Economic Forecast for Local Governments Webinar (10.27.2)

Speakers are labeled SPEAKER_N. This transcript is machine-generated.

Recording

Good afternoon everyone. Um my name is
Tim Forier. I'm the communications
coordinator with New Hampshire Municipal
Association and thank you so much for
joining us for this 2022 webinar series.
Um today's webinar is the economic
update for local governments. We are
joined today by Christopher Piller of
Citizens Bank. Good afternoon Chris.
Good afternoon.
Thank you for joining us Chris.
appreciate your time. Uh we also have NH
Graves, our government uh affairs
council at NHMA. Good afternoon, Nich.
Good afternoon, Tim
and Katherine Hec, the government
finance advisor. Good afternoon,
Katherine.
Hello, Tim.
Um thank you again members for joining
us today. Um we will be starting uh the
presentation with Chris. We ask that you
hold off on your questions until the end
of uh Chris's presentation today and
he'll be more than happy to answer the
questions that you have for him. Um and
we will be packaging this uh video uh or
this presentation into a video recording
and that with the PowerPoint
presentation getting that out to you um
probably early part of next week. But we
hope that you'll uh share these
materials with your municipal colleagues
and friends who couldn't join us today.
If you do have any questions, we ask
that you put that in the Q&A function.
Um, I will be distributing a economic
conditions survey um, in hopes that you
all will fill out this survey by the
December deadline. Um, and I'll be
putting that in the chat line, but that
is the only thing we'll be putting in
the chat line today. So, with that, I'd
like to turn u the program over to
Katherine Hec.
Thank you, Tim. Well, we're going to get
started today with the economic update
presented by Christopher Pelier. He is
the managing director of Citizens Global
Markets interest rate risk management.
And he's here today to give us our
update on the economy. Chris is the
managing director in the bank's global
markets group and leads a team which
assists the bank's corporate clients in
developing and executing interest rate
risk management strategies. We welcome
Chris and we want to thank you and your
team and Citizens Bank for providing our
members with this important update on
current current economic conditions and
trends. So with that I'll turn it over
to you Chris.
Thank you Katherine. Good morning
everyone. Um so obviously interest rates
have become a pretty hot topic over the
past 12 months. Um you know where we
like to start the conversation is to
look back to you know basically over the
past five to seven years and how did we
get here? Um, so we look back to 2016 to
2020, right before the pandemic. And
when we look at a number of uh major
indices, including the unemployment
rate, the 10-year Treasury yield, um,
the Fed funds policy rate essentially,
and then things like CPI, we can see
that everything was pretty balanced for
that five-year period. Um, with
unemployment actually sitting at
all-time lows. And then all of a sudden,
we have the pandemic come in. You can
see pretty clearly where that started
with the spike in unemployment uh which
jumped up to around 15% off that
all-time low level. And so basically
that as we all know that sparked um
first the Trump administration and then
the Biden administration to put through
a bunch of fiscal policy changes and a
ton of spending uh five trillion roughly
uh to promote the economy and then the
Fed acted as well um cutting rates to
zero and then also increasing the size
of the balance sheet. And while that
those motions got everything back on
track as far as the economy goes, we we
were left with a different problem which
is inflation. So that's the new hot
topic over the past six months and and
the thing that the Fed is very focused
on bringing in.
Um when we look over to the actual
policy action um you know especially on
the left hand side of the screen the
Federal Reserve's balance sheet. So the
Fed had kept around a four and a half
trillion dollar balance sheet since the
start of the '08 crisis. um it actually
built up from a billion up to four and a
half trillion. The purpose of that
program called quantitative easing is to
basically the Fed to become a buyer in
the Treasury market and mortgage back
security market. And so as they become
like this artificial buyer of securities
um that flushes the market with cash and
drives down long-term yields. So it's
very stimulative to the economy. And so
they were never really able to get out
of the '08 um QE program. You can see
that even before the crisis, they only
took it down just a bit. uh right right
at the inception basically and then all
a sudden COVID comes in and now they
take it up to eight trillion and then
eventually went up to nine trillion. So
think of that as having all this like
artificial money floating around the
economy. Um and as a result the economy
got back on track very quickly
especially when you think about that
combined with the fiscal stimulus
programs which are shown on the right
hand side of the screen. Um however with
all that extra money in the economy you
know people were happy everyone has jobs
uh wages started growing people started
spending money and we also had supply
chain disruptions which also affected
prices as well. So when you put all that
stuff together people in an economy with
a ton of extra cash and then supply
chain issues all of a sudden you have
inflation and so that the Fed typically
tries to keep inflation around 2%. And
so when you're hearing about CPI at 8%
that's not a very comfortable level and
the and the committee is very concerned
about that you know staying at these
levels are rising. So as a result they
started to change policy uh midyear this
year.
So we when we think about inflation
there's really three major metrics that
people focus on. Um we are probably all
most focused on CPI and PPI. However the
Fed likes to focus on something called
personal consumption or PCE
excuse me. So that's that's the rate
that they're talking about when they
want to get down to back down to 2% and
those metrics right now are floating
around 6%. So while while you have CPI
at 8% um they're really looking for
around a 4% decline in the PCE figure.
And we can see here on the on the right
side of this chart that PPI has come in
quite a bit which should translate
eventually into lowering CPI as well but
there's been obviously a bit of delay
there. Um, I think what's interesting
here too is that we all, you know, some
of us may remember or some of us may
have heard about the high inflation
levels from the, you know, the mid7s,
early 80s, and you can just see how high
we are today relative to the 90s, 2000s,
and 2010s. Um, that's why there's so
much focus on this metric at this point,
and that's why the Fed's uncomfortable
with current levels.
So when we think about inflation in
particularly we're looking at CPI here
uh which is the gray shaded area in the
back of the chart um
got to compare that to what what was the
Fed doing or where were rate where was
rate policy being set versus that you
know high CPI levels and what's
interesting is looking at this chart so
at every point prior to the crisis and
and even some thereafter
the Fed has kept its policy rate, which
is the dark blue line, above inflation.
And so by that nature, you could almost
argue that the Fed funds rate has to be
much higher today in order to bring in
inflation. That's really what the Fed's
trying to feel out. There's no there's
no easy recipe here because there's a
lot of moving parts. Um, and what's also
complicating things is the situation in
Ukraine and Russia. It's a it's
affecting energy prices. is it's
affecting, you know, just people's
overall sentiment around the market. Um,
so it's not like there's an an easy
playbook here, but one interesting thing
to point out is is where rates were
sitting in the past relative to
inflation levels. So if we look back to
the early 80s, that was when Paul Vulker
was the head of the Fed. And as some
might recall, he put policy to 20% for
interest rates in order to reel in
inflation from around 15%.
And today we're sitting with um
inflation or CPI at around 8%
and we have a Fed policy rate of around
just over 3% at this point. And so the
question then becomes is that the right
level? Does it need to be high or does
it need to be lower? Um and the and the
frank answer is I don't think anyone
really knows at this point. There's just
way too much uncertainty. There's been a
ton of volatility in the market and you
can see intraday swings of a quarter of
a point uh which is pretty amazing. I
mean, that's that's by far the most
volatile point in time I've seen in my
career. You know, you could see that on
a day when some major news breaks, but
these are these are day-to-day swings
based on one incoming data point that
might have missed the target. And so,
anytime that we're seeing that inflation
is um showing lower than expected, we
see a pretty sharp decline in interest
rates. And then, conversely, if if uh
these inflation metrics are showing
higher than expected, we see it pop the
other way. So, a ton of a ton of
volatility and I think that this chart
just goes to show you that there's at
least the option that the Fed might have
to tighten it quite a bit more in order
to bring inflation to target levels.
So next up we look at energy prices and
I just touched on that briefly with the
whole situation with Russia and Ukraine
and this is also a driving force for
inflation as well because besides the
supply chain disruptions um a lot of o
oil fields for example were shut down
during the crisis or people might
remember that point in time where for a
day oil actually traded at a negative
value which means suppliers were paying
people to take their oil because they
had nobody nowhere to put it. And so
when you shut down a well like that, it
can take a while to bring it back up
online. And so when demand when the
demand came back, the supply wasn't
there. And so that's part of the reason
why prices started rising. And then we
can see this point in um excuse me, it's
it's actually March of 2022 when Russia
attacked Ukraine. And then we can see
there's even bigger disruption there and
almost an acceleration in prices at that
point. And so at this point we're we're
you know we've gotten back off those
levels but um we have a new factor where
OPEC is now reducing supply to basically
push prices up again. So again this is
why central banks like the Fed and the
ECB, Bank of England are having a tough
time uh well their job's not easy
because there's so many factors that are
driving their decision- making. It's
just not a uh there's no clear answer
here.
