“Serving the Public’s Financial Leaders”Public Finance Resources, Inc.

Revenue Forecasting in Difficult Economic Times

OASBO Annual WorkshopApril 24, 2013

“Serving the Public’s Financial Leaders”Public Finance Resources, Inc.

Stacy Overly & Mike Sobul

Public Finance Resources, Inc.

1

Introduction

• Key areas to look at while forecasting revenues– Property Tax

• Sales ratios• Rate ceilings• Delinquency rates

– Casino Tax– State Revenue

• State revenue trends• Using state income tax trends to forecast SDIT• Federal sequestrations

2

Property Tax

• Three key items to look at when forecasting property tax revenues in difficult economic times– Sales Ratios, an indicator of direction and magnitude of

valuation change at reappraisal or triennial update– Rate ceilings, reduction factors work in reverse but only

up to the voted tax rate– Delinquency rates, may increase during weak economy

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Sales Ratios

• A sales ratio for a valid sale is the valuation of the property sold for tax purposes divided by the sale price

• A valid sale is an arms length transaction between a willing seller and a motivated buyer– Excluded: Bank sales, sheriff sales, sales within families,

etc.• After reappraisal or triennial update, ODT wants

the ratio to be in the 92-94% range4

Sales Ratios

MedianJurisdiction Number Median Sales Market to

County Jurisdiction Name Type Year of Sales Price Price RatioLUCAS LUCAS County 2005 5,354 $111,900 89.47%LUCAS LUCAS County 2006 3,631 $117,500 99.09%LUCAS LUCAS County 2007 3,433 $115,000 102.86%LUCAS LUCAS County 2008 2,184 $122,000 107.38%LUCAS LUCAS County 2009 1,938 $117,000 100.01%LUCAS LUCAS County 2010 1,808 $120,120 103.10%LUCAS LUCAS County 2011 1,688 $120,000 106.66%

LUCAS MAUMEE CITY City 2005 203 $135,000 87.21%LUCAS MAUMEE CITY City 2006 163 $129,900 100.30%LUCAS MAUMEE CITY City 2007 154 $139,050 101.55%LUCAS MAUMEE CITY City 2008 96 $128,250 106.49%LUCAS MAUMEE CITY City 2009 97 $115,000 100.00%LUCAS MAUMEE CITY City 2010 85 $124,500 98.75%LUCAS MAUMEE CITY City 2011 101 $119,900 102.99%

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Sales Ratios

• Remember, if the target is 92 – 94% what level of valuation decrease would you have expected in Maumee’s case for the 2012 Reappraisal/Update????

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Sales Ratios

• The Actual Decrease for Maumee happened to be 12.33%– Verified by the District’s RE Tax Abstract

• Lucas County probably faired worse with a ratio of 106.7

• If there are not 75 – 100 sales within the jurisdictions making up a district, assume the county wide values apply

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Rate Ceilings

• When property values are declining, tax reduction factors work in reverse, increasing tax rates to keep revenues for the school district constant

• However, effective tax rates on levies that are subject to reduction factors can only be increased to offset valuation declines to the point the effective rate reaches the voted rate—the voted rate cannot be exceeded

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Rate Ceilings

JURISDICTIONLEVY YEAR LEVY NAME

GROSS TAX RATE

CLASS I TAX RATE

CLASS II TAX RATE

MAUMEE CSD 0 GENERAL FUND 5.500 5.500 5.500MAUMEE CSD 1976 CURRENT EXPENSE 28.600 6.423 9.843MAUMEE CSD 1982 CURRENT EXPENSE 7.000 3.057 4.693MAUMEE CSD 1986 CURRENT EXPENSE 4.500 2.371 3.293MAUMEE CSD 1990 CURRENT EXPENSE 5.500 3.339 4.787MAUMEE CSD 1992 CURRENT EXPENSE 4.800 3.313 4.596MAUMEE CSD 1996 CURRENT EXPENSE 4.900 3.617 4.900MAUMEE CSD 2003 CURRENT EXPENSE 3.200 3.200 3.200MAUMEE CSD 2003 CURRENT EXPENSE 1.000 1.000 1.000MAUMEE CSD 2003 BOND ($42,000,000) 5.200 5.200 5.200MAUMEE CSD 2005 CURRENT EXPENSE 4.800 4.800 4.800MAUMEE CSD 2006 PERMANENT IMPROVEMENT 0.750 0.750 0.750MAUMEE CSD 2009 CURRENT EXPENSE 3.900 3.900 3.900MAUMEE CSD 2011 CURRENT EXPENSE 4.900 4.900 4.900 9

