By Bob Leland, Senior Advisor, Management Partners

The key to a credible budget forecast is having transparent and realistic assumptions. This will communicate a true picture of your agency’s financial condition, and whether that is positive or negative, it will provide an empirical basis for future budgetary actions.

City of Davis’ 20-Year Forecast Model

Nitish Sharma, former Davis finance director and current CSMFO Sacramento Valley Chapter Chair, generously allowed Davis’s city’s forecast model to illustrate the points in this article.

The City of Davis is a full-service, 68,000 population, university town, with a $70 million General Fund budget. Prior to 2016, the City prepared a 5-year forecast for its annual budget. But it was looking for a more robust forecasting model that allowed staff to easily model various outcomes over 20 years, including funding of infrastructure maintenance. The forecast model we prepared has guided the last three City budgets and given the City a valuable planning tool. A comprehensive forecast discussion and a condensed version of the forecast model itself are available on the City’s website. Major forecast assumptions are as follows:

  • Recessions – On average, a recession has occurred every 7 years since the 1920’s, ranging from moderate revenue reductions of 5-10% from normal growth, up to the substantial multi-year losses of the Great Recession. A typical local agency forecast ignores economic cycles and may rely on conservative linear trends to try to compensate. The value of a forecast model is that you can easily show the impacts for recessions of different timing and magnitude. Davis assumes moderate recessions every 7 years starting in FY20-21, with recovery of 90% of losses over the ensuing 3 years. This provides a realistic “stress test” for City finances.
  • Property Tax – The growth of this key tax is determined by specific elements. Davis assumes the 2% Prop 13 inflator for 96% of existing parcels; an average 40% increase for the other 4% of parcels due to changes in ownership; new construction projected by City planners; and no additional Prop 8 recoveries. This results in pre-recession growth of 4.1%.
  • Sales Tax – Growth is determined by the projections from the City’s tax auditing firm for both its st