County of Ulster, NY
2023 Proposed Budget Analysis & Review
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View 2023 Proposed Budget
The Proposed Budget of the County for the fiscal year ending December 31, 2023 has been constructed with the use of approximately $351.1 million in revenues derived from various sources and $5.3 million in appropriated fund balance and reserves. Key sources of revenue, as depicted in the 2023 Proposed Budget, include sales tax, State aid and Federal aid, real property taxes and special assessments, and departmental fees and charges. A summary of such revenues for the audited fiscal years ended December 31, 2012 through 2021, as budgeted for 2022 and as proposed by the County Executive for 2023 is discussed below. Information for certain fiscal years has been excerpted from the County’s audited financial reports; however, such presentation has not been audited.
Current and Projected Economic Conditions Must be Considered
CMA reviewed the County’s 2023 Proposed Budget to evaluate the treatment of projected sales and occupancy tax revenue, departmental revenues, and departmental expenses (including the use of budgeted contingency) within the context of the current economic environment and actions being taken at the Federal level which will directly impact the County’s fiscal performance on a forward moving basis.
Recessionary Probability. An October 18, 2022 Dow Jones Market Watch article reports that “Bloomberg Economics latest statistical projections showed a 100% probability of a recession within the next 12 months as the U.S. economy contends with decades-high inflation, Federal Reserve interest-rate hikes and mounting geopolitical tensions…Fears of a deep recession have surged in recent months as the Fed hikes interest rates in a bid to cool inflation. Investors believe the Fed risks ‘overtightening’ monetary policy in reaction to higher prices and driving the economy into a sustained downturn.” The Bloomberg model uses 13 macroeconomic and financial indicators to predict the chance of a recession in the range from one month to two years. On October 19th, CBT News reported the recession Bloomberg is predicting with 100% certainty will occur in 2023.
The prediction of a recession has been espoused for the last 18 months by former Treasury Secretary and Harvard Professor Larry Summers. In August, Summers “gave a recession probability 3-in-4 odds.” Summers believes the US has a 75% chance of recession within the next two years. Steve Hanke, a respected professor of applied economics at John Hopkins University agrees, as reported by MSNBC on September 23rd. Hanke opined there’s an 80% chance of the U.S. falling into a recession. Hanke stated “The probability of recession, I think it’s much higher than 50% – I think it’s about 80%. Maybe even higher than 80%.”
Interest Rates and Unemployment. A Fed-induced recession from higher interest rates will foster higher levels of unemployment. CNN Business reported in September that the Fed’s latest economic projections, released alongside a massive third consecutive interest rate hike of 75 basis points show that the central bank is expecting the nation’s unemployment rate to grow to 4.4% next year – up from August’s 3.7% – and potentially as a high as 5%. Assuming no change in the labor force, that would mean approximately 1.2 million more people will be unemployed in 2023. At the high end of the Fed’s range, there could be up to 2.2 million more unemployed. The CNN article states “A key reason Fed chair Jerome Powell wants more slack in the labor market is out of concern that a tight employment situation will continue to push up wages, which could then keep inflation elevated. As the unemployment rate rises, workers lose bargaining power for higher wages and households pull back on spending.”
Impact on Businesses. The literature indicates that a recession would have a negative impact on businesses of all types – including small retail businesses that collect sales tax. In its discussion of recession impacts, consultants at GoCardless highlight decline in consumer spending as one of the four major impacts of a recession (along with job loss, manufacturing slowdown, and decline in real income). GoCardless states businesses might find it more difficult to generate its usual sales.
The online publication CHRON clearly states “During an economic recession, small businesses are often hit the hardest…typically luxury services suffer first as both business and private customers cut back on spending.”
Investopedia ominously reports that “slumping sales” is one effect of a recession on business. Specifically, it stated in a July article that “In a recession, nothing hurts a business quite so much as when the register stops ringing as often, or when orders slow to a trickle. During an economic contraction, aggregate demand declines, translating into a drop in sales for most businesses.” Investopedia went on to state “Recessions cause declines in sales that can spiral as the resulting layoffs further depresses demands.” One of the key “takeaways” identified by Investopedia is “Businesses large and small face declines in sales and profits in a recession.”
