Working with Financially Distressed Cities and Special Districts

1. Working with Financially Distressed Cities and Special Districts Presented by:

2. Introduction Economic & Fiscal Perspective Walter Kieser

3. Economic & Fiscal Perspective Walter Kieser • Fiscal Stress and it’s Causes • Impact of the Great Recession • Prospect of Continued Stress

4. Economic & Fiscal Perspective – Fiscal Stress and its Causes Walter Kieser • Local governments depend heavily on revenue sources that are highly sensitive to economic conditions • Fiscal strategies relying on growth (e.g. cost allocation) fail when growth ceases • Continuing State budget crisis, irrational local government fiscal regime and lack of hope for meaningful fiscal reform • Long term imbalances in persistent municipal cost increases and economy-sensitive revenues • Unsustainable commitments to municipal expenditures (e.g. employee compensation) • Continued exposure of defined benefit retirement obligations to investment strategies and broader equity market conditions

5. Economic & Fiscal Perspective – Municipal Revenue and Economic Indicators Walter Kieser

6. Economic & Fiscal Perspective – Recession Will Continue to Affect Local Government--Walter Kieser • It’s not over yet (despite what the Fed says!) • Slow economic recovery and weak job growth expected even as the recession ends • Protracted weakness of real estate expected—slow recovery expected along with “structural” changes • Housing market not likely to recover (new starts) until at least 2012 • Residential values will take many years to return to 2006 levels, with great geographic disparity • Impending crisis (oversupply, bankruptcies) in commercial real estate will extend into 2012 • Changing consumer behavior—lower retail spending will significantly affect retail businesses

7. Economic & Fiscal Perspective – Prospect for Continued Fiscal StressWalter Kieser • Flat or declining municipal revenues (property tax, sales tax) next few years • Weak recovery of key revenues, which will lag the economic recovery by a year or more • Continued upward pressure of local government costs • Limited growth and weak development-related revenues • The cost burden of existing fee programs and cost recovery strategies may deter development • No relief from Sacramento

8. Economic & Fiscal Perspective – Total Property Tax Revenue 1993 - 2008Walter Kieser

9. Economic & Fiscal Perspective – Sales Tax Revenue 1989 - 2008Walter Kieser

10. Economic & Fiscal Perspective – Public Safety Salaries 1997 - 2008Walter Kieser

11. Fiscal Health & Solvency Tom Sinclair

12. Fiscal Health & Solvency Tom Sinclair • Levels of Fiscal Solvency • Cash flow solvency - Ability to meet payroll and other current obligations. • Budgetary solvency - Do annual revenues cover annual expenses? • Long run solvency - Ability to pay for current and long term program costs, including capital costs, post retirement costs and other costs. • Service level solvency - Can the agency continue to provide acceptable public service levels in the future? Our focus today is on long run solvency and service-level solvency. Failure to do so will eventually lead to budgetary and cash flow solvency challenges.

13. Fiscal Health & Solvency Tom Sinclair What should you be asking yourself or your agency staff about the financial health of your agency? • What are the historical trends of key financial indicators? • Major revenue source trends • Program expenditure trends • Employees per capita trends • Fund balance trends • Enterprise fund surplus/deficits trends • What do the historical trends tell you about the agency’s past and present financial health?

14. Fiscal Health & Solvency Tom Sinclair Long range planning is an essential ingredient for fiscal sustainability. • Does the agency prepare a realistic 5-10 year financial projection as part of its annual budget process? • Do long term financial analyses take “hidden costs” into account? • Are multi-year labor contracts incorporated into the 5-10 year financial plan? • Do capital decisions include life cycle cost analysis? • Are program costs considered when capital decisions are made? • Can the Agency continue to provide adequate service levels and maintain service-level solvency?

15. Fiscal Health & Solvency Tom Sinclair Strong fiscal management begins at the top. • Has the Governing Board adopted fiscal, financial and budget policies? • Does the Governing Board take responsibility for the Agency’s financial condition and practices? Do you have an Audit Committee? A Finance Committee? A Budget Committee? • Does the Governing Board hold management accountable for accurate financial analyses and prudent financial practices?

