Financial Forecasting

1. Financial Forecasting OASBO Summer Conference July 2009

2. What is a Financial Forecast? • A process for projecting revenues and expenditures over multiple years • Generally used for operating and capital funds • Based on assumptions about • Economic conditions • Expected revenue levels • Spending scenarios • A tool for identifying emerging problems and demonstrating to elected officials when corrective action is needed

3. Why forecast? • Recommended Budget Practice by Government Finance Officers Association (GFOA) and National Advisory Council on State and Local Budgeting (NACSLB) • Provides understanding of available funding • Evaluates financial risk / likelihood that factors will play out as predicted • Assesses the likelihood that services can be sustained over a multi-year period • Identifies future commitments and resource demands • Identifies key variables that may change revenue levels

4. GFOA Recommends that • Governments at all levels forecast major revenues and expenditures. • Forecasts extend at least three to five years beyond the budget period and be regularly monitored and periodically updated. • Forecasts, including underlying assumptions and methodology, be stated clearly and made available to participants in the budget process.

5. (Highly visible)Benefits of forecasting • Establish the basis of your proposed budget • Reveal long-term costs of collective bargaining agreements and other current decisions • Anticipate the impact of legislative proposals • Enhance board communication with legislators and other education stakeholders • Shift problem-solving from short-term tactics to long-term strategies • Highlight situations for which financial policies may be needed to avoid future problems • Demonstrate sound management practices to bond rating agencies

6. What is required? • Staff time – mostly yours • Like financial planning…you may think you can’t afford to, but you also can’t afford not to! • The most valuable part of the process is developing the plan: • Identify key variables • Establish clear assumptions • Familiarity with dynamics will help you respond to changing conditions. • Effective communication with stakeholders – superintendent, board, budget committee

7. 5 Steps to Forecasting • Identify Scope • Which funds do you want to include? • What time horizon will be addressed? • How often will forecasting be performed? • Gather information • Forecast • Identify issues • Develop response (in conjunction with other stakeholders)

8. Forecasting techniques • Judgmental • Relies on forecaster’s professional expertise • Implemented quickly and at little cost • Quality depends on forecaster’s experience • Historical trend analysis • Based on historical averages • Requires less experience on part of forecaster • Assumes past is an accurate predictor of the future • Hybrid • Conventional historical trend analysis adjusted according to expert judgment about future events • Most popular approach among smaller municipalities

9. Revenue Forecasting • Identify most important revenue sources • Typically the largest portion of the total • Also highly volatile revenues • Identify factors influencing each revenue source • Where it comes from • Legal authority to collect, including expiration • History of past yields as well as special events that may affect future yields • Limitations on the use of revenue • Other influencing factors • Remember one-time revenues • Risk of over-estimating future resources to fund on-going services • Unusual spikes in regular sources of revenue

10. Expenditure Forecasting • Operating expenditures • Escalation of existing costs • Inflation • Impact of collective bargaining agreements • New operating expenditures • Resulting from new service program initiatives • Typically subject to a different level of review/approval than routine cost increases

11. Expenditure categories • Employee compensation • Different variables govern growth of wages and benefits • Collective bargaining agreements impact employee groups differently • Anticipated increases or decreases in staffing • Enrollment • Special events or one-time sources of funding • Consider turnover and position vacancies • Non-compensation expenditures (e.g., supplies, purchased services) • Judgmental, historical trend analysis, hybrid forecasting • Inter-fund transfers • Non-current liabilities (i.e., asset replacement, early retirement obligations) • Contingency

12. Issues analysis • Diagnose any potential future imbalances between the desired financial position and projected position. • Expenditures exceed revenues • Other deficiencies that might compromise financial stability in long run

13. Response • Develop financial strategies describing how the organization will respond to information uncovered • Involve elected officials, superintendent and other upper management, and finance staff

