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MANAGEMENT UPDATE.

PREDICTING STATE EXPENDITURES

When state government officials talk about long-term forecasting, they often refer to the revenue side of the equation. But in order to ensure fiscal stability in years to come, it’s critical that future expenditures are considered as an equally important part of the equation. 


As the Volcker Alliance explained, “Understanding the affordability of tax cuts or spending programs, without depending on borrowing or one-time revenues to finance them, is contingent on the state’s ability to estimate and control expenditures. Equally important is being able to estimate the impact of changes in both the state's local and the nation’s broader economic trends.


Just a couple of weeks ago, the Government Finance Research Center at the University Illinois Chicago delved deep into this important topic with a thorough analysis of the challenges that states face in producing long-term expenditure forecasts. The report was commissioned by the Pew Charitable Trusts and found that 30 states publish these forecasts, while the remainder may have forecasts of some kind, but they are not published.


Naturally, among those thirty states there’s a huge variety of approaches. For example, the research found that forecasts were from one to five years beyond the current budget cycle, with only Utah providing a 15-year forecast. Additionally, the forecast is prepared by the executive branch in 19 states, the legislative branch in two states, and both branches (collaboratively) in nine states.


Some of the other significant findings include:

 

  • Long-term expenditure forecasting for the most part seemed to be rigidly governed by statute and did not allow analysts flexibility to apply more sophisticated methodologies. 

  • Medicaid was by far the most challenging budget component to forecast.

  • Procedural challenges seemed to center around the validity of the assumptions used and how well states can benchmark these.

  • Communicating forecasting methodologies, assumptions, and implications to legislators, the press, and the public came up frequently as a challenge. 

  • Among all states interviewed, there was substantial interest in understanding how other states forecast. Some states had their own informal state networks where they could discuss how best to approach incorporating specific trends into their forecasting, but there did seem to be an appetite to expand and/or formalize communication channels across states. 

  • Preserving institutional knowledge also came up as a challenge to address.


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MANAGEMENT UPDATE ARCHIVES.

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