So next we look at something called the
uh the Fed's dot plot. And so this is
something that the Fed has released
quarterly since 2015 in order to tell
the orh indicate to the market where the
committee members believe that they will
be setting policy uh over time. And so
we're we're looking at a couple
different versions here. So the yellow
dots on the screen are actually the
votes of the individual committee
members. So there's 16 of them in total.
And we can see for the end of 22 as of
the September Fed meeting that one
member on the low side believed that the
Fed should be setting policy at 3.875%.
Which is about one additional rate hike
this year. And then on the other side
there's a member that believes that the
policy rate should be at 4.625.
So arguing for even more hikes because
the disparity um between the committee
members opinions. the market tends to
focus on the median expectation. And so
now the median is to the median, excuse
me, expectation is to end the year at
4.375%.
And so the market's been tracking about
two additional 75 bip hikes by the end
of this year. Uh the first of which is
expected to come next week at the
November 2nd Fed meeting. That's pretty
widely baked in. It's 100% um priced in
at this point. The point that keeps
moving around is the December implied
number. How much is the Fed going to
raise rates in December and will they
have to? So, as of right now, uh signs
are that they will need to and the
market's pricing a 50 basis point
interest rate hike for the December 14th
meeting. Just days ago, that was pricing
at a 75 basis point hike, which again
speaks to the volatility in the market
and that a couple of soft data points
can all of a sudden uh take a rate rate
hike out of expectations.
When we look out into the future, um the
the committee is basically from a median
expectation perspective, if we're
looking at these yellow dots, um looking
at that green line, the committee is
expecting about one additional 25 basis
point hike in 23 and then they are
actually expecting to cut rates in 2024.
And the premise there is that the
committee believes that um through this
series of 75 basis point rate hikes
which are outsized relative to the pace
that the Fed usually raises rates at
usually 25 bips each time. They believe
that they are going to stifle out
inflation pretty quickly and that they
may be going at a pace where they might
create a little bit of a softening in
the economy. They're hoping for what's
called a soft landing where everything
kind of just ends up smoothly. But we
all can probably figure out that's
probably uh could be unlikely given the
number of factors involved. And so the
committee agrees that
you know these rate this series of rate
hikes will um bring down inflation but
there will be uh a consideration and
maybe unemployment starts to move
higher, wage growth starts to move
lower. So there will be some impact and
as a result uh the current expectation
is that the Fed is expecting to a series
of small cuts in 2024 and their
long-term goal is you know according to
this chart and it always has been
clearly is uh to get the Fed funds
policy rate back to two and a half%. Now
that might seem I don't know if that
seems high or low to people but I would
just remind people that we had zero
rates for a very long time between 2009
in 2015 and then again for about a year
during the COVID crisis. So uh depending
on how you look at things that's a high
level relative to where rates have been
over the past couple years but it's a
very low level when you think back long
term where rates have actually averaged
closer to four or four and a half%.
So next up, we're showing the uh the
Fed's summary of economic projections or
the SEP. So this is something that they
release uh quarterly. So this is not my
own view on where things are going to
land in the next couple years. This is
the Fed's own economists and what
they're projecting. So when you're
thinking about budgeting or um any kind
of thing about long-term rates or where
where the economy is going, um this is
some of the best and brightest putting
out their projections. And so top left,
we're showing the data that gets back to
that um median expectation of the 2.5%
for the Fed funds target rate. That's
what we were just looking at on the dot
plot. Um we can see long-term GDP
expectations 1.8%.
And then uh probably what people might
be more focused on is is inflation. This
is the lower left corner, the PC
deflator. So we can see that currently
it's around 5.4%.
uh we know that they want to get to back
to two and a half 2% and this chart is
showing that they're expecting that to
return you know by 2024 or so. So that's
the again the metric that the Fed is
focused on. They're it's a little less
so on CPI and PPI and more focused on
PCE. Uh and the last thing to look at is
the unemployment rate. So we said that
the unemployment rate was at all-time
lows leading into the crisis. It's back
there now. However, you can see that for
2023 and 2024, the Fed is expecting a
rise in unemployment. And again, that's
the that's the uh collateral damage, so
to speak, of the Fed raising rates
aggressively in order to stifle
inflation. You can't have a win across
the board. So, they're willing to
tolerate higher unemployment in order to
bring inflation back into the target
range.
[Music]
So, next up is a um is a actually a
floating index that I look at very
closely because the corporate borrowers
that I work with are actually paying
this interest rate or this is one of the
in interest rates or floating indices
that are used on corporate debt. It's
called the one-mon term
and sulfur is a new rate. It's really
come around just this year as a
replacement to lie or another rate that
people might be familiar with. Um, but
why we like looking at this chart is
because Sofur tracks very closely to Fed
funds and in fact we'll move in line
when the Fed makes an adjustment. Sofur
is going to jump as well. Um, but what
we can look at here is what the market
is actually expecting for futures in
sulfur which is going to be very closely
related to what the market expects for
Fed funds. And so we talked about a few
minutes ago the Fed will continue to
raise rates into the end of this year.
Um the expectation is they have another
rate hike in early 2023.
And if you're looking at the green line
here at the top of the page, uh this is
as of October 21st. Uh as of that date,
you can see that the market was
believing that Fed funds or sorry uh
term sofa would peak out around 5%.
And so that was the I think that was one
of the recent higher points. I think
we're a little bit off, you know, below
that level at this point in time. But
you can see very clearly there um what
the what the market is expecting for
policy adjustments. So we have about one
and a half% of hikes into or maybe 1.75%
of hikes into the spring. And that makes
sense, right? We're 75 basis points next
week at the November meeting. 75 bits
more was priced in at that point for the
December meeting and then 25 I think for
February. That was really the path that
we're looking at. And then you can see
the progression that markets price for
cuts into into late 2024. It happens
pretty gradually. And again, that's the
assumption that the Fed will have to cut
rates because they will have over
overtightened the economy.
The other amazing thing to look at is
the two lines below that. So the bottom
blue dotted line is that same curve as
of January 1st. And so at that time, the
market was expecting no rate hikes from
the Fed until 2024.
And then again we show um Adam let me
take a step back there. So that was the
point in time where the Fed was arguing
that inflation the rising inflation in
the economy was transitory. It was due
to supply chain disruptions and would be
dissipating at some point. Um and they
had just started to acknowledge that hey
maybe this thing's here to stay. We need
to start doing something. And that's why
it was a very flat curve with very
little rate hikes priced in. By the time
we got to this middle point, which is
August, August 1, which was the recent
low, um, rates had spiked up into June,
come back down for August, and then have
spiked up since then. But we see a very
different curve where instead of, you
know, ending the year at 1% Fed funds
rate, we're now we're looking at, you
know, 3.125 was the expectation
and again with a dip into 2024.
And then here we are, you know, a couple
months later where the high for the
expectations is now 5%. So this just
goes to show you how volatile things
are, um, how much things can change and
and really that was a result of two
things. First, inflation wasn't kicking
back. The Fed's already implemented 3%
of rate increases this year, and we're
not seeing a a matched decline in
inflation. And then on top of that, the
Fed came out with some powerful language
saying, "We know that our rate hikes are
affecting the equity market to the
downside, and we're not really bothered
by that. We understand that tightening
the economy is going to push up
unemployment, and we're not really
bothered by that because our main
mission is to stamp out inflation." And
so by the Fed saying that we're not
going to we're not going to pause as a
result of one of these other indices
going in the wrong direction, it made
them made things very clear that as long
as inflation is staying at current
levels, the Fed will be acting. And
that's why we've seen this pretty big
ramp up over the past couple of months.
So then we get into what are what should
we all be looking at as we try to figure
out Fed's next move. And we're not we're
not encouraging any kind of speculation
by any means, but really we have a few
things. So, we have the balance sheet.
That's the gray shaded area in the
background. Um, again, $9 trillion. And
you can you might be able to see there's
a very slight decline that has started
to occur recently. Uh, the Fed has
halted in reinvesting in some of the
bond holdings. And so, basically, that's
taking cash out of the economy. And so,
when we think about bond economics, if
they are if they are uh no longer
playing in that market, that's going to
put downward pre uh downward pressure on
prices and upward pressure on yields.
And so that's what they want. They want
to start normalizing that piece.
The next thing to look at is the CPI
figure and more importantly the PC
number which is not on here. But as long
as we continue to see those levels um
you know PC around 56% or CI around 8%
we're going to continue to see the there
delay to Fed policy. So they implemented
the first rate hike back in March and
it's hard to tell whether whether we're
really seeing that just yet. You can see
here in the top right corner of this
graph, there has been a decline in CPI,
you know, from 9% down to 8%. But that's
not that I wouldn't say that's
equivalent to the 3% of increases the
Fed's already put in. So then the
question is, is there a delay there that
we're not seeing yet? I think that's one
of the arguments in the economy that the
Fed won't know that it has overtightened
until it's too late. And that's one of
the arguments why you see uh at times
rates fall, you know, falling quite a
bit because data comes in saying, "Hey,
the economy actually is softening. Maybe
the Fed's going too much."
