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Forecasting frustrations: factors limiting accuracy.

Pressures for revenue and expenditure forecasting accuracy are never greater than during periods of recession. Local elected officials and citizen advocacy groups alike expect and demand precision during tough times. But neither is fully aware of the factors that limit the ability of local government forecasters to predict with certainty "bottom line" estimates. A recent survey of Florida's budget officers (county, municipal, school board) reveals some interesting views on the topic of forecasting.

The Survey

The biennial survey, a project of a graduate seminar in the Master of Public Administration Program at the University of South Florida, Tampa, was conducted in October and November of 1991. A mail survey was sent to the chief budget or fiscal officer in all 67 counties, all 67 school districts and a sample of municipalities 133).' The overall response rate was 54 percent. The respondent group is representative of the state's local governments both in terms of population size and geographical location.

Fiscal Stress, Public Anger

Florida's local governments, like those elsewhere in the nation, have had to deal with the consequences of fiscal shortfalls trickling down from the federal and state levels and expenditure-related mandates emanating from the same sources. At the same time, they have had to react to a vociferous citizenry increasingly hostile toward government at all levels. The latter is not an uncommon phenomenon. Historically, when the economy worsens, citizens become angrier at government and more convinced that it wastes their hard-earned tax dollars.

Nearly half (45 percent) of Florida's local government budget officers report their jurisdiction's current fiscal condition is only "fair" or "poor." Fiscal stress is highest among the state's school districts (78 percent see their district as in fair or poor shape compared to 28 percent of the municipal budget officers and 41.5 percent of those from counties).

Mirroring their constituents, governments have experienced sharp increases in the cost of providing health care benefits to their employees. More than two-thirds of Florida's local governments identify this as one of the fastest-growing expenditure categories (81 percent of the school districts; 64 percent of the municipalities; and 63 percent of the counties). In general, personnel-related expenditures (salaries, pension benefits and health care benefits) are the fastest growing elements of all local governments' budgets.

The variation in functional responsibilities across counties, cities and school districts most likely accounts for differences in the citation of other high-growth spending categories. For example, a higher proportion of counties (39 percent) than cities or school districts (3 percent) cite social services as one of the fastest-growing expenditure categories. (In Florida, counties are responsible for welfare.) Likewise, a higher proportion of municipalities cite capital improvements and capital outlays as fast-growing spending categories, reflecting their greater responsibility for capital-intensive functions such as solid waste, sanitation, water, sewerage, etc.

Citizen hostility has increased in 52 percent of Florida's local jurisdictions (in 70 percent of the counties, 56 percent of the school districts and 38 percent of the municipalities). The most commonly cited reasons for this animosity are rising property assessments (67 percent), growing cynicism toward government in general (63 percent), escalating property tax rates (53 percent), the state's budget problems (51 percent) and misconceptions about use of the state's lottery proceeds (36 percent). Many of these factors are the same ones that fueled California's Proposition 13 tax revolt in the late 1970s.

Citizen participation in local budget or tax-related hearings has increased in 28 percent of the jurisdictions but declined in only 8 percent. Significantly, where participation has increased, budget officers report much higher levels of citizen hostility. There is sparse evidence of citizen willingness to support higher taxes, regardless of spending demands that are often outside the control of local governments.

Florida's local government budget officials perceive they have little control over their budgets. Fifty-three percent estimate that more than 90 percent of their budget is "uncontrollable." The problem is particularly acute among school district budgeters, three-fourths of whom see their plight in this manner compared to 46 percent of the county and 45 percent of the city officials. Many see the uncontrollable portion as highly unpredictable--impossible to forecast.

Revenue Forecasting Difficulties

Fifty-three percent of Florida's local governments report that their revenue forecast for the fiscal year just ended was within 1-3 percent of the actual revenue generated. However, during recessions, even a 1-3 percent error in forecasting (particularly if overestimated) can generate substantial difficulty, both fiscally and politically.

