Crowdsourcing for Local Governments: Research Review

Research Review is a place for me to bring you academic research that I think might be of interest or relevant to you all.  It is not necessarily the Cliff notes of the paper, but it will present some key findings or insights from the paper.

In this installment of Research Review I am going to talk to you about crowdsourcing government services via the paper “A Framework for Using Crowdsourcing in Government” (Clark, Zingale, Logan, and Brudney 2016).

So first things first, what is crowdsourcing?  The authors define it as: “Crowdsourcing is a general term used to describe a variety of ways that organizations, particularly in the for-profit sector, take advantage of the thoughts, inputs and ideas of the public” (pg 57). These days that usually means through the internet and/or phone.

The authors characterize crowdsourcing as being less organized and focused than typical workgroups and that they tend to be used for gathering lower level ideas and suggestions—not to say that they are not important, just not necessarily “big picture.”  Of course the crowd matters too. There are times it makes sense to involve everyone, there are times that it does not.  One advantage is that there can be some internal policing and vetting of ideas amongst the participants which can help eliminate biases.  Biases that professional and technical training may inadvertently create or those that may be driven by experiences or status.   While this policing may happen naturally, effective crowdsourcing will also require an administrator (or moderator) of the platform and information.  This administrator will need to understand the issue at hand, have some technical expertise, and what sort of information and input is desired from the crowdsourcing endeavor.

One of the success stories of crowdsourcing is through 311.  There have been some great examples of where online platforms or even webapps have allowed citizens to report problems like potholes or dead trees in the street.  For example, “New York City residents can now take advantage of an innovative Internet platform that combines the instant effects of crowdsourcing with a hobby that many residents like to do – complaining” (full article).

Am I the only who is thinking of Pokémon Go for local governments?  Find three potholes and earn the road warrior badge!  Ride the public bus five times and earn a pine tree hugger badge, ride it 25 times and you can evolve it into a redwood hugger badge!  This is what people like my husband (i.e., nerds) would call gamification and it is pretty popular right now too!

 

But I digress.  These 311 apps have been a great way for helping local governments monitor outages, the need for repairs, and  other problems.  While someone on the government side still needs to sift through all the reports and data and then have a crew go address the problem, it has been successful at identifying needs.

Crowdsourcing is beginning to be implemented by local governments, but there is still room to do more.  The question is how and when and WHAT.  That is where this paper is helpful.  It presents a basic framework to begin to think about these issues.

They develop a framework based on the type of problem, then translating it into what sort of process and feedback you might want to solicit, and then some of the issues with that process.  Once that is laid out, they go into brief case studies to illustrate the points.

This first figure is how they present their initial framework.  It allows for you to identify whether you have a complex or simple problem and the level of expertise you need and the diversity of thought you want.

They further flesh it out through this typology.  You can see under the column labeled “Our Analytical Framework” how this second figure corresponds to the first.  What is SO helpful about this second figure is that it gives a quick and dirty guide to ways in which an organization can crowdsource and some of the issues you should consider.

This all sounds great right?  Well it can be, but the paper highlights numerous issues.  I will highlight one here, transaction costs.  “Transactions costs, in the economic tradition, are the costs of finding partners, negotiating with them, and enforcing the contract you have agreed to. Each interaction between citizen and government incurs a cost on either or both parties. The higher the transaction cost is, the more difficult it will be for citizens and government to collaborate. In government crowdsourcing all three types of transaction costs are present: search and information costs (finding partners/collaborators/information), bargaining costs (negotiating the relationship), and policing and enforcement costs (assuring the contract is carried according to the negotiations)” (page 59).  These costs may not always be obvious and the first that are considered when government begins the process of exploring crowdsourcing—but they are critical.

What are the primary takeaways? They conclude with three themes they believe will help government understand and implement effective crowdsourcing.

