Whether there’s a need to keep a city’s budget in line to avoid cash flow borrowings, to gradually increase pension fund contributions or to plan for future investments, revenue projections and forecasting help cities make sound operating decisions from year to year and attract investors.
Cities will always need to balance their primary legacy costs, like employee pensions, workforce and healthcare costs, with public services investments, and forward financial thinking can guide better decision making.
Revenue Projections: Moving Beyond Annual Budgets
In the late 1990s, the National Advisory Council on State and Local Budgeting (NACSLB) convened to create tools for governments to improve their budgeting processes. The goal was to help governments move beyond balancing revenues and expenditures as a yearly exercise and to establish a framework for budgeting with long-range perspective. The NACSLB authors that prepared the recommended budget practices included staff from the Government Finance Officers Association (GFOA), John Gross, finance director for the city of Aurora, Colorado, now with city of Long Beach, California, and Patricia Tigue, principal debt analyst with city of Portland, Oregon.
The GFOA’s Framework for Improved State and Local Government Budgeting offers four principles for the budgeting process:
#1 Establish Broad Goals to Guide Government Decision Making
A government should have broad goals that provide overall direction for the government and serve as a basis for decision making.
#2 Develop Approaches to Achieve Goals
A government should have specific policies, plans, programs and management strategies to define how it will achieve its long-term goals.
#3 Develop a Budget Consistent with Approaches to Achieve Goals
A financial plan and budget that moves toward achievement of goals, within the constraints of available resources, should be prepared and adopted.
#4 Evaluate Performance and Make Adjustments
Program and financial performance should be continually evaluated, and adjustments made, to encourage progress toward achieving goals.
The ability to develop a budget that achieves goals depends on understanding the level of funding available for services and investments. NACSLB advised governments to prepare multi-year revenue projections over a period of at least three years, and running trends analyses and modeling:
“Preparing projections under different assumptions (e.g., economic assumptions, demand), particularly in the development of a financial plan, permits decision makers to consider the level and mix of taxes, user fees and other revenues that would need to be raised…,” according to the framework.
Revenue Projections: Defining a Path Forward
Pittsburgh, Pennsylvania, which just recently came out of state oversight and into financial solvency after 14 years, surely depended on the quality of their revenue projections to both stay on track and set a financial path forward.
The city’s fiscal year begins in January, and by June, individual departments are reviewing budget worksheets and analyzing revenue projections. During the dog days of summer, they meet with the city’s analysts to discuss budgets and costs before the city’s budget process is completed and its five-year plan adjusted in September.
While Pittsburgh needed to eliminate operating deficits while preserving core municipal services, the city also needed to direct more funding to its capital budget for roads, bridges, public safety facilities and other infrastructure. The city also needed to avoid cash flow borrowings and buffer against unanticipated revenue shortfalls or expenditure increases.
Pittsburgh’s 2017 operating budget included “forecasts based on economic assumptions, recent collection trends and current laws and policies,” such as property tax relief for senior citizens. The city also incorporated data on economic variables into revenue projections to show how aspects of the economy could affect the city’s revenue generating activities. One example is how a modest growth forecast for the total assessed value of taxed property, and expected taxpayer incentives, forecasted a modest increase of 1.2 percent on average per year through 2021 for the city’s Real Estate Tax revenues.
Revenue Projections: Attracting Investment
Revenue projections factor into development of a capital improvement plan, the place where cities establish a framework for prioritizing projects and identifying funding needs and sources to complete those projects.
Revenue projections set a timeframe for when capital projects can begin.
If outside investment is needed for city projects, revenue projections that are backed by economic trends can also help convince the private sector and Federal funding agencies that a city’s project is a smart investment.
Learn more by reviewing or downloading the Framework for Improved State and Local Government Budgeting: