BUDGETING AND FINANCE

Please see attached for instructions.

MPA511 M6D1

Read:

The Basics of Public Budgeting and Financial Management

· Chapter 6: Budget Techniques & Analytical Models, pgs. 157-186

Read and respond (approximately 250 words each) 

M6D1: Forecasting

(SEE ATTACHED .PDF)

Within the notes, you’ll find guiding questions, articles, and videos to help spark the conversations. To start the course off, let’s talk about the differences between public and private budgets. Let’s also explore the implications of federal budget differences on the general public. 

ONE:

Part One:

          Uber’s trend analysis shows an upward trend until 2020. As stated in the article, this is almost entirely due to the COVID-19 pandemic (Iqbal, 2020). While this represented a substantial decrease in usage and revenue, this should not pose a long-term fear for investors. In fact, the public’s reliance on their services may increase due to an increased fear of using larger public transportation systems such as buses or trains. Moreover, the decrease in revenue in Q1 2020 reflects the same amount, as seen in Q3 2019, indicating that they did not lose too much headway in their overall viability (Iqbal, 2020). However, investors’ short-term concerns are reasonable as there is no definite end-date to the pandemic, thus causing individuals who have an interest in more dynamic investments and the most money as quickly as possible, this event may cause them to divest their shares.

         Beyond the pandemic, Uber was heavily investing resources such as capital into the development and research of autonomous car opportunities (Iqbal, 2020).  They have also begun branching out to do food delivery services and freight transport (Iqbal, 2020).  This is a form of diversity and expansion, which should also represent a decrease in fears for investors. These other avenues should be more resistant to pandemic effects. Additionally, Uber is heavily used by US businesses and is most commonly used by younger travelers, ensuring that there is longevity in the company’s usage by consumers (Iqbal, 2020).

         All of this said Uber experienced a significant loss in profits even before the effects of the pandemic. In 2019, they suffered a loss of $8.5 billion in 2019 (Iqbal, 2020).  However, the company maintains a value of $56.6 billion as of July 2020, so it is certainly a company worth maintaining investment in (Iqbal, 2020). Investors should be vocal however, on ensuring the company is not expanding beyond its means.

Part Two:

          The LA forecasting failure had a few issues. They improperly forecasted the market return on their investment portfolio, which funded both their general retirement fund and the police and firefighter retirement fund (Humphreville, 2018). Initially, the city had assumed a growth rate of 7.75% for the pension fund; however, they actually experienced an overall loss of 4% (Humphreville, 2018). This created a gap between the forecasted gain and the fund’s reality, which faced a $20 billion liability for the city (Humphreville, 2018). Ultimately, the city overly relied on historical data, likely using a simplistic model (Menifield, 2017). However, a simplistic model should only use a short duration of three to five years, and LA instead utilized a much longer seven-year baseline, which likely accounts for some of the volatility of the projections (Humphreville, 2018; Menifield, 2017). Moreover, according to Menifield (2017), a significant factor considered when forecasting revenue is historical data and trends to estimate potential gain or loss. However, they should also be conservative in their estimates and underestimate their yields to accommodate fluctuations in the market (Menifield, 2017).

         Another state that has recently experienced significant forecasting difficulties is the state of Hawaii. Obviously, COVID-19 has affected all states in a revenue capacity. As such, states such as Hawaii have adjusted their anticipated revenue yield to account for the loss of tourism and taxable income (Lovell, 2020). However, Hawaii evidently miss-forecasted the total impact that the pandemic would have on their revenue. They made the original estimation of a $300 million loss based on the recession of 2009 (Lovell, 2020). However, the Council on Revenues had to re-forecast as they discovered that the loss would be direr as the state would have an additional $431 million lost (Lovell, 2020). The ultimate consequence of this unrecognized additional shortfall is that the lawmakers had to take over $1 billion out of the rainy-day fund (Lovell, 2020). This takes away state monies that could have been used in recovery efforts from COVID-19, or any other disasters that could occur as the state is required by law to balance the budget (Dayton, 2020; Lovell, 2020). Additionally, the governor stated that he might have to cut employee salaries by 20% to make up for the forecast discrepancy (Dayton, 2020). As such, it is clear that miss-forecasting can have immense impacts throughout the government.

Part Three:

         According to Oil Change International and Greenpeace (2017), it appears that the oil industry was more advocacy than analysis. They chose to ignore factors that they were not interested in, such as environmental regulations (Oil Change International & Greenpeace, 2017). Moreover, they forecasted without regard to technological changes such as electric vehicles, and the expansion of renewable energy options, and these changes could impact their industry (Oil Change International & Greenpeace, 2017). Overall, having a misjudgment on market needs and political state hugely impacts the oil industry’s customer base. Therefore this impacts the relationship of supply and demand with is the driver for the price of the product.

