Revenue forecasting and analysis in Nassau County, New York.

• Author: Guajardo, Salomon A.

In 1997, the National Advisory Council on State and Local Government Budgeting issued 59 recommended budget practices. According to the NACSLB, "a good budget process incorporates a long-term perspective, establishes linkages to broad organizational goals, focuses budget decisions on results and outcomes, involves and promotes effective communication with stakeholders, and provides incentives to government management and employees." The NACSLB framework includes several recommended practices on revenue source analysis. These practices are essential for developing fiscally sound and balanced budgets and for obtaining insights into the factors that affect the intake of major revenue sources.

In 2002, the newly elected county executive of Nassau County, New York, inherited a $2.4 billion government with a projected cumulative deficit in excess of $450 million by 2005. As a result of the structural budget deficit, the major credit rating agencies had downgraded the county's creditworthiness to near junk bond status. The new administration realized that the county's fiscal problems were due in large part to the poor budgeting and financial management policies and practices of the past. Consequently, the county looked to the NACSLB practices as the basis for correcting past financial mismanagement, enhancing the county's budgeting and financial management policies, improving its creditworthiness, and restoring taxpayer confidence. By adopting the NACSLB practices, Nassau County has begun to address its structural deficit and to develop operating budgets based on realistic revenue projections.

This article describes how the Office of Management and Budget, or OMB, used the NACSLB recommended practices to develop a general revenue forecasting approach to help the county achieve structural balance. The techniques related in this article can be replicated by other local governments wishing to improve their revenue analysis and forecasting practices. Even though governments may differ dramatically from one another in terms of their revenue structures, the Nassau case provides a useful framework for gaining a better understanding of the factors that affect revenue sources in the short and long term.

IMPLEMENTING THE REVENUE ANALYSIS PRACTICES

Exhibit 1 summarizes the four NACSLB recommended practices pertaining to revenue analysis. While the NACSLB does not prescribe a step-by-step implementation approach for its practices, Nassau County found the council's division of the various activities involved in revenue analysis and forecasting to be a logical approach to this process. Accordingly, the steps in the county's revenue analysis and forecasting process coincide with the NACSLB practices on this topic, namely, analyze major revenues (RP 9.2a), evaluate the effect of changes to revenue source rates and bases (RP 9.2b), analyze tax and fee exemptions (RP 9.2c), and prepare revenue projections (RP 9.2). Nassau County's approach to each of these steps is described in this section.

Analyze Major Revenues. Because major revenue sources provide the bulk of the necessary and recurring funds needed for a government to meet its operating expenses, it is essential to understand (a) the contribution of each major revenue source to total revenues and (b) how changes in the economy or demand affect the performance of each major revenue source. The former is necessary to determine the extent to which the government's revenue structure is diversified, while the latter helps assess the dependability (or stability) of major revenue sources. In practical terms, this recommendation is implemented by undertaking what is commonly referred to as a revenue mix analysis.

In Nassau County, OMB analyzes its revenue structure to determine each revenue source's contribution to the total revenues in each fund. The revenue mix analysis in Exhibit 2 illustrates how Nassau calculates the percent contribution of each revenue source in each of the seven funds that comprise the operating budget. Exhibit 2 shows that each of the funds in the operating budget is overly dependent on one type of revenue. If you were to compare these numbers to historical data on county revenue collections, you would also see that a number of revenue sources are vulnerable to fluctuations in either economic conditions or demand for services (e.g., off-track betting).

In the general fund, the sales tax is the major source of revenue, accounting for 54 percent of total revenues. The annual amount of sales tax revenue collected by the county fluctuates according to changes in the marketplace. For fiscal 2001, the county lost more than $4 million in sales tax revenue due to late tax filings that resulted from the terrorist attacks of September 11 and their aftermath. Similarly, the amount of federal and state funding received by the county depends on how well the state and national economies perform. For 2003, the county anticipates that the state will reduce its aid distribution because of severe revenue shortfalls.

Exhibit 2 shows that the property tax is the major source of revenue in the other six funds, accounting for 70 percent to 98 percent of total revenues in those funds. The property tax accounts for 98 percent of all revenue in the police district fund, 91 percent in the police headquarters fund, and 71 percent in the fire prevention, safety, communication, and education fund. It is safe to say that the county relies heavily on one source of revenue to fund police and fire operations.

As part of the revenue mix analysis, governments should also identify trends in each major revenue...