Time is always money
An increasing number of local governments are preparing financial forecasts to project revenues and expenditures five or more years into the future. When developed and implemented properly, financial forecasts can help public officials evaluate long-range economic effects of proposed initiatives and educate residents about present and potential financial capabilities of local governments.
Preparing forecasts, particularly those related to finances, can be difficult, and many local governments naturally resist the idea of creating long-term financial benchmarks. The vagaries of the real estate market, local economic conditions affecting sales taxes, franchise fees and service charges can swing revenues by a wide margin. Shifting of political priorities in state capitals and Washington also can present funding surprises in the middle of a fiscal year. Unexpected emergencies can throw off the most detailed expenditure plans. Many public officials also do not want to create forecasts against which they may be held accountable.
However, cities and counties that rely only on an annual budget without a longer-range forecast typically are reactionary in nature, and improve their responsiveness to constituent demands very slowly, if at all. More than a single fiscal year is required to efficiently reallocate resources, deploy new technologies and create new services to meet the needs of a changing community. In addition, local governments that anticipate shifting revenues many years out can better prepare residents for the financial measures needed to adjust to changing economic realities, such as increasing fees and taxes.
Local governments that focus only on the short term also will be at a much higher risk of future financial hardship, especially when decisions are made that do not have an immediate economic effect but have the potential for incurring future financial liabilities, such as those concerning employee pensions and health care benefits.
Forecasts can be used to create a context for the annual budget; establish a baseline for measuring the long-term effects of decisions; test the economic effects of various funding scenarios; and project revenues, expenditures, and cash flows and fund balances. Depending on the nature of the forecasting variable and historical data available, a forecast can consist of a simple trend analysis that sets out best- and worst-case scenarios to show the broadest range of probable outcomes, or it can be more specifically based on changes in assessed property values, commercial and residential development, and local economic conditions that affect permit and planning fees, franchise income and taxes.
A forecast is not a budget, but a projection of possible outcomes based on a set of known variables and assumptions. A financial forecast can change based on new information, and an effective budgeting and planning process will provide a routine for updating the forecast, at minimum annually.
The author is the founder of the Mission Viejo, Calif.-based Government Finance Research Group.