Rate Ceilings

• Maumee has 5 operating levies that are already maxed out, plus a PI levy

• The district will lose revenue from those 6 levies, plus its inside millage

• With total Class 1 operating millage of 45.42 and 23.3 of those mills maxed out, a 10% drop in Class 1 value would lead to a revenue loss in excess of 5%

• The revenue loss on the operating levies is permanent; it can never be recovered

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Delinquencies

• Recessions can cause an increase in tax delinquency rates

• Small changes in delinquency rates can cause significant changes in revenues in the short run

• Delinquencies also cause revenue from new levies to fall short of calculated amounts

• If delinquency rates are not taken into account by county auditors, tax rates on bond levies can be calculated too low, potentially causing shortfall in debt funds

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Delinquencies

• To calculate current Collection rate by class of property for the 2012 tax collection year:A. Compile current year tax revenues from Class 1 and

Class 2 taxpayers (exclude allocations of delinquent tax payments) from the March and August 2012 settlements

B. Multiply tax year 2011 taxable values for each class of property by the appropriate effective tax rate; for Class 1, subtract from this 10% and 2.5% rollback and homestead exemption payments

C. Divide B By A

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Delinquencies

Current Collection Rate (Current Levied Local Taxes): 2012 2011 2010Class I Potential Tax Revenue Levied $12,359,591 $12,249,450 $10,316,067Class I Current Collections per Settlement Sheet $12,016,744 $11,933,096 $10,008,489Class I Collection Rate 97.2% 97.4% 97.0%Class I Delinquency Rate 2.8% 2.6% 3.0%

Class II Potential Tax Revenue Levied $2,148,527 $2,144,311 $1,849,062Class II Current Collections per Settlement Sheet $1,723,241 $1,925,463 $1,545,004Class II Collection Rate 80.2% 89.8% 83.6%Class II Delinquency Rate 19.8% 10.2% 16.4%

Delinquency Rate Calculation for Granville

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Delinquencies

• If you are not able to get data broken out this way from your County Auditor—ASK!

• Licking County used to not break allocations down by class of property or current/delinquent

• Now, each school district gets a report that includes:

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Delinquencies

Levy Class I Delinquent Class I Current Class II Delinquent Class II Current Ten Pct Owner Occ Homestead Total From StateGeneral 5.2 $16,717.49 $868,999.98 $2,962.93 $99,284.69 $96,734.79 $19,184.79 $15,785.77 $131,705.35Current Op 30.9 $20,426.47 $1,061,799.13 $7,177.28 $240,503.62 $118,196.69 $23,441.21 $19,288.07 $160,925.97Current Op 10.0 $11,680.27 $607,156.91 $4,300.90 $144,118.78 $67,587.11 $13,404.11 $11,029.29 $92,020.51Current Op 10.9 $17,376.20 $903,239.39 $4,717.12 $158,065.75 $100,546.26 $19,940.73 $16,407.73 $136,894.72Current Op 3.7 $6,979.59 $362,809.50 $1,714.33 $57,445.58 $40,387.01 $8,009.71 $6,590.59 $54,987.31Current Op 3.7 $8,998.04 $467,732.15 $1,714.33 $57,445.58 $52,066.72 $10,326.07 $8,496.56 $70,889.35Current Op 7.7 $22,026.17 $1,144,952.16 $3,732.44 $125,070.16 $127,453.07 $25,276.96 $20,798.59 $173,528.62Perm Impr 1.7 $5,465.34 $284,096.15 $968.65 $32,458.45 $31,624.83 $6,271.97 $5,160.75 $43,057.55Bond 1.69 $5,433.19 $282,424.99 $962.94 $32,267.52 $31,438.82 $6,235.06 $5,130.39 $42,804.27Bond Lib 0.62 $1,993.24 $103,611.52 $353.28 $11,837.80 $11,533.76 $2,287.42 $1,882.14 $15,703.32Classroom 0.5 $1,223.59 $63,603.94 $231.67 $7,762.91 $7,080.23 $1,404.17 $1,155.40 $9,639.80Bond 3.69 $11,863.01 $616,655.76 $2,102.54 $70,453.94 $68,644.49 $13,613.83 $11,201.85 $93,460.17Current Op 5.8 $18,646.43 $969,269.21 $3,304.81 $110,740.61 $107,896.53 $21,398.41 $17,607.20 $146,902.14Current Op 1.0 $3,214.88 $167,115.38 $569.80 $19,093.21 $18,602.86 $3,689.38 $3,035.73 $25,327.97