Although inflated prices theoretically have more sales tax attached to transactions that are made, the approach being taken by the Federal Reserve (raising interest rates) is predicted by many experts to produce large increases in unemployment, a reduction in the volume of sales, and distress for small businesses that generate sales tax.
CMA Finding – 2023 Economic Forecast. Current inflation, Federal Reserve interest rate hikes and an anticipated recession must be considered in developing future municipal budgets. 2023 municipal financial performance will be directly impacted by the current and projected difficult economic situation and must be factored into many budget decisions to be made for 2023. Undoubtedly, this includes the County’s 2023 Proposed Budget.
Inflation, which currently exists, and will likely continue into 2023, and unemployment and recession, which may occur due to the Federal Reserve’s actions to reduce inflation, must be considered in formulating the 2023 Proposed Budget. Sales and occupancy tax and departmental income on the revenue side, and auto fuel, gas/electric, and supplies on the expense side, deserve particular attention.
It will be important for the County to (i) continually monitor how revenues have been, and will continue to be, affected by economic downturn, (ii) use such proactive measures as may be required to maintain its operations and meet its obligations, and (iii) determine if and how soon its resources and reserves might be depleted.
The $1.9 trillion American Rescue Plan Act of 2021 (“ARPA” or “ARP”) signed into law on March 11, 2021, provides $350 billion dollars in emergency funding for state, local, territorial, and Tribal governments to remedy this disparity between rising costs and falling revenues.
Allocation. Under the ARPA, the County’s allocation of funding was determined by formula. In accordance with the prescribed formula, the County’s allocation of ARPA funding is $34,491,474.
Funding Timeline. ARPA funds are distributed in two (2) equal tranches. The first tranche of funding (50% of total allocation) was disseminated by the U.S. Treasury beginning in May 2021 and has been received by the County. The second tranche was disseminated by the U.S. Treasury in May 2022 and has been received by the County.
Parameters. Funding is subject to the requirements specified in the U.S. Treasury’s Final Rule which was released in January 2022 and took effect in April 2022.
Eligible Uses. As detailed in the U.S. Treasury’s Interim Final Rule, subject to change and amendment, recipients may use funds to:
- Support Public Health Expenditures: For example: mitigation efforts, medical expenses, behavioral healthcare, and certain public health and safety staff
- Address Negative Economic Impacts: Including economic harm to workers, households, small businesses, impacted industries and the public sector
- Replace Lost Revenue: This is a formula driven calculation
- Provide Premium Pay to Essential Workers: Offering additional support to those who have borne and will bear the greatest health risks because of their service in critical infrastructure sectors
- Invest in Certain Types of Infrastructure: Such as Water, Sewer, and Broadband
Spending Timeline. ARPA funds must be “obligated” by State and Local Governments no later than December 31, 2024, and fully expended by December 31, 2026. According to the Interim Final Rule, the U.S. Treasury adopted “a definition of ‘obligation’ that is based on the definition used for purposes of the Uniform Guidance (2 CFR part 200), which will allow for uniform administration of this requirement and is a definition with which most recipients will be familiar.” Funds that are not fully spent by December 31, 2026 are required to be returned to the U.S. Treasury.
CMA Finding – American Rescue Plan Act of 2021 Revenue Replacement Calculation. Many local governments don’t realize they qualify for revenue replacement. These revenue replacement funds may be utilized for expanded purposes and streamline future reporting requirements correlating to ARPA fiscal recovery funds. There are two ways to determine lost revenue:
- A recipient may elect to take the $10 million standard allowance, or;
- A recipient may utilize a formula prescribed by the U.S. Treasury to hypothetically calculate revenue loss accordingly (outlined in the Final Rule).
When utilizing the U.S. Treasury prescribed formula to calculate revenue replacement, it is important for recipients to keep in mind that it can be done for each calendar year (December 31, 2020; December 31, 2021; December 31, 2022; and December 31, 2023).
To date, the County has calculated revenue replacement only for the year ending December 31, 2020. Nevertheless, information is presently available which would allow the County to run the calculation for the 2021 calendar year. As such, CMA strongly recommends that the County calculate revenue replacement for 2021 as these additional funds will provide additional flexibility to ARPA related decisions and, perhaps more importantly, streamline future reporting requirements.
CMA works with a number of ARPA recipients across the State and has recommended running the revenue replacement calculation on an annual basis to all applicable clients utilizing the U.S. Treasury’s prescribed formula.
