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A Brief Primer on the Current Status of Restructuring Sovereign & US Municipal Debt

Bill Brandt“The Politics and Principles of Restructuring”

California’s Fiscal Crisis: Prospects for Deficit Reductionand Pension Reform in the Golden State

September 21, 2012 • IGS, Berkeley, California

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Date Municipality Population04/2000 City of Westminster, Texas 390

09/2000 Town of Tyrone, Oklahoma 880

11/2000 City of Macks Creek, Missouri 267

06/2001 City of Kendleton, Texas 466

11/2001 Village of Hinsdale, Missouri 1,477

12/2001 City Of Desert Hot Springs, California 16,582

06/2002 City of Rio Bravo, Texas 5,553

11/2002 City of Reeds Spring, Missouri 465

10/2003 Village of Brooklyn, Illinois 676

10/2003 City of Iron Mountain Lake, Missouri 693

04/2004 City of Westminster, Texas 390

05/2004 Village of Washington Park, Illinois 5,345

12/2004 Town of Millport, Alabama 1,160

01/2005 Village of Alorton, Illinois 2,749

04/2005 Town of Muldrow, Oklahoma 3,104

08/2005 City of Camp Wood, Texas 822

01/2006 Town of Marshall Creek, Texas 431

12/2006 Town of Moffett, Oklahoma 179

02/2007 Town of Marion, Mississippi 1,305

04/2008 City of Gould, Arkansas 1,305

05/2008 City of Vallejo, California 116,760

04/2009 Westfall Township, Pennsylvania 2,430

07/2009 Village of Washington Park, Illinois 5,345

10/2009 Town of Moffett, Oklahoma 179

10/2009 City of Prichard, Alabama 28,633

03/2011 Boise County, Idaho 7,028

08/2011 City of Central Falls, Rhode Island 19,376

10/2011 City of Harrisburg, Pennsylvania 49,528

11/2011 County of Jefferson, Alabama 658,466

06/2012 City of Stockton, California 291,707

07/2012 Town of Mamoth Lakes, California 8,234

Source: Bloomberg, Census. Used with permission of Bloomberg L.P. Copyright© 2012. All rights reserved.

The table shows the cities, towns, villages and counties that have filed for Chapter 9 municipal bankruptcy since the turn of the century. Stockton, California, became the most populous city to file for Chapter 9 and the second-biggest of any municipality since 2000, according to Census Bureau data. The average population among the 19 municipalities filing for bankruptcy before the 18-month recession starting in December 2007 was about 2,260. For the 12 municipalities filing during of after the downturn, the average population was 99,083. Still, “for the most part, Chapter 9, has been used by small municipal utilities and special tax districts, and rarely by larger municipalities,” Jim Spiotto, a bankruptcy attorney with Chapman and Cutler LLP in Chicago, wrote in March. As Spiotto pointed out this week, a total of 95 municipalities, including those municipal utility and special tax districts, have filed for Chapter 9 since 2000.-Brian Chappatta and Steven Church

CHAPTER 9 BANKRUPTCIES, 2000 TO DATE

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% Job Losses in Post WWII Recessions

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49

Number of Months After Peak EmploymentData as of June 30, 2011

1948 1953 1958 1960 1969 1974 1980 1981 1990 2001 2007

Source: Data360

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40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71

Months Since PeakData as of August 31, 2011

BOSTON

NEW YORK

MINNEAPOLIS

SAN DIEGOL.A.

COMPOSITE

LAS VEGAS

PHOENIX

MIAMI

CHICAGO

Source: Standard & Poor’s / Case-Shiller

Home Price Index-Decline from Peak

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-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1960 1969 1974 1980 1981 1990 2001 2007

% Change in Housing Starts Following the Beginning of a Recession(3-Year Post-Recession Average)

New Privately Owned Housing Units Started

Source: U.S. Census Bureau

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0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Source: RealtyTrac.com

Foreclosed Homes in 2010

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Lag EffectFiscal 2011 Property Tax Revenues Based on 2008-09 Market Values

