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Present Investment Policy - Florida Government Finance Officers

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Present Investment Policy - Florida Government Finance Officers Powered By Docstoc
					              Forecasting Revenues in an
                Uncertain Environment




Kent Olson
Assistant City Manager
City of Coral Gables
May 6, 2012

                                           1
           Topics To Discuss
n   “It’s the Economy, Stupid”

n   Legislative Impacts

n   Societal/Technological Impacts

n   Revenue Projections

n   Long Range Forecasts

n   Final Thoughts
                                     2
      “It’s the Economy, Stupid”

n   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

n   Recession, Depression, Recovery,
    Expansion

n   What phase are we in now?

n   Why is that important?

n   Length of the business cycle


                                       11
        Macroeconomic Indicators
n   Gross Domestic Product (GDP)
n   Retail Sales
n   Inflation
    ¨ Consumer    Price Index (CPI)
n   Interest Rates
    ¨ Bond   yields, yield curve, and spreads
n   Unemployment Rate/Job Growth
n   Real Estate Market


                                                12
Retail Sales: What to Focus On
n   Note which segments report improving
    sales and which are reporting slumps
    ¨ Gasoline sales – if higher, likely related to
     price, not volume
    ¨ Luxury goods
    ¨ Home improvement
    ¨ Restaurants
    ¨ Leisure
    ¨ Travel


                                                      13
Retail Sales: What to Focus On
             (cont.)
n   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
n   Inverted yield curve
n   Inflation trend
         Core vs. overall
    ¨ CPI:
    ¨ Commodity prices
       n   Oil vs. Natural Gas

n   Stock prices
n   Real Estate Markets

                                    15
           Real Estate Markets
n   Residential construction drivers
n   Commercial market (vacancies)
n   Historical price patterns
n   Real estate conditions
    ¨ Up north
    ¨ Locally




                                       16
Sources of Macroeconomic Data
n   Federal Government
n   State Government
n   Business periodicals
n   Newspapers
n   Television programs
n   Radio programs
n   Websites
                            17
“They’re the Federal Government,
They’re Here to Help”
n   U.S. Department of Labor, Bureau of Labor
    Statistics (www.bls.gov)
    ¨ CPI-U

n   Department of Commerce, Bureau of
    Economic Analysis (www.bea.gov)
    ¨ GDP
    ¨ Retail   Sales


                                            18
“They’re the State Government,
They’re Here to Help”
n   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
n   Office of Economic and Demographic
    Research also provides other reports and
    data(www.edr.state.fl.us)
                                                   19
           Office of Economic and
           Demographic Research
n  Provide monthly actual data
n Long-Range Financial Outlook with
  substantial economic and financial analysis
n Under “Economy”, provide county and city
  economic and demographic data
    ¨ Census    data
    ¨   Projections as well
n   Economic Estimating Conferences also
    provide a wealth of information
                                                20
    Revenue Conference Estimates
n   County Property Tax values
n   State General Revenues
    ¨   Sales Tax
    ¨   Documentary Stamp Tax
    ¨   Beverage Taxes & Licenses
n Communications Services Tax
n Transportation Revenues (Fuel Taxes)
n Article V Fees & Transfers


                                         21
     State Department of Revenue
n   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
      n Sales taxes
      n revenue sharing

      n fuel taxes

      n communications services tax

                                                  22
     Some Free Website Sources
n   Wall Street Journal (wsj.com)
n   MSNBC.com
n   CNN.com
n   Bloomberg.com
n   Reuters.com
n   Foxbusiness.com

                                    23
         Microeconomic Factors
n   Local economic conditions
    ¨ New  business openings
    ¨ Business expansions
    ¨ Business closings
    ¨ Layoffs

n   Identify Major Industries/Employers
    ¨ Tourism
    ¨ Manufacturing
    ¨ Medical
    ¨ Finance/Banking
    ¨ Government
                                          24
    Microeconomic Data Sources
n   Local newspapers and business
    periodicals
n   Planning/Building & Zoning Department
    ¨ Buildingpermits
    ¨ Local developments in the planning stages

    n   Local Realtor’s Association
    n   Property Appraiser


                                                  25
        Legislative Impacts - State
n   State targets
    ¨   Property taxes
    ¨   Communications services tax
    ¨   Business taxes (occupational licenses)
    ¨   Red light cameras
    ¨   Fire assessment fees