Section 1210 of the New York Tax Law (the “Tax Law”) authorizes counties to levy sales and compensating use taxes of up to 3% in addition to the 4% sales tax levied by the State. Certain counties have received approval by the State Legislature to impose a sales and compensating use tax of greater than 3%. Sales and compensating use taxes are collected by the State and distributed to counties and municipalities of the State on a monthly basis.
A significant portion of County revenues are derived in the form of sales tax. Sales tax accounted for approximately 39.99% of the County’s General Fund revenue for the fiscal year ended December 31, 2021 (the most recent audited fiscal year), excluding other sources. Budgeting for sales tax is extremely important in that miscalculation can lead to substantial shortages due to the magnitude of this revenue stream.
The 2023 Proposed Budget projects sales tax revenue at $167 million, which represents an increase of 16.78% compared to the amount budgeted for 2022. By any measure, the $167 million projection is deemed to be rather aggressive, especially in these uncertain economic times where recession is projected with near certainty.
Economic Concern. The Fed’s goal to dampen the economy to control inflation, and the widespread belief the Fed’s action will create a recession that will produce high unemployment and less disposable income and cash, and thus reduce sales and the collection of sales tax by businesses that will become more and more stressed, must be taken into consideration during the municipal budget formulation process.
Year-to-Date. CMA reviewed sales tax data from the New York State Department of Taxation and Finance for 2021 and 2022 year to date (through September – see Exhibit RV-I below). The County budgeted $143 million in sales tax for 2022. Based on collections through September, it appears the County will surpass the budgeted amount. However, the September 2022 collection was less than the September 2021 collection (by $472,118), which should raise concern within the context of current and projected economic conditions explained above, especially since the County’s neighboring county, Dutchess, also experienced a reduction in its September 2022 sales tax collection compared to 2021 (by over $4.6 million).
Assuming the County does not experience reductions in the fourth quarter of 2022 compared to 2021, and collects the same amount as 2021, the County should end 2022 with about $163.8 million in sales tax collections for 2022. The 2023 Proposed Budget projects sales tax revenue at $167 million, which could very well be less than what is collected in 2022.
Supply Chain Concerns. In addition to unenthusiastic economic forecasts, there remains multiple disruptions in the product supply and distribution chain which could continue in 2023. These types of disruptions could have an adverse impact on economic activity and thus on sales tax collections. Supply chain problems and their impact on economic activity are other reasons to be cautious in projecting large increases in sales tax revenues.
Sales Tax – Trend Analysis. Exhibit RV-II, on the following page, sets forth the amount of sales tax reported in the County’s Governmental Funds in the audited financial statements for the fiscal years ended December 31, 2012 through 2021, the amount included in the 2022 Adopted Budget and the amount in the County 2023 Proposed Budget.
On average, over the period 2012 through 2021, actual sales tax has historically accounted for more than 36.2% of County revenue in the Governmental Funds. For 2023, the proposed amount of sales tax equates to 44.54% of governmental revenues, which represents a significant increase over the time period measured.
Sales Tax – Budgetary Variance Analysis. Operating budgets of the County were compared against the actual results for each of the fiscal years 2017 through 2021, inclusive. The results were utilized to evaluate a trend of accuracy relating to budgetary forecast.
Positive budgetary variances were reported in each of the last five fiscal years, excluding 2020.
CMA Finding- Sales Tax. When considering current economic conditions and Federal policies of high interest rates to create more unemployment and lower inflation, and the belief by many that such actions will lead to a recession, the County should consider projecting sales tax at a level not above what will be collected this year. The negative trend indicated by the September collection should be followed up with an evaluation of the October numbers to determine if the trend may be the start of a downward spiral in sales tax collection. Because of the magnitude of the sales tax number (even a 1% reduction represents $1.67 million in revenue) a final decision on setting the sales tax revenue projection in the 2023 Proposed Budget should be made after the October sales tax collection numbers are received. The October number (or preliminary number) should be available prior to the final budget hearing on November 15th and well before the scheduled adoption on December 5th.
As noted in Exhibit RV-I, assuming the County does not experience reductions in the fourth quarter of 2022 compared to 2021, and collects the same amount as 2021, the County should end 2022 with about $163.8 million in sales tax collection for 2022.