Collection Year

LevyYear

Value CalculatedAs Of Based on the Market Period

2006 2005 July 1, 2004 January 1, 2003 to June 30, 2004

2007 2006 July 1, 2005 January 1, 2004 to June 30, 2005

2008 2007 July 1, 2006 January 1, 2005 to June 30, 2006

2009 2008 July 1, 2007 January 1, 2006 to June 30, 2007

2010 2009 July 1, 2008 January 1, 2007 to June 30, 2008

2011 2010 July 1, 2009 January 1, 2008 to June 30, 2009

2012 2011 July 1, 2010 January 1, 2009 to June 30, 2010

Example from the notes of the audited financial report of a Colorado school district

Source: Moody’s

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0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Debt/GDP Pensions/GDP

Source: Moody’s Investors Service

Combined Liabilities as Share of GDPTop 10 States

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Numbers/Facts

Among the 50 states, there are: 218 separate state pension plans 2,332 local pension systems

State of Delaware Pension system is nearly fully funded Credit rating is AAA

State of Indiana Public Employees Retirement System is 94% funded Teacher Plan is 43% funded

State of New Jersey Public Employees Fund is 56% funded Local Fund is 71% funded Teacher Plan is 64% funded

Source: Kotok, David. (2011). Munilan and Pensions. Cumberland Advisors.

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$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120

$130

$140

$150

Financial Condition of the State Retirement Systems

(Dollars in Billions)

Total Assets Total Liabilities

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Net Tax-Supported Debt & Unfunded Pension Liabilities as % of GDP: U.S. States Compared

to Advanced G-20 Nations

Source: Moody’s Investors Service & International Monetary Fund

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

2006 2007 2008 2009 2010

U.S. States U.S. Federal Debt Advanced G-20 Nations

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Teachers in Illinois: 2001 to 2010

2001 2010 % increase

# of Annuitants 65,000 98,000 51%

Benefits Paid $1.6B $4.1B 156%

Average Salaries $50,000 $66,000 32%

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$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Bill

ion

s

Fiscal Year Ending June 30

State of Illinois Pension PlansUnfunded Actuarial Accrued Liability

Source: 6/30/09 CGFA Report

Unfunded LiabilityAll State Pension Systems Combined

Dollars in Billions based on Market Value of Assets

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$19.1B $19.1

$10.6

$6.4

$5.8

$0.3

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

$40.0

$45.0

FY1995 FY2003

UNFUNDED PENSION LIABILITY FY1995 VS. FY2003

(in $ billions)

All Other Factors

Benefit Improvements

Investment Losses

Contribution Shortfall

Unfunded Liability: 7/1/95

$42.2B

What caused the Change in the Unfunded Pension Liability?

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BILL BRANDTBILL BRANDT has been in the business of workout, turnaround and insolvency consulting for more than thirty years and is widelyrecognized as one of the foremost practitioners in the field. He is President and CEO of Development Specialists, Inc. (“DSI”), a firmspecializing in the provision of management, consulting and turnaround assistance to troubled or reorganizing enterprises. Mr.Brandt and his firm continue to be involved with some of the more celebrated financial restructuring cases in the nation’shistory, including Mercury Finance Company, Southeast Banking Corporation, Malden Mills, the Keck, Mahin & Cate law firm, theCoudert Brothers law firm, the Ohio “Coin Fund” scandal, and the Bernie Ebbers Settlement Trust.

Mr. Brandt has advised Congress on matters of insolvency and bankruptcy policy, and in that capacity was the principal author of theamendment to the Bankruptcy Code permitting the election of Trustees in Chapter 11 cases. He was also involved in drafting severalamendments to the Bankruptcy Code enacted into law in April 2005 as part of the Bankruptcy Abuse Prevention and ConsumerProtection Act of 2005, which substantially rewrote the nation’s bankruptcy laws. During the Clinton administration, he served as amember of the President’s National Finance Board as well as serving as a delegate from the State of Florida to the 1996 DemocraticNational Convention. During that decade as well, and upon the invitation of both business and political leaders in the People’sRepublic of China, Mr. Brandt worked with various public policy, law and banking leaders in that country on approaches to thereorganization and restructuring of some of China’s state-owned industries. In 2000, he served as a member of the DemocraticParty’s National Convention Platform Committee. In 2002, he served on the Illinois Gubernatorial Transition Team as well as on theState of California’s Business Delegation dispatched to Cuba to discuss politics, business and trade. In 2008, Mr. Brandt served as adelegate from the State of Illinois to the Democratic National Convention.