But as long as we're um Yeah. So, as
long as we're we're we see inflation at
those levels and we're seeing um
unemployment within tolerable levels,
which the Fed just showed us in their
projections, that's probably below 5%.
we're going to see a pretty tight
economy. The question then is, you know,
when does this all start to change? Um,
one interesting point is I I said early
on in the conversation that uh just a
week ago the Fed was the market was
pricing a 75 basis point rate hike for
the December Fed meeting and that's
fallen off. Part of why that's occurred
is that Fed President Daly uh made some
comments late last week that the Fed is
concerned about overtightening and is
going to, you know, try to pause and
slow things at the right time. and that,
you know, people are waiting for the
signal from the Fed that they're ready
to start uh slowing the 75 basis point
increase they've been doing for some
time now. And so I think everyone's so
eager to jump on that and see things
normalize and you know kind of reinforce
equities that you see these these pretty
big uh points of volatility at times. So
uh that that's led into the downturn in
rates just over the past week where you
know essentially a rate hike has been
taken out of the 2022 calendar at this
point in time.
But it's really been an interesting
year. Um, unfortunately there's no
there's no real certainty on what
happens from here. I think we all just
need to continue to watch the data and
it's good to have an understanding of,
you know, when this data point comes in,
what is that what does that mean for the
Fed, how are they going to react to
that? Because then you can start to see
the path forward of if we see inflation,
you know, lingering around 6% for PCE,
the Fed will continue to raise rates. If
we see that drop significantly and
unexpectedly, you might actually see
some cuts come in a bit faster. So, I
would definitely um suggest, you know,
keeping an eye on those those points,
unemployment rate, those major inflation
indices. And then obviously, you got to
you got to watch things like equities as
well. The Fed's been pretty adamant that
they're not going to react to a downturn
in an asset class like housing or
equities, but at some point they may
have to. So, those are the main things
I'd be watching for as you're trying to
evaluate the uh budgeting process and
and the future interest rate exposure.
Thank you.
Um and so with that, we can uh we're
happy to take some questions or if there
are any in the uh in the chat.
Yes, Chris, thank you so much. That was
an excellent presentation. I do have one
question for you. Um the question is
when talking about unemployment as a
contributing variable is there any
allowance for the gig economy
participants that have not return to the
traditional employment market. Do you
have any thoughts on that?
Um, I don't know the hard data answer to
that question,
but I was I was I was traveling
yesterday and I was in an Uber and the
driver was talking to me and was telling
me he cannot get a loan because he's an
Uber driver. So, there's some element
where, you know, some there are
definitely some jobs that are not
considered by some people a real, you
know, real job like those of us all
have. Um and so the question then is
yeah I don't I don't quite have a hard
answer on that but um it's definitely a
thing that's grown over the past decade.
We know that we have various forms of
employment that you know these these gig
jobs and the question is how does that
factor into this whole thing and I I
yeah that's a that's a tough thing to
answer unfortunately I think I think
also I mean the BLS data has always been
kind of questioned about you know how
accurate that number what's the labor
participation rate look like um there is
this element of you know uncertainty in
those numbers but I but I think the
important part to focus on is the
consistency of how it's measured and so
no matter what should be still getting a
pretty accurate read on the economy even
if it, you know, has some slight
variance to it.
Thank you. Well, that's the only
question that we received. However, if
people feel like they have more
questions after thinking about Chris's
presentation, um Nate and I have
provided our email addresses. You can
reach out to us. We certainly have your
contact information as well. You can
continue to put them in the chat and
we'll be happy to um try to answer your
questions. And now we're going to um Oh,
I do have one more question. Chris, I'm
I'm glad you stayed on. I apologize. It
just came in. I'm sure they're typing.
The question is, do you have any
predictions as to what the 20-year bond
rate will be over the next two years?
Um, no. And that's just given that's
just given the uncertainty in the
market. But um yeah, I think that's been
a that's been a tough I I don't think
anyone really predicted that the tenure
would be at four and a 4% as it is now.
That's what makes that game pretty
difficult. Um
I think the data is going to lead us
down that track and I think you know the
incoming data has been so volatile it's
just a really difficult answer to form
for unfortunately. So
well well thank you again Chris. We
really appreciate your time and um at
this point I will turn over the next
portion of the presentation which is
based on the New Hampshire policy um and
economic conditions in our state to Nate
Grace.
Well, thank you Katherine. I'm happy to
uh drill down a little bit on what's
happening in New Hampshire. Um so really
mun municipal budgets are facing dual
challenges here. Uh first inflation is
obviously rocketing costs. We're having
a a big impact on anything from
materials to, you know, your labor costs
to things you're kind of purchasing
incidentally as well as some of those
core items. So incidental items, you
might be purchasing food for, you know,
whatever um
thing you're hosting. And then of course
energy. Uh this is one of the big big
factors for New Hampshire. Um, and we're
also seeing it having a big impact on
things that are sort of tangentially uh
affecting municipalities. So, housing is
is probably the big one here. And based
on what the data is showing us, it looks
like at least until spring uh 2023,
we're going to see some pretty high
inflation. Um, and that's going to be
something that uh you're going to have
to price into uh your budget. Uh the
other big challenge is that taxpayers
real earnings are down. Um, so that's
going to really impact their willingness
to come to town meeting and vote for any
kind of increase. Um, in fact, I mean,
just based on based on my experience
with town meetings, you know, you always
have that group of people who come in
and want to uh cut the budget. You're
probably going to have a larger portion
of those people this year based on what
they're seeing in um, their own lives.
So, as Chris pointed out, um, one of the
things that we look at, uh, first and
foremost is the, uh, consumer price
index. Um, and we've seen that really
spike since, um, the beginning of, or I
guess mid part of 2000. Um, and one of
the big challenges with this, of course,
is that it compounds. So, it's not that,
you know, it's going up 8% this year and
prices are going to fall back to a
normal uh I guess 8% lower next year.
It's the case that it's now everything
costs 8% higher um when you spread it
out across the board. Um and that's been
a big challenge um because we've seen we
saw a higher inflation rate last year.
Um Katherine and I did a webinar on that
um that I think many of you attended um
as that was starting to uh starting to
come to the four and we're seeing that
throughout this year as well and it's
really hard to predict what's going to
happen in 2023
but it's very likely we're going to
continue to see some uh increase of uh
across the board there. Um and it's
really having serious impacts across the
economy here. Um, one of the main things
that you are probably looking at now as
you're planning your municipal budget is
the producer price index. Um, which is
the uh average change over time in the
selling prices um versus what the uh uh
versus what they can um purchase the raw
materials for. And it is uh as you see
it's that gray line on the uh on
It's it's a combination of these various
lines. Um and they're being impacted by
a number of um things as well. So you've
seen energy spike. Uh Chris gave a good
overview of what's happening in in that
and I'm going to delve into that a
little bit more. Um but we've seen goods
uh and services spike as well. Um
because of those logistical challenges.
um we're really seeing pretty
significant um problems happening uh as
as well with those costs.
And so probably one of the biggest
expenses that you're going to see in
your communities that you're going to
hear about in your communities in the
next couple of months is winter heating
costs. And so EIA um does a prediction
every year of how much uh heating is
going to cost for winter compared to
last year. Um and they base that really
on Noah's estimates of what the heating
degree days are. And that's a a formula
that basically calculates how much
energy is needed to to be put into kind
of any sort of heating source. um in
order to keep the temperature reasonable
in in a building. Um and so that varies
yeartoear. On the the left side here,
you see that that bar chart and Noah uh
is fairly accurate when it when it comes
to predicting what the heating degree
days are going to be. Um generally the
median line doesn't vary too much. Um we
are seeing
more variation now than we used to.
simply because of climate change
happening.
But one of the things that EIA does is
they put a bar around that. And so
there's a 10% if it's colder than
expected uh by 10% or warmer than
expected by 10%. Um and they give a nice
uh a nice area that
over time you can see has pretty much uh
shown you the variance in what those
costs are going to be. Um and so overall
costs have expanded uh pretty
significantly. Um and so you see that on
the right with the change from last
winter um what that additional cost will
be for average US households um as
compared to uh last for the the
predicted amount as well as 10% colder
and 10% warmer. Uh and that's really
translates of course into municipal
costs as well. So you're going to be
paying more to heat uh your buildings.
uh over the course of the winter.
