Saturday, January 15, 2011

Why we need a five year forecast

Today's edition of the Columbus Dispatch brought the unwelcome news that the Ohio legislature is contemplating removing the requirement for a five year forecast and substituting instead a three year forecast requirement. The legislature correctly believes that the fourth and fifth years of the forecast are usually inaccurate, state revenues will always be unpredictable and therefore, there is no value in providing them in the forecast. I disagree. While it  is clear that forecasting 5 years out when the state is on a two year budget cycle is problematic, the value of the five year forecast goes way beyond this relatively minor issue.

For example, the entire expense component of the forecast can be predicted with an acceptable margin of error given the relatively stable nature of the workforce and the relatively narrow range of employee compensation and there is value in doing so. Forecasting through the entire 5 year period allows school districts (indeed, requires school districts) to work towards a planned levy cycle. Currently, Worthington is planning its next levy for 2011 or 2012, but the fourth and fifth years of the forecast are required to determine how large the levy should be and when the next levy would be.  The forecast serves as documentation for internal and external audiences that the next  levy will be required and why. Cutting the forecast to three years would make it more difficult to build community support and community understanding of a planned levy cycle.

Worthington is currently struggling to find a path to long term financial stability. One aspect of this project is to convince our constituency that change is necessary. The 4th and 5th years of the forecast are exhibit A in this effort. In addition, reducing the forecast period would serve to obfuscate the  cost of employee labor agreements and ongoing requirements such as employee health care.

Indeed, even the one component of the forecast that cannot be forecasted accurately, state revenues, derives benefit from a 5 year requirement. The permanent reimbursement of tangible personal property taxes, an issue of significant importance to many Ohio school districts only came on the radar screen of many school districts because the lack of said reimbursement caused  revenues to take a significant hit in the 4th and 5th year of current forecasts.

It's my hope that the legislature reconsiders this change.


  1. Well thought out and well written...clearly a 3 year forecast does not look forward far enough for levy planning purposes. Additionally, some revenue sources phase out far into the future, but it would be foolish to ignore/overlook those lost revenues until they were nearly a reality.

  2. Of course, regardless of what the state government decrees, any school board is free to ask its Treasurer to produce a forecast for whatever number of years into the future they choose.

    For what it's worth, our Treasurer said their professional association members thought reducing the forecast horizon was a bad idea.