  1. Lower the transaction costs. Yup, back to this one. They specifically identify lowering the costs to participants (though government matters too).  One way to do this is to take more complex problems and make them into smaller more discrete pieces.  Let citizens easily navigate themselves to the problems where they want to help and feel like they can help.
  2. Make sure you say thank you to participants. You need to acknowledge their contributions with a thank you and some visible evidence that their feedback is being used. So if you are playing Pokémon Go and they find potholes, then let them know when they have been filled and thank them for their assistance! 
  3. Recognize and emphasize that crowdsourcing does not replace what government has been doing, it adds to it.  You still need your experts and there are places where that expertise trumps all outside input.  That does not mean encouraging skepticism, the authors point to evidence that the wisdom of the crowds can be high quality and useful to government.

Thoughts?  Have you all tried any crowdsourcing?  How did it go?  What problems did you encounter?  What successes did you have?  Please comment and share.  Let’s crowdsource this conversation!

 

 

 

Benjamin Y. Clark, Nicholas Zingale, Joseph Logan, & Jeffrey Brudney. (2016) “A Framework for Using Crowdsourcing in Government.” International Journal of Public Administration in the Digital Age, 3(4): 57-75.

Abstract:

Crowdsourcing is a concept in which the crowd is used as a source of labor, idea generation, or problem identification. Crowdsourcing originated in the private sector; though with any good private sector practice it is increasingly being utilized in government. This paper provides an overview of the concept of crowdsourcing, gives examples of its use in the private and public sectors, and develops a framework for how governments can begin to strategize and think about crowdsourcing to solve problems when engaging with citizens. The authors’ framework is illustrated with a number of cases from current or past uses of crowdsourcing in government. They conclude with important considerations about how governments should strategize their crowdsourcing efforts.

 

Training Opportunity: Local Government Federal Credit Union FELLOWS

I know we typically only talk taxes and finances here on Death & Taxes, but I wanted to take the opportunity and let you all know about a dynamic and engaging leadership development opportunity through the School of Government.  The Local Government Leadership Credit Fellows program focuses on personal and organizational leadership skills and aims to develop the next generation of local government leaders.

Participants graduate with a deeper understanding of their individual leadership strengths, skills for improving their organizations, and a renewed passion for public service.

Image result for leading for results fellows

The program is designed for managers, assistant managers, department heads, supervisors, and the like.

Applications are due May 19 and the program’s tuition is covered by scholarships from the Local Government Federal Credit Union.

For more details and directions on how to apply please visit the course page: https://www.sog.unc.edu/resources/microsites/leading-results-lgfcu-fellows.

I hope you will consider applying!

 

 

 

You Are Doing WHAT to the Governmental Funds?? – Part 2, The Short-Term Approach

In our last chapter, You Are Doing WHAT to the Governmental Funds?? – Part 1, The Near-Term Approach, we explored one of the three new measurement focus and basis of accounting (MFBA) options being considered for the governmental funds.  These approaches are presented in the Governmental Accounting Standards Board’s recent Invitation to Comment (ITC), Financial Reporting Model Improvements – Governmental Funds.  And you thought it was a scary chapter!?? The suspense continues with the second MFBA proposal – the short-term (or working capital) approach.  One spoiler alert (but it is for your own good) – each approach goes further away from the current resource measurement focus and modified accrual basis of accounting currently used by the governmental funds.  (Just wait until you read Part 3….)

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Are you a Tax Administrator or a Tax Supervisor? Of course you aren’t

Try this online exercise. Go to Chapter 105 of the North Carolina General Statutes. Here’s a link. Once there, most browsers will allow a search feature. A common way to search in many software applications is to press the <Ctrl> key +F. Now search all of Chapter 105 for “tax administrator”. It doesn’t exist. But there are lots of tax administrators in North Carolina, right? Now search all of Chapter 105 for “tax supervisor”. The tax supervisor is referenced 9 times in the Machinery Act. And if you read the context of those references, there are a few important roles involved there. How many counties have a tax supervisor to fulfill these roles?