And the big thing that has really been
impacted is natural gas. Um one of the
things to know about New Hampshire and
how we provide um heat and energy to uh
to our buildings is we rely pretty
heavily on heating oil. That's not very
common throughout the United States. Um
but it is something that many of our
residents uh do purchase. Uh it's more
common in Maine than in New Hampshire,
but virtually all heating oil is used in
New England. Um so we've seen that and
in the past couple days there have been
a couple articles about
the availability of heating oil is
really uh is really decreasing and
that's driving the price up even more
than it has been, but it's really been
in flux. Um one of the other big costs
we have is natural gas. Um, and we
primarily use uh liqufied natural gas in
order to fuel our electricity
generation. So even though you're seeing
EIA's predictions at about a 10%
increase for electricity costs, anyone
who's already received their bills from
Eversource or who are about to receive
their bills from UNATIL um know that
that's a significant increase that we're
seeing um across the board. And that's
because about 53% 54% of the um
electricity in New Hampshire comes from
uh liqufied natural gas. And by New
Hampshire, I actually mean our regional
distribution. Um because of course many
of you are thinking, well, doesn't theuh
nuclear plant out on the sea coast kick
at kick in a lot of our electricity? It
does, but we fall under a uh a regional
um capture for uh electricity and
therefore it does it it doesn't all all
the electrons go into the grid um and
it's really hard to trace where they go.
So, um, it's basically kind of grid by
grid is what we're talking about. So, in
terms of what we're seeing for heating
averages, and these are updated every
month, we're seeing some pretty
significant increases in costs compared
to last year
um, across New Hampshire. So, we're
seeing, you know, 28 cents to uh 34
cents or so for per kilowatt hour for um
electric
costs. We're seeing um the costs for
things like biomass has increased.
That's wood. Um of course, that has gone
up because many people uh in our state
do have alternative heat sources, wood
stoves, etc. right in their houses and
they're looking to those because they're
cheaper than what they traditionally
use. And as costs go up with those, uh
they're having to figure out those costs
as well. And to some extent that's
impacting um motor fuel costs. Um but
that is on a much larger really global
scale. So we don't really see as much of
a change over when it gets cold uh with
those as we do elsewhere.
And one of the things we really wanted
to try to to show as much as it is
possible to do so is the trends over
time with some of this uh these energy
costs. Um so you're seeing uh the uh
EIA's information about um on the left
hand side uh for electric costs and the
right hand side natural gas prices and
they go through um really these
undulating loops. So, winter they
obviously cost more, summer it's
cheaper. Um, and it's really been pretty
variable over the past couple of months
uh as Europe has really dealt with the
issue of how they're going to fuel um
their own heating needs over winter. And
one of the things that has been a huge
impact is of course since we rely on
liqufied um natural gas. Uh Europe has
also used that pretty extensively now
that they're cut off from uh the the
Russian pipeline has been cut. Um and so
that's mostly what they're burning. Um
so really it becomes a contest between
who's willing to pay more and that's
where the ships go. Um, so that has that
has become um really problematic in
terms of the ability to predict prices.
Over the past couple weeks, we've seen
um those gas prices go down, but that's
not to say they're going to continue to
go down. Um they they seem to have
stabilized uh between the 350 and $4 um
mark for uh per gallon, but we'll see
exactly how that works out.
Um, and in terms of the actual fuels,
uh, I have a slide here that shows you
some of the average prices, uh, across
New Hampshire. And as you can see, these
are pretty high. Uh, fuel oil
especially, it's uh, well over $5 a
gallon. Um, propane is uh, just below $4
a gallon. Um, and of course last year,
both of those were right around $3 a
gallon. Kerosene, not very common for
heating, but it is used in some
instances. Um, that's well over $6 a
gallon. Again, um, it's becoming quite
expensive. And if you've received any of
the mailers that any of the energy
companies have sent out over the past
uh, couple months, you probably know
that there are a lot of people in New
Hampshire really trying to figure out
how they're going to pay for that. And
that's going to impact their ability to
do things like pay their December tax
bill. Um, so that's something that you
need to start planning for uh at the
municipal level in case you start to see
uh higher rates of non-payment than
usual because when people think about
what they're prioritizing,
heating their house uh versus uh paying
a tax bill, the heating the house is
realistically going to win out. um you
know it's one of the basic necessities
to living here is having some sort of
adequate heat along with food. Um so
those are really going to be the
priorities as people cut back.
We've also seen a pretty big uh increase
in our local energy costs and one of the
uh electricity costs and one of the
things that um we've been asked a few
times is well how does that look going
into the future? You know is 2023 going
to be any lower? Is this just a
temporary thing due to uh due to what's
happening in Ukraine um and other
pressures from you know OPEC and other
organizations that control some of the
energy supply? And the answer is it's
really hard to tell. Um probably the
case is that the average electricity
costs that we've seen over the last
seven or eight years um pre- pandemic
are probably lower than what we're going
to see going forward. Um, EIA actually
just released um some information today
uh and I believe the UN released some
information yesterday that indicates it
really looks like we're at a point in
time and we're shifting uh exactly what
type of fuels we're going to be using
and the costs associated with them. And
as really the battle between I guess I'm
going to call it the battle between
renewables and fossil fuels happens um
you're really going to see some costs uh
associated with different policies at
the national and international level
that are going to be essentially paid
for um by uh everyone at the local
level. And it's going to be really hard
to figure out over the next five years
or so what those costs are going to be
except that we're probably seeing some
of the costs
relatively close to what we're going to
see going forward.
So
I only have more bad news because this
is economics the dismal science. So um
the cost of building is getting cheaper
but not by much. And so one of the
things that municipalities have been
looking at uh across the board is things
like housing um as well as sort of that
new revenue that new housing is driving
in the form of um increased prices uh
and additional tax revenue for developed
properties versus undeveloped
properties.
And we saw at the beginning of the
pandemic uh really the drop off in
logistics really caused um prices for
the goods that go into construction to
skyrocket. Um and those prices have
moderated somewhat and we keep seeing uh
information that uh those prices are
going down and they are decreasing by
pretty significant amounts. Um but
they've also increased so significantly
that the decreases aren't making much of
an impact at this point in time. Um so
just the cost to build a three-bedroom
house now as compared to 2019,
you're looking at three times the cost
in materials um alone. And even when
we're seeing significant uh decreases in
costs in some of those inputs, whether
that's lumber, whether that's steel,
whether that's um whether that's going
to be uh you know iron or anything like
that, it's not going to have that big of
an impact on the cost to build.
Um, and so that's going to continue to
uh cause your capital projects to
increase in costs. And we're starting to
see that reflected really effectively in
the municipal cost index. Um, and that's
probably the best measure for what you
need to look at as a municipality for
your costs because it builds in um all
of those things that you do as a
municipality that you know road
maintenance, those capital costs, labor
costs, etc. um are built more into that
than something like CPI because that's
measuring something at that's measuring
the costs for residents. And
unfortunately, one of the things we're
seeing with the municipal cost index is
that is pretty high compared to
everything else. Um it's not as high as
the producer price index. Um but it is
higher than CPI. Um it's higher than
just the construction costs index. So
running a municipality essentially to
provide the same services is is much
more expensive this year than it would
than it has been in the past. Um, and
unfortunately what that means is that
when it comes time to town meeting, and
Katherine's going to cover this in much
more detail than I am, um, there going
to be some really hard qu questions
you're going to have to ask, which is,
you know, are we going to try to provide
the same services as before or are we
going to have to prioritize some ser on
um what are people in town willing to
pay?
And
unfortunately, there's probably not a
lot of room in what they're willing to
pay. So, one of the things we've also
been seeing is that as the interest
rates increase, and those are the
interest rates that uh that Chris was
talking about before, that's going to
impact what what the average person can
borrow as well. And so when we look at
something like home payments, um we're
seeing, you know, the same house, uh the
same price and we and I just based uh I
just took this information from um from
some of the uh the housing groups. uh at
a $400,000 house with the 5% down
payment. Um you know, you're looking at
the cost per month uh increases pretty
significantly as you go from the
interest rates of a year ago at 3.1% to
what we were seeing this summer at 5.5%.
Um and now we've seen in the past couple
of weeks the average rate for a fixed
mortgage has jumped to over 7%. Um, and
that's just the mortgage payment we're
looking at here. It's not including
property taxes. It's not including
homeowners insurance. It's not including
PMI. So,
this is important for you to keep in
mind as you're setting your municipal
budgets because even if you're having
the luck of having an influx of people
uh move into town or a lot of churn, um
most of those people are going to be
less able to absorb increased costs um
than they would have been had uh had we
been talking about um you know, kind of
your same population from two years ago
even. And that's going to probably have
a big impact on their willingness to
look at things like um increasing
property taxes to maintain the level of
services that have been uh historically
gi given to them uh at their
municipality.