                                                 26
Legislative Impacts - Federal
n   Ban on Internet taxation
n   Deficit closing efforts
    ¨ Elimination of deductibility of state and local
     taxes
    ¨ Loss of grant funding

n   Location of Armed Forces bases and
       personnel


                                                        27
Societal/Technological Changes
- Telecommunications
n   Impact of cell phones
    ¨   More households giving up land line phones

n   Watching TV on the computer
    ¨   Cable and Satellite services losing customers

n   Prevalence of wireless access
    ¨    Fewer customers need cable lines to access
        Internet

n   iPhones
                                                        28
    Other Societal/Technological
             Changes
n   Higher Savings Rate
    ¨   Is this a short-term or long-term
        phenomenon?

n   Greater Fuel Efficiency of Vehicles
n   Economic growth of China and India
n   E-commerce
    ¨   It’s not just sales tax; think property values

                                                         29
            About Projections

n   Past performance is not an indicator of
    future performance

n   All projections are wrong – the only
    question is by how much

n   Use previous projections versus actual to
    fine-tune future projections


                                                30
A Tale of Two Forecasters




                            31
     Selected Projection Methods
n   Historical averages
n   Historical growth rates
    ¨ Average
    ¨ Compound  Annual Growth Rate (CAGR)
    ¨ Regression analysis

n   Flat



                                            32
           Data Example
         Revenues      % Change
n 2005   749,500
n 2006   797,700      6.43%
n 2007   856,000      7.31%
n 2008   838,200     -2.08%
n 2009   902,400      7.66%
n 2010   937,300      3.87%
n 2011   971,400      3.64%

                                  33
Assessing Growth Rates Methods
n Revenues went from $749,500 in 2005 to
  $971,400 in 2011
n Average of the growth rates = 26.82/6 = 4.47%
n Average growth = (971.4/749.5)=1.296
  1.296-1=.296; .296/6 = .0493 = 4.93%
n CAGR = (971.4/749.5)^(1/6) = 1.04417;
   1.04417 – 1 = .04417 = 4.42%
n 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             % Change
n   2005    749,500
n   2006    797,700                 6.43%
n   2007    856,000                 7.31%
n   2008    795,000                -7.13%
n   2009    902,400                13.51%
n   2010    937,300                 3.87%
n   2011    971,400                 3.64%
n   Total                          27.63%
n   Annual Average goes from 4.47% to 4.60%
n   Greater variation causes greater inaccuracy
                                                  35
                    Revenues
n   Property Taxes
n   Elastic Revenues
    ¨ Fluctuate   more with the economy

n   Inelastic Revenues
    ¨ Barely affected by changes in economic
      conditions




                                               36
                 Property Taxes
n   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

n   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                                                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
                                                                                  38
                                  DR420, p. 2
14. 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%
                                                                                   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           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
                                                                                                 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)                    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


                                                                                          41
    Revenue Projection Methods
n   Historical averages
n   Historical growth rates
    ¨ Average
    ¨ Compound  Annual Growth Rate (CAGR)
    ¨ Regression analysis

n   Flat



                                            42
             Elastic Revenues

n   Sales tax

n   Utility tax/franchise fees

n   State Revenue Sharing




                                 43
    Best Possible Methods – Elastic
n   CAGR
n   Average growth rates
n   Regression analysis
n   Caveats
    ¨ Be   sure to temper these methods

    ¨ Be   sure to factor the business cycle into projections

    ¨ Factor   in local conditions

                                                                44
           Inelastic Revenues

n   Gasoline tax

n   Cigarette tax

n   Ambulance fees




                                45
           Best Methods - Inelastic

n   Historical averages

n   Flat

n   Factor in local conditions




                                      46
        Long Range Forecasting

n   “In the long run, we’re all dead.”




n   John Maynard Keynes, 1883-1946
                                         47
        Long Range Forecasts

n   Methods identified earlier work for short
    and long-term projections

n   Fallacy of using a consistent percentage to
    project over several years




                                                48
                     Transparency
n   Assumptions accompany the numbers
    ¨ Allprojections are based upon certain
      assumptions – spell them out
       n    Allows reviewers to revise assumptions
       n    Allows for development of alternative scenarios

n   Future Millage Rates
    ¨ Letelected officials see what’s coming
    ¨ Are these politically palatable?



                                                              49
The Fudge Factor




                   50
The Fudge Factor




                   51
           The Fudge Factor

n   Use to moderate inherent biases in
    forecasts

n   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
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 Contributions            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
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 REVENUES               985,358,119   999,648,103   1,018,671,960   1,045,445,266   1,078,030,970
                                                                                              53
                 Final Thoughts
n   Adjust your forecasts in subsequent years
    ¨   Compare your prior forecast to actual results
    ¨   Analyze variances
    ¨    Adjust your methodology to improve future
        forecasts

n   Remember your audience
    ¨   Internal vs. External


                                                        54
           Additional Resources
n   GFOA

n   FGFOA

n   Other Florida cities/counties

n   Other cities and counties, period




                                        55

				
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