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Budget director uses forecasts to calculate Oklahoma City's 2010 budget


Grant Slater June 18th, 2009

The Oklahoma City Council was set to approve a 2010 budget Tuesday that includes a recession-induced hiring freeze across many departments and a 1.5 percent cut for everyone without a uniform an...

The Oklahoma City Council was set to approve a 2010 budget Tuesday that includes a recession-induced hiring freeze across many departments and a 1.5 percent cut for everyone without a uniform and a badge.

RECESSION-PROOF GOGGLES
CURVEBALLS
A HIGHER POWER
THE SOOTHSAYER OF STILLWATER

Those are grim numbers in a grim economic time. If you're looking for the source of the bad news, look no further than a decades-old dissertation from a doctoral student at Oklahoma State University, a cluster of cubicles in Philadelphia and January's Israeli invasion of the Gaza Strip.

Within the cloistered confines of City Hall, Budget Director Craig Freeman has limited tools at his disposal to predict the peaks and valleys of tax revenue that will flow into his office before next June.

"We're not economists," Freeman said. "We're really familiar with our revenues by seeing how they come in each month, but I've learned that when we project the revenues, the only thing we know for sure is that we're wrong. That's it."

The question then becomes how far they are off and in what direction, he said. To make that determination, the budget office turns to Stillwater and the Oklahoma Econometric Model.

That model is proprietary property of the Center for Applied Economic Research at Oklahoma State University, and the current keeper of the flame is center director Russell Evans, an OSU grad who took over the center in May after the former director moved to the Federal Reserve's Denver branch.

Essentially, Evans is to linear regressions and weighted variables what Gary England is to hook echoes and wall clouds. (Although, don't expect to break out the beer bong for the Russell Evans Drinking Game any time soon.)

Evans' office has what amounts to a monopoly on economic forecasting in the state, providing projections for state offices as well as metro areas like Oklahoma City and Tulsa.

When the council calls for a 1.5 percent budget cut or a hiring freeze, that is based in no small part on the fact that the Oklahoma Econometric Model has predicted that Oklahoma City will slow to a near-stagnant 0.2 percent level of job growth by the end of 2009. That, in turn, will affect how much money city residents have to shell out for cameras, cars and other amenities that come with a sales tax.

The inner workings of the model are a trade secret, and Evans can quickly digress into dense econo-speak as he describes how it works.

"It is essentially a large-scale statistical estimation and forecasting model for economic variables including things like personal income, taxable retail sales, oil and gas production levels and prices, employment numbers, unemployment rate," he said.

The legend around the water cooler in Stillwater is that some doctoral student decades ago concocted the model for his dissertation and that it has been in use ever since, albeit with tweaks and adjustments by the center's director, Evans said.

What we can know is that the model involves hundreds of equations solving for many hundreds of variables. Also, there is most likely a significant portion of the Greek alphabet involved.

"It's a complex exercise, and it's not uncommon for it to take many, many minutes to run," Evans said. "You might as well push 'run,' go eat some lunch and come back to check it later."

RECESSION-PROOF GOGGLES
But to get the model up and humming, Evans needs numbers to crunch. For that, he turns to the discreetly named powerhouse in the business, IHS Global Insight.

From his office in Philadelphia, Jim Diffley processes mountains of data culled from sources like the federal government's Bureau of Labor Statistics.

As group managing director of regional services, Diffley and his team are responsible for all the country's metro areas and determining how super-macroeconomic factors will come to bear on still-pretty-macroeconomic cityscapes across the U.S.

Global Insight has offices around the world, and a good portion of its data is plugged in from sources like the U.S. State Department or global commodities markets, Diffley said. Their models are also a closely guarded secret that imbues them with the economic gravitas to make wide-ranging forecasts for a "diverse array of clients."

But all the secret formulas are having difficulty with the current global economic climate.

"We didn't predict the deepness of this recession a year ago," Diffley said. "It's mad."

Oklahoma dodged the early onset of the downturn because of its oil and gas-based economy and its proximity to Texas, another state that has on its recession-proof goggles, Diffley said.

Global events " for example, the war in Gaza in early 2009, which helped give oil prices a 200-point bump on the commodities market " have smoothed the way.

CURVEBALLS
From the streams of data that Global Insight spews out, Evans and his team sift out the Oklahoma-specific values to plug into the Oklahoma Econometric Model.

If anything, his job is harder than those in Philadelphia, Washington, D.C., or New York because economic effects trickle down to the local level.

"The thing that national forecast has that more local forecasts don't is the luxury of not being influenced by outside factors," Evans said.

For example, an estimate from Global Insight on employment numbers in a certain sector might not reflect the reality on the ground in Oklahoma. With local knowledge, Evans can tweak the model to provide better information for policy makers.

Also, oil and gas prices have an outsized influence on the state economy. While oil prices worldwide bottomed out last year and then started to tick back up, here in Oklahoma what was once about 200 oil rigs operating across the state last summer has dropped to between 60 and 80 this year, he said.

And there are always curveballs.

"Is it possible to get the weather forecast wrong? Well, yeah. It's nearly impossible to get it right," Evans said. "My perspective would be that the national forecast that we used was not pessimistic enough, did not appropriately capture the severity of the national recession."

A HIGHER POWER
All this uncertainty and volatility has left city officials "concerned," as Mayor Mick Cornett told OKCBiz in the June issue of the publication.

After seeking the wisdom of Evans' model for next year's budget projections, city officials then turned to an even higher power.

"Give us and the council wisdom to ask the right questions that we might come up with a budget that will meet the needs of our citizens and bring glory to you. In Jesus' name we pray. Amen," Ward 3 Councilman Larry McAtee intoned at the June 9 council meeting.

Sales tax revenues flowing into the city's coffers have dropped precipitously in recent months. While most income is reported to the city on a quarterly basis, Freeman provides the council with sales tax figures every month.

"Everything didn't make sense," he said. "The economy was barreling into a recession, and we're still seeing 6.5 percent growth."

THE SOOTHSAYER OF STILLWATER
But, in March, April and May, those numbers started to drop when compared to the same period last year. The trend continued into June. It's the biggest drop year-to-year in any of the records the city has on hand dating back to the early '90s, Freeman said.

It appears that the recession has finally closed the gap and has started to insinuate itself in the yearly plod of the city budget, Freeman said.

City officials are quick to point out that Oklahoma City still stacks up very favorably when compared to other major metropolitan areas. While Oklahoma City is hanging on by its fingernails to a small growth rate, other municipalities are hemorrhaging money.

Although it may not seem like it now, this recession " like all the others before it " will end. That's where the soothsayer of Stillwater has a few words of encouragement for the disenchanted.

"We should be just fine coming out the other side of this," Evans said. "Grant Slater

 
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