1. 1 Forecasting Revenues in an Uncertain Environment Kent Olson Assistant City Manager City of Coral Gables May 6, 2012

2. 2 Topics To Discuss “It’s the Economy, Stupid” Legislative Impacts Societal/Technological Impacts Revenue Projections Long Range Forecasts Final Thoughts

3. 3 “It’s the Economy, Stupid” When did this phrase originate, and by whom or what organization?

4. 4 “It’s the Economy, Stupid” “I feel your pain”

5. An Economist’s Focus 5

6. An Accountant’s Focus 6

7. An Economist’s Focus 7

8. An Accountant’s Focus 8

9. 9

10. An Accountant’s Focus 10

11. 11 Importance of the Business Cycle Recession, Depression, Recovery, Expansion What phase are we in now? Why is that important? Length of the business cycle

12. 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

13. Retail Sales: What to Focus On 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

14. 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

15. Probable Leading Indicators Inverted yield curve Inflation trend  CPI: Core vs. overall  Commodity prices Oil vs. Natural Gas Stock prices Real Estate Markets 15

16. 16 Real Estate Markets Residential construction drivers Commercial market (vacancies) Historical price patterns Real estate conditions  Up north  Locally

17. Sources of Macroeconomic Data Federal Government State Government Business periodicals Newspapers Television programs Radio programs Websites 17

18. “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

19. “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

20. 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

21. 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

22. 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

23. Some Free Website Sources Wall Street Journal (wsj.com) MSNBC.com CNN.com Bloomberg.com Reuters.com Foxbusiness.com 23

24. 24 Microeconomic Factors Local economic conditions  New business openings  Business expansions  Business closings  Layoffs Identify Major Industries/Employers  Tourism  Manufacturing  Medical  Finance/Banking  Government

25. 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

26. Legislative Impacts - State State targets  Property taxes  Communications services tax  Business taxes (occupational licenses)  Red light cameras  Fire assessment fees 26

27. 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

28. Societal/Technological Changes - Telecommunications Impact of cell phones  More households giving up land line phones Watching TV on the computer  Cable and Satellite services losing customers Prevalence of wireless access  Fewer customers need cable lines to access Internet iPhones 28

29. 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

30. 30 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

31. 31 A Tale of Two Forecasters

32. 32 Selected Projection Methods Historical averages Historical growth rates  Average  Compound Annual Growth Rate (CAGR)  Regression analysis Flat

33. Data Example Revenues % Change 2005 749,500 2006 797,7006.43% 2007 856,0007.31% 2008 838,200 -2.08% 2009 902,4007.66% 2010 937,3003.87% 2011 971,4003.64% 33

34. 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

35. Average of the Growth Rates Fault Revenues % Change 2005 749,500 2006 797,7006.43% 2007 856,0007.31% 2008 795,000 -7.13% 2009 902,400 13.51% 2010 937,3003.87% 2011 971,4003.64% Total 27.63% Annual Average goes from 4.47% to 4.60% Greater variation causes greater inaccuracy 35

36. 36 Revenues Property Taxes Elastic Revenues  Fluctuate more with the economy Inelastic Revenues  Barely affected by changes in economic conditions

37. 37 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

38. 38 DR420, p. 1 DR420 Fiscal Year 2012 (Tax Levy Year 2011)Utopia Beach 1. Current Year Tax Value- Real Property1,178,512,144 2. Current Year Tax Value - Personal Property42,155,231 3. Current Year Tax Value - Centrally Assessed Property13,260,287 4. Current Year Gross Taxable - Operating Purposes1,233,927,662 5. Current Year Net New Taxable Value12,268,759 6. Current Year Adjusted Taxable Value1,221,658,903 7. Prior Year Final Gross Taxable Value (from prior year DR403)1,257,978,930 8. Number of Tax Increment Value sheets1 9. Does the taxing authority levy a voted debt service or millage voted for 2 years or less?No 10. Prior Year Operating Millage Levy7.7564 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

39. 39 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 1,0008.1158 17. Current Year Proposed Operating Millage Rate8.1150 18. Total taxes at proposed millage rate (line 17 x line 4, div. by 1,000)10,013,323 19. Check Type of Principal AuthorityMunicipality 20. Check Type Taxing AuthorityPrincipal 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%

40. 40 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 168.1158 3. Prior Year majority vote maximum rate from 2010 Form DR420MM, line 137.9471 4. Prior Year operating millage levy from Current Year Form DR420, line 107.7564 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 71,257,978,903 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 151,099,175,780 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 income1.0055 13. Majority vote maximum millage rate allowed (line 11 x line 12)8.3798

41. 41 Form DR420MM, p. 2 14. Two-thirds vote maximum millage rate allowed (line 13 x 1.10)9.2178 15. Current year adopted millage rate8.1150 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 41,233,927,662 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 & MSTUs0 (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

42. 42 Revenue Projection Methods Historical averages Historical growth rates  Average  Compound Annual Growth Rate (CAGR)  Regression analysis Flat

43. 43 Elastic Revenues Sales tax Utility tax/franchise fees State Revenue Sharing

44. 44 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

45. 45 Inelastic Revenues Gasoline tax Cigarette tax Ambulance fees

46. 46 Best Methods - Inelastic Historical averages Flat Factor in local conditions

47. Long Range Forecasting “In the long run, we’re all dead.” John Maynard Keynes, 1883-1946 47

48. 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

49. 49 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?

50. The Fudge Factor 50

51. The Fudge Factor 51

52. 52 The Fudge Factor Use to moderate inherent biases in forecasts In later years, use a percentage of the projected number (e.g., 98%)

53. 53 Example – Revenue Projections REVENUESFY2012FY2013FY2014FY2015FY2016 Property Taxes - Net483,547,576489,078,711498,199,141516,192,915539,225,842 Utility Service Taxes127,417,277128,936,594130,894,749132,111,626133,410,371 Other Taxes1,117,000 1,128,1101,139,3311,150,664 Franchise Fees40,075,34941,020,54741,973,04242,437,12842,905,997 Licenses and Permits7,743,4917,820,9177,899,1177,978,1008,137,644 JEA Contributions101,687,538104,187,538106,687,538109,187,538111,687,538 Half-cent Sales Tax73,255,03375,452,68477,716,26580,047,75382,449,185 City Revenue Sharing20,625,30320,978,79421,489,01022,013,34422,552,205 County Revenue Sharing22,932,04023,296,18423,846,49224,418,16325,012,252 Other Revenue Sharing7,357,9657,358,8857,414,9787,450,4007,513,936 Ambulance Fees15,995,76816,315,68316,641,99716,974,83617,314,333 Other Charges for Services45,857,97246,274,36547,099,48847,583,78948,454,814 Fines and Forfeits3,991,2193,991,3904,004,2634,023,7764,043,386 Interest Income9,025,000 9,070,1259,090,2259,135,676 Miscellaneous Revenue15,632,67715,834,78916,042,34516,227,22216,464,071 Other Sources9,096,9118,959,0228,565,3008,569,1218,573,055 TOTAL REVENUES985,358,119999,648,1031,018,671,9601,045,445,2661,078,030,970

54. 54 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

55. 55 Additional Resources GFOA FGFOA Other Florida cities/counties Other cities and counties, period