Present Investment Policy

Report
Forecasting Revenues in an
Uncertain Environment
Kent Olson
Assistant City Manager
City of Coral Gables
May 6, 2012
1
Topics To Discuss

“It’s the Economy, Stupid”

Legislative Impacts

Societal/Technological Impacts

Revenue Projections

Long Range Forecasts

Final Thoughts
2
“It’s the Economy, Stupid”

When did this phrase originate, and by
whom or what organization?
3
“It’s the Economy, Stupid”
“I feel your pain”
4
An Economist’s Focus
5
An Accountant’s Focus
6
An Economist’s Focus
7
An Accountant’s Focus
8
An Economist’s Focus
9
An Accountant’s Focus
10
Importance of the Business Cycle

Recession, Depression, Recovery,
Expansion

What phase are we in now?

Why is that important?

Length of the business cycle
11
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
12
Retail Sales: What to Focus On

Note which segments report improving
sales and which are reporting slumps
sales – if higher, likely related to
price, not volume
 Luxury goods
 Home improvement
 Restaurants
 Leisure
 Travel
 Gasoline
13
Retail Sales: What to Focus On
(cont.)

Note which retailers report improving sales
and which are reporting declines
 Target,
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. IKEA
 Home Depot and Lowe’s
14
Probable Leading Indicators

Inverted yield curve

Inflation trend
 CPI:
Core vs. overall
 Commodity prices

Oil vs. Natural Gas

Stock prices

Real Estate Markets
15
Real Estate Markets

Residential construction drivers

Commercial market (vacancies)

Historical price patterns

Real estate conditions
 Up
north
 Locally
16
Sources of Macroeconomic Data

Federal Government

State Government

Business periodicals

Newspapers

Television programs

Radio programs

Websites
17
“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)
 GDP
 Retail
Sales
18
“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)
19
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 data

 Census
data
 Projections as well

Economic Estimating Conferences also
provide a wealth of information
20
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

21
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

22
Some Free Website Sources

Wall Street Journal (wsj.com)

MSNBC.com

CNN.com

Bloomberg.com

Reuters.com

Foxbusiness.com
23
Microeconomic Factors

Local economic conditions
 New
business openings
 Business expansions
 Business closings
 Layoffs

Identify Major Industries/Employers
 Tourism
 Manufacturing
 Medical
 Finance/Banking
 Government
24
Microeconomic Data Sources

Local newspapers and business
periodicals

Planning/Building & Zoning Department
 Building
permits
 Local developments in the planning stages

Local Realtor’s Association

Property Appraiser
25
Legislative Impacts - State

State targets

Property taxes

Communications services tax

Business taxes (occupational licenses)

Red light cameras

Fire assessment fees
26
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
27
Societal/Technological Changes
- Telecommunications

Impact of cell phones


Watching TV on the computer


Cable and Satellite services losing customers
Prevalence of wireless access


More households giving up land line phones
Fewer customers need cable lines to access
Internet
iPhones
28
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
29
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
30
A Tale of Two Forecasters
31
Selected Projection Methods

Historical averages

Historical growth rates
 Average
 Compound
Annual Growth Rate (CAGR)
 Regression analysis

Flat
32
Data Example
2005
 2006
 2007
 2008
 2009
 2010
 2011

Revenues
749,500
797,700
856,000
838,200
902,400
937,300
971,400
% Change
6.43%
7.31%
-2.08%
7.66%
3.87%
3.64%
33
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

34
Average of the Growth Rates Fault










Revenues
749,500
797,700
856,000
795,000
902,400
937,300
971,400
% Change
2005
2006
6.43%
2007
7.31%
2008
-7.13%
2009
13.51%
2010
3.87%
2011
3.64%
Total
27.63%
Annual Average goes from 4.47% to 4.60%
Greater variation causes greater inaccuracy
35
Revenues

