Underestimation of Revenues: Review of Revenue Estimates Term Paper

Revenue Estimates: Underestimation of Revenues

Although the United States has an excellent budget policy, she is yet to reach maximum efficiency with regard to revenue estimation. When it comes to public budgeting, ours is a picture that is far from the ideal. There has been a consistent pattern of underestimation of revenues in federal, state, local, as well as agency budgets. This trend may not be desirable for a recovering economy since government decisions on new policy initiatives and sustainable policy settings depend significantly on these annual revenue forecasts. This text hypothesizes that the current methodology, resourcing, and governance of forecasting activity has, year after year, played a role in the inaccurate estimation of revenues. The U.S. Department of Homeland Security and several security agencies in Florida will be utilized in an attempt to demonstrate just how prevalent an issue this is proving to be in public budgeting. Morgan et al. (2008) express that even the smallest of revenue forecast errors could have a somewhat significant effect on budget surpluses, leading to either reduced or insufficient spending or "program cutbacks partway through the budget cycle" (p. 225). To this end, there is need to prioritize best practice forecasting methods that cater for risks over the traditional processes and forecasting techniques.

Hypothesis: the current methodology, resourcing, and governance in forecasting activity has consistently contributed to the inaccurate estimation of revenues in federal, state, local as well as agency budgets.

Context of Revenue Forecasts

Revenue forecasts are a crucial budget management tool, providing a logical basis for decision-making in regard to new policy initiatives and sustainable policy settings (Klay, 1992). Revenues, when compared to expenses, seem more variable, and can, hence, be controlled minimally by the government. Klay (1992) posits that this could be due to not only the resource and export orientation of the U.S. economy, but also the exposure it has to volatile product prices. The role of revenue forecasts can, however, not be underestimated because even the smallest error is capable of eroding budget surpluses, causing a rapid spiral in debt, and making it quite a challenge for fiscal organs to achieve their targets, while at the same time retaining their credit rating statuses (Morgan et al., 2008). A budget that underestimates revenues could lead to reduced spending and in its wake, leave unmet critical needs; whereas one that overestimates the same could result in cutbacks partway through the cycle (Morgan et al., 2008). Either event would result "in citizen and employee disenchantment with the organization" (Morgan et al., 2008). Accurate revenue forecasting is therefore crucial to maintaining the taxpaying public's confidence as well as the trust of public employees (Morgan et al., 2008).

It would be prudent at this point to give a brief description, outlining among other things, the major sources of revenue for the four budgets that are the subject of this analysis; the DHS' budget, the State of Florida's budget, the Dade County budget, and the City of Miami Police Department budget.

The Department of Homeland Security ICE (Federal Budget)

In 2012, "the President requested $68.9 billion to fund homeland security activities in 2013" (CBO, 2012). The Department of Homeland Security (DHS) was assigned/allotted a massive 52% of this request, which translates to $35.5 billion. This was part of an overall budget of $60 billion, which included trust funds, fees, subsidies, and other funding that is not appropriated (CBO, 2012).

The 2013 budget prioritizes six mission areas outlined in DHS' 2010 Bottom-up and Quadrennial Homeland Security Reviews, and builds on the department's progress with regard to each of these six areas.

Mission 1: Transportation and border security (29% of request) -- preventing illegal activity and at the same time facilitating lawful trade and travel across America's sea, land, and air borders. The budget supports 21, 186 CBP officers and 21, 370 border patrol agents, and invests in the recapitalization of Coast Guard assets (DHS, 2013).

Mission 2: enforcement of immigration laws (36% of request) -- the budget funds the USCIS business transformation scheme; allocating $20 million towards the SAVE program, and $11 million towards Immigrant Integration (DHS, 2013). Furthermore, $112 million is provided for the facilitation of the E-Verify program. The FY 2013 budget reduces by $17 million the allocation to the 287(g) program. This can be attributed to the introduction of the more efficient Secure Communities program (DHS, 2013; National Immigration Forum, 2012).The other four missions, which include warning and intelligence, defense against catastrophic threats, domestic counter terrorism, and emergency response and preparedness, received significantly lower allocations of the President's request - 1%, 7%, 8% and 8% respectively (COB, 2012). Four departments within homeland security -- Coast Guard, ICE, TSA, and CBP- take up 70% of the President' request, with ICE being allocated $12 billion, a 2% increase from its allocation in 2010 (DHS, 2013; National Immigration Forum, 2012).