The collection of taxes on real property represents the County’s second largest source of revenue. Real property taxes accounted for approximately 21.37% of the County’s Governmental Funds revenue for the fiscal year ended December 31, 2021 (the most recent audited fiscal year). The collection of real property taxes could be impacted by a recessionary period.
Real Property Taxes – Trend Analysis. Evaluating historical fiscal data provides constructive information that can be used to both identify structural imbalances and predict future risks.
Exhibit RV-IV sets forth the amount of real property tax reported in the County’s Governmental Funds in the audited financial statements for the fiscal years ended December 31, 2012 through 2021, the amount included in the 2022 Adopted Budget and the amount in the County Executive’s 2023 Proposed Budget.
Real property taxes accounts for 20.77% of governmental revenues in the 2023 Proposed Budget, which is generally consistent with prior years.
Real Property Taxes – Benchmark Analysis. Similar to the trend analysis, per-capita benchmarks were used to compare the County to its peers.
Exhibit RV-V sets forth the percent change of real property tax reported in the 2020 for Mid-Hudson counties on a per-capita basis.
Relative to real property taxes, the County posted the 5th highest per capita rate of the Mid-Hudson counties for 2020, the most recent year for which such information is available.
CMA Finding- Real Property Tax Levy. The proposed property tax levy for 2023 includes a 3% reduction compared to the prior year.
In a typical budget year, it would be customary for a municipal jurisdiction to increase the levy, likely up to the 2% cap (inclusive of applicable deductions and exclusions). However, the levy must be carefully balanced against the tax base’s ability to pay, otherwise risk becomes inherently built into the 2023 budget. If the burden on local taxpayers becomes too great, uncollected payments to towns and school districts could conceivably increase. Raising taxes at the County level may exacerbate these effects. For these reasons, and based on the benchmark analysis, CMA finds a levy below the 2% tax cap to be both conservative and appropriate for 2023.
The County derives a major portion of its Governmental Funds revenue from State aid. State aid accounted for approximately 14.06% of the County’s Governmental Funds revenue for the fiscal year ended December 31, 2021 (the most recent audited fiscal year).
State Aid – Trend Analysis. Evaluating historical fiscal data provides constructive information that can be used to both identify structural imbalances and predict future risks.
Exhibit RV-VI sets forth the amount of State aid reported in the County’s Governmental Funds in the audited financial statements for the fiscal years ended December 31, 2012 through 2021, the amount included in the 2022 Adopted Budget and the amount in the County Executive’s 2023 Proposed Budget.
State Aid – Benchmark Analysis. Similar to the trend analysis, the benchmarks were used to compare the County to its peer, Mid-Hudson counties on a per-capita basis.
Exhibit RV-VII sets forth the percent change of State aid reported in 2020 for Mid-Hudson counties on a per-capita basis.
Relative to State aid, the County posted the 4th highest amount of the Mid-Hudson counties for 2020, the most recent year for which such information is available.
CMA Finding- State Aid. The County derives revenue through various forms of State aid. State aid in the 2023 Proposed Budget totals approximately $57.8 million dollars, a slight increase compared to the 2022 Amended Budget of $56.1 million. The projection of State aid in the 2023 Proposed Budget was deemed appropriate.
The County derives a major portion of its Governmental Funds revenue from Federal aid. Federal aid accounted for approximately 8.14% of the County’s Governmental Funds revenue for the fiscal year ended December 31, 2021 (themost recent audited fiscal year).
Federal Aid – Trend Analysis. Evaluating historical fiscal data provides constructive information that can be used to both identify structural imbalances and predict future risks.
Exhibit RV-VIII sets forth the amount of Federal aid reported in the County’s Governmental Funds in the audited financial statements for the fiscal years ended December 31, 2012 through 2021, the amount included in the 2022 Adopted Budget and the amount in the County Executive’s 2023 Proposed Budget.
Federal Aid – Benchmark Analysis. Similar to the trend analysis, the benchmarks were used to compare the County to its peer, Mid-Hudson counties on a per-capita basis.
Exhibit RV-IX sets forth the percent change of Federal aid reported in the 2020 for Mid-Hudson counties on a per-capita basis.
Relative to Federal aid, the County posted the 4th highest amount of the Mid-Hudson counties for 2020, the most recent year for which such information is available.
