The Art of Revenue Forecasting

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1 The Art of Revenue Forecasting 1 Budgeting and Fiscal Management Workshop 2018 Overview Overview of Budget Process What goes into revenue forecasting Forecasting Methods Major Revenues in Washington Some Examples 2 1

Budget Process Estimate Beginning Balances

Expenditures Mostly Uncontrollable Can be

2 Budget Process Estimate Beginning Balances Project Revenues Requested Expenditures Add Debt Service & Capital Calculate Ending Fund Balances Revenue Forecasting Revenues = How Much You Can Spend Forecasting Revenue <> Forecasting Expenditures Mostly Uncontrollable Can be unpredictable Dependent on Economy Revenue is not Balancing Tool 4 2

Revenue Forecasting May Be Most Important Thing You Do

Department Heads Good Affirmation Know the Details

Domestic Product Unemployment Rate Inflation Gas Prices

3 Revenue Forecasting May Be Most Important Thing You Do Have Your Numbers Verified Use a Team Approach Department Heads Good Affirmation Know the Details (DWLS) Can Exaggerate Know Your Surroundings Gross Domestic Product Unemployment Rate Inflation Gas Prices Strength of the Dollar Stock Market Housing Prices Population Growth 6 3

4 Revenue Forecasting Document Your Approach Revenue Manual in Budget Spend Time on the Big Revenues Property Tax Sales Tax State Shared Revenue Estimator Gas Tax Liquor 7 Revenue Troubles Revenue budgets don t have a do not exceed or don t go below. Dilemma is most cities & towns do not have economists and statisticians on staff 8 4

5 Types of Revenue Forecasts Extrapolation or Projection Deterministic Projections Multiple Regression Equations Econometric Equation Systems Microsimulation Judgmental and Subjective 9 Most Widely Used Forecast Judgmental and Subjective! 10 5

Policy Restrictions 11 Revenue Estimate Type of Revenue Forecast Whatever

research has found Statistically sophisticated or complex methods do not

6 What goes into revenue forecasting? Professional Judgement Economic Forecasts Historical Trends Best Practices Policy Restrictions 11 Revenue Estimate Type of Revenue Forecast Whatever type you use, it should: understandable transparent structured Forecast research has found Statistically sophisticated or complex methods do not necessarily produce more accurate forecasts than simpler ones. * 12 *Government Finance Review, Revenue Forecasting, October

Forecast Policies Conservative Under estimates revenues TOO conservative could lead to

financial policies 13 Key to Revenue Forecasting Must understand revenue source

7 Forecast Policies Conservative Under estimates revenues TOO conservative could lead to unnecessary cuts Objective Project revenues as accurate as possible but understand risks. Could also result in budget cuts/layoffs Must have contingency funds and strong financial policies 13 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 14 7

Key to Revenue Forecasting Good judgement and experience of forecaster Talk to the people in the field Revenues need to be monitored carefully and regularly against forecast Compare against same time

Forecast Forecast Forecast Forecast Forecast Forecast 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

00 General Property Tax 713,437 667,316 728,533 734,549 532,377 547,552 497,325 1,204,040 1,330,976 1,370,019 1,402,838 1,458,569 1,507,112 1,265,103 1,447,816 1,612,678 1,631,905 1,651,324 1,670,937

8 Key to Revenue Forecasting Good judgement and experience of forecaster Talk to the people in the field Revenues need to be monitored carefully and regularly against forecast Compare against same time periods of prior years Compare year to date Compare biennium to date 15 Revenue Forecasting Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Budget Forecast Forecast Forecast Forecast Forecast Forecast BARS# TAXES General Property Tax 713, , , , , , ,325 1,204,040 1,330,976 1,370,019 1,402,838 1,458,569 1,507,112 1,265,103 1,447,816 1,612,678 1,631,905 1,651,324 1,670,937 1,690,747 1,710, Tax Title Property ,792 1,296 4, ,786 3, Forest Excise Tax-Private Harv 4,353 4,128 10,317 9,209 7,956 10,026 12,517 10,332 9,080 4,245 3,607 5,579 6,827 5,225 5,666 5,299 5,386 5,475 5,564 5,656 5, Sales Tax - General 511, , , , , , , , , , , , , , , , , , , , , Sales Tax - Criminal Justice 90,410 85, ,067 86,908 87,020 98, , , ,973 93,898 96, ,940 91,864 91,865 98, , , , , , , In Lieu of Taxes - Water 110, , , , , , , , , , , , , , , , , , , , , In Lieu of Taxes - Sewer 94,962 95,137 95,157 92,856 94, , , , , , , , , , , , , , , , , In Lieu of Taxes - Storm 94, , ,164 99,466 60, ,172 19,175 21,911 23,700 23,458 23,245 24,178 26,998 48,098 53,542 54,420 55,312 56,219 57,140 58, Business and Occup. Tax 536, , , , , , , , , , , , , , , , , , , , , Admissions Tax 3, Utility Tax - Gas 101, , , , , , , , , , , ,038 88,044 85,717 98,548 87,595 89,031 90,490 91,974 93,482 95, Imp. Garbage Settlement , Utility Tax - Cable TV ,170 96, , , , , , , , , , , , , , , , , Utility Tax - Telephone 117, , , ,523 96, , , , , , , , , , , , , , , , , Utility Tax - PUD 388, , , , , , , , , , , , , , , , , , , , , Utility Tax - Water, Sewer, Gar 179, , , , , , , , , , , , , , , , , , , , , Utility Tax - Bags, Dumpsters 1,241 1,585 1,621 2, Utility Tax - Solid Waste ,972 91, , , , , , , , , , , , , , , , Utility Tax Addition , ,646 42, Utility Tax - Coll Agency Accts Leasehold Excise Tax 34,143 26,633 26,207 26,969 26,760 28,649 29,411 33,997 28,933 34,144 38,255 40,481 50,625 52,470 59, , , , , , , Gambling Tax 58,652 49,784 44,403 40,782 39,885 35,425 32,474 36,357 28,755 21,781 21,161 19,778 20,743 17,776 21,585 22,770 23,143 23,523 23,908 24,300 24,699 TOTAL TAXES: $3,040,803 $3,080,919 $3,421,779 $3,362,974 $3,522,134 $3,777,013 $3,727,474 $4,639,242 $4,768,981 $4,651,143 $4,773,541 $4,651,154 $4,462,495 $4,363,699 $4,625,365 $5,094,523 $5,054,164 $5,130,097 $5,206,740 $5,284,514 $5,363,437 Annual % Change: 1.3% 11.1% -1.7% 4.7% 7.2% -1.3% 24.5% 2.8% -2.5% 2.6% -2.6% -4.1% -2.2% 6.0% 10.1% -0.8% 1.5% 1.5% 1.5% 1.5% Average % Change since 2000: 1.3% 6.2% 3.6% 3.8% 4.5% 3.6% 6.5% 6.1% 5.1% 4.9% 4.2% 3.5% 3.1% 3.3% 3.7% 3.5% 3.3% 3.2% 3.1% 3.1% 16 8

9 Revenue Forecasting 17 Typical City Revenues 18 9

10 Property Taxes $3.225 Maximum ($3.60 with Fire Pension) The Old Standby Commonly the Largest Source of Revenue Receive in two large distributions Know the other districts around you Fire ($1.50) Library ($0.50) Hospital ($0.50) Assessor 20 10

Property Tax Calculation Calculation of 2019 General Tax Levy: 2018

11,424 PLUS: Property Tax increase from current base: 15,206 EQUALS:

101% is Optional: If you don t take the 1% increase Please bank the

11 Property Tax Calculation Calculation of 2019 General Tax Levy: 2018 General Tax Levy 1,520,609 PLUS: Property Tax from New Construction: 11,424 PLUS: Property Tax increase from current base: 15,206 EQUALS: 2019 Recommended Regular Tax Levy Revenue $1,547,240 Property Taxes 101% is Optional: If you don t take the 1% increase Please bank the unused capacity Can be taken in the future Done with a simple resolution 11

Sales Taxes Can be different in each City/County

12 Sales Taxes Can be different in each City/County State 6.5% County 0.5% City 0.5% Criminal Justice 0.1% % Mental Health 0.1% Public Safety 0.3% Transit 0.7% Total 8.8% Sales Taxes County 6% City 6% State 74% Transit 8% Criminal Justice 1% 911 1% Mental Health 1% Public Safety 3% 12

13 Sales Taxes Major Revenue Categories: Retail Construction Automobiles Groceries Lodging/Restaurant/Bar Retail Sales Tax Forecasting Two Month Lag Seasonality fluctuations CPI/Inflation Consumer confidence New or expanding businesses Businesses Closures Tax Law changes 26 13

A Tale of Two Cities Know your base City #1

Stores Vulnerable Conservative High Reserves City

Building Materials, Restaurants Consumables

Forecasting One time versus on-going Talk to your

14 A Tale of Two Cities Know your base City #1 Multiple Retailers, 3 car lots, Large Grocery Stores Vulnerable Conservative High Reserves City #2 Small Grocery, Gas (Propane, Home heating oil), Building Materials, Restaurants Consumables Objective Low Reserves 27 Construction Sales Tax Forecasting One time versus on-going Talk to your building department Leading Indicator Know the projects in your community 28 14

15 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 29 Leakage Sales Tax Forecasting Outside Dollars Coming In Local Economy Local Dollars Going Out 30 15

