Transportation Authority Beset by Years of Faulty Sales Tax Forecasts

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The Orange County Transportation Authority Board of Directors has decided to use an outside consultant to help the agency better project sales tax revenue after years of relying on assumptions from a trio of universities that proved to be overly rosy.

The Transportation Authority depends on sales taxes to fund billions in transit services and road projects. For example, about half the agency’s bus operations are funded with sales tax revenue, and major efforts like the I-405 freeway expansion rely primarily on sales taxes.

And if the forecasts are off by even the slightest bit, it could mean officials have hundreds of millions less than they thought they had to spend on the projects long-term.

That’s exactly what has happened in recent years as the agency has relied on the average of forecasts from three local universities – Cal State Fullerton, UCLA and Chapman University. So board members during their regular meeting on Monday decided to add figures from Fresno-based MuniServices, LLC to help them shoot closer to the mark.

“The big problem with this is about following through with our promises to the voters,” Director Jeffrey Lalloway, also an Irvine city councilman, said at Monday’s meeting. “Those projections drive everything we do on the board.”

The bad sales tax forecasts began with the Great Recession, which hit in 2008 and was far more devastating and lasting than the universities predicted. For example, in 2009 the average of the universities’ forecasts showed sales tax growing by 0.7 percent. In reality, sales taxes shrank by 13.3 percent, according to a staff report.

The universities were also too optimistic in their sales tax in 2015 and 2016, figures in the staff report show. So far this year, sales tax growth for Measure M2 – the countywide half-cent sales tax that funds transportation improvements — has been at 3.3 percent, yet the schools predicted 6.7 percent, more than double the actual growth rate.

The projections were even worse for the quarter-cent sales tax under the Transportation Development Act that funds bus operations. In 2015, the forecasting average from the three universities was 7.8 percent, while actual sales tax growth was at 2.9 percent. And there’s a similar disparity for sales tax receipts reported this year.

Agency officials say one problem with forecasting for the quarter-cent sales tax is that, unlike Measure M2, which is funded by a point-of-destination sales tax, this is a point-of-sale tax. That means the tax is levied based on where purchases are distributed from, not where they’re delivered. So as online shopping grows, revenue growth for the Transportation Authority becomes more sluggish.

Lalloway pointed specifically to the massive I-405 freeway expansion as a project that could have been significantly affected by the faulty projections. After a contentious debate with elected officials from other cities last year, the board decided not to add another free carpool lane to the freeway.

With the revenue projections falling short, Lalloway says adding another lane could have meant other projects would be on the chopping block.

In hopes of avoiding such problems in the future, agency leaders decided to use consultant MuniServices, LLC for the short-term, five-year forecast. And for the longer-term forecasts, the board decided to use a mix of forecasts from the consultant and the three universities.

MuniServices, LLC has been more accurate in its recent forecasts, according to the staff report. In 2015, there was zero variance between what the consultant projected and what actually came in, the report states.

One reason MuniServices, LLC is more accurate is they have a “granular level” method of looking at businesses coming into Orange County (as well as leaving) and therefore have a very specific understanding of market forces in the county, a Transportation Authority staffer told the board.

Please contact Adam Elmahrek directly at aelmahrek@voiceofoc.org and follow him on Twitter: @adamelmahrek

  • Roger Butow

    It took the OCTA Board 8 years to realize that their advisors were way off. The article doesn’t explain how or why these 3 schools were chosen to begin with, where was their proven, long term track record prior to this?

    The problem isn’t about “following through,” the problem is that with so little margin for error, poor hiring choices or jobbing out analyses/assessment was a serious mistake. No wonder the OCTA is in constant $$$ hot water, seriously under-funded.

    They’re unable, in-house, to accurately forecast their own income arc. Poor budget management to say the least.