Understanding Local Government’s Financial and Operational Issues -- Tools Needed to Address the ‘New Reality’ -- Presented by: Municipal Resource Group and Wilke Fleury, Hoffelt, Gould & Birney, LLP

Presentation Overview Mike Oliver Municipal Resource Group

Presentation Overview New Economic Reality -- It’s Not Kansas Anymore Forces that have created the ‘Tipping Point’ Consolidation & Simplification -- two effective tools The ‘Hammers’-- Dissolution and Bankruptcy

Financial Factors Driving the Economic Distress -- Economics Tom Sinclair Municipal Resource Group

California has declined from the 5 th to the 8 th largest economy in the world Source: World Bank, United States Department of Commerce 5.4% Gross Domestic Product decline in 2009 California GDP has declined for the first time since 1999

New business starts have been declining since 2006 Source: California Department of Finance, Financial Research Unit Impacts economic development, jobs, unemployment and spending

California unemployment ranks 3 rd in the U.S. Source: United States Bureau of Labor Statistics One out of every eight California workers is out of work (not including those who have given up looking)

Taxable sales have declined by 22% in three years: regained 5% in Q Source: California Department of Finance, Financial Research Unit Direct revenue to cities and counties Revenue to the State

Property assessed valuation increases have declined to 4% year over year Source: State of California Controller’s Office

Revenue sources that depend on growth have all but disappeared Source: California Department of Finance, Financial Research Unit ( estimate for new housing starts)

State Budget Impacts  State budget take-backs have, and will continue to impact local governments  “It’s our money, we stole it fair and square”

California population is projected to continue to grow by 27% over the next 20 years Source: California Department of Finance, Demographic Unit (estimated 2015 through 2030) Service demands on local government will continue to increase

Forecast: Unemployment and lack of private investment will continue to create downward pressure on the economy Revenues from new development will be slow to recover Many revenue sources will remain flat for several years

Forecast: Retail sales may have bottomed out Real property tax revenue growth will lag behind an economic recovery Population growth and the economy will impact demands on local governments Sacramento will not help

The Future of Local Government Finance Trying to drive while blindfolded Mike Oliver

Black Swan Theory Nassim Taleb’s theory of events of large magnitude and consequence Three attributes of a Black Swan Event: An outlier -- nothing in the past can point to its possibility Carries an extreme impact Retrospectively predictable Local Government is facing a ‘Black Swan’ event

Forces At Work In Local Government Finance Objective Threats (outside our control): Economic boom and bust cycles are accelerating (bubble economics); Federal and State fiscal instability and liabilities; Lack of local control of revenues.

Forces At Work In Local Government Finance Subjective Threats (within our control or created by us): Operating costs growing at excessive rates: salaries, benefits, staffing; Long-term liabilities incurred without resources to address them;

Forces At Work In Local Government Finance Subjective Threats (within our control or created by us): Lack of flexibility in workforce/mission revision capacity; Failure to Utilize Predictive Financial Models, Educate the Community, and Blaming Sacramento and Washington for financial problems.

Household Net Worth Household Net Worth: The assets of households minus their liabilities. Ratio to Disposable Personal Income

Subjective Threats: 1.Operating costs growing at excessive rates: salaries, benefits & staffing disproportionate costs for Public Safety eliminate flexibility -- Four comparably sized cities of 65,000 to 75,000 Population General Fund Expenditures range from $ per capita to $1,184.00; Percentage of General Fund Committed to public safety ranges from 44.3% to 64.4%;

Subjective Threats: 1.Operating costs growing at excessive rates: salaries, benefits & staffing disproportionate costs for Public Safety eliminate flexibility -- Public Safety PERS costs are escalating: 37% of salary 2010 to 48% in 2014, over 10 years projected to reach 65%; General Employee PERS costs are also escalating: 26%-2010 to 31% in 2014, over 10 years to reach 38%.

