Financial Trend Monitoring and Forecasting
in Uncertain Times
By Christopher Raths
Municipal Manager, Roxbury
As money for local government services becomes more scarce, town leaders will be forced to better manage resources and services. Maintaining fiscal integrity will be vital to the ability of municipalities to not just survive but prevail in a challenging economy.
In my 20 years as a Municipal Manager, fiscal times have never been this uncertain, nor have sound financial management practices been more critical. The tools detailed in this article include a Financial Trend Monitoring System (FTMS) and five year Revenue/Expenditure Forecasting. Both use the Microsoft Excel program and are practical tools for all sizes of governments. It is estimated that approximately 20 hours a year are needed for the analysis and forecasting process.
The FTMS analysis was developed by the International City Manager Association (ICMA) in the 1980s. The system “identifies the factors that affect (a town’s) financial condition and arranges them to facilitate analysis and measurements” (ICMA Evaluating Financial Conditions 2003).
When implemented, the FTMS and revenue forecasting provide detailed methods to:
- examine local government financial conditions;
- identify existing and emerging financial conditions; and
- help develop solutions for problems.
Furthermore the FTMS:
- identifies areas of financial concern;
- assists the executive and council in financial planning and forecasts; and
- assists in maintaining a favorable bond rating; as well as,
- educating taxpayers on the forces impacting the decisions of township officials.
FTMS There are four types of trends reviewed in the Roxbury Trends Analysis. These include; Revenue Indicators, Expenditure Indicators, the Township’s Operating Position, Debt Structure, and finally Environmental Conditions.
The review of the Revenues and Expenditures provides an analysis that identifies: a deterioration of the tax base, practices that impact revenues, poor estimating practices, inefficient collection of revenues, overdependence on a single revenue source and inadequate user fees.
Revenue Indicator The Township of Roxbury reviews the following Revenue Indicators:
- Operating Revenue per Capita
- Tax Revenue as a percentage of Total Operating Revenue
- State Revenue as a percentage of Total Operating Revenue as illustrated in the following graph (State Aid Revenue as a Percentage of Total Operating Revenue):
- Grant Revenue and Inter-local agreements as a percentage of Total Operating Revenue
- Property Tax Revenue per Capita
Expenditure Indicator The township’s annual review of Expenditure Indicators helps to identify the following:
- excessive growth of overall expenditures as compared to revenues;
- increase in fixed cost, such as pension and health benefits;
- ineffective budgetary control;
- decline in personnel productivity; and
- excessive growth in programs.
The Township of Roxbury reviews the following expenditures trends on an annual basis:
- Comparison of Revenues and Expenditures per Capita
- Expenditure per Capita
- Expenditure per Function
Review of Operating Condition The FTMS also includes a review of the Township’s Operating Position. The Operating position refers to the township’s ability to balance its
budget on a current basis; based on a given year’s cash flow, level of revenues maintained for emergency purchases and liquidity of funds.
An analysis of the Operating Position will identify potential or continued deficits, decline in reserves and liquidity and ineffective forecasting techniques and budgetary controls.
The Operating Position Trends reviewed in Roxbury are changes in undesignated Fund Balance, changes in Net Validation and the percentage of outstanding or uncollected property tax.
Review Of Debt Structure The Township of Roxbury’s FTMS also includes a review of our Debt Structure. A review of the debt structure will enable the township to determine: poor cash management procedures or controls, over reliance on long term debt, whether or not debt service has become inflexible with large increases in future debt service or creating too much debt for the community to support. Furthermore, a township’s debt position is a significant factor reviewed by Bond Agencies.
A review of the township’s debt position includes net debt per-capita, net debt as a percentage of equalized value and the debt service as a percentage of the township’s Total Revenue.
Environmental Conditions The final component of the FTMS analysis is the review of the Township’s Environmental Condition. The examination of the Township’s Environmental Condition and demographic characteristics helps to identify a declining or rising tax base, an over reliance on a particular tax classification or increasing costs due to intergovernmental constraints, labor costs and inflation.
The trends reviewed by the township include the following:
- The Tax Value of the township’s five largest property tax payers
- Tax values by category for four years
- Intergovernmental constraints or Forces Driving the Budget
The following chart details the uphill battle we face in trying to keep taxes low when “Forces Driving the Budget” is accounted for. If one particular chart can educate the public as to the inherent cost we face this is the one.
In 2008 less then one half of 1 percent of the budget was truly discretionary.
Revenue Expenditure Forcasting The first section of this article provided an overview of the Financial Trend Monitoring System (FTMS) and its benefits to local communities. The following section provides a review of Roxbury Township’s Revenue/Expenditures forecasting model.
The forecasting model is a multi-year budgeting tool using Excel worksheets. It uses general budgeting principals and previous years’ experiences to provide valuable information to management and elected officials. In utilizing this information it is important to be conservative in both revenue and expenditure projections. This tool is highly accurate when properly utilized. For example; in 2003 the township projected a total tax rate of 3.8 per 100 for 2008. The actual rate was 3.6 per 100 in 2008.
Fund Balance The township’s management attempts to maintain 4 percent of the previous years’ operating budget as a constant fund balance. Anything above that can be utilized to offset the tax rate.
Local Revenue From 2001 to 2007 the township provided for a 1 percent increase for local receipts. The exception was for Uniform Construction Fees. Any projected increase is a result of a review of pending or proposed projects with the Construction Official and Township Planner. Beginning in late 2007, local receipt projections were revised from 1 percent increase to 0 percent.
State Aid Without Offsetting Appropriations Until 2008, the township projected a 0 percent increase in State Aid for each year. We did not anticipate the 10 percent reduction for 2008. In this year’s budget the township is projecting a 0 percent based upon 2008’s actual receipts.
Grants Inter-Local Agreements Roxbury Township provides several services for surrounding communities including Health services for the Boroughs of Mine Hill and Wharton and trash collection for the Borough of Netcong. The revenue for these services is actual numbers from contracts.
These are projected at no increase over five years.
Tax Levy In calculating the Tax Levy the Township assumes no Tax Increase. Any projected tax increase is the reflected Tax Rate Calculation. The township does include a NVT projection which is determined by a review of pending or proposed projects with the Construction Official and Township Planner. The municipality should take into consideration potential Tax Appeals. At this time Roxbury Township is projecting a 0 percent increase in the NVT over the next five years.
Five Year Expense Projections In order to project expenses the township utilizes the following general rules:
- Departmental projected expenditures are based upon the previous five years’ actual increase or 4 percent whichever is greater.
- Departmental projections are also based upon actual
contracts including inter-local and Union wage increases.
- A debt service schedule is developed by the Chief Financial Officer utilizing actual debt service payment. New debt is capped at $1.5 million per annum. This cap was established by Mayor and Council under the township’s Capital Improvement Program.
Conclusion As previously detailed the Township utilizes Excel spreadsheets for this analysis. The township is willing to forward you the information for your use. To date we have sent the information to over 40 communities. These simple tools will provide valuable information necessary to make informed decisions to address the challenges we are facing.
Thanks to Lisa Spring, Roxbury Township CFO, Valarie Wyble, Roxbury Township’s Administrative Assistant and Greg Fehrenbach for their assistance and advice.
Christopher Raths has over 19 years experience as a Municipal Manager starting in North Carolina, continued in Massachusetts and in Roxbury for the past seven years.
This article was originally published in New Jersey Municipalities magazine. Vol. 86, No. 3, March 2009