Kind of in conjunction with this, we're
seeing home sales softening across the
state. Um, and that really makes sense,
uh, because of course as the sales price
climb, um, which they are still
climbing. Um, as those climb, as
interest rates climb, it's becoming
much, much more expensive to purchase a
home. Um, so we're really starting to
see the market in home sales soften.
If we think back to um
2008
um and prior to that in the early 90s,
that's going to have a pretty
significant impact on
could have a pretty significant impact
on people's um ability to um continue to
uh keep up with these additional costs.
And we're seeing the same thing on the
rental side as well. Uh and this has
been trailing the home sales increases
um not necessarily by uh a full year but
pretty closely. Some new data was
released uh late yesterday that
indicates that New Hampshire we've seen
about a 20% increase in the median rent
over the past year. Um that's keeping in
line with kind of the 20% increase in
home values that we saw about a year
ago. And we've really seen a pretty
significant jump since 2019 in what
those uh median gross rents are.
And
I thought I had another slide here, but
uh but that's something that we're
probably going to continue to see uh in
the future as well. Uh as our home
prices rise, we're going to see median
gross rents increase as well. And that's
going to put pressure on the municipal
bottom line particularly in the form of
uh employee costs, labor costs, because
already, you know, if they can't afford
to buy the house, uh it's going to be um
hard to hire people because you're
looking at a smaller set of people um
the set that's probably looking to rent
in in or around your municipality. And
obviously if those costs are going up at
some point um those are starting to uh
outstrip the ability to pay them. Um and
that's going to have significant impact
on you know their ability to become an
employee for the municipality. And
that's going to put greater pressure on
um on wages uh than already exist. And I
know that many many many of you uh have
contacted us and said the same thing
which is that hiring is really hard um
because of the availability of houses
because of the uh costs of of those at
the moment.
Um and that's
kind of all of that uh combined uh is um
you know one of the one of the things
that we're seeing is a lot of talk about
um the increase in wages and how
uh how that has affected uh additional
costs as well. And one of the
unfortunate things at the moment is that
uh wage growth is occurring but it's not
occurring in the sense of allowing
people to purchase more or even maintain
the level of purchasing that they had
before. Um so on the left here you see
the um 12 that you see over a period of
about five years the increase in real
average hourly and weekly earnings
across private sector employees. So
caveat there. Um and you saw a pretty
big increase in 2020 uh and 2021 uh in
terms of actual dollars people were
taking home. Um this was this was that
movement um you saw uh a few months ago
even that people were quitting taking
different jobs and much higher salaries.
Um but as that data was tracked um
through the Bureau of Labor Statistics
even though um people were making more
money uh it wasn't actually equating to
their purchasing power um increasing and
that's of course because of inflation.
And so when you split that down um
between high skill, low skill, and
mid-skill workers, you see the same um
you see the same type of information
across the board, which is yeah, they've
seen some pretty big increases in salary
on average over the past couple years.
Um you know, this year uh touched right
around um 6%. But uh in terms of their
actual purchasing ability, you see that
on the left, that's decreased by about
2%. 2 and a half%. So even as
um employers across the board are trying
to pay their workers more, those aren't
keeping up with inflation and that's
putting even more pressure on uh
individuals to make choices about what
they're spending money on. And that's
going to impact kind of the bottom line
here for municipalities.
And in uh local government, um we're
seeing some pretty stark uh employment
trends. So local government employment
rates haven't um recovered from pre-
pandemic levels. So there was uh a
pretty significant cut in uh local
government employees um during the
pandemic. And
unfortunately, it's it's been the case
that uh New H New New Hampshire, like
most of the country, um one of the
largest employers is government. Um and
so,
um and New Hampshire isn't isn't really
outside the box here. we actually have a
a much fairly lower percentage of um
people who work uh for government
whether state, federal, or local level.
It's about 13.4%.
Um nationwide uh the average is 15.4
with a range from 13 to 25. So we're
pretty close to the low end on that. Um
but the number of government workers um
in New Hampshire's decreased in recent
years. And if you've seen any
information from um New Hampshire DOT
recently, they put out a call for anyone
who has a CDL to come and work for them
for snow plowing at the state level. And
that's going to cause some decreases in
availability of uh of state employees to
and state functions over the course of
winter um because they simply don't have
the people to to plow snow. Um so
they're pulling from other state
government agencies um and undoubtedly
have been contacting uh municipalities
as well. Um which means there's going to
be greater pressure on municipalities to
um
to do some of what the state does um
depending exactly where those workers
are being pulled from. Um and
unfortunately um that's going to create
uh an even greater disparity than we're
already seeing um for governmental
services.
And we have I just had some statistics
here on you know our population um our
median household income. And one of the
surprising things is we actually saw a
increase in median household income over
the course of the pandemic. Um but even
though that's the case, uh we aren't
quite keeping up with inflation. Um so
it's not all bad news. Um it's actually
our our average rate is just below
inflation at 7.1%.
But again, it depends on where you are
in the state. Um the southeast quadrant
really is seeing the most increase um in
median household income in line with the
fact that most of the people there
commute into Boston um or many of them I
should say not most of them commute into
Boston um and other uh areas that just
have generally higher wages than you see
um up in the north country which is less
uh less populated. Um, and that's going
to create a bit of a disparity when
you're looking at what you can do as a
municipality in terms of what you might
be able to um the choices you're going
to have to make in terms of your
budgeting process. Um, so those of you
in the souththeast particularly might be
able to
um continue to provide the same services
and really focus on providing the same
services. Whereas if you're in the north
country, um you know, the costs of
everything having gone up, it might be
the case that you're looking at
prioritizing
um what services you provide um in a
much more dire situation than um than
elsewhere.
So where are we headed? Um that's the
question that everyone wants to know. Um
particularly as we look at uh the fact
that it's going to be the state budget
cycle next legislative session. Um when
we're looking at kind of what costs are
now baked into uh the goods and services
that were that were being provided and
we are providing um and really it's
quite hard to tell um where we're going
to be going. Um I guessing uh you got
that from Chris's presentation as well.
So I I hate to say the same thing here,
but um you know, we do know that
inflation is going to continue. Um we're
going to see uh pretty significant
impacts from uh what the Fed decides to
do. Um and that's really going to help
guide us uh where we go. And at this
point, no one's really sure if we're
going to have a soft landing or not. Um,
one thing we can say at least in the
immediate future is that interest rates
are likely to continue to rise. Um, so
it's probably not a great year to borrow
uh if you don't have to. Um, looking at
the data that Chris provided earlier,
it's probably the case that 2023 2024
going to be much more favorable in terms
of interest rates. Um, it may be the
case that you'll be looking at
refinancing those. um uh in the future
and we're going to see continued
pressure um kind of outside of the
normal economic cycle on things like
rent um because there are companies out
there that have now uh focused on things
like rent um and apartment
affordability. Um so one of those uh
ProPublica just did a uh series on and
um which really shows that uh apartment
rents uh across the board have gone up
pretty significantly even as we've seen
the overall economy indicate that it
might be softening a bit. And uh when I
went to that uh company's um web page to
learn some more about it, um I learned
that uh they were happy to report that
uh market rate apartment renters signing
leases so far in 2020 are spending only
23.2%
of their income towards rent. Um still
well below the traditional affordability
ceiling of 33%.
They had some other articles uh about uh
how you know landlords could really
target um higher income individuals
because they were more able to absorb
increased costs and rent. Um and so
we're going to see some of those
pressures sort of filter down through
the market um and affect uh affect
municipalities not only in terms of what
uh funds people have available to put
into your local economy into your local
budgets but also affect um kind of
what's driving what's being built,
what's being proposed in your town. It's
going to have a pretty broad um impact
across the board. Um, and one thing we
can say is we I think it's pretty
reasonable to expect that inflation is
going to stay well above the Fed's
target for um a while now. Um, so this
Bloomberg Economics um did a uh analysis
that they released uh about a week ago
um where they think we're headed, it's
pretty similar to what you saw um Chris
present, but um a little bit different.
Their numbers are a little bit higher uh
as well.
