Elliott D. Pollack & Company Some Perspectives on Forecasting in an Uncertain Economy GFOAz October 17th, 2014 Presented By: Jim Rounds Sr. VP, Elliott D. Pollack & Company

Elliott D. Pollack & Company Some Basic Considerations Understanding the background economy. Policy versus economics. Risk assessment. Math and timing. Example: OSPB and JLBC. Example: Maricopa County

Elliott D. Pollack & Company Understanding the background economy… …Tell the story.

Elliott D. Pollack & Company Example:

Elliott D. Pollack & Company United States Real Gross Domestic Product* Annual Growth ** Source: U.S. Bureau of Economic Analysis & Blue Chip Economic Indicators * Based on chained 2009 dollars. ** 2014 and 2015 are a forecast from the Blue Chip Economic Indicators, September Recession Periods 3.8% = 40-year avg during expansion 3.2% = 20-year avg during expansion Underlying = 2.2% Act: -2.0, 4.6, 2.8, 3.3% But, next year hit “average.”

Elliott D. Pollack & Company S&P * Source: Standard & Poor's (S&P); Moody's Analytics (ECCA) Converted * Data through July 31,2014 Recession Periods Risk? Bubble?

Elliott D. Pollack & Company Consumer Confidence 1978 – 2014* Source: The Conference Board *Data through August Recession Periods Disenfranchised Weary Worried P.O.’d So people will be spending more…

Elliott D. Pollack & Company Alaska 47 Jobs growing Jobs declining Top 10 Hawaii Job Growth 2014 YTD June 2014 vs YTD June 2013 Source: US BLS

Elliott D. Pollack & Company Job Growth 2014 YTD June 2014 vs June 2013 Source: U.S. Bureau of Labor Statistics RankState% chg. 1North Dakota4.34% 2Nevada3.78% 3Texas3.07% 4Florida3.03% 5Utah2.87% 6Colorado2.85% 7Oregon2.84% 8Delaware2.42% 9California2.34% 10South Carolina2.08% 11Washington2.07% 12Tennessee1.88% 13Georgia1.84% 14North Carolina1.81% 15Arizona1.77% 16Indiana1.66% 17Minnesota1.65% 18Oklahoma1.65% 19Wisconsin1.58% 20Iowa1.56% 21Massachusetts1.49% 22Missouri1.47% 23Rhode Island1.35% 24New Hampshire1.27% 25Maine1.23% RankState% chg. 26New York1.23% 27Hawaii1.15% 28Arkansas1.11% 29Kansas1.06% 30Montana1.06% 31Nebraska1.04% 32West Virginia1.01% 33Wyoming0.98% 34Ohio0.96% 35Idaho0.93% 36Mississippi0.93% 37Louisiana0.92% 38South Dakota0.79% 39Alabama0.75% 40Michigan0.64% 41Maryland0.64% 42Connecticut0.63% 43Pennsylvania0.61% 44Vermont0.55% 45Illinois0.55% 46Kentucky0.54% 47Alaska0.31% 48Virginia0.18% 49New Jersey0.07% 50New Mexico-0.20%

Elliott D. Pollack & Company Net Percentage of Large U.S. Banks Reporting Eased Standards versus Tougher Standards on Residential Mortgage Prime Loans 2007 Q1 – 2014 Q2 Source: Federal Reserve Recession Periods Still Flat…

Elliott D. Pollack & Company U.S. Foreclosure Lag 2002–2021 Source: CoreLogic Recession Periods

Elliott D. Pollack & Company Tell the story… The economy is growing but some recent statistics are skewed a bit and need to be adjusted. Businesses are spending a little more as are consumers. This should continue but only moderately. Population flows to AZ still weak another year or so, but good long term opportunity. Expect steady improvement. No boom. Downturn not most likely scenario but plan for continued weakness. THIS FRAMES THE FORECAST!

Elliott D. Pollack & Company Policy versus economics… …Get the “buy in.”

Elliott D. Pollack & Company Forecasting is about more than modeling and math. Risk must be set by policymakers and staff working together. Use of outside opinion? Optimistic, Baseline, Pessimistic.  When to move from one to the other? Public Policy

Elliott D. Pollack & Company What is your plan?  If a downturn comes, do you want to have fewer cuts? If so, then a more conservative forecast is needed to constrain spending (or a reserve fund in some cases).  Did this policy get set by public officials?  Set policy, then match with forecast approach. = “buy in.” Public Policy !

Elliott D. Pollack & Company Risk assessment… …Some will be dictated, some you will dictate.

Elliott D. Pollack & Company Forecasting & Budgeting Risk Revenues Most Likely Pessimistic Recession Normal Expansion Now Policy sets risk, economy sets revenues. A policy change can affect the forecast as much as the economic analysis. a b c

Elliott D. Pollack & Company Forecasting & Budgeting Risk Revenues Most Likely Pessimistic Highest Risk ?

Elliott D. Pollack & Company Forecast policy can sometimes change the revenue forecast as much as a new economic assessment. The last dollar that is projected is the most risky. What to do now?  True “most likely” or use “pessimistic”?  Capital vs ongoing?  Reserves? Forecasting & Budgeting

Elliott D. Pollack & Company Math and timing… …It’s not just the rate of growth, it is when in a fiscal year it picks up.

Elliott D. Pollack & Company Timing: Slightly missing a forecast’s timing can have severe implications. Math: A 50% decrease requires a 100% increase for full recovery.  Thus, we are dealing with a larger percentage range this time around. No 7% default.  Some taxes are harder to forecast just from volatility. The basics make it more difficult this time…

Elliott D. Pollack & Company

This is why it helps to know the story. When is full recovery? What will growth rates need to be to get there?

Elliott D. Pollack & Company Example: OSPB and JLBC… …Some math, some consensus, some policy.

Elliott D. Pollack & Company Example: Maricopa County… …Strategic planning meets long term forecasting.

Elliott D. Pollack & Company Again… Understanding the background economy. Policy versus economics. Risk assessment. Math and timing.

Elliott D. Pollack & Company Your specific questions?