300 W. Markham St.

Little Rock, AR 72201

Phone: (501) 682-1234

Fax: 501- 682-1235
Email: hwmoses1@colr.gov

City of Little Rock,

Arkansas

REVENUE FORECASTING OPTIONS

Factoring in Dirty Indicators

Prepared by Harold Moses

Report Distributed March 29, 2016

Prepared for BINS 7308

FORECASTING OPTIONS
As was my charge from you, this report addresses the question: What are some forecasting
options available that might help the City of Little Rock prepare for short-term uncertainties?
There are two viable alternatives that need to be considered. One technique is to base
predictions entirely on nontraditional or dirty indicators. Rather than looking backwards at
traditional historical data in an attempt to measure the economic environment itself, focus
entirely on behavior within the citys environment in the here and now, instead. Another
method is to link forecasts to both dirty and traditional indicators. When dirty indicators
are incorporated into the citys existing process, a forecasting procedure will be established
that maximizes predictability. Most important, steps can be taken to identify these markers in
in the economic sector. (McDonald, 2012). Table 1 summarizes the results of a comparison of
the citys existing model to both procedures.

CONTEXT AND SCOPE OF PROBLEM

Despite its size, Little Rocks geographic location has helped in establishing it as a major
economic and political center within Arkansas and the South. Major corporations either with a
large presence or headquartered in Little Rock include Maybelline, Levi Strauss, and Walmart.
The Arkansas Department of Human Services released data in March 2005 showing that
Walmart was the Little Rock employer with the highest number of employees receiving some
type of public assistance for themselves or their families most often childrens Medicaid
services. Of the approximately 2,800 workers at the citys top nine employers who received
public assistance, more than 40 percent were Walmart associates. (Mattera and Purinton,
2012).
The citys board of directors has determined that because of a shortfall in revenue resulting
from unanticipated Walmart layoffs, there is a dire need to cut the citys services by 10 percent
over the next three years. A reduction in city services will place a hardship on taxpayers, and
such a move is politically unpopular as well. The citys 11 directors are elected officials and
they are reluctant to make the announcement public until a follow -up forecast can be made.
The City of Little Rocks forecasts have typically relied on the analysts ability to draw
conclusions about historical data which typically include unemployment, recession, and
inflation rates. All too often, short-term predictions based on these factors have been filled
with error due to forecasters making faulty assumptions about the immediate future. As a
result, both the elected officials and the city manager become paralyzed by the uncertainty of
whether they actually have enough money to provide for the health and safety of local
residents when forecasters have missed their mark.

DIRTY INDICATORS IDENTIFIED IN LITTLE ROCK

To establish dirty indicators for Little Rock was accomplished by using information gathered
from previous city budgets, interviews from the City of Little Rock Finance Department, then
subsidizing this data with archival research from local p ublications. Using information gathered
from the interviews, a broad outline of city behavior was established and suitable
measurements were pursued. Following this process, 20 potential indicators were established.
Of these, only threeplastic bags, ammunition, and lipstickshowed the statistical
relationship necessary to be counted as a dirty indicator (Boesler, 2012).

RELATIVE PERFORMANCE OF FORECASTING MODELS

Utilizing data from 2000 and 2012 (City of Little Rock Budget, 2000 & 2012), three forecasting models of
the City of Little Rocks total revenue were estimated using ordinary least squares statistical analyses. The
results of these analyses are provided in Table 1 (City of Little Rock Budget, 2015, 2014, 2013).

Model
Actual
Revenue
City Model
Dirty Model
Hybrid Model

2013
Forecast
Error
$815,544
---

2014
Forecast
Error
$999,374
---

2015
Forecast
Error
$2,061,261
---

$897,000
$914,000
$915,000

$889,161
$948,161
$934,000

$939,313
$1,020,000
$1,044,000

$18,544
$1,544
$544

$37,213
$21,787
$7,626

$121,948
$41,261
$17,261

Table 1. Actual vs. Forecasted Revenue, 2013-2015 (thousands).

Note: Adapted from A Dirty Approach to Efficient Revenue Forecasting. Journal of
Public and Nonprofit Affairs, p.13, by B. D. McDonald III, 2015.

