forecasting municipal revenue william michael rodgers, cpa director of finance city of webster,...
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TML Revenue Workshop 1
FORECASTINGMUNICIPALREVENUEWilliam Michael Rodgers, CPA
Director of Finance
City of Webster, Texas
June 2015
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TML Revenue Workshop 2June 2015
“It’s tough to make predictions, especially about the future.”
-Yogi Berra
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TML Revenue Workshop 3June 2015
“Yes, I can predict what will happen tomorrow. Just give me a week to think about it.”
-Anonymous
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TML Revenue Workshop 4
How Do You Estimate Revenues?
• Review your books• Are revenues greater or less than last year?• Are revenues what you expected?
• Look outside• Is your population growing?• Do you see any new construction?
• Listen to those who know• Have you heard the latest business news?• What is the current barbershop gossip?
June 2015
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TML Revenue Workshop 5
Sources of Municipal Revenue
• Property tax• Sales tax• Mixed beverage tax• Franchise / access tax• Hotel occupancy tax• Permit / license fees
• Court fines and fees• User fees• Charges for service• Special assessments• Transfers in• Use of Reserves
June 2015
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TML Revenue Workshop 6
City of Webster Revenue
Sales Tax41%
Property Tax12%
Franchise & Local Taxes7%
Permit Fees1%
Court Fines & Fees4%
Charges for Service16%
Miscellaneous2%
Grants2%
Use of Reserves4% Transfers
12%
June 2015
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TML Revenue Workshop 7
Property Tax Revenue
• Reliable and relatively stable source of revenue• Residential component can constrain revenue growth• Increase to residential property value is limited by law• Tax exemptions can reduce value considerably • Residential taxpayers are also voters!
• Commercial and industrial property values are less predictable
June 2015
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TML Revenue Workshop 8
City of Webster Property Value History
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
$-
$50,000,000
$100,000,000
$150,000,000
$200,000,000
$250,000,000
$300,000,000
$350,000,000
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
% Change from Previous Year Residential Properties
June 2015
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TML Revenue Workshop 9
City of Webster Property Value History
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
$-
$200,000,000
$400,000,000
$600,000,000
$800,000,000
$1,000,000,000
$1,200,000,000
$1,400,000,000
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
% Change from Previous Year Commercial & Industrial Properties
June 2015
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TML Revenue Workshop 10
Property Tax Revenue
• Revenue indicators include:• Appraisal District preliminary estimates• Construction permit values• Utility customer count• General economic news about community• Local real estate association news (such as Houston
Area Realtors’ HAR.com)
June 2015
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TML Revenue Workshop 11
Sales Tax Revenue
• Sales tax can contribute a large amount of revenue but it is much more volatile than other sources
• Susceptible to changes in economy, even at national and international levels
• The unpredictable nature of sales tax will require maintaining a greater reserve amount in funds relying on sales tax revenue
June 2015
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TML Revenue Workshop 12
City of Webster Sales Tax History
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
$-
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
$16,000,000
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
% Change from Previous Year Sales Tax Revenue
June 2015
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TML Revenue Workshop 13
Sales Tax Revenue
• Revenue indicators include:• Sales tax permits• Certificates of Occupancy• Press releases from public companies• Sales figures for comparable businesses• Texas Comptroller’s confidential report• Federal Reserve Beige Book
June 2015
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TML Revenue Workshop 14
Mixed Beverage Tax
• A tax of 6.7% is imposed on the gross receipts from the sale of mixed beverages• Rate was lowered from 14% to 6.7% in 2014• Cities are allocated 10.7143% of the tax received
• There is also a new 8.25% mixed beverage sales tax on mixed beverages
• Revenue indicators include:• Average collection in past years• Changes to the number of bars and restaurants• Texas Comptroller website
June 2015
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TML Revenue Workshop 15
Franchise / Access Fees
• Cities can charge a franchise or access fee to utilities for the use of the City rights-of-way
• Many fees are now governed by the Public Utilities Commission
• Revenue indicators include:• Utility company notification• Average collection in past years • Certificates of Occupancy
June 2015
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TML Revenue Workshop 16
Hotel Occupancy Tax