Um, and so in summary, uh, you know, I
just want to say that, uh, you know,
inflation is going to increase the short
and long-term costs of what we're
looking at, um, when we're looking to,
uh, purchase, uh, anything. Um, it's
really hard to say at this point in
time, um, how that's going to affect
something like the state budget. Um
we've seen some softening in some in
some areas like the tourism numbers. Um
but we're still at target level with
those. Um and because there's so much
extra money in the economy at the
moment, uh which Chris went into some
detail on the it's really the case that
some of the spending decisions being
made at the municipal level are going to
contribute to rising costs in specific
areas or industries. Um so we saw that
with something like broadband
deployment. There was a lot of broadband
uh monies available over the over the
past year. Um uh I think the shovel
ready communities um ended up getting
some of those uh contracts, some of that
deployment happening. Um some of the
communities that needed more time to put
projects together
saw that the labor costs were much
higher. Um, I heard from at least uh one
municipality that um one of the
available companies um was really
putting pressure on them to uh to sign a
contract or they were going to go out to
some place like uh Minnesota because of
course uh every community across the
entire nation has really when you look
at like ARPA and some of that other
federal funding are looking at the same
types of projects um which is causing
significant decreases in the uh in the
availability of certain supplies and
significant increases when you can find
them because much like those tankers out
in the Atlantic, if if Europe's paying
more and in this case, if Minnesota's
paying more, that's where they're going
um rather than New Hampshire.
Um so with that, if anybody has any
questions, I'm happy to take those.
Thank you, Nate. I do have one question.
The question is, what is happening
around the state to encourage affordable
housing development at the state and
local level?
So,
that's a really tough uh tough question.
Um because
realistically, it requires a number of
things to come together. Um it requires
kind of the right conditions for
affordable housing. So, when we're
talking about affordable housing, we're
talking about uh usually uh a pretty
high density. So, you know, a number of
dwelling units on the same uh lot or
otherwise clustered close together. Um
probably provided with public water or
sewer because septic is uh expensive and
wells are expensive and require a
minimum lot size. So realistically,
um, that's what we're looking at in
terms of housing. Um,
and coupled with that, you need it to
be, uh, the materials and the labor to
be there, uh, for that to get built. Um
it's something I've talked with some
developers about recently and uh in the
case of
you know what they're going to build
it's going to depend on market demand.
So if you look at some place like
conquered where I live, um there was a
project proposed for the old um guess
the old uh conquered monitor uh kind of
forest call it because they owned a big
tract of forest along the Marmac River.
Um and recently the proposal came in to
change uh what was going to be built
because the demand wasn't there for um
as high a density and so instead some of
the denser and therefore less costly uh
dwelling units were being changed into
single family homes because that's what
that's what the developers determined
that people wanted. Um and so in terms
of that one of the things they're
looking at is uh material cost. So, when
you're talking about the cost of
materials doubling, tripling,
quadrupling, um, you know, a house that
would have cost, you know, $100,000 to
build is now costing $400,000. Um, it's
not quite that dire. Um, but it is the
case that you're seeing the same houses,
literally the same houses just being
built on different lots next to one
another. um as I've seen down the road
for me um over the course of uh a
several year period have vastly
different prices. Um and so
the governor has launched uh the uh
affordable housing grant program
um that has been um putting out some
money to help encourage more affordable
housing. Um, and there have been some
legislative changes to
sort of the local zoning and planning
board process in the last legislative
session um that have changed some of the
processes and may or may not make uh it
therefore a little bit cheaper to build.
And uh it's very likely we're going to
see some future legislation
um potentially future monies um given
for this particular uh issue, but we're
not quite there yet where we know what's
going to happen.
Thank you, Nate. Um there was another
question. all the copies of the
presentations and this recording will be
provided and um I will get into the all
the different indices as this other
question asked where we could get it and
one is available by um a free membership
through American county magazine and
we'll talk about that through my
presentation. Can you see my screen?
Okay, Nate with the budget slide on it.
I can. Yes.
Okay, great. So, if there's no more
questions, I'm going to get started on
my portion of the presentation which is
to talk more about budget specific
considerations. as well. I would have
enjoyed talking about the charts and
graphs tremendously. Um, nature handles
a lot of our our policy here at NHMA and
I'm going to get into some of the tools
and um resources that we can use as we
prepare our municipal budgets.
So, I won't I don't need to recover what
Chris and Nate went over, but I will
tell you that while New Hampshire relies
heavily on local property tax, um you're
going to read in the papers that other
states are going to be better positioned
to keep up with this inflation because
they have things like sales tax, income
tax, and perhaps local option taxes. So,
of course, always making sure we're not
comparing ourselves to others. you know,
we want to be apples to apples will be a
little bit important um in this case
because of our reliance on the property
tax.
Another important point is to keep in
mind that government budgets are what's
considered in economics as
counteryclical, meaning our demand for
public services are often increased upon
when we see the economy slow down. So,
while we're going to see the inflation
cause a decline in the consumer spending
resulting in decreased revenue that
could potentially be tax revenue, we're
also going to see our citizens perhaps
need more services. That could be our
health and human services budgets. That
could be an increased use of park spaces
and recreation programs because they're
looking for, you know, less expensive
alternatives. that could be increases.
Um maybe people aren't going to rent a
dumpster and have that service or a
garbage pickup anymore in towns with
transfer stations and they're going to
start to use the transfer station in in
your local community. So there's
different um demands that we typically
see when the economy slows down.
So when we develop our budgets, there's
two types of strategies most of us go
toward and it could be a combination of
both, but we have our level services
budget which usually happens when we're
in more um favorable economic times and
a level funding budget. And I would say
many of us combine those two strategies
in order to bring forward our budget to
our voters, the proposed budget to the
voters. So, it's really important to
note that of course a level services
budget in times of inflation that we're
seeing that is going to see significant
increases as you know it's probably very
obvious to have the same goods or
services delivered to our communities in
a level funding budget. If that's the
target where we don't want to increase
what we are um proposing to our
residents at time of town meeting, we're
probably going to see automatic cuts
have to be made. So again, most of us
are going to combine the two, but it's
probably important to really dive in and
figure out what strategy that you're
going to look to use. I will have to say
um school districts, for example, almost
always have to move toward level service
budgets. um can't really cut um some
educational programs out of the district
curriculum that are required by law.
That's one example. We can't cut snow
plow services. Um when it snows, we have
to plow. So those are level services.
So I would encourage everyone to rethink
the budget development process that
you're going through and undertaking at
the moment. So, traditionally, it's most
common that we use the incremental line
item budgeting strategy, and that's
basically taking last year's budget and
with some changes around the margin,
making it next year's budget. So,
because our budget is a political
instrument, and it's weighing our policy
priorities against whatever available
resources we may have, um, it really
becomes a statement of our our values.
It's a value statement of the community.
So, other strategies include zerobased
budgeting if you haven't tried it. So
building a budget from zero and one
strategy is to do it um department by
department one year at a time. So maybe
one year and I'm not picking on anyone
is the highway department, one year is
the police, one year is fire for
example. So that it kind of the
zerobased budget gets built in over time
and it's it's a larger undertaking. Um,
however, it can have a lot of value to
see that do we have some lines that are
no longer being used or being
underutilized, overutilized. Really
pairing down and seeing what it is that
we need to be providing in those
individual budgets. And that's when
priority based budgeting and
performance-based budgeting um
strategies can come in. Priority based,
of course, is based on the community's
priorities, what is really important to
that community. And if people come out
at town meeting and they they vote for
it because that is what they believe is
important in your community then by all
means um that should be in the budget.
That's you know the citizen engagement
and community engagement is a very
important part of priority based
budgeting. And then performance-based
budgeting we see we're budgeting for
direct outcomes. So we see this with
health and human service budgets, with
certainly school budgets, making sure
that how the resources are used and
measuring them against measurable
outputs. Um so the performance-based
budgeting can actually be applied to
almost all areas of government, believe
it or not. However, it's often more
associated with again those
service-based programs in municipal
government.
So, one of the key concepts to look at
is forecasting the revenues and
expenditures and cash flows. And you're
all going to say, "Yes, Katherine, we
you know, of course, we do that." But I
would really encourage you um especially
in the uncertain economic times that
we're facing to look at some historic
data and go back 3 to 5 years. Um look
at your revenue from the last 3 to 5
years. look at what we're predicting
right in the future and compiling that
against expenditures over the last three
to five years and pull out any trends
that you're seeing um whether it's
department by department or category by
category but really um using the data to
support your decisions um is going to be
extremely important. It always is, but
more so now than ever. And then
conducting a cash flow analysis. We'll
get into why that's going to be even
more important um in some subsequent
slides, but making sure that you have
sufficient cash liquidity to meet your
dispersement needs um and limit any idle
cash that we can invest is going to be
tremendously important because as we
enter these inflationary periods as you
already seeing your electric bill and
your you say your fuel bills going up
and we're headed into heating season,
that's going to put a pressure instantly
on your cash flow and where does your
cash flow shake out. So these are some
important concepts um and we do have a
broad um variety of members on this
call. So I do want to start at some
simple concepts and also get into some
more complex um topics. So in that cash
flow analysis, it's going to be very
important to identify if there's periods
of excess funds that we can invest in.