The State of Florida's Budget FY 2011-12

The state budget can be categorized into the General Environment, the Judicial Branch, Natural Resources, Environment, Growth Management and Transportation, Criminal Justice and Corrections, and Human Services (FCFEP, 2010). The last three take up the highest amounts of revenues and are largely funded by tax/general revenue (FCFEP, 2010). Apart from the General government, and the Judicial Branch, both of which are relatively small and funded by a mix of sources, the other categories are funded by state and federal funds (FCFEP, 2010).

Trust funds and general revenue are the primary sources of Florida's revenue (FCFEP, 2010). Taxes on utilities, fishing and hunting licenses, drivers' licenses, and automobiles titles are major sources of revenue for the state. In the FY 2011-12 period, the Medical Care Trust Fund was the largest trust fund, totaling $12.1 billion. The State Transportation Trust Fund "was the second-largest, appropriating almost $5.7 billion for highway and bridge construction and maintenance" (FCFEP, 2010, p. 14).

The sales tax is Florida's main source of recurring general revenue, estimated at $16.8 billion - approximately 75% of the total general revenue estimate of $22.4 billion in 2012 (FCFEP, 2010). Since the state is one of nine that do not have personal income tax, the remaining general revenue percentage is catered for by corporate income, documentary stamp, insurance premium, beverage, tobacco, and intangible taxes, interest earnings, and corporation fees (FCFEP, 2010).

Dade County Budget FY 2013-14

Dade County's operating budget brings together various budgets relating to distinct services, including fire rescue services within the Dade Fire Rescue Service District, library services within the library system, local services within the UMSA, and a number of other proprietary operations (Miami-Dade, n.d.).

The proposed budget for FY 2013-14 stands at $6.358 billion. $4.4 billion of this budget represents direct operating budget, and $1.9 billion, capital projects (Miami-Dade, n.d.). The capital budget is divided into seven strategic areas; General Government, Economic Development, Health and Human Services, Neighborhood, Recreation, Transportation, Public Safety, and Policy formulation (Miami-Dade, n.d.). The proposed Capital Improvement Plan is funded 49.95% by revenue bonds, 16.57% by proprietary operations, 15.49% by other county and non-county sources, 11.7% by general obligation bonds, 2.4% by state grants, 2.08% by impact fees, and 1.81% by federal grants (Miami-Dade, n.d.).

Property taxes are the main source of county revenue, estimated at $50.98 million, 3% higher than the 2011-12 budget amount (Miami-Dade, n.d.). The revenues are expected to rise steadily over the next few years following the passage of Amendment 10 to the State Constitution (Miami-Dade, n.d.).

The City of Miami Police Department Budget FY 2013-14

The FY 2013-14 budget for the police department stands at $3.458 billion. Taxes are the main source of revenue for the City of South Miami, under which the police department falls (City of South Miami, 2014). The budget supports the six fundamental goals of City Services, Fiscal Responsibility, Economic Development, Reinvestment, South Miami Downtown, and Sense of Community (City of South Miami, 2014).

The police department takes up $6milion in revenues (the highest among all departments); the department of solid waste management is second, taking up only $1.3 million in revenues (City of South Miami, 2014).

Ad valorem tax, the main source of revenue, is expected to increase over the next few years owing to the Save Our Homes Effect (Amendment 10), the Double Homestead Exemption, the Millage Cap established, the recent changes to the General fund Expenditure, Emergency Reserve Funds, and the Capital Projects Fund (City of South Miami, 2014).

Forecasting Track Record

A 2011 report by the Rockefeller Institute of the Government ranked Florida among the most accurate states in revenue forecasting, reporting a median percentage error of less than 1% over the year 2011. Local councils and agencies in Florida base their revenue forecasts on the forecasted revenue.....