14. Sample Forecast – Scope • General Fund • Three years • Annual forecast

15. Sample Forecast – Revenues • Major Sources • Property taxes (Operating levy) • State School Fund grants • Other local revenues (Federal Forest Fees, Common School Fund, County School Fund) • Interest earnings on investments • Indirect charges on grants • Student fees

16. Sample Forecast – Revenues • Factors influencing major revenue sources • Property taxes (Operating levy) • Assessed Value growth – 3% per year in 2009-10 and 2010-11, increasing by ¼ percent in each of following two years • Collection rate – 93% in 2009-10 due to recession, increasing by ¼ percent in each of the following three years • State School Fund grants • State per pupil payment - $5,999 in 2009-10 (49% biennial total) • Federal SFSF grant of $231 per pupil in 2009-10 (49% biennial total) not continued in 2011-13 • Future biennial amounts projected at CPI • Enrollment (ADMw) • Declining regular enrollment • Stable alt. ed. enrollment • Hold harmless ADMw throughout forecast period

17. Sample Forecast – Revenues • Factors influencing major revenue sources • Other local revenues (Federal Forest Fees, Common School Fund, County School Fund) • Federal forest fees drop to 90% of prior years receipts in 2010-11 and 2011-12, discontinued in 2012-13 • Other funds projected at current levels • Interest earnings on investments • Interest rate projections – Recessionary recovery begins 2011-12 • Reserve levels stable at 5% of operating revenues

18. Sample Forecast – Revenues

19. Sample Forecast – Expenditures • Factors influencing expenditure growth • Compensation • Assumes current staffing levels throughout forecast • 3% average increases in salaries for all employee groups in 2009-10; future increases at CPI • Composite PERS rate projected to increase 8 percentage points in 2011-12 • 5% increases in insurance contributions in each year of the forecast • Other benefits costs constant at current level • Purchased services, supplies and equipment increase at rate of CPI

20. Sample Forecast –Expenditures • Factors influencing expenditure growth (cont’d) • Transfers • Annual transfer to support Food Service operation projected annually, with increase in 2010-11 • One-time transfer to support textbook adoption in 2009-10 • Contingency • Forecast at 2% annually • Underspending • Estimated to be the equivalent of 66% Contingency and .75% all other Operating Expenditures (excluding transfers)

21. Sample Forecast – Expenditures

22. Sample Forecast – Summary

23. Sample Forecast – Summary

24. Sample Forecast – Reserves

25. Sample Forecast – Issues Analysis • Identify potential future imbalances • Is deficit related to on-going operations or one-time expenditures/transfers? • Are non-recurring revenues being used to fund on-going expenditures? • Do expenditure trends reflect revenue trends? • Do costs reflect highest priority services? • Do costs include new, one-time or on-going expenditures (e.g., PERS rates)

26. Sample Forecast –Issues Analysis • Do any financial policy issues arise? • Compliance with existing policies • Need for additional policies? • Use of one-time revenues for time-limited services • Fund balances not used for unsustainable commitments

27. Sample Forecast – Response • What solutions are available? • Increase revenues • Reduce expenditures • Build reserves

28. Sample forecast • Thoughts? • Questions?

29. Case study: Eugene School District 4J • Board policy • Forecast framework • Forecast timeline • General fund forecast summary and assumptions • Revenue and expenditure forecasts • Capital forecast • Statistical tables http://www.4j.lane.edu/fs

30. 4J Board Policies • Resource Planning and Allocation • Accounting and Financial Practices http://policy.osba.org/eugene

31. Resource Planning and Allocation “The district estimates revenues, operating and capital expenditures, and debt service each year for the following five years. Annually, the superintendent will propose a financial forecast that is reviewed and potentially modified by the budget committee or board. This forecast serves as the basis for budget instructions to the superintendent for the following year and for other financial planning activities.”