         Budgeting is typically done on an annual basis and compares expenses and financial gain to come to a responsible expenditure plan within the financial means of the organization (Menifield, 2017). Meanwhile, a forecasting model is primarily concerned with the potential for future profit and is often done with a larger scope of years in mind (Menifield, 2017). This serves as a predictive model for administrations or businesses to base future projects, mergers, or other such expenditures later on (Menifield, 2017).

         This article shows the impacts of forecasting on stakeholders, projects they were willing to undertake, and the anticipated gain of a very costly project such as the expansion of oil acquisition in the Arctic (Oil Change International & Greenpeace, 2017). Clearly, the oil industry is utilizing a status quo model of forecasting, which results in the industry, acting as if nothing will significantly change for them (Menifield, 2017). However, as this model is not resistant to economic and political changes, this likely is not the best model for them to follow (Menifield, 2017). Overall, responsible forecasting is essential to proper assessments of yield based on historical trends and is a crucial part of organizational growth and stability. However, when this is done incorrectly, this can yield significant discrepancies and cause an organization to grow beyond its means.

References

Dayton, K. (2020, May 20). Despite urgent social needs, Hawaii legislators decide to bank state and federal funds. Honolulu Star Advertiser. Retrieved from https://www.staradvertiser.com/2020/05/20/hawaii-news/despite-urgent-social-needs-legislators-decide-to-bank-state-and-federal-funds/

Humphreville, J. (2018, December 24). LA forecast: Pension and budget will be clobbered by poor investment returns. City Watch LA. Retrieved from https://citywatchla.com/index.php/la-watchdog/16803-la-forecast-pensions-and-budget-will-be-clobbered-by-poor-investment-returns

Iqbal, M. (2020, July 30). Uber revenue and usage statistics. Business of Apps. Retrieved from

Lovell, B. (2020, May 28). Experts: State budget hole much deeper than predicted. Honolulu Civil Beat. Retrieved from https://www.civilbeat.org/2020/05/experts-state-budget-hole-much-deeper-than-predicted/

Menifield, C. E. (2017). The basics of public budgeting and financial management. [eCampus]. Retrieved from https://ecampus.vitalsource.com/#/books/9780761869764/

Oil Change International & Greenpeace (2017). Forecasting failure: Why investors should treat oil company energy forecasts with caution. Retrieved from http://priceofoil.org/content/uploads/2017/03/forecasting-failure.pdf

TWO:

Consider the following article about Uber’s performance trend to determine the value of maintaining and managing a budget. Uber’s trend analysis boasts profits, but investors are concerned. Discuss the reason(s) why? Or rather should they be concerned?

Uber is a company on the rise.  From their beginnings in 2009, they have certainly come a long way.  Looking at their model of expansion and growth it shows that an upward trajectory is in their future.  While there could be and will be a small dip as a result of COVID-19 and the effects that it has around the world, Uber as a company has done an excellent job of diversifying to be able to weather this storm.  “Uber has also diversified its core offering over the years, introduced peer-to-peer rides through UberPop, ride sharing through UberPool, and various levels of luxury options including an Uber Copter” (Iqbal, 2020).  While a certain amount of concern is normal in business, Uber is poised to survive this global pandemic and come out the other side even stronger.  As their meal delivery service “Uber Eats” has become a go to meal delivery service for many around the country, it is the potential of Uber Freight that could be their real launching pad.  With delivery of goods and services being the new normal in this day in age, having a network of vehicles at their disposal willing to deliver freight in their local communities or across country means a revenue stream that has a very high celling.

Los Angeles is just one city who has seen the results of poor budget forecasting. What if any challenges are being experienced by other local or state governments or even an organization when budget forecasting or the lack thereof has adversely impacted its operation?

Looking for a state that is experiencing a challenge with previously budgeted monies, I needed look no further than my own backyard and the state of Maine.  Maine is a tourist dependent state, meaning that much in the way of revenue planned and budgeted each year comes from tourism.  Where once lumber, potatoes and lobster were the backbone of the state, now it is the number of people that come to visit that is the real difference.  So, with the current state of COVID-19, the money that has been expected never made it to the coffers.  In response to this, Maine has done what so many other states have had to do and asked for help.  “A response to the $800 million tourism economic recovery plan proposed by an alliance of retail and hospitality groups Friday is now in the hands of the Maine Legislature and Gov. Janet Mills” (Milliken, 2020).  If this package had not been approved by the Legislature, then it may well have spelled a complete economic failure within the state, even triggering failure to pay options on debts that are currently being carried.  While you can never truly prepare for a global pandemic, you can have a “rainy day fund”, that will allow for the absorption of a substantial downturn.  This very issue had been a hot topic when the last gubernatorial race was held, and the incoming Governor wanted to focus on expansion of the tourism and not any form of savings.  I am not one to second guess that decision, because I actually was a fan of some of the planned expansion to include an “east-west highway” (as the state only has a single interstate in I-95), but now the focus needs to shift.  Recovery is the order of the day and this may well take years to recover fully if that is even possible.

