federal Government

State Government

Business periodicals

Newspapers

Television programs

Radio programs

Websites17

“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)GDPRetail Sales

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“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)

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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 dataCensus data Projections as well

Economic Estimating Conferences also provide a wealth of information

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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

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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

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Some Free Website Sources Wall Street Journal (wsj.com)

MSNBC.com

CNN.com

Bloomberg.com

Reuters.com

Foxbusiness.com

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Microeconomic Factors Local economic conditions

New business openingsBusiness expansionsBusiness closingsLayoffs

Identify Major Industries/EmployersTourismManufacturingMedicalFinance/BankingGovernment

Microeconomic Data Sources Local newspapers and business

periodicals

Planning/Building & Zoning DepartmentBuilding permitsLocal developments in the planning stages

Local Realtor’s Association

Property Appraiser

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Legislative Impacts - State

State targets

Property taxes

Communications services tax

Business taxes (occupational licenses)

Red light cameras

Fire assessment fees

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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

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Societal/Technological Changes - Telecommunications

Impact of cell phones More households giving up land line phones

Watching TV on the computer Cable and Satellite services losing customers

Prevalence of wireless access Fewer customers need cable lines to access

Internet

iPhones28

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

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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

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A Tale of Two Forecasters

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Selected Projection Methods

Historical averages

Historical growth ratesAverageCompound Annual Growth Rate (CAGR)Regression analysis

Flat

Data Example

Revenues % Change 2005 749,500 2006 797,700 6.43% 2007 856,000 7.31% 2008 838,200 -2.08% 2009 902,400 7.66% 2010 937,300 3.87% 2011 971,400 3.64%

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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

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Average of the Growth Rates Fault Revenues % Change

2005 749,500 2006 797,700 6.43% 2007 856,000 7.31% 2008 795,000 -7.13% 2009 902,400 13.51% 2010 937,300 3.87% 2011 971,400 3.64% Total 27.63% Annual Average goes from 4.47% to 4.60% Greater variation causes greater inaccuracy

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Revenues

Property Taxes

Elastic RevenuesFluctuate more with the economy

Inelastic RevenuesBarely affected by changes in economic

conditions

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Property Taxes Need to duplicate the DR420

Estimate changes in assessed valueSave Our HomesNonresidential 10% cap Local real estate market conditionsWillingness to change tax rate

Project maximum millage calculation also

(Form DR420MM or DR420MM-P) need to update numbers

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DR420, p. 1DR420 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 1

9. Does the taxing authority levy a voted debt service or millage voted for 2 years or less? No

10. Prior Year Operating Millage Levy 7.7564

11. Prior Year Ad Valorem Proceeds (7) x (10) 9,757,388

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) 836,743

13. Adjusted Prior Year Ad Valorem Proceeds (line 11 - line 12) 8,920,645

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DR420, p. 214. Dedicated Increment Value (sum of 6b or 7e for all

DR420 TIF forms) 122,483,123

15. Adjusted Current Year Taxable Value (line 6 - line 14) 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) 8,920,645

23. Curr. Yr. Agg. Rolled Back Rate (line 22 div. by line 15, mult. by 1,000) 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%

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Form DR420MM, p. 1DR-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 1,257,978,903

6. Prior year maximum ad val. proceeds with majority vote (3 x 5 div. by 1,000) 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

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Form DR420MM, p. 214. 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) Majority

17. The selection on line 16 allows a maximum millage rate of:(enter appropriate rate) 8.3798

18. Current Year gross taxable value from Current Year Form DR420, line 4 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) 10,340,067

25. Are taxes on line 22 < or = to taxes on line 24? yes

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Revenue Projection Methods

Historical averages

Historical growth ratesAverageCompound Annual Growth Rate (CAGR)Regression analysis

Flat

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Elastic Revenues

Sales tax

Utility tax/franchise fees

State Revenue Sharing

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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

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Inelastic Revenues

Gasoline tax

Cigarette tax

Ambulance fees

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Best Methods - Inelastic

Historical averages

Flat

Factor in local conditions

Long Range Forecasting

“In the long run, we’re all dead.”

John Maynard Keynes, 1883-194647

Long Range Forecasts

Methods identified earlier work for short and long-term projections

Fallacy of using a consistent percentage to project over several years

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Transparency

Assumptions accompany the numbersAll projections are based upon certain

assumptions – spell them out Allows reviewers to revise assumptions Allows for development of alternative scenarios

Future Millage RatesLet elected officials see what’s comingAre these politically palatable?

The Fudge Factor

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The Fudge Factor

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The Fudge Factor

Use to moderate inherent biases in forecasts

In later years, use a percentage of the projected number (e.g., 98%)

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Example – Revenue ProjectionsREVENUES FY2012 FY2013 FY2014 FY2015 FY2016

Property Taxes - Net483,547,57

6489,078,71

1 498,199,141 516,192,915 539,225,842

Utility Service Taxes127,417,27

7128,936,59

4 130,894,749 132,111,626 133,410,371

Other Taxes 1,117,000 1,117,000 1,128,110 1,139,331 1,150,664

Franchise Fees 40,075,349 41,020,547 41,973,042 42,437,128 42,905,997

Licenses and Permits 7,743,491 7,820,917 7,899,117 7,978,100 8,137,644

JEA Contributions101,687,53

8104,187,53

8 106,687,538 109,187,538 111,687,538

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

Other Revenue Sharing 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

Miscellaneous Revenue 15,632,677 15,834,789 16,042,345 16,227,222 16,464,071

Other Sources 9,096,911 8,959,022 8,565,300 8,569,121 8,573,055

TOTAL REVENUES985,358,11

9999,648,10

31,018,671,9

601,045,445,2

661,078,030,9

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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

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Additional Resources

GFOA

FGFOA

Other Florida cities/counties

Other cities and counties, period