 

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You Are Doing WHAT to the Governmental Funds?? – Part 1, The Near-Term Approach

In my previous post, Invitation to Comment – or Invitation to Disaster?? The Long Slog to a New Financial Reporting Model Begins!, I provided a fascinating overview of the Governmental Accounting Standards Board’s (GASB) new financial reporting model project.  As was noted, the actual Invitation to Comment (ITC), Financial Reporting Model Improvements – Governmental Funds is a first step in the long due process of developing a new GAAP standard.  As is the case here, an ITC usually provides an opportunity for the GASB to solicit feedback on various proposal considerations.  A significant aspect of the reporting model project is the reconsideration of the unique measurement focus used in the governmental funds (current financial resources).  The ITC details three new measurement focus approaches to consider – the near-term approach, the short-term approach, and the long-term approach.  This post, focusing on the near-term approach, is the first in a series that will provide (hopefully) a clearer insight into the plotting that is occurring in Norwalk.

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Congratulations to our Tar Heels!

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Congratulations to our Tar Heels!  Why is this on Death & Taxes you ask?  Well…

Thank you to all of the Tar Heels who made their way to Franklin Street last night!

Thank you for coming to town and spending your sales tax dollars in Orange County!  Come back and snag a championship t-shirt!

So this is a great example of Orange County importing sales tax dollars (with over 9,000 in the Dean Dome and 55,000 on Franklin Street alone).  It also demonstrates some of the additional costs that come with enthusiastic non-residents!

“Chapel Hill officials already warned fans not to light bonfires on the street after the game, but by midnight fans already had three bonfires burning brightly in the intersection.  Also, by 12:05 a.m. Tuesday, young men had climbed street poles on at least three corners of the intersection and were standing on top of the walk/don’t walk signs…The streets were cleaned and reopened by 2:10 a.m. Tuesday.” (Article)

 

It all comes back to taxes…

 

 

Senate Bill 126: You down with this SB? Yeah, you know me… So you know that it is complicated.

There has been a great deal of interest in the distribution of local sales tax revenue in North Carolina in the past few years.  I will admit that as a scholar of local sales tax policy and effects, it has been an interesting time to be in the state (and made me much more popular!).  Not surprisingly, I have been having a lot of conversations with people across the state about SB 126, so I thought I would put some of my thoughts down on proverbial paper.

First things first, over the past few years there have been proposals and changes to the distribution of local sales taxes.  Some of you may recall there was even talk of making all distributions on a per capita basis rather than a mix of per capita and point-of-distribution (for more on local sales taxes please see this, this, this, and this).  While we have seen quite a bit of activity, with particular goals in mind, this tinkering with distribution is nothing new to North Carolina.  Our local sales taxes, or what are commonly referred to as “Articles”, have been adjusted numerous times by eliminating particular Articles, introducing new ones, earmarking revenue from them, or even changing the distribution of revenue (more of the local sales tax revenue was distributed on a per capita basis in the past than is now!).

So why are we tinkering with them now?  Well, I will not say what is motivating our elected officials, but it is likely the concern over the revenue raising capacity, or lack thereof, of our rural communities in the state.  As with the previous proposals in recent years, and what we have actually changed, SB 126 primarily benefits our rural jurisdictions.  The concern is that it benefits our rural jurisdictions at the expense of our urban ones.

What are we actually talking about?

Well we are talking about changing the existing adjustment factors for Article 40 which were in place as a hold harmless from previous changes to that sales tax base to a different set of adjustment factors.  While this may not sound dramatic, it is for some jurisdictions.  Let’s talk about it from a county-wide perspective (so some of this revenue is the county’s and some is the municipalities within the county).  The proposed adjustment factor is not a reinvention, but instead using the area development tiers which have three levels; 0.9, 1.0, and 1.1.  The current adjustment factors give extra revenue to the counties with the greatest capacity for generating revenue, because it was a hold harmless.  These tiers are essentially/frequently the opposite of that, so in most cases if you have a high adjustment factor under the current system you are looking at a substantial decrease and vice versa. For example, Columbus County would benefit tremendously with a change in their adjustment factor of 0.29.  They currently receive 81.3% of the Article 40 revenue generated in their county and under the new system they would receive 110%.  On the flipside, Dare County will have a change in their adjustment factor of 0.49.  They currently receive 149% of the revenue generated in their county by Article 40 and would instead receive 100%.  My home county of Orange would go from 115.3% to 90%.  These are, in many cases, substantial changes.

