Saturday, December 11, 2010
City’s Response in a Nutshell: IMG Got It Wrong by Cherry-Picking Data To Match Result it Wanted
The City has responded to Civil Beat’s analysis of Infrastructure Management Group’s study of Honolulu rail’s financial plan. Deputy Project Manager Mark Scheibe’s memo to CB is published at the subscription news service’s website today “in the clear” – available to all visitors, not just subscribers. We therefore reproduce the memo in its entirety here:
Editor's Note: The City of Honolulu issued this memo to Civil Beat in response to its article Friday, Civil Beat Analysis: City's Rail Tax Plan Optimistic. The article explored the differences between the city's perspective on tax revenues to pay for the project and the projections of a consultant hired by the state. Civil Beat invited the city to respond.
The IMG Report includes the summary statement “GET revenues are most likely to grow at a compounded rate that is approximately 30 percent lower than the forecast included in the current Financial Plan.” The report further states “the GET tax growth is unlikely to grow beyond a 4 percent compound growth rate over the forecast period, well below the 5.4 percent in the current Financial Plan.”
The IMG Report paints a picture of two competing forecasts, theirs and the one presented in the August 2009 Financial Plan. Amazingly, the IMG Team, while working for the State of Hawaii, ignored the source of forecasts specifically prepared for the Governor and the Legislature, by the State’s Council on Revenues. If the IMG Team had explored this source they would have discovered that the Council on Revenues most recent report forecasts state general fund tax revenues for FY 2011 through FY 2017 will grow at a compound rate of approximately 6.7 percent per year, certainly more than 4 percent per year.
Further, other than creating several charts showing how historical GET revenues compared to the certain economic variables (employment, population, etc.) it does not appear that the IMG Team completed any statistical analyses to determine whether there was a statistically significant relationship between GET and these economic variables. Rather, to generate its forecast of GET surcharge revenues, the IMG Team appears to have merely selected a historical period of time, calculated the compound annual growth rate of GET revenues over that historical period of time, and then extrapolated that calculated growth rate to every year of its forecast.
Regardless of their actual methodology, however, the IMG Report’s discussion of GET growth rates draws a comparison between the Hawaii economy and the U.S. Gross Domestic Product (GDP). The Report describes a forecast of U.S. GDP from the Congressional Budget Office (CBO), which “is expected to average between 4% and 4.5% for the next ten years” in order to support their 4 percent growth rate conclusion. In reality, the most recent forecast of nominal GDP published by the CBO in August 2010 shows average annual growth over the next ten years (2011 to 2020) of 4.7%, even exceeding 6% in the short term (2013 and 2014) during CBO’s projected timing of an economic recovery.
In contrast to a nebulous process that may or may not be tied to U.S. GDP, for the GET forecast used in the August 2009 Financial Plan complex statistical analyses were performed that tested data on the historical GET tax base against several economic variables in order to identify which had the greatest explanatory power, and the degree of that effect. These data combined with independent forecasts of economic variables (e.g., retail spending, hotels and lodging spending, etc.) were used to create the Financial Plan’s forecast for the GET surcharge revenues.