.$152,043.91 $7,903,466.17 $34,813.02 $1,166,548.60 $879,793.17 $174,483.82 $143,570.06 $1,197,847.05

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Casino Revenue• In January 2013, schools received just under $21

per pupil in casino tax distribution.

• Revenues are distributed to LEAs, JVS, and community schools

• See this URL link for a district’s number of pupils for this purpose:– http://www.tax.ohio.gov/government/casino.aspx

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Casino Revenue• Payments each year beginning in FY 2014 will occur

August 31 and January 31

• Payments will not be even—the August payment will contain 7 months of revenue and January 5 months worth

• Based on current casino tax collections patterns, total payments in FY 2014 should be about $52 per pupil, $30 in August and $22 in January

17

Casino Revenue

• Payments are not expected to grow beyond FY 2015 (and potentially could shrink)

• Competition for gambling dollars will come from newly opened Racinos

• Thistledowns (near Cleveland) opened in early April; Northfield Park (also near Cleveland) is expected to open in December

• River Downs (Cincinnati), and new facilities in Montgomery County and Warren County are slated to open during CY 2014

18

State Revenue Trends

• State revenues as compared to estimates will be a strong indicator of the condition of the state budget and the need for potential budget corrections

• State revenue trends can be used as a guide to local trends

19

State Revenue Trends

• Through March, state tax revenues are $311 million (2.2%) ahead of estimates

• Total revenues are $800 million ahead (the big difference being the finalization of the JobsOhioliquor transaction

• In addition, state spending is about $175 million below estimate

20

State Revenue Trends

• Final state income tax returns were due last week

• Based on evidence from fourth quarter estimated payments that were due back in January, payments with returns should be sharply above estimates and refunds should be sharply lower

21

School District Income Taxes• The evidence from the state income tax can be used

as an indicator for school district income tax collections

• State fourth quarter estimated payments were very strong in January (38% above estimate)

• State withholding is running about one percent ahead of estimate

• State payments from trusts were three times what was estimated (historically, 75% of trust income is capital gains)

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State Revenue Trends• Withholding running ahead of estimate is a good sign

for everyone with an income tax

• Evidence of very strong receipts from estimated payments and trusts will mostly benefit districts with traditional income taxes

• I would recommend looking at the May 10 Governor’s Monthly Financial Report at obm.ohio.gov to see how Annual Return and Refund payments did in April as an indicator of July SDIT distributions

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Federal Sequestration

• Sequestration may reduce allocations under federal Title I, Title IIa, and IDEA in FY 2014

• Reductions could be 7 – 9 percent

• In doing your five-year forecasts, if you have personnel tied to these dollars, costs would be shifted onto operating budgets if personnel reductions are not made

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“Serving the Public’s Financial Leaders”Public Finance Resources, Inc.

Public Finance Resources, Inc.PO Box 1822

Columbus, OH 43216Phone: 614-732-5948

“Serving the Public’s Financial Leaders”Public Finance Resources, Inc.

www.PFRCFO.com

Stacy OvelryConsultant

Mike SobulConsultant

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