In some cases these percentages may seem more extreme than they are and in other cases, perhaps less.  So in Orange County, using the county-wide numbers for FY16 that 25% percent change is a loss in revenue of just under $2.4 million.  For Dare County, which would experience a loss of 49% it is just under $1.2 million.  The gain for Columbus County, with its additional 29% is just over $1.1 million.  In contrast there are counties like Tyrell which would receive, county-wide, about $30,000 more.  And then there are Wake and Durham, which would have reductions of 24% and 6% respectively, and lose $4.8 and $4.2 million each.  ***These numbers are low estimates because of remaining Article 40 funds that would like be distributed in the same manner.***

Are other states doing this?

No not really, though that does not mean much.  Local sales tax laws vary tremendously from state to state and the issue of fairness or equity with regards to them is nothing new.  There are only three other states that, like North Carolina, distribute a portion of the local sales tax revenue on a per capita basis and there are other states where other local taxes are shared amongst jurisdictions.  Perhaps the most famous is Texas’s “Robin Hood” program which was just found to be constitutional again.  Robin Hood is probably what you imagine, redistribution from the wealthy to the poor.  In this case via school districts and property tax revenue.  Of course, the most common way that states redistribute wealth between jurisdictions is at the state level with state revenues.

From the urban or tourism rich county perspective.

Many of you are frustrated.  You feel like you are being penalized from being a growing, if not thriving, area.  You understand that you do not (typically) just have bags of money laying around and that being more urban or having a robust tourism industry comes with costs too.  Some of you are acutely aware that you have made choices about zoning and development to build up your sales tax base and this feels like you are now being penalized for that choice because you would not receive the local sales tax revenue that you had been expecting.

Urban/Tourism Rich perspective:

  • That urban and tourism rich communities have a lot of non-residents visit or work there. While this generates additional local sales tax dollars (and other benefits) it also comes with additional costs for roads, police, etc.  These communities have people using their goods and services that do not pay for them in the traditional avenue (property taxes).  Thus, local sales taxes allow you to capture some revenue from these non-residents and offset the costs of having them commute or visit.
  • These communities often have actively recruited zoned, incentivized businesses that add to their local sales tax base based on the assumption that the law would not change and they would receive the status quo share of revenue.

From the rural county perspective.

Many of you are also frustrated, you commonly have high property tax rates, often high utility rates, and no more ability to raise local sales taxes.  You feel like you are maxed out on the capacity side, and yet you still do not have enough revenue.  You look to your urban neighbors and watch your citizens go shop and spend their money in those counties.

Rural perspective:

  • Tax leakage. This is the most powerful argument about why we can or even should tinker with local sales tax distributions.  Tax leakage occurs when people travel outside of their jurisdiction to purchase goods and thus their sales tax dollars go to a jurisdiction other than their home jurisdiction.  It happens for many reasons like working in other jurisdictions or preferring the shopping options in another jurisdiction (typically because there are better and more options available).  When this occurs it is typically rural dollars leaking into urban areas, so is arguably the rural areas subsidizing their urban neighbors.
  • It is not just about sales taxes it is about revenue raising capacity. Many rural jurisdictions are losing population and wealth is migrating out of those areas, leaving the jurisdiction in a hard spot to provide mandatory and important services.
    • On a side note about this, we know from the income tax literature that the people that are most able to move (migrate) are the wealthy. So what we expect and observe is that the people left behind are the ones who cannot move either because of their job or their wealth.  Of course there are people who choose to stay, but there are others with fewer and more difficult options.

  • While for local budget and finance officers it is easy to just see the different revenue raising capacities of different counties across the state, it is important to remember that our urban and tourism rich counties doing well and being successful is advantageous to all of us because of state level taxation and expenditures. This is not an “us versus them” issue though it may feel that way at times.

  • Saving grace. I will also note that the fact that we tax food in North Carolina helps all counties generate stable local sales tax receipts and additional revenue.  It especially helps rural counties.  Your citizens may do their shopping in other counties, but they likely do their grocery shopping in your county.  Also, like I said it is the most stable part of the sales tax base and the least sensitive to income levels.  Of course, there are concerns about the fairness of taxing food from the citizen perspective.

Like I said there are no answers to be found in this week’s blog post, just more questions and considerations.  What are you all thinking about with regard to SB 126?  What other factors should be on this list?