• Cities can adopt a tax on the room rate charged by hoteliers
• The maximum tax rate is 7% with the exception of certain jurisdictions
• This special revenue can only be spent on those items identified by State law
• Revenue indicators include:• Occupancy rates• Overall economy, both locally and nationally • Special events in the community
June 2015
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TML Revenue Workshop 17
Permit / License Fees
• Cities can charge fees for the permits and licenses that are issued
• The rates charged are determined by Ordinance• Revenue indicators include:
• Local economy• Anticipated and ongoing construction activities• Amount of available space for new development• Average collection in past years
June 2015
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TML Revenue Workshop 18
Court Fines & Fees
• The State and Municipal Judge set the various court fines and fees
• Majority of collections are returned to the State• City cannot set quotas for number of citations to be issued
• Revenue indicators include:• Increased enforcement efforts by Police• Changes to traffic patterns or construction • Average collection in past years
June 2015
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TML Revenue Workshop 19
User Fees / Charges for Service
• Utilities and certain general government functions charge users for services provided
• Utility Funds should strive to cover all expenses, including depreciation, with rate revenue
• General Fund charges typically do not cover all direct operating costs
June 2015
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TML Revenue Workshop 20
User Fees / Charges for Service
• Revenue indicators include:• Rate changes, if any• Certificates of Occupancy• Consumption by comparable users• Average revenue for multiple years• For utilities, weather makes a difference!
June 2015
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TML Revenue Workshop 21
Special Assessments
• A City may create an improvement district for certain purposes
• State law governs a district’s creation and operation
• Costs of improvements are allocated to property owners within the district
• Revenue indicators are similar to property tax
June 2015
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TML Revenue Workshop 22
Transfers In
• A City may transfer money between funds• The transfer is typically based upon the value of services provided by the receiving fund
• Some utilities transfer funds into the General Fund in lieu of paying taxes
• There should be a written document describing the purpose and amount of each transfer
• Anticipated revenue would change if the transfer calculation included a variable factor such as percentage of revenue
June 2015
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TML Revenue Workshop 23
Use of Reserves
• Planned use of accumulated reserves is an acceptable source of revenue
• Best if used for one-time or capital expenditures• Drawing down reserves for recurring expenditures can be a sign of distress• Expenditures may be growing more rapidly than
revenue• May need to increase property tax rates• May need to cut expenditures
June 2015
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TML Revenue Workshop 24
Long-Term Forecasting
• Rule #1: The numbers are wrong!• Rule #2: The longer the period, the “wronger” the numbers!
• Forecast only what is known rather than what might occur
• Agree on assumptions and math does the rest• The results are used to show trends over time
June 2015
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TML Revenue Workshop 25
Is This Good?
2012 2013 2014 2015 2016 $10,000,000
$12,000,000
$14,000,000
$16,000,000
$18,000,000
$20,000,000
$22,000,000
$24,000,000
City of TX Long-Term Financial Projection
Revenue Expenditures
June 2015
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TML Revenue Workshop 26
What About Now?
2012 2013 2014 2015 2016 2017 2018 2019 2020 $10,000,000
$12,000,000
$14,000,000
$16,000,000
$18,000,000
$20,000,000
$22,000,000
$24,000,000
City of TX Long-Term Financial Projection
Revenue Expenditures
June 2015
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TML Revenue Workshop 27June 2015
“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
-Warren Buffet
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TML Revenue Workshop 28
Beware of Forecaster Bias
• An optimist may use overly aggressive revenue assumptions over time• Higher-than-average revenue gains predicted• Revenue trends never decline
• Can result in budget shortfalls if results don’t appear
• An optimist rarely hits assumption targets
June 2015
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TML Revenue Workshop 29
Beware of Forecaster Bias
• A pessimist may budget too conservatively• Little or no growth is anticipated• Revenue trends remain essentially flat
• Can result in unnecessary budget cuts• Often exceeding assumption targets is indicative of a pessimist
• A realist in an optimist with experience!
June 2015
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TML Revenue Workshop 30
Any Questions?
William Michael Rodgers, CPA
Director of Finance and Administration
City of Webster, Texas
(281) 316-4102
June 2015