SUBCOMMITTEE ON THE USE OF LONG-TERM FORECASTS
TASK FORCE FOR LONG-TERM
FINANCIAL ANALYSIS AND PLANNING
December 8, 1999
Legislative Building, Room 2135
Carson City, Nevada
The meeting of the Task Force Subcommittee on the Use of Long-Term Forecasts convened at 1:05 p.m. on December 8, 1999, in Room 2135 of the Legislative Building, Carson City, Nevada.
SUBCOMMITTEE MEMBERS PRESENT:
John P. Comeaux
SUBCOMMITTEE MEMBERS EXCUSED:
LEGISLATIVE COUNSEL BUREAU STAFF PRESENT:
Mark Stevens, Assembly Fiscal Analyst
Ted Zuend, Deputy Fiscal Analyst
Sherie Silva, Secretary
Ted Zuend, Deputy Fiscal Analyst, addressed the subcommittee concerning the selection of a chairman. He noted that the chairman will be the person to report to the full Task Force, as well as ensure that the committee does not get out of hand, although the committee’s small size makes that unlikely. He suggested that Perry Comeaux not be chairman for a couple of reasons:
1. He wears a number of different hats in various endeavors through his job as Budget Director, and
2. He will probably end up being impacted by some of the legislation that will be proposed. He would be better in the role of devil’s advocate rather than actually controlling the process.
Mr. Zuend thought either Mark Arrighi or Diane Torry should be selected as chair, with the other as vice chair. He added Charles McNeely and George Stevens are from local government, which would be their focus more so than statewide issues.
Mr. McNeely moved that Mr. Arrighi serve as chairman and Ms. Torry be selected as vice-chairman. The motion was seconded by Mr. Comeaux and passed unanimously.
Discussion was then held as to when to schedule subcommittee meetings. Mr. Zuend suggested the subcommittee meet in conjunction with the Task Force meetings, possibly one hour before, in order to not burden the members with additional meetings. Mr. Arrighi remarked the plan seemed appropriate to him, and the other committee members agreed.
Ted Zuend then reviewed items which he felt were important for the committee to consider.
1. A decision needs to be made as to whether the forecast process and use should be for more than 6- and 10-year periods. The Economic Forum now makes short-term forecasts of revenue, but there is nothing formally done on the expenditure side, except separate estimates made by the Prison System and Education. Consideration needs to be given to making short-term projections—the 6- and 10-year periods are only the minimum that needs to be done.
2. Another decision to be considered is whether local government can and should be incorporated into the process. Should the process and the use incorporate at least information that could be usable for local governments? If so, to what extent? Sales tax is a key component of local government revenue, and property taxes are fundamental to schools. A lot of what the state needs to do is dependent upon how much or how little property tax revenue is generated at the local level.
Mr. Zuend said that Don Hataway had commented that Governor Guinn is viewing the Fundamental Review process and revenue forecasting as possibly an ongoing or repetitive process. Mr. Zuend added that this committee does not have issues with the Fundamental Review, but it will be looking at technical aspects related to forecasting revenues and expenditures to see how they match up over time. Mr. Hataway had also mentioned the Task Force may be repetitive, and he does not feel that the Legislature or the Governor wants to create two forecast mechanisms. It is Mr. Zuend’s impression that the current forecasting is an informal process that the Governor wants done, and that the Budget Office is feeling their way through it. He had asked Mr. Hataway to bring any suggestions as to how the process might help in long-term planning to the Task Force and the subcommittee.
Perry Comeaux said the Budget Office has put a lot of thought and effort into the forecasting efforts, although the Budget Office will definitely learn some things as the process is completed, which could help this group or the permanent forecasting committee. He said it probably does not make any more sense to have an Executive Branch and a Legislative Branch long-term forecasting effort than it does to have the Executive Branch and Legislative Branch putting a biennial budget together. Mr. Comeaux said regardless of who does it, forecasting is a dicey business. It is not a science, although there is probably some science involved, but it is also a very intuitive “artsy” kind of undertaking. He feels that a consensus kind of approach would be desirable.