 

 

There are two sides to every coin: Or is there Common Sense about Cost Accounting in Government?

In the 1990s there was a wave of euphoria about cost accounting and particularly Activity Based Costing (ABC).  One book in particular stands out in my mind as particularly euphoric: Common Cents: The ABC Performance Breakthrough by Stephen Turney.  While it had a clever title, few people remember this book now, but many people remember ABC.  Many finance and budget managers do not recall ABC with fondness.  In fact, when government budget and finance managers are asked about the use of ABC in their organizations now, most will say that they are not using it.  However, when asked if they are doing some form of cost accounting, the measure is much higher.  In this post, I explore why budget and finance managers are willing to say that they are doing cost accounting and not ABC.  I further explore (and mix) the metaphor of common sense/cents about cost accounting by thinking of its uses as two sides of the same coin.

Some background on cost accounting…

Cost accounting is the measurement and use of both direct and indirect cost information for an organizational purpose like rate setting, grant overhead recovery, performance measurement or cost management. For private businesses, cost accounting is essential for pricing goods and services.  In government, cost accounting has many uses as well.  It can be used to price goods as businesses do, to collect overhead for grants, and to improve performance measurement systems.  These are all beneficial uses that are broadly supported by most organizations. The other side of the coin is that cost accounting can be used for intensive cost management purposes, but these uses may generate resistance in organizations. Intensive cost management such as contracting out services and service cutbacks or eliminations can generate resistance from employees.  It is important for managers and budget officers that are looking to use cost accounting for the first time, or more intensively, to consider both sides of the coin and plan accordingly.


The easy side of the cost accounting coin

– Collecting grant overhead

– Accurately price goods or services

– Improve performance management systems

In my research and as described in my forthcoming edited book, cost accounting has many acknowledged uses in government.  The oldest use of cost accounting was to collect grant overhead costs from the federal government as described in the A-87 circular.  The benefit of A-87 cost accounting is that when local governments provide federal services that they should be able to charge indirect costs like HR, IT, and Accounting costs to the grant so that the local government does not have to subsidize services that are most appropriately paid for by the federal government.

Cost accounting also has an important place in accurately pricing goods and services that government “sells” to consumers.  Like federal grants, services that are sold to private consumers need to have indirect costs added into them so that the general tax is not unintentionally subsidizing the service.  Finally, cost accounting is important for performance management systems.  The work of the North Carolina Benchmarking Program most directly speaks to this issue.  Without cost accounting, we cannot be sure if performance differences come from differences in processes that we can learn from or whether they come from simple differences in resources.  Generally, few people inside an organization object to these purposes and may readily assist if they believe that it can be used to generate new revenues for their programs.

The difficult side of the cost accounting coin

– Contracting out services

– Service cutbacks and eliminations

– Overhead cost management

 

Cost accounting also has some more difficult uses.  I suggest that these are difficult only because they are difficult for people in the organization.  Analysts and managers have told me that people believe that when the government starts collecting data on the “full” cost of services they think that sweet Ms. Betty in Animal Licenses is going to lose her job.  They believe this because cost accounting allows governments to more accurately estimate the benefit associated with contracting or eliminating services.  If we only look at the budgeted costs of a services like animal licensing, we leave out important indirect costs or the budgeted cost is aggregated at such a level that it obscures the individual cost of services.  So, cost accounting can be used to both combine direct and indirect costs and track expenses at a more granular level, which becomes very beneficial for contracting and service analysis.

Cost accounting also often shows that building space, which is an often untracked overhead expense in the budget, is an important cost of services.  If the cost of building space is added into the cost estimate, the service managers often have to justify the high cost of the space for things like storage.  This is something that managers do not want to have to justify and defend.

The improved ability to evaluate contracting, service elimination, and overhead cost management are all important and appropriate uses of cost accounting from the budget officer’s perspective. However, this side of the coin may appear negative from the employee and service manager’s perspective, and organizational resistance may ensue.  Often this resistance is seen in the form of service managers focusing on the excessive time and data requirements of cost accounting.