32. Accounting and Financial Practices “Each fund will maintain an appropriate contingency account to meet unanticipated requirements that may occur during the budget year. Cash reserves and fund balances will be consistent with generally accepted accounting practices and local budget law. The targeted contingency for the general fund is two percent of the operating budget. The district will review other funds for contingency and cash reserve requirements to ensure that each fund has sufficient reserves and a positive balance at year end, as required by local budget law.”

33. Accounting and Financial Practices “The district will maintain an ending fund balance in the general fund, in order to provide stable services and employment to offset cyclical variations in revenues and expenditures. The targeted floor for the ending fund balance will be at five percent of annual operating revenues. The annual financial forecast will project operating revenues and ending fund balance for the next five years… Once the targeted five percent for the ending fund balance has been achieved, the superintendent will advise the board if at any time the ending fund balance falls below or is projected to fall below that amount…”

34. 4J Forecast Framework • The financial forecast has been prepared in response to the district’s adopted management goal of maintaining long-term financial stability. • The forecast establishes key assumptions underlying the projections and indentifies variables which may cause the projections to change. • Its purpose is to provide the fullest picture of the district’s financial future so that decision-making today can support high quality and innovative educational programs tomorrow.

35. 4J Forecast timeline • November • Update spreadsheets • Finalize enrollment projections with Instruction Department • Develop revenue and expenditure assumptions • Identify “baseline increases,” expenditures expected to grow at a rate greater than inflation * • Determine service level changes * • Identify potential issues of concern • Review preliminary forecast with superintendent’s staff * Inclusion in forecast requires superintendent’s staff approval

36. 4J Forecast timeline • December • Adjust assumptions as needed to reflect Governor’s recommended budget and December 1 State Economic and Revenue Forecast • Finalize draft forecast • Present draft forecast to Budget Committee as basis for developing proposed budget • March • Revise assumptions to reflect changing economic conditions and new information • Compare updated forecast to December draft and document changes • April / May • Present updated forecast to Budget Committee in conjunction with proposed budget

37. General Fund Revenue Forecast • Property Tax Collections • State School Fund • Formula Grant • Other Local Revenues • High Cost Disability Grant • Local Option Levy • Other Revenues

38. Property Tax Collections • Current Year Taxes • Growth of assessed property values • Change in compression losses • Anticipated dynamic between real market and assessed values • Reflects up or down economy • Tax collection rates • Be alert to possible taxpayer initiatives, property tax limitation measures • Prior Year Taxes • Percentage of outstanding balance of uncollected taxes paid in years after levied • Trend

39. State School Fund • State School Fund Formula grant • State K-12 budget assumptions • Use of ARRA funding, state reserves • Annual growth in per pupil funding • Changes in average teacher experience • District enrollment projections • Other local revenue projections • Phase-out of Federal Forest Fees • High Cost Disability grant

40. Local Option Tax Levy • Growth projections • Impact on “tax gap” of real market and assessed property value assumptions • Statutory limitations • Renewal assumptions • When does current levy expire? • Changes in rate/levy at renewal? Note: A local option tax for capital expenditures would be addressed in the capital forecast.

41. Other Revenues • All other operating revenues such as interest earnings, tuition and fees • Generally projected based on historical trend • Adjust for anticipated influences (i.e., interest rate fluctuations)

42. General Fund Expenditures Forecast • Salaries • Employee contract agreements • Projected changes in staffing levels • Enrollment trends • One-time sources of revenue • School closure/consolidation plans • Benefits • PERS rates • Retirement benefits costs projected by actuary

43. General Fund Expenditures • Other operating expenditures • Inflationary increases • Increases greater than inflation rate (e.g., utilities) • Transfers to other funds • Capital costs not qualifying for bond funding • Equipment and textbooks • Employee contract agreements re: insurance reserves • Nutrition Services and Risk Management operations • Contingency • 2% of operating expenditures, per board policy

44. Forecast Summary

45. Questions? Caroline Passerotti passerotti@4j.lane.edu (541) 790-7608