Forecasting Must-Reads for Finance Professionals
July 12, 2016 – Mike McCann
Experts often write about forecasting across multiple publications – a testament to the topic’s importance. This post will highlight some examples every aspiring forecaster should be familiar with. Our professional associations publish monthly magazines which frequently discuss related topics. Other public interest organizations also follow and contribute to the dialog. GFOA has an extensive collection of Best Practice recommendations. Numerous books address the subject from various angles.
Forecasting discussions in the Media
ICMA’s Public Management (PM) Magazine often covers forecasting. Planning, budgeting and forecasting success is critical for the government executives that ICMA supports, and the organization’s literature touches forecasting’s political, technical, and policy aspects in many contexts.
“In Addison, Texas, for example, long-term forecasting of the city’s revenues and expenditures suggested that the city needed more financial flexibility because continuation of then current trends would have caused the town to fall below its policy for minimum levels of fund balance. This led the town manager to spearhead an organizational redesign to reduce the town’s long-term, structural cost. The result was a $1.6 million savings over five years and, more important, a thorough examination by the town and its departments of how best use of available resources could be made to meet service objectives.” Protect Your Community with Financial Planning by Shayne Kavanagh, Public Management Magazine – June 2007
“For more than a decade, Mecklenburg County, North Carolina, has embraced strategic planning and performance management practices. With an average population growth rate of 3 percent annually since the late 1990s, county leaders have continuously faced the challenge of how best to respond to the growth, as well as address short-term and long-term needs of the community. . . . In reality, the county’s response to an increased demand for services, a decline in property tax and sales tax revenue, and a reduction in force required a different way of thinking about the provision of government.” A Planning Evolution How Mecklenburg County Got On the Road to Strategic Business Planning by Monica Allen, Public Management Magazine – July 2016
Other government observers express similar views. The non-profit Civic Federation addressed the need for forecasting in their online journal:
“The Civic Federation often recommends that local governments undertake long-term financial forecasting and planning, which the Federation believes is one of the single most important financial practices for local governments to undertake.” Local Governments Need Transparent Long-Term Financial Planning The Civic Federation – January 19, 2011
GFOA’s monthly Government Finance Review authoritatively covers forecasting, budgeting, and many other professional topics regularly. The “GFR” is a must-read for all financial professionals. This detailed article that should be in all forecasters’ libraries:
“Too many governments have found out the hard way what can happen in the absence of a realistic forecast model, one that projects and quantifies the impact of potential revenue shortfalls and increased liabilities well into the future.
Forecasts can be used to create a strategic context for evaluating the annual budget, to establish a baseline for measuring the long-term effects of decisions, to test the economic effects of best-case and worst-case funding scenarios, and to establish a baseline projection of revenues, expenditures, and future cash flows and fund balances.” Long-Term Financial Forecasting for Local Governments by Christopher J. Swanson, Government Finance Review – October 2008
GFOA Best Practice publications
GFOA maintains a large library covering many relevant topics and is always a valuable resource. Whether serving as a finance director, budget manager, or accounting analyst, having the professional skills and knowledge to deliver quality forecasts is critical. Incorporating this established guidance into your process adds to the credibility of your final product.
Financial Forecasting in the Budget Preparation Process (February 2014) notes that “the forecast is an integral part of the annual budget process. An effective forecast allows for improved decision-making in maintaining fiscal discipline and delivering essential community services.” All government forecasters should be thoroughly familiar with this important guiding document.
Inflationary Indices in Budgeting (March 2010) suggests that forecasters consider which indices are the best predictors for local use. The Construction Price, Employment Cost, and Municipal Cost indices are among the widely-used indices discussed. GFOA suggests that specific indices may be used to provide better predictions in different areas of the forecast.
Long-Term Financial Planning (February 2008) should be used on a systematic basis by all governments, as it combines financial forecasting and strategies for future scenarios. GFOA calls out the value of a plan which “stimulates long-term and strategic thinking,” helps create consensus, and communicates with stakeholders. This Best Practice is closely related to and builds on the next item below.
Establishment of Strategic Plans (March 2005) relates the government’s strategic planning process and long-term financial plan, prepared concurrently. GFOA lists several important considerations for strategic plans, two of which are especially important in forecasting:
- A thorough analysis of the government’s internal and external environment sets the stage for an effective strategic plan.
- Local, regional, national, and global factors including:
- economic and financial factors
- demographic trends
- legal or regulatory issues
- social and cultural trends
- physical (e.g., community development)
- intergovernmental issues, and
- technological change.
Achieving a Structurally Balanced Budget (February 2012) provides a powerful discussion of many of the elements important to both forecasts and budgets. The article explores the differences between a legally balanced budget and the higher bar of a long-term structurally balanced budget. Categorizing recurring vs. non-recurring revenues and expenses are explained. The proper understanding and use of reserves in maintaining the structurally balanced budget over many years is outlined. Two recommendations are particularly important for forecasters:
- Differentiating between recurring and nonrecurring revenues in forecasts.
- Using reserves conservatively as a smoothing factor in multiyear forecasts.
Establishing Government Charges and Fees (February 2014) supports the use of charges and fees method of funding government operations. The government should be transparent about whether it intends to recover the full cost of specific services or something less, and why. In considering fees, GFOA recommends including full direct and indirect costs, central services overhead, and costs for use of capital facilities. Fees should be updated (i.e. forecast) over the long-term for inflation, adequacy of cost recovery and competitiveness of current rates.
Interesting books add to the mix
Modern Budget Forecasting the American States Precision, Uncertainty and Politics, by Michael J Brogan (2014, Lexington Books), examines budget forecasting with a focus on errors in forecasts and their ramifications, and the political and financial risks that policy makers are willing to accept in the process.
Superforecasting: The Art and Science of Prediction, by Philip Tetlock and Dan Gardner (2015, Tetlock Consulting) explores forecasting and predictions in much broader context, with great insight from a social scientist’s perspective.
Next week we will finish this forecasting series with a conversation with a data scientist working in this field and learn a little of where we might see predictive software moving in the future.
Mike McCann moved into government service in Ukiah, then Monterey CA, after beginning his career in corporate (ADP, Wells Fargo Bank, Blue Shield of CA), not-for-profit (Blue Shield of Ca, Mendocino Private Industry Council), and start-up accounting. For the last 20 years, Mike has been hands-on with budget, financial reporting and accounting operations, including City budgets and CAFRs. He holds a B.S. in Accounting from SJSU and M.S. in Instructional Technology from CSUMB.
Contact Mike with questions or comments at firstname.lastname@example.org.
Category: Government Finance