 

My common sense suggestions about both sides of the cost accounting coin

The previous discussion of the “other” side of the coin that generates resistance in the organization has suggested why cost accounting (and ABC in particular) has been limited in government.  If the resistance hypothesis is correct, then the next question is what can be done about it? In my forthcoming edited book and in my dissertation (found here: see chapter 3 in particular), I note that the cost accounting used in practice by local governments is not completely an ABC cost accounting system, which may help this problem of resistance and minimize the time and data requirements.  I call this development “hybrid” cost accounting.  These hybrid cost accounting systems are neither very basic or exactly like ABC.  They have a mix of basic and specific cost drivers, the level of cost is passed down to some broad programs and some very specific activities, and that the “fullness” of the system is mixed.  In other words, the systems that are developed and used by cities over time are not purebred ABC systems.  The system is more basic in areas where it is not as important to have a specific activity cost and in areas that generate the most resistance.

Additionally, many cities have found that they have multiple cost accounting systems for different purposes like A-87 cost accounting plans for federal grants and then “full” cost accounting for purposes of setting rates and evaluating the cost of services.  All of this points to the new understanding that there needs to be multiple estimates of cost for the multiple purposes of government.

In conclusion, cost accounting has many significant benefits for government, but we have to use some common sense about our expectations for cost accounting and how it will be received by the organization.  In other words, we need to consider both sides of the coin and especially from the perspective of the service managers and employees. By using hybrid cost accounting systems and multiple cost systems, we may be able to minimize the resistance from the organization and maximize benefits.

Zach Mohr is an Assistant Professor at UNC Charlotte.  He has a forthcoming, edited book on cost accounting titled Cost Accounting in Government: Theory and Applications.  It will be published by Routledge in May 2017.  Links to actual local government cost accounting documents and other useful cost accounting resources can be found on his faculty website.

Invitation to Comment – Or Invitation to Disaster?? The Long Slog to a New Financial Reporting Model Begins!

Well, it was inevitable. While we all are still reeling from the fun that has been GASB Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments that was issued in June 1999, another chapter in the never-ending saga has begun. Yes, the Governmental Accounting Standards Board (GASB) recently added a new financial reporting model project to their official agenda. Now, the good news is that this type of project takes time – lots of time. The project that culminated in GASB Statement No. 34 was a 15-year process. The first implementers of GASB Statement No. 34 did so 15 years ago. So, one would hope that this is the beginning of another 15 year adventure and, at the end, most of us will be retired. Well, no such luck this time. While we do have time to possibly retire, the potential release of a new reporting model standard is currently slated for November 2021, with implementation certainly several years after that. However, we are not looking at a 15-year process.

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Mirror, Mirror on the wall, How much revenue will we generate this fall?

Yup, you guessed it, today’s blog post is on revenue forecasting!  My current blog series is about some of the non-legal finance issues that are out there and revenue forecasting, while required by law, is a really important one!  There are many people that are involved with revenue forecasting in local governments. While many outside of government may just assume that there is some accountant or budget wonk sitting in a back room who is somehow magically able (or has some very scientific formula) to predict how much money is going to be coming in next year, we know better.

There are many reasons to forecast revenues including planning for the future (are we going to have enough money coming to support our expenditures in five years) and to balance this year’s budget, but in North Carolina local governments are also required by law to forecast revenues.  Our forecasted revenues set the parameters on the budget, they define how much we can spend this year and may cause policy choices on both the expenditure and finance side (like setting the property tax rate).

This is why it is explicitly required in the Local Government Budget and Fiscal Control Act or simply the Fiscal Control Act.  The Fiscal Control Act requires that the budget is balanced and that the estimated revenue for the following year, used to create the balanced budget, be reasonable, reliable, and justifiable.  The question is, how do we do that?

In this blog post I am going to discuss forecasting methods broadly, if this is something you are more interested in and you want more details (and math!) please see my chapter in the Introduction to Local Government Finance textbook.

First, of all what do we need to successfully forecast our revenues? We need: data, institutional insight, and judgement.  We need data on the revenues we have collected in the past, policy changes, changes to our tax base, and whatever else we think may be important to know about past revenues and future revenues.  For example, beyond just property tax collections it is important to have data on property tax rate changes, reassessment cycles, etc.

