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TML Revenue Workshop 1
FORECASTINGMUNICIPALREVENUEWilliam Michael Rodgers, CPA
Director of Finance
City of Webster, Texas
June 2015
TML Revenue Workshop 2June 2015
“It’s tough to make predictions, especially about the future.”
-Yogi Berra
TML Revenue Workshop 3June 2015
“Yes, I can predict what will happen tomorrow. Just give me a week to think about it.”
-Anonymous
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
TML Revenue Workshop 27June 2015
“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
-Warren Buffet
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
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
TML Revenue Workshop 30
Any Questions?
William Michael Rodgers, CPA
Director of Finance and Administration
City of Webster, Texas
(281) 316-4102
June 2015
