Making sense of conflicting economic signals.

• Author: Eichem, Robert
• Position: Best Practices

According to the projections of Esteemed Economist A, there will be a long, slow recovery with an average annual increase in GDP of 2.5 percent. Equally Esteemed Economist B says the economic world as we know it will change forever, deflation is a definite possibility, and the recovery could take years, if not decades. Given the contradictory outlooks, it's difficult for finance officers to know what to do with our jurisdictions' investment portfolios, to finalize revenue projections for the next budget, to propose options for capital financing, or to make any of the financial projections we are required to make.

Adding to the pressure is the need to document why we have chosen our projections. How will you get the message across to the community, policy makers, senior management, and other interested parties in lay terms that can be understood? It is also best to document the reasoning for your projections, in case you need to defend them at a later date.

A basic premise of budget projections is to underestimate revenues and over-estimate expenses. However, your credibility is not enhanced in today's tight budget situations if your projections are so conservative that programs are eliminated and people lose their jobs, only to find out the projections were far exceeded. At the same time, overly optimistic projections can lead to layoffs and downsizing. It can also create credibility problems with policy makers, senior management, unions, and the community if the numbers are too far off.

MAKING SENSE OF THE DATA

One of the best methods for making sense of the morass of economic information and crystallizing what projections should be based on can be found in the GFOA book, Investing Public Funds, by Girard Miller with Corrine Larson and Paul Zorn (second edition, Chicago: Government Finance Officers Association, 1998). It provides a format for preparing a formal investment outlook. The concept is to identify major forces and factors likely to influence the markets during the time horizon you are considering. Then, succinctly describe the situation, the result, and your conclusion.

Major objectives of the matrix are:

* Identify important forces and factors likely to influence the markets.

* Record the present developments, status, and trends.

* Identify expected future scenarios and their investment implications.

* Identify factors that signal a change in the trend and the need to reconsider the investment strategy.

See Exhibit 1 for a...