COVID-19 Federal Response and Related Revenue Challenges. The federal government has passed several pieces of legislation in response to the COVID-19 pandemic, including the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, and the American Rescue Plan Act of 2021, which attempt to address financial instability and liquidity issues through a variety of stimulus measures.
Stimulus Measures for Individuals and Businesses. Individual taxpayers who meet certain income limits received direct cash payments from the federal government. Unemployment rules have been changed to allow self-employed workers, independent contractors and others who would not normally qualify to receive benefits, and unemployment insurance recipients received an additional $600 per week payment until July 31, 2020.
Businesses will benefit from various federal tax law changes, including a payroll tax credit. Air carriers and businesses critical to national security are eligible for direct loans and loan guarantees from the United States Department of the Treasury, and the Federal Reserve has received financial support for its lending programs. Smaller businesses have been incentivized to keep workers in their jobs through the Paycheck Protection Program (offering short-term loans that can be forgiven in whole or in part).
Stimulus Efforts for State and Local Governments. The CARES Act included a $150 billion Coronavirus Relief Fund, which provides funds to states, tribal governments and local governments with populations exceeding 500,000 (local governments with smaller populations can receive monies from the amount allocated to their state). This money is intended for programs that are necessary expenditures incurred due to the public health emergency resulting from the pandemic. This money is not intended to be used to directly account for revenue shortfalls due to the COVID-19 pandemic, but it may indirectly assist with revenue shortfalls in cases where the expenses that are being covered by this fund would otherwise create a further budget shortfall.
Municipal Liquidity Facility. The Federal Reserve established its “Municipal Liquidity Facility” (“MLF”) that offers up to $500 billion in direct federal lending to certain state and local issuers, subject to certain restrictions and limitations. Proceeds borrowed under the MLF may be used to help manage the cash flow impact of income tax deferrals resulting from an extension of income tax filing deadlines, potential reductions of tax and other revenues or increases in expenses related to or resulting from the pandemic, and requirements for the payment of principal and interest on outstanding obligations. Only counties with a population of 500,000 or more and cities with a population of 250,000 or more can participate in the program. An eligible issuer must have been rated at least BBB-/Baa3 as of April 8, 2020, by two or more national credit rating agencies. In New York State, the city of Buffalo (population 256,304), counties of Suffolk (1,476,601), Nassau (1,356,194), Westchester (967,506), Erie (918,7629 and Monroe (741,770), are the only MLF eligible issuers, other than the State itself and some of its agencies.
American Rescue Plan Act. On March 11, 2021, the Federal American Rescue Plan Act (“ARPA”) was enacted. The ARPA is a $1.9 trillion economic stimulus bill intended to contain the COVID-19 pandemic and accelerate the nation’s economic recovery. The ARPA provides the State with $12.6 billion in general aid (“recovery aid”) as well as $17.2 billion in categorical aid for schools, universities, childcare, housing and other purposes. The County received approximately $17 million in ARPA Funds in 2021 and approximately $17 million in additional funds in 2022.
CMA Finding- Federal Aid. As with State aid, several factors remain outside the County’s direct control, which could greatly influence and/or reduce Federal aid. Despite all of the unknowns, there have recently been large allocations of Federal aid specifically to the County. As such, the projection for Federal aid in the 2023 Proposed Budget was deemed to be appropriate. Nevertheless, the County should continue to monitor this source and seek to identify strategic opportunities to increase this form of aid. There presently exists several Federal grant programs which may be applicable to the County.
The County’s Commissioner of Finance is responsible for the collection of hotel occupancy taxes imposed on the occupancy of hotel rooms, as authorized by the County Charter. Occupancy tax is the tax that is charged for things such as motel and hotel rooms, and homes rented through services like AirBnB. According to the Charter, the term “hotel” or “motel” includes an apartment hotel, motor court or inn, boardinghouse or club, or similar hotel or motel type of accommodations by whatever name designated, whether or not meals are served, and shall include those facilities commonly known as “bed-and-breakfast” and “tourist” facilities.
Hotel or motel occupancy tax revenue accounted for approximately 0.87% of the County’s Governmental Funds revenue for the fiscal year ended December 31, 2021 (the most recent audited fiscal year). In the 2023 Proposed Budget, occupancy tax receipts are increased by 9.6% from $2,875,000 in the 2022 Amended Budget to $3,150,000.