We're going to have to maximize on those
investments right now more than ever. Um
certainly have a portfolio that is
structured to meet your cash needs and
demands and anticipate if short-term
borrowing is going to need to happen. So
of course estimating um deposits,
inflows, and outflows. I do have a cash
um flow forecast worksheet available in
Excel. It's a simple document. You don't
need to make it more complex than it
needs to be, but I do have that. So you
can email me if you're more interested
in learning about that. I can send that
over to you. And of and certainly really
checking on our outflows. As I said,
we're going to have an increased demand
instantaneously in some of our
month-to-month costs. That's going to
put a huge pressure on our cash flow.
And do we have sufficient cash to cover
is going to be an important question as
we look at a typical municipal cash flow
cycle. Now, of course, this is based on
a calendar year town. I guess it right
because you're seeing December having
the highest in November and December
having the highest rate of revenue come
in. The yellow line is their cash flow.
The orange line is our town receipts and
that orange line you're going to see in
July and December being the increases
because of the tax collection. We have
the school payment in there because
that's one of the largest obligations if
not the largest obligation that we have
monthly if that's our structure with um
our payments if not quarterly or
whatever the municipality and school
district have agreed upon to pay that
obligation. And then we have our basic
town expenses in the gray line which we
usually see a typical uptick in expenses
in August. However, we're going to start
to see that uptick starting right here
um now and moving right into January.
So, do we have adequate cash on hand to
cover? And then we're going to look at
our town receipts, our cash receipts.
What are our receipts looking like? And
we're going to talk a little bit more in
depth about some of the analysis we can
do around our revenue.
So, of course, our revenue should talk
about when we forecast it, how we're
building our budget. And I've heard many
times people say, "Well, we can't really
do much about revenue."
Well, I would agree that um things
certain types of revenue um are a little
bit out of our control. Really looking
at the data and seeing if there's any
trends that we can pull out of the data
are going to be tremendously important
when we look at what our resource
availability becomes and the
sustainability of some certain policies,
programs, and um services that we're
offering in our communities. So
the GFOA actually has a great quote and
it says, "In the absence of a formal
forecast, a common assumption is that
the future will not be much different
than the past." And that assumption
could be seriously flawed. And I
couldn't agree more. Um just because
we're in a stable place today doesn't
mean that position couldn't change
significantly and quickly um over time
if we're not looking at all the
different data points available to us.
So, our revenue sources, um, education
funding, highway block grants for
municipalities, meals and rooms revenue,
environmental grants. So, these have a
big question mark next to them. We're
entering into a state budget year. So,
the legislature will be um working from
January to June to provide um a a state
budget to move forward. And in that
budget will be these types of revenues
for municipalities. With that said, we
won't know as we're developing this
budget what January 1st of 2023 might
look like. So, we have to forecast that
and we'll get into that a little bit.
And then on the municipal revenue side,
property tax, interest, motor vehicle
collections, you know, all of these
solid waste fees, re recreation fees and
revenue, um utility fees. These are all
areas that we need to analyze to see if
there's any trends. So, in the chat, Tim
put in a survey um that was created to
kind of help you pair down on all of the
different questions you can be asking
yourselves about revenue. And um it'd be
very helpful if you turn it back into
NHMA, but if for no other reason, it's
going to be great data for you to
analyze in your municipality for any
trends. So, when we look at um a state
revenue such as meals and rooms
distribution, the positive news is the
formula has changed. The legislature has
given us 30% based in a dedicated fund.
And last year the actual revenue we saw
was hund00 million shared through the
municipalities based on population. Um
this year it's $121 million that will be
shared out to municipalities based on
municipal populations. Um the reason why
I'm bringing this up is because while
it's a new formula, it's extremely
advantageous. The legislature um really
increased its revenue share. was up 45%
from last year and 55% this year over
prior years um that was in the budget.
We're going to have to track it
ourselves a little more closely and I
have provided the link right into the
presentation um where we can look at the
revenue reports and tracking the monthly
revenue is going to help us understand
where we might shake out at the end of
the year because the new formula is
based on the actual meals and rooms tax
collected. We won't know until the end
of the fiscal year, which is June 30,
what that might look like to
municipalities, but we can track we can
track it ourselves and clearly um we can
look if it's above plan, at plan, where
it's coming out in the prior year. All
of this is contained in those reports.
So that's something we can do on our
own. the New Hampshire retirement
system. It's another area where we can
see that we did get a 7 and a half%
refund on our retirement contributions.
Um the DRRA has those those numbers and
you can see them to apply to your tax
rate right now. So that's very exciting.
That's about $26.7 million that went
back to municipalities. And we also see
a trend that the new rates came out
based on the actuarial evaluation and
those rates are trending down. But what
is a competing idea is that while our
employer contribution rates might be
down for these classifications, which is
fantastic news over the next two years,
if we increase salaries because of
inflationary pressures, um we're going
to see those pension increase pensions
increase. So while you're budgeting,
it's really important to note that as
soon, you know, if you pull one lever um
like increasing a salary to retain an
employee, which is extremely important
in this current job market and what
we're experiencing as governments and
local governments, that really could
negate some of the decrease we're seeing
in the new rates, for example. So just
really something um interesting to point
out.
So our municipal revenue estimates
what we typically look at is are our
revenues tracking equal to or above the
estimates in the budget cycle. So we
look at our report and say yep our
revenues are you know tracking or not
tracking but it's more important to
start asking the some more detailed
questions and the wise. So what's your
collection for taxes compared to prior
years? Are we seeing a decrease due to
some of the measures and um
circumstances that nature and Chris
talked about? Home mortgages being more
expensive, inflation impacting our our
residents. Are we seeing um people, you
know, unable to pay their their tax
bills due to um increased home values in
general? What percentage are self-payers
versus escrow? And why would we ask
ourselves that question? That's a great
question because our self-pay um is a
more v typically could be a more
vulnerable population to paying their
tax bill. If we know that 70% of our
taxes are paid through escrow, you're
guaranteed 70%
of that income coming in. The banks are
not going to default most of the time on
any type of tax payment. Um, is there
delinquencies or are you seeing a trend
in increased delinquencies to your
utility payments, water, sewer, for
example? Are you seeing foreclosure
notices in your community? These are
important questions to ask as we're
developing the budget. Same with
abatement applications.
Um, you can look online to see where um,
it's usually reported if home sales are
slowing, which Niche has reported is
happening statewide, but there's still
some hot markets depending on where you
live. motor vehicle registration. Is
that tracking at or above plan? I think
this is a critical um area to look at
because our town clerks, town clerk tax
collectors bring in a consistent revenue
stream month over month over month in
that area. We're seeing car prices be at
all-time highs. However, the
availability of new cars is way down.
So, if we're registering older vehicles,
that revenue could be decreasing. um we
rely on that consistent revenue as we
wait for the two tax bills to go out. I
believe there's a couple of communities
that are quarterly and a few communities
out in New Hampshire that bill um the
yeah the quarterly payments but
typically we have you know two bites at
that apple. So, we really do rely
heavily on those motor vehicle
registration revenues and where is it
tracking in your community and when is
the last time you really looked at um
your fees across all departments to
align with the cost recovery goals?
looking at whether it's recreation fees,
um transfer station fees, the your
planning and zoning board fees. Those
are examples of is that tracking with
inflation and it's just a local policy
decision on if if in fact there's
anything you want to do about modifying
those fees.
So another key concept in understanding
our fiscal condition once we're really
looked at our revenue condition and
forecasted it but before expenditures
can be determined um I'd be curious to
know about how many people conduct
fiscal capacity or fiscal condition
testing looking at different
environmental factors um organizational
factors and fiscal conditions very
specifically like revenues expenditures
and debt service to figure out what your
community can actually afford to be
taxed, right? What's the affordability
of what you're proposing? Um, it doesn't
need to be an overly complex system. I
do have some templates on this as well.
However, it's very important to look at
things like your community profiles.
There is a link right at the bottom of
the slide and you can click on it and
look up your own community and it'll
tell you things such as your economic
conditions, personal employment
information, your population numbers.
These are all things that are really
important to start to look up. In
addition, the median household income,
which we heard great news in New
Hampshire, has been growing and New
Hampshire's economy has remained strong
throughout the pandemic and post
pandemic, which is extremely positive
news. We're one of 10 states that's
really um staying strong so far. So, we
are ahead of the curve in that area. um
that that link in the slide that you'll
received what that you've already
received or you will be receiving does
contain town by town your median
household income. So it's really
important to start to look at those
types of factors as you're building a
budget and then start to track that data
and compare it year-over-year to see any
trends as we're developing our
expenditures.
