AGENDA #3a
BUDGET WORKING PAPER
TO: W. Calvin Horton, Town Manager
FROM: James M. Baker, Finance Director
SUBJECT: Revenue and Cost Projections for Revenue Producing Activities
DATE: May 2, 2001
A Council member requested information on the relationship between projections shown in past budgets for activities or services that are partially offset by fee revenue. The Council member noted that the cost projections assume cost increases each year (4% for personnel and 3% for operating costs), but that the revenue projections related to these activities or services are flat with no projected increase.
As a general practice in making our five-year projections of revenues and costs, we normally try to be liberal on costs and conservative on revenue projections. We also consider the first and second year of the five-year projections to be more accurate and reliable as predictions of future revenues and costs, and the out years three to five to be less accurate, but reliable enough to show overall trends.
In projections involving overall costs, we normally use a guideline of about 4% for personnel costs increases, and 3% as an inflation factor to reflect general operating cost increases for most activities. There are always exceptions in certain categories, with some operating costs increasing more than 3% and some by less. However, by always assuming cost increases, we attempt to make the cost projections side of our forecasts liberal, so that the increases we actually expect to occur are reflected in the forecast.
In projecting revenues, our general guideline is to be conservative rather than liberal, especially for revenues that are related to activities or services for which we collect a permit fee or general fees that attempt to recover a portion of the costs for such activities or services. Our practice has therefore been to show these revenues as fairly constant over the five-year projection period, but to adjust the estimated revenue for these activities as we update the forecast immediately prior to beginning the budget process for a specific budget year.
The two factors that determine revenue for these activities are both the costs involved in the activity or service, and the level of activity in a given year. Examples include all permits related to building and inspections, development review fees, street cuts, special garbage collections, and library fines. Consistent with past practice, we normally project revenue for these activities as constant over the five-year period, because we are uncertain as to the level of activity from year to year, and do not want to assume in revenue projections that the level of activity will necessarily increase each year resulting in higher revenue. However, each year as the process for a given budget begins, we do review and analyze the costs related to revenue producing activities to determine whether an increase in the fee or charge is warranted based on a review of current costs, and based on similar fees or charges in other jurisdictions. In this way, the proposed or recommended budget estimates for these activities reflect careful review and analysis of current activity and current circumstances. After updating an estimate for a given year, we would not consider it prudent to then assume increases in the level of activity for future years that would necessarily generate additional revenue.
We also believe that in most years the increase or change in revenue that might be associated with revenue producing activities would not be great enough to have a significant effect on the overall forecast for future years. These forecasts project differences between revenues and costs as tax rate equivalents, with l cent on the tax rate currently equal to about $396,000. Therefore, even if increases in revenues for these activities for future years were included, the increases are not likely to be large enough to significantly affect the bottom line tax rate increase forecast for a given year.
For reasons as discussed above, we believe the most prudent approach to cost projections is to make liberal estimates of costs that include increases in personnel and operating costs. For revenue projections, we believe it is more prudent to make conservative estimates of revenues that do not assume a constant increase in a given level of activity that would lead to additional revenue in future years.