The article, Forecasting Failure: Why Investors Should Treat Oil Company Energy Forecasts with Caution, investigates the impact of poor forecasting. The article claims that the price of oil has been impacted by a failure to forecast. What happened? How does the article demonstrate the difference between budgeting and forecasting?

This is a case of production over technological advancement.  Meaning that this article talks about how evolving technology was not accounted for, such as renewable energy options, or even electric vehicles.  “The companies assume that electric cars will remain marginal, a view not shared by the car industry, nor by industry experts” (Oil Change International & Greenpeace, 2017).  This is a good example of how the oil and gas companies was their stockholders to believe that they are the only game in town and that they are going to continue to grow.  It is almost hard to believe that this is still a topic of conversation these days, with the shift in focus to renewable energy and moving toward a cleaner environment.  As for the difference between the budget and forecast for this article it is about perspective.  The oil and gas companies will want to forecast growth and the environmental groups will want to have money budgeted to further the advancement of energy efficient projects… perspective plain and simple.

References:

Iqbal, M. (2020).  Uber revenue and usage statistics.  Business of Apps.  Retrieved from https://www.businessofapps.com/data/uber-statistics/

Menifield, C. E. (2017).  The basics of public budgeting and financial management.  [eCampus].  Retrieved from https://ecampus.vitalsource.com/#/books/9780761869764/

Milliken, M. (2020).  $800 plan to rescue Maine’s tourism industry is up to Legislature, Mills.  Maine Biz.  mainebiz.biz.  Retrieved from https://www.mainebiz.biz/article/800m-plan-to-rescue-maines-tourism-industry-is-up-to-legislature-mills

Oil Change International & Greenpeace (2017).  Forecasting failure: Why investors should treat oil company energy forecasts with caution.  Retrieved from http://priceofoil.org/content/uploads/2017/03/forecasting-failure.pdf

THREE:

Put yourself in the shoes of the stakeholder. Uber’s trend analysis boasts profits, but investors are concerned. Discuss the reason(s) why? Or rather should they be concerned?

Somewhere from when I was a child to present day, we went from not talking to strangers, not initiating contact with people we don’t know, and not ever, and I mean EVER getting in to a car with someone you never met before, to calling a complete stranger to come pick you, and only you, up from a nightclub/bar because you are so drunk you cannot drive yourself home.  I’m sure there are some that will argue it’s a responsible thing to do, as for me, I will stay responsible by not getting to a point that I can’t drive home, and yes, I know Uber is also used by a few who are not knocking out keggers or having one too many martinis at the Copacabana or the Cotton Club.  I am probably among the minority who hasn’t used Uber for their services, as a stakeholder (not really) I should give it a go, but as for me, I think I would pass on the beer and bring along my .40 cal, just saying.  Although the Uber trips by quarter have increased by roughly 500 from Q1 2018 to Q1 2020, we’ve fallen from 87% of the market share in 2017 to 71% in 2020 (Iqbal, 2020).  I have concerns over extending too far in to delivering food, helicopter transportation, and peer to peer rides.  I understanding expanding and adapting are often keys to successfully growing and sustaining, but I also believe in dancing with who you brought to the prom, and Uber made it’s bones by offering an alternative to taxis and public transportation.   As a stakeholder, I have several concerns including; extended too far into other arenas of transportation, backlash from the taxi industry, legal issues concerning operating practices and agreements among drivers, offering of shares to drivers as a means to resolve working conditions, the banning of Uber in certain countries such as Germany, Denmark or cities such as London, and criticism concerning the public’s reaction to charging more for a ride during peak hours, creating a sense of distrust or shady business practices.  How Uber reacts and adjusts to the pandemic will determine gains or losses in the upcoming fiscal year.  My concern as a stakeholder in Uber isn’t the price of rides, the availability of drivers, or the acceptance of the taxi companies, it’s Uber’s ability to inflict pain and misery upon itself through creating a operating climate that seems to self destruct every six months or so.  Although there seemed to be no easy way of introducing an alternative to taxis and public transportation, no means that would be fully accepted within a transportation system seemingly inflicted by monopolies for the past decades upon decades, if Uber pushes a bit too hard with working conditions and not playing well with others, combined with the pandemic and competitors such as Lyft, profit shares may continue to be affected.     