City of Pleasanton PERS Contributions

Campbell, Belmont & San Bruno PERS Contributions

Going For Broke: Reforming California's Public Employee Pension System

Introspection & Reflection -- Novel Concepts For Local Government Financing To be truly free, it takes more determination, courage, introspection and restraint than to be in shackles. - Pietro BelluschPietro Bellusch A looking inward; specifically, the act or process of self-examination, or inspection of one's own thoughts and feelings; the cognition which the mind has of its own acts and states; self-consciousness; reflection en.wiktionary.org/wiki/introspection en.wiktionary.org/wiki/introspection INTROSPECTION

Introspection & Reflection -- Novel Concepts For Local Government Financing “There are two distinct classes of what are called thoughts: those that we produce in ourselves by reflection and the act of thinking, and those that bolt into the mind of their own accord” Thomas Paine quotes (English born American Writer and political pamphleteer, whose 'Common Sense' and 'Crisis' papers were important influences on the American Revolution. ( )There are two distinct classes of what are called thoughts: those that we produce in ourselves by reflection and the act of thinking, and those that bolt into the mind of their own accordThomas Paine quotesEnglishAmericanWriter REFLECTION ‘Serious thought or consideration’

A Private Sector Model: Alan Mulally -- CEO Ford Motor Company

Ford Motor Company a Private Sector Model: Alan Mulally, CEO years at Boeing-hired in 2006 by Bill Ford to remake the Ford Motor Company Ford -- Second quarter 2009 net loss of $424m -- Second quarter 2010 profit $2.9b Sold: Jaguar, Range Rover, Aston Martin & Volvo -- smothered Mercury in June 2010

Ford Motor Company a Private Sector Model: 97 nameplates to 60 on the way to platforms to 12 Company’s entire strategy -- its products, standards and operating plan fit on an 11x17 sheet of paper

Develop accurate financial data and utilize revenue & expenditure modeling for all financial decisions; Recognize the ‘elephant in the room’ regarding costs of service and trends; Attain staffing flexibility and options for service delivery; Take Away – Products of Introspection & Reflection

Make the hard choices—sooner rather than later; Create a framework for development of a strategy to address the future—put it on an 11x17 sheet of paper; Start now! Take Away – Products of Introspection & Reflection

Effective Consolidation of Public Safety Services The Path to Success Bill Mc Cammon

Current State of Public Safety Police and Fire have become an increasingly larger portion of city budgets Pension costs, training requirements, and specialization all contribute to the increases

Current State of Public Safety Cities are laying off police officers and firefighters to balance their budgets e.g. Stockton 24; San Jose 49; Vallejo 15 Communities expect elected leaders will maintain existing service levels

Regionalized Models for Service Delivery Service levels can be maintained and enhanced at reduced costs Local control can be maintained Governance models include JPA’s and/or contracts for service Services can include dispatch, communications, EMS, Training, Law Enforcement

Regionalized Models for Service Delivery Successful regionalized model examples include: LA County Fire (59 cities) Orange County Fire Authority (22 cities) Sac Metro Fire District (2 cities, 16 Fire districts) Alameda County Fire Department ( 3 districts, 4 cities, 2 national labs) Cal Fire

Obstacles and Opportunities for Regionalization Lack of Political will Perceived loss of local control Equity e.g. disparate levels of service Organized Labor Operational issues i.e. lack of communications; EMS delivery; training standards

Path to Regionalization - Alameda County Model Prior to 1993 Alameda County responsible for three fire departments County developed a master plan and petitioned LAFCO for the consolidation 1993 the Alameda County Fire Department (ACFD) was formed

Path to Regionalization - Alameda County Model 1995 the City of San Leandro entered into a contract for service with the newly formed ACFD 2000 the City of Dublin contracted with the ACFD 2003 Regional Dispatch created ACFD, 3-cities, County EMS