Mr. Zuend said he thought it might be helpful for each member to explain how their respective entities have used long-term forecasts in the past. He asked Mr. Comeaux to begin with an explanation of use of prison inmate population forecasts.
Mr. Comeaux said the state’s use of long-term forecasts has been spotty. In terms of prison population, forecasts are looked at on a 10-year basis, mostly for use in the construction program. The 2-year window is used for operating purposes. Most of the other forecasts, even those with long-term data, are used for development of the biennial budget; the short-term data is primarily used, and little is done with the long-term forecasts. As an example, the state has known for years that the growth in K-12 enrollments would increase, but the numbers were never quantified.
Mr. Comeaux said the Governor has determined that in order to be able to make any kind of decisions and be proactive rather than reactive, some very general assumptions must be made regarding minor revenues and expenditures, and a hard look must be taken at the major revenues and expenditures. The extent the state currently uses long-range forecasts is negligible, even for tax policy; Mr. Comeaux feels it is essential that tax committees be required to consider the long-range impacts of the bills they pass.
Mark Arrighi stated he is a partner in a statewide CPA firm with seven offices. A 5-year long-term forecast and a current budget are prepared each year. For the long-term, projections are made for revenues and capital expenditures. From the revenue side, his type of business involves the sale of time, so the labor side is the flip side of the coin. Long-term projections are used to plan for employment and staffing needs, as well as physical space requirements. The projections are reviewed every year from the office level up the line through the firm. The goals are tracked and adjusted annually.
Mr. Zuend asked if the process is formalized. Mr. Arrighi replied each office has a shareholder in charge, and an annual meeting of shareholders in charge is held. The budgets are presented, discussed, adjusted, and approved by the group. A budget report is received every four weeks. Capital improvement requests are also submitted and approved. Staff planning needs are also tracked. The process is very formal and tracked continually.
Diane Torry explained she has had experience with a number of bank multi-state holding companies. The process is very, very formalized and involves a 5-year horizon. Data is gathered annually from various areas of the country in terms of providing and validating information for long-range forecasts. The forecasts are then developed into a detailed financial projection, along with the capital needs forecast. This information is made available to everyone prior to the budgeting cycle. She said the projections also involve a best, worst, and most likely scenario in order to make a determination of the impacts of each on operations.
Ted Zuend asked if the formal nature is typical for private enterprise. Mark Arrighi replied that from his experience the process is very formal and is necessary for a business to succeed.
Diane Torry said that during the 10 to 15 years she was involved at the executive level, she saw a tremendous evolution of forecasting as it became more sophisticated. She noted the banks that became acquisition targets were those that perhaps did not have the best formalized process.
George Stevens said the focus of Clark County’s long-range planning is on capital projects and infrastructure, including parks, police and fire stations, as well as staffing. A few years earlier, the juvenile facilities and detention center were expanded, and forecasts were put in place for staffing. He said his board does not focus on anything other than capital needs—their goal is building infrastructure and facilities. They do not involve themselves in the individual programs. Clark County has a Taxpayer Bill of Rights which provides that the operating budget cannot increase more than the combination of population and CPI. Mr. Stevens said it is obvious that in Clark County the revenues are going to grow at least at that level. Unlike the state, which sets its budget every 2 years, Clark County’s budget is managed on a daily basis, which makes immediate adjustments possible. The capital plans are done on a 5-year horizon, and then adjusted every year thereafter beginning in the 6th year.
Charles McNeely stated the City of Reno has a very formal process. Compared to most other cities, Reno probably spends a lot more time planning and forecasting through a structured process. The city has been involved the last 2-1/2 years specifically in developing 10- and 20-year financial plans that cover not only capital planning, but also operating. The plans are developed in conjunction with departmental directors who are required to develop 5- and 10-year plans for staffing, equipment, and program growth needs. The forecasts are then balanced with revenue projections. Mr. McNeely said the process has enabled the city to look in more detail at how long-term revenues will match up with expenditures, and officials can make decisions as to what might need to be done internally to adjust the city’s way of doing business. With the development of the 10- and 20-year plans, the city is now making adjustments in staffing and growth, as well as infrastructure planning. Mr. McNeely added the process involves managers as well as policymakers, and a budget review is conducted annually.