BUDGET ESTIMATES USING THE CITY MODEL

The first set of estimates are for the forecasting model based on the process established by the
City of Little Rock. According to interviews conducted with staff from the Little Rock
Department of Finance, each form of revenue, or revenue stream, is established independently
with the forecast of total revenue achieved by adding the streams together. The estimate of
each stream is reached by its average growth rate over the past five years, producing a total
revenue whose forecast is also based on its past values. The results show significance for both
the two- and three-year lags, such that every dollar collected in the two -year lag forecasts
$0.50 of revenue and the three-year lag forecasts $0.73 of revenue. Although a simple process,
the model is relatively strong, statistically, especially over the long run.

BUDGET ESTIMATES USING THE DIRTY MODEL

The second set of estimates are for the dirty model. Plastic bag manufacturing has the largest effect,
with every 1,000 bags representing a change in the environment of Little Rock capable of producing
$4.501 in revenue. Income from ammunition sales within Little Rocks surrounding metropolitan area also
has an effect of $.501 in total government revenue for each dollar earned. The final dirty measure is
mens underwear sales, which has both a two- and three-year lag. At the two- and three-year lag periods,
1,000 pair of mens briefs signals a change that is associated with a loss of $0.14 and $0.29 in revenue
respectively. This model demonstrates considerable statistical strength relative to the city model.

BUDGET ESTIMATES USING THE HYBRID MODEL

The third, and final, set of estimates is for the hybrid model, which incorporates the features of the city
and dirty models. Based on the results, every dollar of revenue collected in the two-year lag forecasts
$.038 of revenue, and remained statistically and consistently significant. According to the estimates,
every, 10,000 plastic bags manufactured is associated with a reduction in total revenue by $102.00 and
every dollar of ammunition revenue, leading to its reduction by $0.09. The total sales of lipstick shows a
positive effect at the two-year lag, with every 1,000 units of lipstick sold signaling a change that is
associated with an increase in total revenue by $0.07. At the three-year lag, the effect is reversed,
resulting in a decrease of $0.11. This model maintained with the strength of the previous models,
explaining almost all variance.

CONCLUSIONS REACHED
Each of the three models presents a strong explanation of total revenue for the City of Little Rock.
However, to better understand the utility of dirty forecasting, comparisons across models can be drawn.
This comparison comes in two parts: a look at the ability of the models to explain variation revenue, and
a forecast of revenue for each model across a number of years. Beginning with the explanation of
variation, all three models have strong predictive value. The citys model has the lowest explanatory
power, providing an explanation of 59 percent of all variation in revenue. At 73 percent, the
explanatory power is improved with the dirty forecast. The hybrid forecast provides the greatest
understanding of total revenue with 98.9 percent. In modeling terms, the stronger the explanation the
stronger the model. Taking steps to strengthen the forecasting model is critical to the citys success.

References
Boesler, M. (2012). The 40 most unusual economic indicators. Retrieved from www.businessinsider.com/40-most-unusual-economic-indicators.
City of Little Rock, Arkansas. (2015). City of Little Rock Annual Report. Retrieved from www.littlerock.org/!userfiles/.../AnnualBudgetBook_2015.pdf
City of Little Rock, Arkansas. (2014). City of Little Rock Annual Report. Retrieved from www.littlerock.org/!userfiles/.../AnnualBudgetBook_2014.pdf
City of Little Rock, Arkansas. (2013). City of Little Rock Annual Report. Retrieved from www.littlerock.org/!userfiles/.../AnnualBudgetBook_2013.pdf
City of Little Rock, Arkansas. (2012). City of Little Rock Annual Report. Retrieved from www.littlerock.org/!userfiles/.../AnnualBudgetBook_2012.pdf
City of Little Rock, Arkansas. (2000). City of Little Rock Annual Report. Retrieved from www.littlerock.org/!userfiles/.../AnnualBudgetBook_20.pdf
ICMA Center For Management Strategies. Local government financial reporting: Innovations in
economic modeling and forecasting. Retrieved from http://icma.org/en/icma/knowledgenetwork/blogs/blog/50/Center for ManagementStrategies
Mattera, P. and Purinton, A. (2012) Shopping for subsidies: How Wal-Mart uses taxpayer money
to finance its never-ending growth. Retrieved from www.goodjobsfirst.org/sites/default/files/docs/pdf/wmtstudy.pdf
McDonald III, B. D. (2015). A dirty approach to efficient revenue forecasting. Journal of Public and
Nonprofit Affairs, 1(1), 3-17.