So, this is an example, and I do have a
little caveat. Um, in my previous life
when I owned my own consulting firm,
this is an example of a community that
is not in New Hampshire, but this is a
real life example. And they wanted to
really understand what it would cost to
provide 24-hour police protection in
their community. And what they did was
look at what many of us look at a
percentage of a particular category such
as salaries. And at that time, 72% of
their budget, municipal budget, was
based on salaries and benefits. And they
said, "Well, it's going to go up to 76%
if we add 24-hour police protection."
But when we did the costing analysis and
the per capita analysis, this is how it
shook out. Um, and they were quite
surprised to see that it was going to be
$19 basically per person to start
offering 24-hour police protection. So
again, I would encourage anyone who's
looking to expand services, which is
extremely warranted, especially again
during those un uncertain economic times
when there might be increased demand for
municipal services, to really cost the
project and maybe do a per capita
analysis rather than just the percentage
of the budget in one category analysis
because you're going to see a very
different number. And as you can see in
this community, things like library
services and parks and recreation, um,
anything under a dollar didn't make the
this chart, for example, but was really
important to this community. Um, and it
really is up to the local community to
decide, but it paints a very clear
picture of cost, especially when
introducing a new type of service. Um,
oftentimes school districts do per
capita um or per pupil I should call it
per pupil services and look at the cost
per pupil when they make a change um to
really understand the impact that's
going to have on each individual
student. So I would say that's a great
way to understand the general cost of
your services and it's another way to
look at it.
So the expenditure analysis we're having
different options to measure inflation.
Um, Nich and Chris went over a whole
bunch of them. So, I did want to touch
on these are the different indices and
they all have a different function. So,
use the right tool, right, for the right
job. So, the producer price index, for
example, measures the price of
commodities. Consumer price index, CPI,
is often used for cost of living
adjustments. So, that's good for colas
and salaries. the construction price
index would be more relevant when we're
looking at highway projects for example
or really doing a large municipal
project. So these are the types of areas
that we would want to focus on the right
index for the right job. So at the
bottom the municipal cost index is
published by American city and county
magazine. You have to sign up to be a
member to access that indices but it is
free and that does carry several of the
indices within the municipal cost index.
So again the education price index EPI
um is another index that that schools
could use and the gross domestic product
GDP
different indices right tool for the
right job. So I think that's rather
important.
The other strategy that we can use is
rank and prioritize expenditures like we
would in our capital planning and create
a predetermined clear objective set of
criteria to evaluate our projects to
promote procedural justice when we're
allocating limited resources if you're
looking at providing um a level funded
budget for example or you're looking to
make cuts. Um this does ensure that um
making sure our assets are maintained of
course and then if there's an asset
program or service that's in the budget
but really no longer fits the community
maybe it can be retired or discontinued
or the resources redirected. Um and in
capital planning we use things like
establishing a priority order, the need
versus want categories or we have
aggregate need ranking and perhaps a
scoring scale. So on this slide, you can
see several of the different models that
you could use perhaps to rank your
projects or your services depending on
the need like required by law or public
health and safety. So if there are cuts
to a budget, you have a methodical way
to go about doing it that has more
objective measures involved. Um that'll
be important. And then of course we have
our debt consideration. So, federal
policy makers have responded to
inflation by raising the rates. And you
can see the 20-year bond in the July
sale and 713 was 3.38%.
So, of course, this is a cost increase
on top of our already increased costs
with our contract, services, and
materials, goods or equipment. But I
would, as we are a little bit unsure,
there's also um weighing against the
future cost of deferment. And I think
that's an important consideration
because the cost of debt now versus if
we don't do the project now and we defer
it, it's only going to cost more later.
In my region, there's a project that was
bid out about a half a million dollars
um a year and a half ago and now it's up
to 900,000.
So what is the cost not to bond the
project and move forward with it if
whatever you're trying to correct or
move forward with might deteriorate,
require further maintenance, or just
prices in general continue to increase?
So we have to do um we have to do that
analysis before we decide oh debt is a
little expensive right now. We really
want to make sure that we weigh those
options and then of course doing our
investment review.
We are required to review our in
investment policies annually as per
statute. The treasurer shall invest in
any excess funds that is part of um New
Hampshire state law and the trustees of
the trust funds have similar
obligations. It doesn't mean that we
can't look at our investment policy
multiple times during the year. So, I
would really encourage anyone who might
have done that over the summer as we're
seeing this changing market to really go
back to their policy, review their
investment policy, and make sure their
primary objectives can be accomplished
through safety, liquidity, and yield in
that order. and review all the different
um objectives that you currently have,
your standard of care, your risk
tolerance, um any procedures that you
have, um or how you work with different
financial institutions to move those
investments forward because we're going
to have to capture every dollar that we
can in a higher interest rate market on
the investment side and really get into
that um cash flow and get into that cash
flow and find the times that we can
afford to invest our additional funds to
maximize on that yield. And then of
course, everyone's favorite topic is
fund balance. It's going to be extremely
important to do that cash flow analysis,
look at our revenues, and make sure that
we have adequate fund balance going into
a time that's economically uncertain.
Um, if we don't have adequate fund
balance, our cash flow is going to
become under stress, and we might have
to issue short-term debt to cover the
gap, which also has a cost as well. And
it also would allow for making sure we
have funds to invest if we have adequate
cash flow in hand. So in this example,
um our revenues, our expenditures,
making sure that we start with a healthy
cash flow and fund balance is going to
be very important to make sure that we
can cover our expenses. So it's going to
be very important in general that we
keep in mind our long-term goals when
developing this budget. look at our
policy priorities moving forward. We
have to keep the lights on. We have to
turn the heat on. Um there's some real
necessities that are our individual
citizens are going to become um faced
with making these choices as Nate talked
about with the housing market being what
it is, with the rental market being what
it is. Make sure your welfare or your
your assistance budgets for health and
human services are going to be adequate.
If you're starting to see trends like
town clerk receipts being down, tax
payments being down, um interest on
penalties and leans being up, these are
all indicators that you're starting to
experience fiscal stress. So, with that,
um I don't see any questions. I know
you've spent a long time with us on this
webinar and I don't want to keep people
longer than they have. Um and I want to
thank you for your time and I'm going to
turn it over now to Tim.
Uh thank you, Katherine. And this still
gives our members time uh between now
and the end of these upcoming uh event
promotions uh time to put questions in
the Q&A uh function box. But um on uh
Wednesday, November 9th, we do have a
representative from the New Hampshire
Housing who will be talking specifically
about the H homeowner assistance fund
and how this program can help struggling
homeowners in your city or town. Next
slide, please.
Can you advance the slide? Yeah, I
I'm Yeah, I'm trying. I apologize. Thank
you.
That's okay. I knew you could do it.
Thank you, Katherine. Um, we do have and
we do hope that all of you will be
joining us on Wednesday and Thursday,
November 16th and 17th, uh, for our 81st
annual conference at the uh, Double Tree
U, uh, by Hilton Manchester Downtown
Hotel. Um, we have over 50 programs,
close to 85 exhibitors and vendors. Um,
and we hope you, our members, will be
there as well. Next slide, please.
I do want to remind everybody that all
this information and a copy of this
webinar will be sent out to you as
registrants and attendees,
as we do with every webinar. Thank you
for that, Katherine. And if you haven't
enjoyed enough of what Katherine has
been dishing out, please come back and
join us for December 1st when she will
get into a little bit more detail about
developing and adopting effective um uh
policies um and where to start. Uh and
uh if you can advance, thank you. Um,
and NDHMA's executive director, Margaret
Burns, and myself will give you a full
walkthrough of all the membership
benefits, uh, including some free
resources that are available to you as
both full and associate members. Um, so
we hope that you'll join us on
Wednesday, December 7th for that, uh,
program.
And lastly, again, if you've not had
enough of Katherine, we are going to be
be promoting her for the entire month of
December before she gets over to the
legislature. But on December 14th, we
have a program with Katherine and with
representatives from the New Hampshire
School Boards Association and NH Graves
who will talk about default budgets and
how they work um and where to get
started. I think nature will also um uh
wish for me to uh alert you that there
will be an article in the upcoming town
and city regarding default budgets. And
I also want to remind you that there
will be an article on the homeowners
assistance fund as well as a full page
um flyer uh in the January uh February
issue of Town and City, the November
December issue, excuse me, I'm jumping
the gun of uh Town and City, which will
be coming out shortly. Uh so with that I
think we are done. Um no more questions.
Thank you members for sticking through
the entire program with us. We
appreciate your support. Um great job
Chris Peliter. Uh great job Nate Grace,
Katherine Hec. Um what a wonderful
presentation. Appreciate what you've
done for us today. Uh and um thank you
for joining us today.
Thank you everyone.