Knowing What You Can Spend › ... · 2018-07-14 · Knowing What You Can Spend The Importance of...
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1 Knowing What You Can Spend The Importance of Multi-Year Financial Forecasting in Cities and Towns Presented by: Christopher J. Ketchen, Division of Local Services October 28, 2006 Association of Town Finance Committees 2 What I hope you learn… • How to get help with forecasting through the Division of Local Services • The need to manage expectations in an environment of “structural deficits” • The implications of which approach you take toward budgeting
Transcript of Knowing What You Can Spend › ... · 2018-07-14 · Knowing What You Can Spend The Importance of...
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Knowing What YouCan Spend
The Importance of Multi-YearFinancial Forecasting in Cities andTowns
Presented by:
Christopher J. Ketchen, Division of Local Services
October 28, 2006 Association of Town Finance Committees2
What I hope you learn…
• How to get help with forecasting through theDivision of Local Services
• The need to manage expectations in anenvironment of “structural deficits”
• The implications of which approach youtake toward budgeting
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October 28, 2006 Association of Town Finance Committees3
What is “structural balance/deficit”
Structural balance – program cost growthequals revenue growth
Structural deficit – Currently in balance butrecurring revenues do not cover recurringexpenses
October 28, 2006 Association of Town Finance Committees4
Why is structural balance so elusive?
• Environment created by Prop 2_ worksagainst structural balance
• The Commonwealth has worked both towardand against structural balance
• Cities/towns have worked against structuralbalance (often without even knowing it)
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October 28, 2006 Association of Town Finance Committees5
How much is that dollar really worth?CPI vs. Proposition 2 1/2 since 1980
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00
$2.20
$2.40
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
CPI Prop 2 1/2
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State aid and structural balance
• Increases in State aid that outpace costincreases can help balance the budget
• Level funding/cuts can lead to deficits
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October 28, 2006 Association of Town Finance Committees7
Cherry Sheet Aid FY83-FY07
1.7 1.92.1 2.2
2.62.8 3.0
2.7 2.62.3 2.5
2.72.9
3.23.5
3.84.2
4.54.9
5.1 5.14.8 4.9 4.8
5.2
0.00
1.00
2.00
3.00
4.00
5.00
6.00
FY83
FY85
FY87
FY89
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
Bill
ion
s $
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# of Cities & Towns/Override Attempts
2833
20 21
5363
74
133
181
144
8475
6054
3933 31 29
41 4652
68 6575
54
0
20
40
60
80
100
120
140
160
180
200
FY83
FY84
FY85
FY86
FY87
FY88
FY89
FY90
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
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Sometimes communities work againststructural balance
• By not understanding financial impact offuture events
• By not considering full future costs ofexpenses
• By spending one-time funds for on-going costs
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Budgeting:
Traditional approach
vs
Forecasting approach
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October 28, 2006 Association of Town Finance Committees11
Traditional approach to budgeting
• Balanced only for one year
• Line items in budget are changedincrementally year-after-year
• Often results in level service, level funded,or funding cuts
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The case against the traditionalapproach
• Income & Expenses: No consideration foron-going relationship
• This year’s surplus can very quickly spiralinto next year’s deficit
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Forecasting approach to budgeting
• Identifies future shortfalls (structural deficit)
• Focus on departments/programs
• Calculates approximate funding for plannedservice levels
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Why forecast?
• To manage expectations
• To enhance fiscal stability/enable correctiveaction
• To quantify financial impact of policydecisions
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What you need to understand first…
• In the beginning, projections almost alwaysinvolve deficits
• Multi-year projections are the only way toidentify trends
• Integrating timing of capital spending iscrucial
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Critical considerations in forecasting
• Consensus around assumptions
• Identifying trends vs spikes/depressions
• Creating realistic expectations
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The revenue side
• Develop revenue inventory
• Analyze impact of rate changes or changesin economic conditions
• Craft reasonable assumptions for out-years
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The expenditure side
• Quantify year-over-year salary obligations– Easy for contract employees (just read the
contract)
– Make assumptions on non-contract employees
– Estimate ongoing program/staffing needs
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The expenditure side (continued)
• Estimate non-salary departmental expenses
• Make reasonable assumptions on healthcare,other benefits and shared costs
• Insert costs of capital plan estimates
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Our new Revenue and ExpenditureForecasting Tool is here to help:
http://www.dls.state.ma.us
click on “Financial Management Assistance”