Data is foundational, but without institutional insight it would be easy to misinterpret that data.  Institutional insight and knowledge helps a forecaster know what data needs to be collected, what effect changes have had on your community, what population or demographic changes may be occurring, whether firms are entering or exiting, etc.  Institutional insight provides the context for the data.  In a course I was teaching, I had the opportunity to talk with a budget officer from Fayetteville and we were talking about unexpected shocks to budgets.  She mentioned how the federal government shut down that occurred in 2013 really hit them hard because of the importance of Fort Bragg to their community.  They were affected by the shutdown in ways that most jurisdictions outside of metro D.C. were not.  If you had no context and were looking at their revenue receipts for that period and comparing them to other jurisdictions you would not only be confused but you would also let that shock affect your forecast in inappropriate ways.

Lastly, you have to always use your judgement.  You need to make sense of the numbers, look at the trends, and not rely exclusively on the numbers spit out of models.  I sometimes refer to this as the “gut check.”  You can use real numbers and reasonable forecasting methods and get unrealistic forecasts.  There are a lot of reasons this may happen and we are going to discuss some of them below!

There are two main categories of forecasting methods: qualitative and quantitative.

Qualitative forecasting relies on expert judgement.  The experts can be internal (like budget directors) or external (like local economists).  This is extremely common and can be very reliable when the expert understands the revenue source, the economy, and the community.  Can’t decide on just one expert? You can also use a panel of experts who bring different knowledge and perspectives to the process.  This often means internal experts as well as economists, business owners, bankers, etc.  There are many strengths to qualitative forecasting such as it is typically low cost, straightforward, and not too data intensive.  ***Note: This does not mean that our experts do not use data though!***  However, it has its share of weaknesses too.  You need to identify the correct experts, it is not as transparent a process, and it is hard to avoid forecaster bias.  Forecaster bias comes in many shapes and sizes but an example of it is that your expert remembers last time there was a downturn and it took your community 5 years to get back to previous sales tax collections, never mind that the previous economic downturn was the Great Recession and the next downturn will likely (hopefully!) be much less dramatic.  Or they know that this new box store coming in is going to generate tons of revenue, they just know it!

Quantitative judgement relies on data very heavily and there are numerous ways it can be accomplished.  For some tax sources, like property taxes, they can be forecasted through formulas because you have all the data you need (like tax base, rate, and collection rate) to calculate it.  Unfortunately this information is not available for the majority of taxes and fees.  A common method of quantitative forecasting is trend analysis, where the forecaster uses previous collections (and the changes from year to year) to estimate future collections.  There are many ways to forecast using trends including applying the average growth over the period to the previous year’s revenue.  The issue you here is that trend analysis is always backward looking and will lag behind changes to the economy.

A final way that is more common in larger jurisdictions is causal modeling where not just previous revenue is used, but also other economic drivers.  The advantage is that it can be forward looking and it incorporates the “why” of changing revenue collections.  It requires a lot of data though and for most local governments that data is not available, at least not for the most recent time periods.  And when it comes to data you should always remember GIGO: Garbage in, Garbage out.

So how do we choose? Well resources are the first hurdle.  What capacity do you have on staff (not just skill set but time)? Do you have the money to hire consultants?  Do you have the data?  The second consideration is to think about the revenue being forecasted, you should not be using the same (quantitative) forecasting technique for all your revenue sources.  ***See the book chapter for more on this.*** The third consideration is what works on previous data?  I suggest you forecast for previous years using a few different methods.  You know what the actual revenue collections are, so you will be able to identify which quantitative methods work best for different revenue sources.

Final thoughts on revenue forecasting.

  • All forecasts are wrong. The goal is to minimize how wrong they are.
  • Be cautious, but not too cautious. It is prudent to air on the conservative side of forecasting but too conservative and you are either taxing people too much or you are missing opportunities by not budgeting your revenues.
  • Expert judgement should always be incorporated, even when doing quantitative forecasting. The gut check of “does this make sense” is valuable.  I suggest you graph your estimate against the previous years to eyeball your forecast to help inform that gut check.

 

 

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