1. Warning Signs: How to Recognize Them and Do Something About It Bob Leland Management Partners CSMFO Annual Conference Oakland CA February 22, 2013 1

2. City of [your name here] 2 Fiscal Mayhem… Like You

3. LaborRetireesDebt Enterprise Subsidies Pooled Cash/ Loans 3 Elements of Fiscal Mayhem Bad Economy Bad Revenue Estimates Bad Accounting/ Late CAFR Bad Luck, RDA Loss

4. Acts of fiscal mayhem increase demand on limited General Fund resources, exacerbate impact of financial downturns Incremental decisions often don’t always appear dangerous until viewed in the aggregate If not addressed, high unit costs erode solvency in three ways:  Cash – can you pay your bills when they come due?  Budget – can you balance a budget, meet annual obligations?  Service – can you provide at level required for community health, safety & welfare? 4 Mayhem Erodes Solvency

5. “I can’t see your fiscal problems from here!” 5 Problems Not So Obvious to Outsiders

6. MOUs typically not discussed in CAFR Affects 70-80% of General Fund expenditures Don’t assume labor cuts can be made “in time”  Closed contracts, disincentive to negotiate  3-Way negotiations: Management, Council, Unions  Meet & confer (MMB), good faith (PERB), imposition now requires 90-day fact finding process Long-term impact not recognized in one-year budget format, component costs not displayed Need payroll model  Apply pay and benefit factors to current workforce (including vacancies)  Estimated pension & medical costs  5-10 year forecast 6 Labor

7. Long-term contracts may delay needed changes Compensation linked to levels in other cities  Negates earlier “concessions” to pay for higher benefits Add-pays boost compensation above labor market No contracting out Management rights restrictions No layoff clause Binding arbitration Different MOU expiration dates “Me-Too” clause 7 Labor MOU Mayhem PE RS

8. COLA deferrals rather than elimination  Until last day of contract (“lift”)  Trade for higher COLA later (as price of deferral)  Problems likely not short-term, increases future obligation Status quo extension  Precludes negotiated changes if circumstances worsen End PERS pickup – employees pay own rate  In exchange, equal salary boost to offset impact (414h)  No net gain, but OT/leave payoffs/salary load increases Health contribution tied to cost of given insurance plan  Double-digit rate increases beyond your control  Current practice if no contract, so increases may continue 8 Labor – Making Matters Worse

9. Constant Fire staffing/minimum staffing levels  Institutionalizes overtime, employees grow to count on it MOUs more liberal than FLSA  Allows paid time off to count toward payperiod hours worked High minimum OT hours on call-backs  Work 1, get 4 Allowing too many people on vacation at one time  Forces OT for fire shifts with minimum staffing Scheduling issues  Police court appearances on days off Manual time & attendance systems  Hard to track, delayed data, unknown reasons for OT 9 Overtime Mayhem

10. OPEB note in CAFR provides some warning  Is plan pre-funded (likely not)  Unfunded liability level (compare to pension, may be higher) High cost provisions:  No or limited vesting period for benefits  Employees receive benefits beyond age 65  Surviving dependents covered  No limits on benefits Pay-go expenses escalating rapidly, may exceed health benefits to current employees  If you can’t fund ARC, change plan benefits Retiree medical benefits do not provide services to community 10 Retiree Medical

11. CAFR only describes debt clinically, misses big picture Debt mayhem takes many forms:  Edifice complex, lure of high-end amenities  Debt backed by developer fees, assuming continued growth for 30 years  General Fund pledged to pay for RDA, Enterprise, Special Revenue obligations  Essential facilities (city hall, fire/police stations) pledged to bonds paying for non-essential facilities (recreation)  Debt service back-loaded, assuming future revenue growth (or higher payroll over which to spread POBs)  Timing risk (PERS loss of your POBs)  Variable rate bond risk 11 Debt Obligations

12. CAFR shows snapshot of transfers/ loans… but not trends/context Enterprise support happens when:  User fees not high enough Prop 218, political resistance to increasing them Better slow/steady fee increases over time vs. erratic/large  Internal financing used due to poor enterprise credit (low fees or non- essential nature) Added drain on GF resources  May be booked as loans, but is there capacity to repay? 12 General Fund Subsidy of Enterprises Why subsidize?  Water  Sewer  Airport  Marina  Transit  Arena  Ballpark  Golf

13. Payments in lieu of taxes charged to enterprises  Property tax/franchise tax Old News: Jarvis organization wins all of these under Prop 218  City forced to repay enterprises  Need clear nexus between services & charges to utilities General Fund does not pay water fees on city parks or buildings New Prop 218-based suits allege unequal treatment among ratepayers  Would force City to pay charges 13 Reverse Subsidies Also Cause Trouble

14. Makes it easy to spend cash that “isn’t yours” Common practice: internal borrowing for cash flow ▪ General Fund must repay advances by end of FY ▪ External borrowing (TRANS): if you don’t qualify that is major warning sign No debt beyond current FY, as it creates impermissible debt without voter approval  Article XVI Section 18a of CA Constitution: “No county, city, town, township, board of education, or school district, shall incur any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year, without the assent of two-thirds of the voters of the public entity…” 14 The Menace of Pooled Cash

15. Debt limit applies equally to internal loans from restricted funds and external borrowing from lender General Fund overdraw of pooled cash by FY end is necessarily money borrowed from restricted funds  Prohibitions on use of restricted funds: Prop 218, grant limitations, AB 1600, gas tax, other state/federal laws Having plan to pay it back does not change fact it is a loan and thus a “liability” Cities may be doing this, but does not make it legal  Some have plans to repay, others lack that capacity  Extensive use of interfund loans is major danger sign 15 Debt Limit Issues

16. No published decision, so remedy unclear  Could be required to restore borrowed funds immediately, with financially catastrophic results Public immunity only goes so far  Does not extend to knowing violations  Public officials are at risk, especially if local politics are toxic State Controller audits cite restricted fund use:  “_____ has made it a habit to tap legally-restricted funds to cover its budget and cash shortfalls… It appears that the City moved money wherever it wanted, whenever it wanted, regardless of the law or the intended purpose of those taxpayer dollars” Dilemma: Violating fund restrictions vs. violating state labor laws vs. bankruptcy 16 Potential Liability to You

17. Acts of fiscal mayhem are eroding your solvency  “friends come and go, but enemies accumulate” CAFR: too late and incomplete story Draining reserves to delay the inevitable leaves agency more exposed to every other risk Price of leaving unit costs high is inevitable erosion of services to point where no slack left in system Recession is beyond your control, but achieving fiscal sustainability and service solvency means identifying and dealing with these problem areas 17 Final Thoughts