Determinants of local government revenue forecasting practice: empirical evidence from florida

Abstract

Two decades of research on municipal forecasting practice suggest that it is less advanced than other sectors. Moreover, local forecasters have a greater error tolerance than peers. Survey results of Florida's finance directors provide evidence of why this is the case. Unlike other levels of government, local finance officials receive limited political or bureaucratic scrutiny that might induce more accurate forecasts. The judgmental approaches deployed facilitate the downside bias typically found in municipal forecast practice which fosters surplus building, per Wildavsky's (1986) description of municipal budgeting. Absent greater senior management participation, it is unlikely municipal forecast practice will change. Findings also confirm that survey-based forecast research should account for respondents' stated levels of accuracy and their "risk adjusted" perceptions that account for a preferred downside bias of one to seven percent. INTRODUCTION: THE LOCAL FORECASTING CONTEXTRevenue forecasting is a cornerstone of budget preparation. This is thought to be particularly true in local government (Wildavsky, 1986). Unlike their state and local peers which have more elastic revenue streams, local governments are still heavily reliant on ad valorem revenues which are only mildly elastic and frequently restrained by constitutional limits (Mikesell, 2003). Thus Wildavsky typifies the local budgeting process as top-down in character, in

The GASB No. 34 Impact of Budget-to-Actual Variances on Bond Ratings: Evidence from U.S. Cities

“…In contrast, more favorable expenditure variances are associated with higher bond ratings. These findings are consistent with Frank and Zhao (2009), who emphasize the importance of precision in revenue forecasting and conservatism in estimating expenditures. Associations are robust when we examine S&P and Fitch ratings.…”

“…In addition, because governments cannot legally spend more than is appropriated, they may build slack into their budgets, resulting in expenditure variances that are mostly favorable. In contrast, revenues may not be required to exceed a minimum level, but Frank and Zhao (2009) cite the importance of precision in revenue forecasting. As a result, we expect state and local governments to aim for revenue variances of low magnitude, in either direction.…”

“…However, given the legal requirements associated with the appropriations/spending process, we expect a disproportionate share of favorable expenditure variances. Moreover, despite the emphasis on precision in revenue forecasting (Frank and Zhao 2009), the flagging of unfavorable variances, including revenue variances, as potential causes for concern (GASB 2012) likely leads to small favorable revenue variances. Therefore, we expect that revenue, expenditure, and surplus/deficit variances to be disproportionately favorable than would be expected absent legal constraints and managerial incentives.…”

“…The ability to predict revenues and expenditures and the demonstration of fiscal restraint are important elements of successful management. Frank and Zhao (2009) cite the importance of precision in revenue forecasting. Describing revenue forecasting as the ''cornerstone of budget preparation,'' Frank and Zhao (2009) find that local government officials attempt to under forecast revenue and constrain expenditures.…”

“…Frank and Zhao (2009) cite the importance of precision in revenue forecasting. Describing revenue forecasting as the ''cornerstone of budget preparation,'' Frank and Zhao (2009) find that local government officials attempt to under forecast revenue and constrain expenditures. City governments differ from their federal and state counterparts in that municipal revenue streams are less elastic with the emphasis on property taxes (Frank 1990;Mikesell 2003).…”