Property Taxes

Elastic Revenues
 Fluctuate

more with the economy
Inelastic Revenues
 Barely
affected by changes in economic
conditions
36
Property Taxes

Need to duplicate the DR420
 Estimate
changes in assessed value
 Save Our Homes
 Nonresidential 10% cap
 Local real estate market conditions
 Willingness to change tax rate

Project maximum millage calculation also
(Form DR420MM or DR420MM-P) need to
update numbers
37
DR420, p. 1
DR420 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
9. Does the taxing authority levy a voted debt service or millage voted
for 2 years or less?
10. Prior Year Operating Millage Levy
11. Prior Year Ad Valorem Proceeds (7) x (10)
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)
13. Adjusted Prior Year Ad Valorem Proceeds (line 11 - line 12)
1
No
7.7564
9,757,388
836,743
8,920,645
38
DR420, p. 2
14. Dedicated Increment Value (sum of 6b or 7e for all DR420 TIF forms)
15. Adjusted Current Year Taxable Value (line 6 - line 14)
122,483,123
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)
23. Curr. Yr. Agg. Rolled Back Rate (line 22 div. by line 15, mult. by
1,000)
8,920,645
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%
39
Form DR420MM, p. 1
DR-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
6. Prior year maximum ad val. proceeds with majority vote (3 x 5 div. by 1,000)
1,257,978,903
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
40
Form DR420MM, p. 2
14. 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)
17. The selection on line 16 allows a maximum millage rate of:(enter
appropriate rate)
18. Current Year gross taxable value from Current Year Form DR420, line 4
Majority
8.3798
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)
25. Are taxes on line 22 < or = to taxes on line 24?
10,340,067
yes
41
Revenue Projection Methods

Historical averages

Historical growth rates
 Average
 Compound
Annual Growth Rate (CAGR)
 Regression analysis

Flat
42
Elastic Revenues

Sales tax

Utility tax/franchise fees

State Revenue Sharing
43
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
44
Inelastic Revenues

Gasoline tax

Cigarette tax

Ambulance fees
45
Best Methods - Inelastic

Historical averages

Flat

Factor in local conditions
46
Long Range Forecasting

“In the long run, we’re all dead.”

John Maynard Keynes, 1883-1946
47
Long Range Forecasts

Methods identified earlier work for short
and long-term projections

Fallacy of using a consistent percentage to
project over several years
48
Transparency

Assumptions accompany the numbers
 All
projections are based upon certain
assumptions – spell them out



Allows reviewers to revise assumptions
Allows for development of alternative scenarios
Future Millage Rates
 Let
elected officials see what’s coming
 Are these politically palatable?
49
The Fudge Factor
50
The Fudge Factor
51
The Fudge Factor

Use to moderate inherent biases in
forecasts

In later years, use a percentage of the
projected number (e.g., 98%)
52
Example – Revenue Projections
REVENUES
FY2012
FY2013
FY2014
FY2015
FY2016
Property Taxes - Net
483,547,576
489,078,711
498,199,141
516,192,915
539,225,842
Utility Service Taxes
127,417,277
128,936,594
130,894,749
132,111,626
133,410,371
1,117,000
1,117,000
1,128,110
1,139,331
1,150,664
40,075,349
41,020,547
41,973,042
42,437,128
42,905,997
7,743,491
7,820,917
7,899,117
7,978,100
8,137,644
101,687,538
104,187,538
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
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
15,632,677
15,834,789
16,042,345
16,227,222
16,464,071
9,096,911
8,959,022
8,565,300
8,569,121
8,573,055
985,358,119
999,648,103
1,018,671,960
1,045,445,266
1,078,030,970
Other Taxes
Franchise Fees
Licenses and Permits
JEA Contributions
Other Revenue Sharing
Miscellaneous Revenue
Other Sources
TOTAL REVENUES
53
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
54
Additional Resources

GFOA

FGFOA

Other Florida cities/counties

Other cities and counties, period
55

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