16. Fiscal Health & Solvency Tom Sinclair Recommendations • Assure that elected officials are involved in overseeing the Agency’s financial affairs. • Develop long-range financial planning tools. • Include hidden costs, asset replacement and deferred costs in long range financial analyses. • Avoid long-term labor contracts. • Adopt financial policies. Pay attention to the policies. • Evaluate the ability to provide effective service levels in the future.

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

18. To Be Eligible for Chapter 9 Bankruptcy Relief, the Debtor Must: Municipal & Public Agency Bankruptcy Daniel Egan • Be a “Municipality” • Be specifically authorized by state law to commence a bankruptcy case • Be insolvent • Desire to effect a plan of adjustment • Have previously negotiated with creditors, unless negotiation is impracticable

19. The two most difficult elements to prove for eligibility are: Municipal & Public Agency Bankruptcy Daniel Egan • That the Debtor is insolvent; and • That the Debtor desires to effect a plan of adjustment

20. During the Chapter 9 Case the Debtor can: Municipal & Public Agency Bankruptcy Daniel Egan • Defer payment of “prepetition” debts and liabilities; and • Seek authority to reject collective bargaining agreements and executory contracts. This latter right gives the municipality leverage in renegotiating labor contracts

21. During the Chapter 9 case, the Debtor must: Municipal & Public Agency Bankruptcy Daniel Egan • Continue to pay postpetition debts and liabilities (like payroll and benefits); and • Honor prepetition pledges of, or liens on, special revenues

22. Municipal & Public Agency Bankruptcy Daniel Egan 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.

23. How much does the Debtor have to pay? Municipal & Public Agency Bankruptcy Daniel Egan • 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.

24. District “Dissolutions” and City “Disincorporations” Mike Oliver

25. District “Dissolutions” and City “Disincorporations” Mike Oliver • 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.

26. District “Dissolutions” and City “Disincorporations” Mike Oliver • City Disincorporation • Effect of Disincorporation—’winding-up’. BOS assumes responsibilities/funds/tax levys/public utilities • Process—Initiation 25% registered voters/ agency application—Lafco can’t initiate. Always requires vote

27. Threats to Local Government Solvency Mike Oliver

28. Excessive Employee Costs Threats to Local Governments’ Solvency Mike Oliver • Salaries based on public sector jurisdictions—not private sector comparable pay—total compensation • Automatic adjustments accelerate costs—COLA’s, comparative agencies • PERS/1937 Act retirement benefits-add-ons

29. 2. Unsustainable Service Levels Threats to Local Governments’ Solvency Mike Oliver • Minimum manning for fire services, use of artificial boundaries constrain service • Artificial ‘demand’ standards-law enforcement officers per 1,000—sworn/non-sworn ratios • Subsidies to services—Redevelopment Funds • Use of public employees where contract positions are less expensive

30. 3. Unfunded Liabilities Threats to Local Governments’ Solvency Mike Oliver • Unsustainable retirement costs • Operations & maintenance costs which are un-and under funded • Bonded indebtedness which is no longer revenue supported—redevelopment

31. Contact Information • Municipal Resource Group - Mike Oliver • 675 Hartz Avenue, Suite 300 , Danville, CA 94526 • (510) 915-4376 • moliver@municipalresourcegroup.com • Tom Sinclair (530) 878-9100 • tsinclair@municipalresourcegroup.com • Wilke, Fleury, Hoffelt, Gould, & Birney, LLP - Daniel L. Egan, Esq. • 400 Capitol Mall, 22nd Floor, Sacramento, CA 95814 • (916) 441-2430 • degan@wilkefleury.com • Economic & Planning Systems, Inc. - Walter Kieser • 2501 Ninth Street, Suite 200, Berkeley, CA 94710 • (510) 841-9190 • wkieser@epsys.com