Forecasting Methodology &

Budgeting Basis

FY 2021-23 Proposed Policy Budget

CITY REVENUE EXPENDITURE FORECAST METHODOLOGY

The City prepares revenue and expenditure forecasts for its biennial budget. The forecasts are based on:

  • current expenditure spending
  • revenue collection trends
  • historical budgetary performance
  • prevailing general economic conditions
  • department input

A detailed forecast is prepared for the General Purpose Fund (GPF) and for other selected funds.


To prepare the forecast, a comprehensive analysis of the City's revenues and expenditures is performed. These major components are projected into the two-to-five-year period based on various relevant assumptions. For example, projections for property tax, the single largest source of revenue for the City's General Purpose Fund (GPF), are made based on the projected growth in the net assessed value of local property and projected changes to the tax delinquency rate. Similarly, a forecast of expenditures is performed by separately analyzing individual expenditure categories (e.g., salaries, retirement, benefits, utility expenses, etc.) based on projected cost increases (e.g., pay/step increases, PERS retirement rates, benefit cost inflation, energy prices, etc.).



FORECASTING TECHNIQUES

Citywide revenues and expenditures are projected using two forecasting techniques: qualitative analysis and quantitative analysis.

Qualitative Analysis

This analysis projects future revenues and/or expenditures using non-statistical techniques. These techniques rely on human judgement rather than statistical analysis to arrive at revenue projections. Qualitative forecasting is essential for projecting revenue or expenditure components that are unstable, volatile, or for which there is limited historical information. To facilitate sound qualitative analysis, the City of Oakland seeks input from outside experts in economic forecasting, municipal finance, and other relevant fields. Just two examples of this are the City's reliance on the League of Cities' anlysis and recommendations relating to legislative issues impacting cities, and the Legislative Analyst Office for their expertise and analysis of the State of California budgetary issues that may potentially affect the City of Oakland.

Quantitative Analysis

This involves looking at data to understand historical trends and casual relationships. One type of quantitative analysis is a time series analysis which is based on data that has been collected over time and can be shown chronologically on graphs. When using time series techniques, the forecaster is especially interested in seasonal fluctuations that occur within one year, the nature of the multi-year cycles, and the nature of any possible long-term trends. Casual analysis is another type of quantitative analysis which deals with the historical inter-relationships between two or more variables. One or more predictors, directly or indirectly, influences the future of revenue or expenditure. The casual forecasting techniques are predicated upon selecting the correct independent variables, correctly defining their interrelationship to the dependent variable, i.e., the projected revenue or expenditure item, and finally, collecting accurate data.

REVENUE FORECAST

Citywide revenues are projected using dynamic forecasting that anticipates changes in revenues triggered by new economic development, economic growth, changes in the levels of service of departments and agencies, (in the case of Master Fee Schedule changes approved by the City Council), changes in governmental policies at the state or federal level, and various economic and demographic changes. The purpose of this dynamic forecast is to demonstrate the potential impact of various events and actions on the selected revenue sources. Under this scenario:


  • Tax Revenues are projected to grow at rates that are responsive to dynamic forces in the economy. Generally, the assumption is the local economy will be affected by national and state trends, with some deviation expected due to specific characteristics of regional businesses and labor markets.

  • Fee increases will likely follow projected inflation and changes in the local population due to increased service costs and changes in demand.

  • Any known or anticipated changes in revenues as a result of potential changes in state revenue streams and/or legislation are reflected in the analysis.

The revenue forecast considers a variety of economic factors and trends including changes in economic growth, income, sales, and Consumer Price Index (CPI) among other factors. Anticipated changes in State or local policy are also considered.



EXPENDITURE FORECAST

Forecasting the City's expenditures involves analyzing future costs at the department level and by category. The expenditure forecast begins with the baseline budget which represents the cost of maintaining the current level of

services while considering all unavoidable costs necessary to continue at that current level. Examples of unavoidable costs are pre-negotiated MOU salary levels as well as health care and retirement costs that the City pays on behalf of its employees.


The baseline budget is then modified to reflect changes to programs and services that the Mayor and the City Administrator recommend as part of the Proposed Budget. These modifications might include additions or reductions in any of the categories discussed above. Changes to debt service are made based on changes in the City’s debt payment schedules.


The expenditure forecast follows the guidance of the Government Finance Officers Association (GFOA) which recommends that expenditures be grouped into units of analysis that are meaningful to the organization such as departments and standard budget categories of expenditures. As such, staff grouped proposed budget expenditures by department and by expenditure category consistent with the City’s chart of accounts. Future expenditures are forecasted for the FY 2021-23 Proposed Budget. This forecast generally assumes that expenditures will only grow due to inflationary cost escalation. Costs also change due to modifications in service or staffing levels as described in the “Significant Changes” summary for each department and “Service Impacts” section.



BASIS OF BUDGETING

The City of Oakland’s basis of budgeting for its major fund groups (General Funds, Special Revenue Funds, Enterprise Funds, Internal Service Funds and Capital Project Funds) are the Generally Accepted Accounting Principles (GAAP), and the modified accrual basis of accounting.


Revenues are budgeted according to when they are both measurable and available. Revenues are considered available when they are collected within the fiscal current year, or soon enough thereafter to pay liabilities of the current period. The City considers property tax revenues to be available for the year levied if they are collected within 60 days of the end of the current fiscal year. All other revenues are considered available if they are collected within 60 days of the end of the current fiscal year.


Expenditures are budgeted according to when the liability is incurred, regardless of the timing of related cash flows. The exceptions are debt service, compensated absences, and claims and judgments, which are budgeted as expenditures according to when the payments are due. The City’s basis of budgeting is the same as the basis of accounting used in the City’s audited financial statements, the Comprehensive Annual Financial Report.