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Stephen Cooke, University of Idaho scooke@uidaho

Implementing Ongoing and One-time Distinctions in the Idaho General Fund Revenue Forecasting Process. Stephen Cooke, University of Idaho scooke@uidaho.edu Michael Ferguson, Division of Financial Management mferguson@dfm.idaho.gov May 15, 2008

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Stephen Cooke, University of Idaho scooke@uidaho

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  1. Implementing Ongoing and One-time Distinctions in the Idaho General Fund Revenue Forecasting Process Stephen Cooke, University of Idahoscooke@uidaho.edu Michael Ferguson, Division of Financial Managementmferguson@dfm.idaho.gov May 15, 2008 Pacific Northwest Regional Economics ConferenceTacoma, Washington

  2. Cuts in Parks Bring Home Tennessee Budget Woes (nyt, Friday May 9, 2008) • “Forty-three states are reporting that revenues are not keeping pace with budget expectations, and 22 have begun cuts or hiring freezes, according to the National Conference of State Legislatures…. • “The state [of Tennessee] has drained reserve funds for various departments and used one-time revenues to pay for continuing obligations while watching its credit rating fall.”

  3. recessions Idaho GFR Holdback Percentages: FY 1981 - FY 2003 This chart reflects the final holdback or negative supplemental action at the end of the fiscal year. FY 1985 is not reflected because the 3.0% holdback imposed by the Governor at the start of the year was rescinded. Source: Mike Ferguson, Division of Financial Management, Idaho

  4. Instability and the Business Cycle(http://www.philadelphiafed.org/econ/indexes/coincident)

  5. Actual and Forecast General Fund Revenue 10/21/2014 5

  6. Two-way Comparison of Forecasts of GFR

  7. Sources of Instability • Growing importance of capital gains • More Financial Assets in Personal Income • Tech stock bubble • Housing price bubble • Bear Stearns et al. & sub-prime mortgages

  8. Instability in Capital Gains

  9. Instability in Housing PricesIdaho House Price Index: 1997.4 to 2007.4(Office of Federal Housing Enterprise Oversight)

  10. Problem • Idaho: Economic bubbles lead to GFR instability • Needed: a way to estimate the Growth Path of GFR independent of economic bubbles and cycles

  11. Growth in Idaho’s General Fund Revenue and Personal Income: FY70 to FY06

  12. Rule of Thumb GFR Forecast Where R is the general fund revenueY is personal income ry is the elasticity parameter (1.04) 2 is the future 0 is the past Repeat forecast 36 times (where 0 = 1971 to 2007) Take the mean of the distribution as the forecast

  13. Actual and Predicted nominal General Fund Revenue:Idaho FY98 to FY06

  14. Six way comparison of GFR Forecasts ($ mil.)

  15. Ongoing and One-time GFR ($ mil.):Idaho FY00 to FY07

  16. Actual & Forecasted General Fund Revenues(nominal $ million) (http://dfm.idaho.gov/cdfy2009/publications/eb/sectiona/revenue.pdf) 10/21/2014 Benson, Cooke, & Holley (top) Ferguson (bottom) 16

  17. Advantage of the Ongoing, One-time Distinction • Ongoing GFR equal to ROT provides a stable long-term revenue forecast w/ smaller variance • Need to establish a budget stabilization fund with an 11% of the GFR forecasted cap (11% = 2*s.e. of the forecast) • The different between the cumulative carryover and 11% of GFR equals the one-time revenue • Ongoing & One-time revenue approach solves the GFR cyclical instability problemfor Idaho

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