Mr. Zuend asked if the local governments contract with outside parties for economic and demographic information. Mr. McNeely replied the City of Reno primarily gathers their information internally, although from time to time outside consultants have been brought in. Mr. Stevens added that Clark County utilizes outside consultants in development of some of the comprehensive master plans, but from the financial standpoint, the work is all done in-house.
Mr. Zuend said a key question for the committee is whose direction will be followed with regard to forecasts, i.e., the Governor, the Legislature, etc. He said the intent of the committee is not to create a task force to generate economic plans which would be stored on a shelf somewhere.
Ms. Torry recalled there had been discussion at the previous meeting about obtaining information from other states regarding their practices. Ted Zuend replied that he and Russell Guindon have identified a number of states that have formal long-range planning groups. Their plan is to synthesize the information and bring it to the next meeting of the Task Force. They do not want to inundate the committee with too much paperwork.
Mr. McNeely commented there is a lot of information available regarding forecasting, both at the local and state level, and he would encourage researching other states—preferably sooner rather than later—in order to help the committee form ideas and concepts it might wish to explore. He said he would be happy to review and begin to digest any material as soon as it is available.
Mark Arrighi suggested the subcommittee needs to decide what is to be done before the next meeting. The goal of the subcommittee is to present a report to the Task Force suggesting uses and/or possible legislation and how they might integrate with the Fundamental Review, the Governor, the Economic Forum, and so on. Committee members have already received a lot of information regarding the governmental budgeting process. He thought the major specific task of committee members would be to become familiar with that process and to give some consideration as to how agencies and departments might use forecast numbers in the development of their biennial budgets. He suggested the next meeting consist of discussion of the budgeting process and how long-term forecasting can be used in that process.
Perry Comeaux said the document prepared by Russell Guindon would be a good start as to some of the questions that need to be answered, e.g.:
1. Who is required to use forecasts?
2. How will they be used?
At the state level for example, will agencies be required to use forecasts to evaluate proposals to expand and/or add new programs? If so, how will that be done? If a proposal is made to expand a program and the long-range forecast indicates existing revenues will not support it, does the agency have to come up with recommendations as to how to close the gap?
Mark Stevens, Fiscal Analyst, said if long-range forecasts are going to be of use to the Executive Branch, timing is an issue. When does the information need to be available? The Legislative Branch needs it for the legislative session, but when should the report be done for best use by the Governor? He said he did not know the answer, but it is probably a question that needs exploring by the committee.
Ted Zuend remarked that Perry Comeaux receives some unreasonable budget requests from agencies, even on a short-term basis. He wondered if the committee could make recommendations for both the long- and short-term that would encourage agencies to create their initial budgets in a more responsible manner.
Mr. Comeaux replied that was a question he had alluded to earlier, i.e., if an agency proposes expansion of an existing program or addition of a new program and the long-range forecast indicates that the current revenue structure will not support existing programs, what then? He agreed the committee has an opportunity to make some parties who have heretofore been fairly irresponsible in terms of their proposals or recommendations more responsible.
Ms. Torry said she agreed that responsibility should be one of the outcomes of the study. On the other side, however, if the projections indicate expansion is needed, then how are revenues increased to provide for those needs? Use of the projections may not only reveal the need to cut expenses, but also the need to increase revenues.
Mr. Zuend said a major question to be answered is whether the committee will play an advisory role in the process as well as provide numbers. The Economic Forum has no advisory role; they simply rubber-stamp a revenue forecast. Mr. Arrighi stated it was his understanding that this specific task force was going to create a formal, permanent body for forecasting.
There was no public testimony.
Mr. McNeely moved for adjournment; motion seconded by Perry Comeaux and passed unanimously. The meeting adjourned at 1:50 p.m.
Sherie Silva, Secretary
Fiscal Analysis Division
Mark Arrighi, Chairman
Subcommittee on the Use of Long-Term Forecasts