This article is adapted from Informed Decision-Making through Forecasting: A Practitioner's Guide to Government Revenue Analysis, by Shayne Kavanagh and Daniel Williams (GFOA: 2017).
"Forecasting is very difficult, especially if it is about the future."
--Niels Bohr, Nobel Prize-winning physicist
Forecasting revenues is a fundamental part of budgeting and financial planning. Revenue forecasts allow public officials to anticipate resource availability and plan accordingly for things like enhancing services to the community, changing the salaries and benefits of public employees, and adjusting tax rates. Governments use 12- to 18-month forecasts to develop budgets that are balanced and affordable. They use longer-term forecasts to analyze the financial sustainability of existing policies and programs, and to provide warning about potential imbalances in the government's financial future. A forecast provides a shared basis for discussion about what the fiscal future might look like and what actions can be taken. In the absence of a formal forecast, a common assumption is that the future will not be much different than the past--an assumption that could be seriously flawed.
That said, to paraphrase Niels Bohr, forecasting is not without its challenges. One of the biggest challenges is that forecasts are often not effective in influencing financial decisions. (1) Frequently, decision makers are much more strongly influenced by other factors. A forecast is not effective at influencing decisions just by virtue of its accuracy and reliability. These elements are necessary and important, but alone they are not sufficiently effective. This article examines several strategies you can use to boost the utility of your forecast.
Establishing the forecaster's credibility is essential because decision makers are more likely to use a forecast from a trustworthy source (and less likely to use a forecast from a disreputable source). Therefore, a good place to boost the utility of your forecast is to build credibility. Even if you don't have a credibility problem, more credibility is never a bad thing. In any case, research suggests that people generally overestimate how trustworthy and credible they seem to other people. (2)
Understand Your Audience. A forecaster who demonstrates an understanding of the audience's concerns and needs will seem more credible. Common questions about a revenue forecast might include: What are the implications for constituents' tax bills? Can we lower taxes? What is the impact on high-priority (often capital) projects? Can we afford improvements or augmentations to a high-priority service? Are our current services and obligations affordable into the future?
One way to cement an understanding of the audience's concerns is to discuss them directly. For example, in the City of Sunnyvale, California, staff met with elected officials to review the city's long-term forecasts in study sessions, rather than the regular council meetings. This allowed the elected officials to ask questions and exchange ideas with staff about key forecast assumptions before it was presented at the city's council meetings. Staff was then able to fine-tune the forecast presentation, which A) better aligned the forecast presentation to the informational needs of elected officials, and B) demonstrated to elected officials that staff took their questions and concerns seriously. For example, elected officials were often curious about how new growth and development projects would affect the city's tax revenues. The informal meetings gave the council and staff the opportunity to discuss the point at which new development would be included in the forecasts versus when it was too speculative to be included. Because there were differences of opinion on this question, the less formal meetings allowed for a more relaxed discussion than might have been possible in regular council meetings.
Know the Facts. Having a substantive command of the facts underlying revenue performance builds the forecaster's credibility. The details a forecaster should know will depend on the community. For example, the City of Palo Alto, California, has a population of about 66,000 and is located at the epicenter of Silicon Valley. Palo Alto's staff remains abreast of the health of the Silicon Valley economy in general, and growth in venture capital activity in particular because those measures have been...