Community Services Provider Arc of Yates utilizes Palisade’s @RISK to Predict Potential Budget Shortfalls

Arc of Yates County, New York provides services for people in the community with developmental disabilities. The organization was facing funding shortfalls from state and local governments, and turned to Palisade’s @RISK to manage and mitigate these risks. Through their use of @RISK, Arc of Yates has been able to develop more effective strategic contingency plans and communicate their challenges to board members and other stakeholders.

About Arc of Yates
Founded in 1975, Arc of Yates is a non-profit organization for people with developmental disabilities. It provides a wide range of community-based services, including service coordination, residential living, clinical services, employment opportunities, and industrial and educational development throughout Yates County in upstate New York.

Budget Uncertainty
With the recent economic downturn, Arc of Yates was unsure of how to account for potential shortfalls in their annual budget planning. As a non-profit organization, Arc of Yates primarily relies on funding from state and local governments.  According to Stephen Johnson, CFO at Arc of Yates, “These funding streams are affected by state and local budget deficits, early retirements of knowledgeable government workers who are not being replaced, inconsistent and capricious rate-setting methodologies and heightened government audit protocols.”  As a result, Arc of Yates could feel the strain on its own year-to-year budgets. 

In addition, Arc of Yates also had to consider a number of additional variable and uncertain factors including Medicaid rate reductions, state contract reductions, county contribution, state audit, and inflation when planning their budget.

Arc of Yates turns to @RISK
To quantify the magnitude and probability of risks in their funding streams that could impact their financial planning, Arc of Yates turned to Palisade’s @RISK. These risks are updated monthly or even weekly, and the group needed a dynamic tool that could keep up with the fast-paced environment.  @RISK uses the Monte Carlo simulation technique: a powerful, yet simple tool for users of all levels to model uncertainty, utilizing ranges and probabilities. Using Palisade’s software, Arc of Yates was able to quantify the actual probability of funding shortfalls and mitigate these risks.  These were crucial insights as Johnson and his team developed their three-year strategic financial plan.

@RISK works by providing a range of probability distributions to represent uncertain variables, and then computing hundreds or thousands of different scenarios.  A probability distribution is simply a range of values with greater probability of certain values occurring than others.  The normal distribution, or “bell curve,” is a common example.  The values around the center – or mean – of the distribution are more likely to occur than the values at the ends or tails.

Due to the magnitude of uncertainties and no clear guidance from the State of New York, some of Arc of Yate’s uncertainties were initially modeled as uniform distributions, which show an equal probability of all values occurring.  As more information became available, those distributions became more refined to beta general distributions.  Due to the fact that they usually are given a range of funding cuts (e.g. 0 to 10%), normal distributions were not used because it’s impossible to determine the mean or standard deviation.  Where there was uncertainty in funding methodology, Johnson and his team used a combination of a binomial and beta general distributions.  Where historical data were available, the group used @RISK’s distribution fitting feature to determine the best distribution to use from the data.  “We are not sophisticated statisticians,” noted Johnson, “and have found the above distributions to be most easily comprehended by our stakeholders.”

In addition to helping Arc of Yates manage uncertain funding, @RISK has been instrumental in communicating risks to the group’s board of directors.  The graphs and output reports generated by @RISK are concise and easy to understand, enabling Johnson and his team to convey their challenges and strategies to senior leadership more effectively and in less time.

Figure 1---Example of Arc of Yates results graph using @RISK. The red graph shows the range of projected surplus for 2011. There is a 90% chance of a surplus between $195,430 and $352,827. However, in 2012 and 2013, deficits are expected.

A history of analytical expertise
Johnson has used @RISK and other Palisade software since 2000.  In addition to @RISK, he has used PrecisionTree for decision tree modeling and StatTools for statistical analysis.  @RISK, PrecisionTree, and StatTools are available in an integrated bundle with the DecisionTools Suite.  His experience stems from work done in R&D for the commercial printer RR Donnelly in 1999.  There, he began to use a range of quantitative analytical techniques to make better decisions, including Monte Carlo simulation, decision trees, the Analytical Hierarchy Process, and others.  He was particularly impacted by the work of the Strategic Decision Group (SDG) in his exploration of Monte Carlo simulation and decision trees, which led him to Palisade software solutions.

Realistic outcomes
“The greatest benefit to Arc of Yates has been reducing a number of significant uncertainties down to a single output that provides our senior leadership and board of directors with a realistic expected outcome,” said Johnson.  “Comparing the two outlying years in our three-year strategic financial plan has also provided advance warning that the next two years will be financially challenging.  As a result, we have re-prioritized capital projects for 2011-2013 and will need to work more collaboratively with other similar agencies to reduce overhead and administrative expense.”

The utilization of @RISK empowered Arc of Yates with the direction it needed to foresee potential obstacles and short falls in its budgetary forecast. “By understanding risks, we are able to both quantify and focus other activities that will generate replacement revenue and contingency plans for cost reduction,” said Johnson.

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