The rate the County charges is 2%. Unlike sales tax, occupancy tax is wholly established by the County Legislature and collected by the Commissioner of Finance.
Recessionary Impact. The online publication CHRON clearly states “During an economic recession, small businesses are often hit the hardest…typically luxury services suffer first as both business and private customers cut back on spending.”
CHRON’s discussion of the impact of a recession on luxury services includes travel and hospitality as effected areas.
The Journal of Hospitality and Financial Management has stated “The negative impacts of economic recession on lodging firms have been well documented.” This position is supported in the literature.
Kenzie Academy of SNHU stated in a May 7, 2022 article that “the 2008 recession also negatively impacted spending on leisure and hospitality – Even major players like Disney were forced to lay off workers or significantly reduce hours.”
In an article by the business website FACTY addressing what industries are impacted by recession, FACTY includes airline and travel industries as most effected. FACTY states “As employment rises and families begin to pinch pennies, traveling and vacations aren’t at the forefront of many people’s minds. This causes serious problems for the airline and travel sectors of the economy, who rely on sales and tourism to stay afloat.”
Year-to-Date Amounts. Year to date, 2022 budget numbers show that the County has collected $2,632,089 in hotel occupancy tax compared to its 2022 budget projection of $2,875,000. The County should realize the remaining $242,911 of the budgeted amount. The 2023 Proposed Budget calls for an increase to $3,150,000 in hotel occupancy tax. Within the context of a looming recession and the historic impact recessions have on the hospitality industry based on the research, a $275,000 increase may be too aggressive.
Trend Analysis. Exhibit RV-X, on the following page, sets forth the amount of hotel or motel occupancy tax revenue reported in the County’s Governmental Funds in the audited financial statements for the fiscal years ended December 31, 2012 through 2021, the amount included in the 2022 Amended Budget and the amount in the County’s 2023 Proposed Budget.
CMA Finding- Hotel or Motel Occupancy Tax Projection. Because of the possibility of recession, higher unemployment, and high interest rates that impact credit charges, there is a certain level of expectation that the hospitality industry could be negatively impacted moving forward into 2023. CMA recommends that the County evaluate and consider current year occupancy tax receipts right up until a final decision is required to finalize the 2023 budget to ensure 2022 fourth quarter receipts are not trending downward. By doing this, the County can potentially avoid overestimating this revenue item for 2023.
CMA Finding- Hotel or Motel Occupancy Tax Rate Increase. In its prior review, CMA recommended the occupancy rate be reviewed by the County and increased accordingly to match the “market rate.” The County’s rate of 2% is far below the rate charged by most New York counties, which is generally in the range of 4% to 4.5%.
The County derives revenues from various form of departmental fees and charges. Departmental revenue accounted for approximately 2.59% of the County’s Governmental Funds revenue for the fiscal year ended December 31, 2021 (the most recent audited fiscal year).
Exhibit RV-XI, sets forth the amount of departmental revenue reported in the County’s Governmental Funds in the audited financial statements for the fiscal years ended December 31, 2012 through 2021, the amount included in the 2022 Amended Budget and the amount in the County Executive’s 2023 Proposed Budget.
Recessionary Impact. In the uncertain and threatening economic environment described earlier, it is important that departmental revenues be budgeted (projected) carefully and conservatively. CMA reviewed departmental revenue lines to assess whether the County’s revenue estimates (especially those for departmental fees) were developed in line with current and predicted economic conditions. Some of the larger lines are presented in Exhibit RV-XII.
Like many other public jurisdictions, in order to operate and provide adequate services to residents and other stakeholders, the County requires secure, predictable revenue sources which will grow on an annual basis to keep pace with expenditures. Annual growth of recurring revenue sources is an important factor since the County’s largest expenditures (salaries, employee benefits, equipment, etc.) also increase annually. If revenues become stagnant and expenditure growth cannot be offset, the fiscal condition of the County will deteriorate.
As a result of a looming recession, there exist significant and unknown factors outside the direct control of the County which could (severely and significant) impact key revenue sources. As a result, it is inevitable that a certain level of revenue risk will exist in the 2023 Proposed Budget. To limit the risk of developing a structurally imbalanced budget, revenues should be kept as conservative as possible.