Utah Financial Forecasting and Planning: Overcoming Volatility

Written by: Christopher Collard

Utah was recently recognized in a Pew Charitable Trusts report for exemplary budgeting practices. Namely, Utah does a good job at forecasting tax revenue and dealing with revenue volatility.

A key difficulty in the budgeting process lies in forecasting tax revenue:

  • Business cycles are unpredictable and have a large effect on the amount of money the state collects through taxes.
  • Recessions decrease revenue from sales tax and income tax.
  • Swings in specific industries can have large effects on tax revenue.
  • The federal government can unpredictably cut the funds promises to states (as exemplified by sequestration).

One way Pew recommends dealing with tax volatility is the use of a rainy-day fund. Utah has two. One is for general funds and a second is dedicated expressly for education. Pew’s research indicates that these funds are best utilized when deposit rules are tied to state specific volatility. Utah has a set percentage of the budget surplus required to go into the rainy-day funds. Utah has set up these accounts in such a way that it can easily withdraw funds in times of need. By contrast, many states have such stringent requirements for the use of rainy day funds, that nearly a dozen states had hundreds of millions of dollars that they were not able to utilize during the most recent recession.

Pew also cited Utah specifically for its legislatively mandated report on changes in revenue volatility. This report is to be published every three years; the first report was published in 2011, and an update is expected later this year. Pew recommended this policy as a ‘best practice’ for other states and commended Utah’s report as the most comprehensive in the nation in studying Utah’s tax base, interactions between the tax base and tax rate, and policies that could affect the tax code.

After the sequestration cut Utah’s federal funds, the 2013 Legislature added an additional requirement to track federal fund volatility. Further, the 2014 Legislature passed one resolution and two bills (HJR 11, HB 311, and HB 357) to encourage the state to consider surpluses in state revenue as volatile one-time surpluses (rather than assume them to be stable growth) and to mandate reports on important financial indicators to help legislators and others better understand trends in tax revenue.

However, there is also risk in a policy that declares more surplus revenue as one-time funds. If the calculations of one-time and ongoing revenue growth are incorrect, funds may be allocated in a way that favors one-time infrastructure projects at the expense of funding ongoing needs in education, health care, poverty relief, criminal justice, or other operating expenses that may actually be a higher priority in the long run.

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