Los Angeles is just one city who has seen the results of poor budget forecasting. What if any challenges are being experienced by other local or state governments or even an organization when budget forecasting or the lack thereof has adversely impacted its operation?

Looking back a few years, I’m certain public administrators yearn for the days of old, when economies weren’t completely devastated by actions due to a pandemic.  Budget forecasting seems to be a much easier task when there are securities and economic practices that are not affected by the population staying quarantined, or the government temporarily closing down businesses.  In a literal sense, challenges are being faced on almost every level of state or local governments due to a lack of forecasting an economic halt in lieu of the actions inflicted by the corona virus.  The one light town I live in with a population of slightly over 3,000 has reported record highs of water usage, with Georgia Power stating the same with residential electricity use.  When you stay home you use more water and electricity, not to mention Toilet Paper Fiasco 2020.  Canada’s Minister of Finance confirmed our neighbors to the north will end up with a deficit of $343 billion, with some predicting the number could reach $400 billion or more (McFarlane, 2020).  Previous Finance Ministers hiked income taxes, slashed the federal civil service, and unilaterally dumped federal responsibilities on the provinces, in order to keep the budget in check.  Prior to the pandemic, Ottawa had seriously considered launching an initiative of a national pharmacare program; this however has been shelved due to covid-19. 

Since the Justin Trudeau was elected Canada’s Prime Minister, his administration raised taxes on most taxpayers, while increasing spending and borrowing (Clemens, Palacios, & Veldhuis, 2020).  Under the Trudeau administration, the deficit racked up an $89.1 billion bill from 2015-2019.  Income tax was raised for more than 80% of middle class families, with 60% of those who fall below middle class paying more in taxes today than they did prior to Trudeau’s administration taking office.  Trudeau borrowed money to pay for $69.1 billion in government spending, during a period of a stalled economy.  During the period of 2014-2019, business investment dropped 17.3% in machinery, factories, and intellectual property, a direct contrast to the 41.2% increase in business investment between 2003-2008.  It’s clear the raising taxes, borrowing money to pay for government spending, and forecasting an increase in business investments, combined with a severe decline in the hospitality sector, has left Ottawa and other parts of Canada in severe deficit, and a need to reconsider forecasting.

The article, Forecasting Failure: Why Investors Should Treat Oil Company Energy Forecasts with Caution, investigates the impact of poor forecasting. The article claims that the price of oil has been impacted by a failure to forecast. What happened? How does the article demonstrate the difference between budgeting and forecasting?

When I first glanced at this article, complete with 89 references, I thought I was doomed to busting out the notebook and settling in for a few cups of coffee, but surprisingly it was an easy read.  The article highlighted several fields in which the oil companies were failing to forecast;

· The pursuance of high cost/high risk investments such in Alaska, Australia, and Brazil. These investments succeed only if the demand for the product continues to grow.

· Failure to recognize climate change and act in the public’s eye

· Acceptance of electric vehicles and acknowledging a possible decrease of 2 million barrels of oil per day by 2023.

· Underestimating growth in renewable energy (Muttitt, 2017)

Failure to forecast revenue due to the above mentioned factors can create a less than stellar future for the price of oil.  Menifield’s key factors in forecasting revenues include; historical data is the key to success, use good judgment, and focus on large revenue sources, all of which the oil businesses seem to be missing the mark (Menifield, 2017, p. 159).  While budgeting is taking expenditures and revenues in to consideration, forecasting focuses primarily on revenue, often using a cost benefit and cost effectiveness analysis, something that appears to be lacking in the oil industry.  Most concerning is the brush off the oil company seems to be giving the alternative vehicle industry, combined with the historical lack of caring for environmental concerns. 

Clemens, J., Palacios, M., & Veldhuis, N. (2020). Economic recovery requires Ottawa to change direction. Retrieved from https://financialpost.com/opinion/economic-recovery-requires-ottawa-to-change-direction

Iqbal, M. (2020). Uber Revenue and Usage Statistics (2020). Retrieved from https://www.businessofapps.com/data/uber-statistics/#3

McFarlane, L. (2020). Opinion: Balanced budgets may become a distant memory. Retrieved from https://www.princegeorgematters.com/local-news/opinion-balanced-budgets-may-become-a-distant-memory-2609879

Menifield, C. C. (2017). The basics of public budgeting and financial management (3 ed.). Retrieved from https://ecampus.vitalsource.com/#/books/9780761869764/cfi/6/16!/4/2/2@0:0

Muttitt, G. (2017). FORECASTING FAILUREWHY INVESTORS SHOULD TREAT OIL COMPANY ENERGY FORECASTS WITH CAUTION. Retrieved from http://priceofoil.org/content/uploads/2017/03/forecasting-failure.pdf

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