LongRange Budgeting and Capital Improvement Plan CIP

1
Long-Range Budgeting and Capital Improvement
Plan (CIP)

Kent Olson Budget Officer City of
Jacksonville November 18, 2009
2
Topics to Discuss

• Its the Economy, Stupid
• Revenue Projections and Methods
• Expenditure Projections and Methods
• Financially Feasible Capital Improvement Plan

3
Its the Economy, Stupid

• When did this phrase originate, and by whom or
  what organization?

4
1992 Election
I feel your pain
5
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

6
Importance of the Business Cycle

• Recession, Depression, Recovery, Expansion
• Where are we now?
• Why is that important?
• Length of the business cycle

7
Economic Indicators

• Gross Domestic Product (GDP)
• Retail Sales
• Inflation
• Consumer Price Index (CPI)
• Personal Consumption Expenditures (PCE) deflator,
• price index, Implicit price deflator, chain
  price index for PCE (Greenspan favorite)
• Producer Price Index
• Money supply growth
• Interest Rates
• Bond yields, yield curve, and spreads
• London Interbank Offering Rate (LIBOR)
• Unemployment Rate/Job Growth

8
Gross Domestic Product
9
Personal Consumption Component of GDP
10
Change in Retail Sales
11
Consumer Price Index
12
Producer Price Index
13
Federal Funds Rate
14
Fed Funds Futures
15
Agency Forward Rates
16
Job Growth
17
Florida Unemployment
18
Unemployment Rate
19
PMI Index
20
Things to watch for

• Inverted yield curve
• Inflation trend (CPI, PCE,PPI?)
• Core vs. overall
• Commodity prices
• Oil vs. Natural Gas
• Stock prices
• Trade Deficit
• Local economic conditions

21
All forecasts are local

• Gather information on local conditions
• Building permits
• Local Realtors Association
• Local developments in the planning stages
• County or metropolitan economic data
• Identify Major Industries/Employers
• Tourism
• Manufacturing
• Medical
• Finance/Banking
• Government

22
Real Estate Markets

• Residential construction drivers
• Commercial market (vacancies)
• Historical price patterns
• Real estate conditions
• Locally
• Up north

23
Projections

• Dont let forecasting exasperate you!

24
Selected Projection Methods

• Historical averages
• Historical growth rates
• Average
• Compound Annual Growth Rate (CAGR)
• Regression analysis
• Flat

25
Data Example

• Revenues Change
• 2003 749,500
• 2004 797,700 6.43
• 2005 856,000 7.31
• 2006 838,200 -2.08
• 2007 902,400 7.66
• 2008 937,300 3.87
• 2009 971,400 3.64

26
Assessing Growth Rates Methods

• Revenues went from 749,500 in 2003 to 971,400
  in 2009
• 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

27
Average of the Growth Rates Fault

• Revenues Change
• 2003 749,500
• 2004 797,700 6.43
• 2005 856,000 7.31
• 2006 795,000 -7.13
• 2007 902,400 13.51
• 2008 937,300 3.87
• 2009 971,400 3.64
• Total 27.63
• Annual Average goes from 4.47 to 4.60
• Greater variation causes greater inaccuracy

28
Revenues

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

29
Property Taxes

• Need to duplicate the DR420
• Estimate changes in assessed value
• Save Our Homes
• Nonresidential 10 cap (may move to 5)
• Local real estate market conditions
• Willingness to change tax rate
• Project maximum millage calculation also
• (Form DR420MM or DR420MM-P)

30
DR420, p. 1
31
DR420, p. 2
32
Form DR420MM, p. 1
33
Form DR420MM, p. 2
34
Elastic Revenues

• Sales tax
• Income tax
• Utility tax/franchise fees
• State Revenue Sharing

35
Best Possible Methods Elastic

• CAGR
• Average growth rates
• Regression analysis
• Be sure to temper these
• Be sure to factor the business cycle into
  projections
• Factor in local conditions

36
Inelastic Revenues

• Gasoline tax
• Cigarette tax
• Ambulance fees

37
Best Methods - Inelastic

• Historical averages
• Flat
• Factor in local conditions

38
Expenditure Projections

• Salaries
• Benefits
• Contractual Services
• Commodities
• Capital items
• Debt Service

39
Salary Projections

• Use an assumed general rate of increase (or
  decrease)
• Take into account union contracts that are
  currently in effect
• Account for changes in personnel (up or down)

40
Benefit Cost Projections

• Separate those that are related to salaries
  (pension, FICA, Medicare) from the unrelated
  (health, dental, etc.)
• Project future contribution rates for all benefit
  costs, especially pension
• Adjust projections to account for salary
  projections done previously for related costs
• Use expected position counts for unrelated

41
Estimating Future Pension Costs

• Use information in latest actuarial report
• Review amortization of gains/losses
• Take into consideration any recent benefit
  changes
• Investment return experience
• Salary progression experience
• Turnover

42
Contractual Services

• For multi-year contracts, use known costs
• Estimate for future for ongoing services, with
  adjustments
• Use trend information to base future cost
  estimates (e.g., 3-4 per year)
• Should be consistent with general inflation
  assumptions

43
Commodities

• Look at historical costs for basic supplies
• Take into account changes in personnel
• Special attention on volatile and more costly
  items such as fuel/gasoline and utilities
• History is somewhat spotty as predictor
• China and India
• Speculation distorting current situation
• Long-term, has nowhere to go but up
• Conservation a possibility

44
Capital Cost Projections

• Based upon CIP submissions/approvals
• Need to collect associated operating costs and
  factor into operating costs portion of model

45
Debt Service Projections

• Existing debt, without refunding (unless known)
• New debt
• for projects underway
• based upon future capital plans
• Interest rate assumptions
• Run pro forma debt schedules
• Financial Advisor
• Excel

46
The Fudge Factor

• Use to moderate inherent biases in forecasts
• In later years, use a percentage of the projected
  number (e.g., 98)
• With subsequent projections, adjust to increase
  accuracy

47
Capital Improvement Plan

• Hopefully, its more than this . . .

48
Capital Improvement Plan

• Process Make it Formal
• Coordinate Timing with Budget Development
• Identify Funding Sources
• Combine with Long-range Forecast

49
Process

• As with Budget, reduce to writing
• Prepare calendar of expected events
• Involve department heads
• Spell out approval process/authority
• Prioritize projects for final product

50
Timing is Everything

• Prior to Budget Commencement
• Prepare calendar of expected events
• Finish CIP process prior to Budget Submissions
  from departments

51
Sample Layout
52
Basic Tenets

• Must be financially feasible
• Statutory citation (defined in 163.3164(32))
• Need to show costs by fiscal year
• Smooth capital costs over the period

53
Financial Feasibility

• What are your projected millage rates?
• What percentage of your budget will comprise debt
  service?
• How does your five year plan fit in with other
  financial policies?
• Debt policy
• Reserve policy

54
Identify Funding Sources

• Cash is King
• Debt
• Repayment terms
• Timing of issuance
• Is it affordable?
• Grants

55
Example Funding Sources
56
Additional Resources

• GFOA
• FGFOA
• Small Government Manual link to Minnesota
• Other Florida cities/counties
• Other cities and counties, period