Long-Term Forecasts for Cities and Counties Robert Leland Senior Advisor, Management Partners
Revenue Gap Persists Agencies have not recovered from Great Recession revenue loss Large gap between past expectations and current reality Without cuts, spending was on track to continue on pre-recession trend line 2015 GAO report on state and local government fiscal outlook: revenue gap to continue next 50 years 2
The Next Recession On average every 6.8 years since 1927 Budget impacts often lag official term Issues are timing and magnitude Causes of recession differ Your mileage may vary 3
Wage and Health Pressures Local government wage gap since last recession has yet to be closed Pension reform (lower benefits) adds to Steep rise in health costs until 2014 Future unknown due to potential change in federal law wage pressures 4
Pension Funded Status Low, Employer Contributions Will Continue to Rise Overall Funded Ratio of Pension Plans South Dakota 104.1 Montana 74.5 Wisconsin 102.7 New Mexico 70.6 New York 98.1 North Dakota 70.4 North Carolina 94.6 Maryland 68.8 Florida 92.0 Alaska 67.5 Oregon 91.9 Alabama 67.0 Idaho 91.3 Missouri 66.9 Tennessee 91.3 Michigan 66.5 Delaware 89.1 New Hampshire 65.4 Nebraska 88.8 Vermont 65.4 Utah 88.5 Kansas 65.2 Washington 86.8 Louisiana 63.8 Iowa 85.1 Arizona 63.2 Arkansas 82.4 Hawaii 62.4 Maine 81.3 Mississippi 61.8 Georgia 80.7 Massachusetts 61.5 Oklahoma 80.3 Indiana 60.3 Wyoming 80.1 Colorado 60.0 Minnesota 78.8 South Carolina 57.9 Ohio 78.8 Pennsylvania 57.6 West Virginia 76.9 Rhode Island 55.5 Texas 75.6 Connecticut 49.4 Nevada 75.2 Illinois 40.2 California 75.0 New Jersey 37.8 Virginia 74.6 Kentucky 37.4 Median 74.6 5
Lower Investment Returns Will Boost Employer Rates CalPERS is lowering its discount rate from 7.5% to 7.0% Total impact phased in over seven years Investment advisors project 6.2% average return over next decade Makes further discount rate reduction likely CalPERS income: 65% from investments Substantial increases in employer rate increases required to compensate for lower investment income 6
Evolution of Pension Costs (CA City with 160,000 Population) Costs up due to retroactive improved benefits, investment losses, quicker amortization of unfunded liabilities; costs will double in 10 years Biggest impact is discount rate cut 7
Self-Inflicted Wounds Taking matters out of your own hands Salary formulas linked to other agencies Binding arbitration Constraints on service delivery or contracting out Operating subsidies to other funds Fee levels too low, service levels too high Contingent liabilities GF on the hook for development-backed bonds Pledged assets at risk in case of bond default Bad budgeting practices Pooled funds papers over GF deficit, effectively misuses restricted funds Don t show fund balances in budget Available versus non-spendable balance (cash is king) 8
Assessing Fiscal Solvency Incremental decisions often don t appear dangerous until viewed in the aggregate Cash solvency Do we have ability to pay for current year obligations? Budget solvency Do recurring revenues meet or exceed recurring expenses over time (not balanced with one-time transfers or use of reserves)? Is budget sustainable over long-term? Service solvency Are resources sufficient to fund level of services required for community s health, welfare and safety? 9
Financial Weaknesses Not Always Obvious CAFR looks backward and data late CAFR not always clear on factors contributing to fiscal distress (e.g. labor impacts, contingent liabilities) Shortfalls may not be evident due to aggregating funds, uncollectible receivables or loans Cash may look adequate because of sweeping resources from other funds and past cuts that are unsustainable long-term Budget looks forward but short-term Doesn t reflect long-term trends from growing obligations (labor, debt, retiree medical, pension) Need longer-term perspective and ability to model alternate outcomes 10
Specific General Other Diagnostic Tools GFOA s Long-Term Financial Planning Recommendations Analysis examines sufficiency, flexibility, vitality, equity, demand and political environment ICMA s Financial Trend Monitoring System Measures indicators that ICMA, credit rating agencies and others cite as most relevant in determining the financial condition of local governments League of California Cities Financial Diagnostic Tool 14-point report card that grades the near-term financial health of a city s General Fund and other operations, including financial health indicators Prepare long-range forecast model tailored to agency s specific needs 11
Many Advantages of Long-Range Forecasting Transparency stating assumptions improves credibility, communicates true fiscal condition Fiscal Discipline realistic forecasting precludes wishful thinking about capacity for revenue growth Early Warning reveals adverse trends, gives staff and Council time to craft appropriate solutions, avoids crisis mode Promotes Sustainability identifies long-term impacts of policy decisions; encourages sustainable solutions rather than short-term fixes promoted by one or two year budgets Living document continuously updated with new information ( the numbers never sleep ) 12
Reasons Agencies Don t Do Forecasting We re overworked as it is Forecasting sounds complicated You can t predict the future anyway If my projections are wrong I ll be criticized We just have to get through this year s budget We just have to get through the upcoming election Forecasting is for those bigger/wealthier/poorer agencies 13
All Agencies Should Do Forecasting Large or Small Fast-Growing or Mature Wealthy or Distressed 14
Forecast Building Blocks Identify Factors Driving Forecast Pressures on city revenues and spending levels Create Baseline Forecast Long-term projections under current service levels with reasonable growth assumptions and known increases, before corrective actions Test Alternative Outcomes Optimistic and pessimistic revenue scenarios, including recession Build in costs that should be in baseline budget but aren t (ISF, reserves, deferred maintenance) to make current level of service sustainable over time Service level increases (tied to city priorities/goals) Recommend Policies and Corrective Actions Impact of spending cut or revenue increase options needed to balance forecast 15
Budget Forecast Model Budget Identifies spending priorities in the near-term (1 to 2 years) Forecast Identifies demand on available resources over long-term (5-20 years), under given set of assumptions Different assumptions = different forecast Facilitates development of budget parameters Model Tool for preparing a forecast spreadsheet on steroids Tests sensitivity of assumptions, what is sustainable over time Can produce many alternate forecasts and what-if scenarios Easy to change variables (don t hard-code variables within formulas) Visual dashboard charts changing results as variables are revised 16
Five Stages of Forecast Grief Denial Things can t be that bad Anger I thought we d made all the tough decisions already, and our fiscal problems were behind us Bargaining You re being too conservative, just change these assumptions to make my problems go away Depression Why didn t I take that other job Acceptance Ultimately consensus is achieved on the most likely fiscal outcome, then move ahead to solutions! 17