Cities have had more difficulty forecasting accurately than either counties or school districts, most likely because they rely on more revenue sources. Twenty-three percent of the cities surveyed had forecasts that were off their actual revenue by 5 percent or more. Comparable figures for school districts and counties were 11 and 5 percent of the respective respondents.

Smaller jurisdictions, mostly municipalities, have a more difficult time forecasting revenues than larger jurisdictions. For example, among jurisdictions with 1990 populations below 10,000, 28.5 percent were off their projections by more than 5 percent, compared to only 2.4 percent of those with populations over 100,000.

Two factors stand out as being the most problematic:

* changing state funding levels (cited by 64.5 percent of the local budget officers); and

* state economic fluctuations (identified by

56 percent). These figures, shown in

Exhibit 1, are indicative of the dependency

of Florida's county and city governments

have on state shared tax

revenue.(2) In the case of school districts,

it is evidence of the large impact state

funding formulas and direct allocations

have on their relatively limited revenue

bases. Florida's local governments have

far less own-source revenue-raising

authority than those elsewhere, making

them more dependent on state funding

and more subject to fluctuations in the

state's economy.(3)

Several other factors appear to be somewhat troublesome for different types of local governments. A sizeable proportion of the state's municipalities (38 percent) report difficulties in revenue forecasting due to local economic fluctuations. One explanation may be that cities, with their more transient and economically diverse populations, and their heavier reliance on elastic revenues, may be more quickly and directly affected by purely local economic fluctuations than counties or school districts.

Counties (27 percent), more than cities or school districts, identify different fiscal years for overlapping governments as particularly problematic. This is not surprising in light of the fact that they rely more on intergovernmental revenues than cities or school districts.

General purpose governments (counties and cities) perceive the lack of current detailed local indicators as more of a problem than school districts (14 percent vs. 5 percent). Again, this is related to their respective revenue profiles. General purpose governments rely on a far greater number of revenue sources.

Surprisingly, several other factors commonly perceived to negatively impact revenue forecasting are not cited as often as expected. For example, few cite staff forecasting inadequacies as a factor. Fluctuations in the international economy also appear to create little havoc in forecasting. This is surprising in light of the role international markets play in two of the state's largest sectors (tourism and agriculture). Finally, only a relatively small percent see changing federal funding levels as problematic (around 8 percent). This may be attributable to the small incidence and the no- / low-growth nature of federal funding to local governments in recent years. Federal government-related factors appear to play a more important role in expenditure forecasting.

Expenditure Forecasting

There is much more variation among Florida's counties, cities and school districts in factors they identify as making expenditure forecasting difficult. However, there is a consensus that the most difficulty comes from anticipating new state mandates. As seen in Exhibit 2, 73 percent of the counties, 62 percent of the school districts and 57 percent of the cities identify this as problematic. This is the case in spite of the fact that in 1990 Florida voters adopted a constitutional amendment to limit unfunded state mandates.(4)

Federal mandates also are seen as impacting negatively on expenditure forecasting accuracy, particularly by municipal budget officers. Twenty-one percent of Florida's city budget officers cited this problem as did 10 percent of the county officers, but only 3 percent of the school board budgeters.

Smaller jurisdictions are much more likely to lay at least some of the blame for expenditure forecasting inaccuracies on the federal government. Twenty-three percent of the jurisdictions under 10,000 cite this factor as problematic compared to 7 percent of those over 100,000. Smaller jurisdictions in Florida, and elsewhere, have been particularly hard hit with federal mandates in the employment and environmental areas. Smaller jurisdictions are also somewhat more prone to attribute expenditure forecasting inaccuracies to the lack of forecasting expertise among their current staff. However, the percentage citing it is still small (7 percent among those below 10,000 population).

The fiscal impacts of federal and state court rulings jeopardize expenditure forecasting accuracy; more for counties than cities or school districts. Particularly difficult to project and costly to implement are rulings related to correctional systems and facilities--a county function in Florida.

