Revenue forecasting under the best circumstances is a difficult task for those developing and managing municipal and state budgets, but the COVID-19 pandemic has made the task much more difficult. And that reality has meant new and unforeseen challenges for policymakers seeking to strategically allocate funds and use reserves.
Without understanding how the pandemic might affect consumer behavior, how state and local revenue streams might be influenced by that behavior, or what actions federal lawmakers might take in response, state and local leaders face significant budgetary decisions with little information.
At a late August webinar hosted by The Pew Charitable Trusts, a leader of the District of Columbia’s recent efforts discussed how D.C. has leveraged its stress testing process and adapted revenue estimation tools in this time of uncertainty.
Speakers at the session for state and local officials, agency directors, and budget analysts included Norton Francis, director of revenue estimation for the Office of Revenue Analysis in the D.C. Office of the Chief Financial Officer, and Don Boyd, co-director of the State and Local Government Finance Project at Rockefeller College at the State University of New York, Albany and principal of Boyd Research.
Francis summarized D.C.’s process for revenue estimation before the onset of COVID-19, highlighting recent growth, particularly in the food and hospitality industry. Last year, Francis’ team warned that a recession was increasingly likely because of changes in global trade policy, a slowdown in in-migration, and housing affordability concerns.
To get a sense of various potential economic scenarios, the Office of the Chief Financial Officer completed a stress test of the city’s finances. That proved to be a valuable exercise as D.C. responded to the fiscal effects of the pandemic, Francis said.
After the pandemic hit earlier this year, officials faced a key hurdle in forecasting because they needed to quickly collect revenue data to get a more accurate assessment of what was happening at a time of rapid change. In response to this challenge, the office began collecting alternative data that estimated real-time revenue, including restaurant reservation counts, aggregate credit card usage, and smartphone usage.
“We knew we were in a different environment and the traditional methods would not work,” Francis said.
D.C. officials developed revised revenue projections, based on monthly alternative data, and matched the results with Mayor Muriel Bowser’s phases for reopening. Francis’ team then projected how various industries might rebound from the recession. As a result of the updated projections, Bowser and the D.C. Council made policy changes to ensure that D.C. would maintain a balanced budget. Those included deferring capital project funding and passing emergency expenditure reduction measures.
Francis outlined key takeaways from D.C.’s estimate work. Because local leaders must operate at times as a city, county, or state, their revenue projection process can serve as an example across different levels of government. He highlighted the importance of robust recession planning, including the stress testing that examined multiple economic scenarios to help D.C. develop a range of recession plans. Because it completed this planning in advance during a time of economic stability, it had a blueprint ready for tackling the sudden economic decline in the spring of 2020.
Francis emphasized the importance of well-resourced reserves for states, counties, and localities. “The District’s reserves gave policymakers some breathing room as the situation was unfolding, allowing leaders to focus on the public health emergency at hand,” he said.
Having those resources available also meant that policymakers would not need to make drastic midyear cuts to programs and services.
Finally, Francis said, forecasters must be flexible when completing estimations, particularly during unexpected events such as the pandemic. When circumstances change, they might need to pivot to new methodologies, as the D.C. team did when turning to credit card and cellphone data.
Boyd then offered remarks and posed questions to Francis from participants on issues such as D.C.’s unique budgeting requirements, its population loss during the pandemic, details on alternative data sources, and potential changes to the projected timelines used in the revenue projections.
The slides from this webinar are available to download below. More information on Pew’s work on recessions and the pandemic’s impact on state budgets can be found here.
Jeff Chapman is a director and Airlie Loiaconi and Dana Westgren are senior associates with The Pew Charitable Trusts’ state fiscal health project.