The Limitations of Cash Projections

Terry, Lockridge and Dunn was hired by the City of University Heights to provide some perspective on the financial viability of the City, and whether the additional taxes to be generated by a commercial entity like One University Place is necessary for the continuted financial health of the City. TLD's conclusion was "no, it is not necessary, but with some caveats" (starting on page 6). Unfortunately, the message heard was only the "No" and the caveats were largely ignored.

The caveats are extremely important, because cash projections are by nature speculative and simplistic, because it's very difficult to build in all the different things that might affect the final results. The further you try to project, the more likely your scenario won't happen because of intervening factors. Growth rates are not steady over the years, and that alone affects the end result. I did a spreadsheet assuming 2001 as a base year and used TLD's average growth rates calculated for that exact period, and ended up with a reduction in the cash reserve of over $2 million. Decision-making and other factors kept the cash reserve in the black over that period.



This is not to say that a cash projection model cannot be helpful. It can show trends and help provide an answer to "what might happen if we did this?" But it is only one tool, and should be only one factor in the decision-making process.

The most important factors in relying on this particular cash projection, in my opinion, are the assumption of a 3.8% growth rate in property values, and reduction in public safety growth to 2.5%. While reduction in expenses is under our control, the growth rate in revenue is not, and so should be scrutinized closer. The 3.8% is the average of all the growth rates over the past 10 years. However, this includes out of the ordinary growth rates of 15% and 11% in 2007 and 2009 when the completion of the Grandview and Birkdale projects. TLD took out unusual expenses in their growth projections, so it's puzzling that they did not take out unusual income growth that cannot be replicated without a new development. Bill Greazel, County Assessor, predicted a 2% rate, and historical growth rates using 2% instead of the spike years produces a 1% rate. In response to a request by council, TLD re-ran their model with a 1% growth rate and predicted a much less rosy picture of the City's finances, with an increased need to reduce expenses in order to remain viable.

I tend to be Libertarian in my political views, so I am completely in favor of continuing to review our expenses to be sure we are being fiscally responsible with the tax dollars entrusted to the City. But I am also realistic in that sometimes cutting expenses cannot be the sole source of budget balancing. Before we willingly give up a potential revenue stream, we should be fully aware of what might have to happen, including what services might have to be cut back on, in order to balance the budget.