Path to Regionalization - Alameda County Model 2001 the Lawrence Berkeley National Lab contracted with the ACFD 2008 Lawrence Livermore Lab contracted with ACFD 2010 the cities of Newark and Union City contract with the ACFD

Regionalization Considerations Complete standards of cover model to establish base line service levels Establish support at the staff, and elected level Develop community outreach program to develop local support

Regionalization Considerations Establish contracting model i.e. contract for service, full consolidation, new governance JPA Consider walking before you run possible functional consolidation of some services, EMS, Training, Communications, Administration, or other specialized services

Municipal and Public Agency Bankruptcy Chapter 9 of the Bankruptcy Code Daniel Egan

To Be Eligible for Chapter 9 Bankruptcy Relief, the Debtor Must: Be a “Municipality” Be specifically authorized by state law to commence a Bankruptcy Be insolvent Desire to effect a plan of adjustment Have negotiated with creditors, unless negotiation is impracticable

The two most difficult elements to prove for eligibility are: That the Debtor is insolvent; and That the Debtor desires to effect a plan of adjustment

During the Chapter 9 Case, the Debtor can: Defer payment of “prepetition” debts and liabilities; and Seek authority to reject collective bargaining agreements and executory contracts.

During the Chapter 9 Case, the Debtor must: Continue to pay post petition debts and liabilities; and Honor prepetition pledges of, or liens on, special revenues

The Goal (and Goal Line) -- Confirmation of a Plan of Adjustment The Goal of a Chapter 9 is to obtain confirmation of a Plan of Adjustment, which restructures the debtor’s liabilities The Plan cannot modify or eliminate prepetition liens or pledges on special revenues. The Plan can extend or restructure other obligations, and even provide for payment of less than 100% of the amount of the prepetition debt.

How much does the Debtor have to pay? When the Plan provides for payment of less than 100% of all debts, the Debtor must pay all it can reasonably be expected to pay under the circumstances. However, the Debtor is not obligated to increase taxes to make payments under the Plan. This aspect appears to distinguish a Plan of Adjustment under the Bankruptcy Code from a dissolution under California state law.

District “Dissolutions” District Dissolutions  Effect of Dissolution: successor to ‘wind-up’ affairs, debt obligations, revenues  Process: Initiation by agency resolution, petition or LAFCO. Majority protest. Petitions exceeding 10% or 25% mandate vote, depending on how initiated.

City “Disincorporations” City Disincorporations  Effect of Disincorporation—’winding-up’. BOS assumes responsibilities/funds/tax levy's/public utilities  Process—Initiation 25% registered voters/ agency application—Lafco can’t initiate. Always requires vote

Comparison of Bankruptcy & Disincorporation/Dissolution Daniel Egan

Comparison of Bankruptcy and Disincorporation/Dissolution Which option to choose: If the entity desires to survive the financial crisis, only bankruptcy will allow survival. If the entity desires to liquidate, dissolution/disincorporation will accomplish this result, and the result may also be possible in a bankruptcy plan.

Comparison of Bankruptcy and Disincorporation/Dissolution If the entity wishes to merge with a financially healthy entity, a bankruptcy may allow the distressed entity to first shed liabilities and burdensome contracts Picking the appropriate poison Who inherits service responsibility The County’s role and legal obligations to provide service

Presentation Review New Economic Reality -- It’s Not Kansas Anymore Several converging Forces have created the ‘Tipping Point’ Consolidation & Simplification -- two effective tools The ‘Hammers’-- Dissolution and Bankruptcy

Discussion

Contact Information Municipal Resource Group - Mike Oliver  675 Hartz Avenue, Suite 300, Danville, CA  (510)   Tom Sinclair (530)   Bill Mc Cammon 

Contact Information Wilke, Fleury, Hoffelt, Gould, & Birney, LLP - Daniel L. Egan, Esq.  400 Capitol Mall, 22 nd Floor, Sacramento, CA  (916) 