School districts are more prone to have difficulty anticipating the costs of employee wage agreements than cities or counties. School districts are more labor intensive and more unionized than cities or counties in Florida which explains this differential. The absence of current demand indicators is a concern of general purpose government budgeters, while none of the school district finance officers cite this as a problem, probably because of their narrower and more definable client base--school-age children.

The Role of Politics

Aside from the more externally driven economic factors affecting local government revenue and expenditure forecasts, there are the internally driven political factors. Florida's budget officers attest to the fact that these factors exist ... and affect forecasting.

Fifty-one percent of the survey respondents acknowledge that politics more often than economics "often" or "almost always" dictates the outcome of budget decisions in their jurisdictions. County and city budget officials are much more likely to see this as the case than school district budget officers (75, 54 and 31 percent respectively).

Florida's counties and cities have much more flexibility in their budgets than the state's school districts, thereby providing greater opportunity for politics to intervene. More than three-fourths of the school district budget officers report that the controllable portion of their budget is less than 10 percent. Comparable figures for counties and cities are 46 and 45 percent respectively.

Estimating Biases. It is not evident from this survey whether politics during the current recession has pushed forecasters to make more conservative forecasts (underestimates) or more liberal forecasts (overestimates). The prevailing literature on forecasting suggests that, being an election year, the forecasts would lean in the liberal direction. But the author's knowledge of Florida's citizenry leads her to believe they lean in the other direction.

Statewide surveys of Floridians 18 years of age or older consistently have shown little support for new or higher taxes and have laid the primary blame for growth in local government spending on "irresponsible spending decisions by local officials" (56 percent) rather than on the state (7 percent) or federal (9 percent) governments or on citizen desires for more services (10 percent).(5) In such a hostile political climate, overestimates would appear to create far more political fallout for public officials than underestimates.

Regardless of the scenario, the pressure is on local budget forecasters to improve the accuracy of their estimates on both sides of the budgetary ledger. As our survey has shown, elected officials' and citizens' accuracy expectations are rising at the same time the political and economic environments of local governments are becoming more complex and beyond the control of the forecaster.

These survey results may serve to educate elected officials and citizens as to why it is not always legitimate to lay the primary blame on local forecasters for inaccurate forecasts that are increasingly driven by economic and political events beyond their control. Nonetheless, Florida's forecasters appear to be coping quite well ... so far!


(1) The sampling procedure used to select municipalities to be surveyed was a stratified random sample. At least one municipality from each county was included in the sampling frame to ensure geographical diversity. Likewise all cities with more than 100,000 population were surveyed to ensure a representative group from that population range since more than 85 percent of all Florida's municipalities have less than 25,000 population. The remainder of the cities were randomly selected from a list of Florida cities by county, again to ensure geographical diversity. (2) Advisory Council on Intergovernmental Relations, Florida Department of Revenue, Economic and Demographic Research, Florida Legislature, Local Government Financial Information Handbook, July 1991, Tallahassee, FL: ACIR, 1991. (3) MacManus, Susan A., "Financing Florida's Governments," in Huckshorn, Robert J., ed., Government and Politics in Florida, Gainesville, FL: University Presses of Florida, 1991, pps. 241-283. (4) MacManus, Susan A., "|Mad' About Mandates: The Issue of Who Should Pay for What Resurfaces in the 1990s," Publius 21, Summer 1991, pps. 59-76. (5) Ibid., p. 66. Susan A. MacManus, professor and chair of the Department of Government and International Affairs at the University of South Florida, Tampa, has written extensively on the topic of intergovernmental fiscal relations and local government retrenchment strategies. She has served on the Florida Governor's Council of Economic Advisers and is on the editorial boards of Public Budgeting & Financial Management and State and Local Government Review, among others. She wishes to acknowledge the graduate students who worked on this project: Rayme Suarez, Patricia A. Turner, Clark R. Gottschalk, Denise C. Hanigan, Patrick W. Rinard, Michael J. Taylor and Martin J. Wisgerhof.
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Title Annotation:budget forecasting
Author:MacManus, Susan A.
Publication:Government Finance Review
Date:Jun 1, 1992
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