16 Leakage Category Sales Tax Forecasting % of Retail Sales Compared to WA Agriculture, Forestry, Fishing 320% Gas Stations & Convenience Stores W/pumps 90% Public Administration, Other 57% Transportation & Warehousing 47% 31 Arts, Entertainment & Recreation -78% Electronics & Appliances -80% Sporting Goods, Toys, Book & Music Stores -85% Motor Vehicles & Parts -90% Apparel & Accessories -96% General Merchandise Stores -97% Sales Tax Forecasting $4,000, Budget Process $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 Actual Actual Actual Budget June YTD

17 Sales Tax Forecasting $3,600, Adopted Budget $3,500,000 $3,400,000 $3,300,000 $3,200,000 $3,100,000 $3,000,000 Actual Actual Actual Budget Budget Sales Tax Forecasting $3,600,000 How Did 2016 End Up $3,500,000 $3,400,000 $3,300,000 $3,200,000 $3,100,000 $3,000,000 Actual Actual Actual Actual Budget Budget

18 Sales Tax Forecasting $3,800,000 How Did 2017 End Up $3,700,000 $3,600,000 $3,500,000 $3,400,000 $3,300,000 $3,200,000 $3,100,000 Actual Actual Actual Actual Budget Actual Budget Sales Tax Forecasting $4,000, Budget Process $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 Actual Actual Actual Actual Budget June YTD

19 Sales Tax Forecasting $3,700, Adopted Budget $3,600,000 $3,500,000 $3,400,000 $3,300,000 $3,200,000 $3,100,000 $3,000,000 Actual Actual Actual Actual Budget Budget Sales Tax Forecasting $3,800,000 How did 2017 End Up? $3,700,000 $3,600,000 $3,500,000 $3,400,000 $3,300,000 $3,200,000 $3,100,000 $3,000,000 Actual Actual Actual Actual Actual Budget Budget

20 Franchise Fees/Privilege Taxes Permission for utilities to use City/Town s right of way Usually based on % of gross sales Very steady Utility Taxes Levied on utilities operating in your City Water Sewer Storm Gas Telephone Cable Electric 40 20

Utility Taxes 6% Limit No Limit Similar to the

21 Utility Taxes 6% Limit No Limit Similar to the Other Rates Electric Water Cable Gas Telephone Sewer Storm 41 Utility Taxes Usually very stable Will increase with rate increase Keep in touch with your Utilities Used more frequently to generate revenue Internet and Cell Phones 42 21

22 State Shared Revenues Gas Tax Liquor Taxes Liquor Profits Criminal Justice Transportation City Assistance MRSC Calculator Other General Fund Revenues B&O Taxes Leasehold Excise Taxes Fines and forfeitures Interfund Leases Investment Income 44 22

23 Enterprise Funds Water, Sewer, Storm, Garbage Like a business Need to be self supporting Utility rates versus tax revenues 45 Utilities Utility Rate Forecasting Comp Plan Proposed rate increases Population increases New homes/businesses Weather Rate Model Flat vs. Consumptive 46 23

Messages in 2019 Conservative or Objective 4% 3% 2%

Practices Develop Revenue Policies Fees & Charge

cover costs of services provided) One-Time Revenue

24 Messages in 2019 Conservative or Objective 4% 3% 2% Unemployment GDP Growth Inflation 47 Incorporate Best Practices Develop Revenue Policies Fees & Charges (e.g. cover costs of services provided) One-Time Revenue (Including Fund Balance) Not Used for Recurring Expenditures Define Allowable Uses Develop a Fund Balance Policy 48 24

Use Professional Judgement Track History (Trend Analysis)

with future forecasting/budgeting Revenue data goes back to

Understand what drives each revenue source Understand the why

25 Use Professional Judgement Track History (Trend Analysis) Project the future Go Back, Measure, & Explain Variations Helps with future forecasting/budgeting Revenue data goes back to Summary Revenue, Overall Monitor, monitor, monitor Understand what drives each revenue source Understand the why of revenue deviations Communicate Clearly Be Transparent Revenue Manual 50 25

26 Revenue Manual 51 Summary (Cont.) Forecasting is a Journey There is a 100% Guarantee the actual results will be different than the forecast Forecasting is the Cornerstone to Financial Planning/Stability 52 26

27 Questions? 53 Contact Information Mike Folkers 54 27

REVENUE ASSUMPTIONS. Actual Actual Adopted Revised Adopted TOTAL SOURCES BEGINNING FUND BALANCE $

REVENUE ASSUMPTIONS. Actual Actual Adopted Revised Adopted TOTAL SOURCES BEGINNING FUND BALANCE $ General Government Funds Revenues REVENUE ASSUMPTIONS This section explains and illustrates the estimates for revenue sources included in the General Government funds of the 2009/ Biennial. Key funding