By Gubernatorial appointment, Mr. Brandt is serving his second consecutive term as Chair of the Illinois Finance Authority, havingbeen first appointed in 2007 and then reappointed in 2010. The IFA is one of the nation’s largest self-financed entities principallyengaged in issuing taxable and tax-exempt bonds, making loans, and investing capital for businesses, non-profit organizations andlocal government. The Governor has also appointed Mr. Brandt to the Illinois Broadband Deployment Council, which works to ensurethat advanced telecommunications services are available to all the citizens of Illinois. He serves as a member of the National AdvisoryCouncil for the Institute of Governmental Studies at the University of California at Berkeley, while also serving as a member of theBoard of Trustees of Loyola University Chicago, and is a life trustee of Fenwick High School in Oak Park, Illinois. Additionally, he wasalso featured in What Happened, a documentary film humorously chronicling the dot-com “bust,” which premiered at the New YorkCity Film Festival.

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BILL BRANDTMr. Brandt has written for publications that span a broad spectrum of thought, ranging from Maclean’s, Canada’s WeeklyNewsmagazine, to Directors & Boards, Corporate Board Magazine, the Florida Real Estate Journal, and the American BankruptcyInstitute’s Law Review, published in conjunction with St. John’s University School of Law. He is the co-author of the “Due Diligence”chapter in the 2nd edition of Bankruptcy Business Acquisitions published by the American Bankruptcy Institute. He is a frequentlecturer and speaker on topics of corporate restructuring, bankruptcy and related public policy issues and regularly appears onCNN, CNBC, CNNfn, Bloomberg, and Canada’s BNN, as well as the CBS Radio and National Public Radio networks. He has beenprofiled and interviewed in a wide array of periodicals including, among others, The Wall Street Journal, The New York Times, TheInternational Herald Tribune, Business Week, The Miami Herald, The Chicago Tribune, The Boston Globe, Billboard Magazine and BankBailout Litigation News.

He served several terms as a member of the Board of Directors of the American Bankruptcy Institute, as well as also serving severalterms on the Advisory Board for that organization’s Law Review. He served for almost 20 years as a member of the private Panel ofTrustees for the United States Bankruptcy Court for the Northern District of Illinois and briefly served as a member of the same panelfor the Bankruptcy Court in the Southern District of Florida in the late 1980s. He is a member of the Executive Committee of theBankruptcy Section of the Commercial Law League of America and serves on their National Government Affairs Committee. Mr.Brandt is a member of the Board of Advisors for the American Bankruptcy Institute’s Bankruptcy Battleground West seminar heldannually in Los Angeles and is also currently serving his third consecutive three-year term as a member of the Board of Directors ofthe San Francisco Bay Area Bankruptcy Forum. In addition to the Commercial Law League of America and the American BankruptcyInstitute, he holds memberships in the National Association of Bankruptcy Trustees, the International Council of Shopping Centersand the Urban Land Institute.

His biography appears in a number of reference works including Who’s Who in America, Who’s Who in Finance and Industry, andWho’s Who in American Law. For well more than a dozen years, his firm, Development Specialists, Inc., has been rated as one of theoutstanding turnaround firms in the world by the publication Turnarounds & Workouts. Mr. Brandt has also been routinely listed inthe K & A Restructuring Register, an annual roster of the country’s top 100 restructuring advisors. He received his B.A. from St. LouisUniversity and his M.A. from the University of Chicago, where he also completed further post-graduate work toward a doctoraldegree.

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DSI Civic specializes in government financial restructuring and reorganization; debt restructuring; forensic auditing; and negotiations - including vendors, bargaining units, regulatory bodies, investors and financial institutions.

DSI Civic has been a leading provider of management, consulting, and financial advisory services for more than thirty-five years, successfully crafting and executing strategies for government officials, corporations, regulatory agencies, not-for-profit organizations, and court-sanctioned committees protecting the rights of retirees and pension holders.

DSI Civic recognizes the dramatic differences between realigning government bureaucracies and realigning commercial enterprises. We understand the complex and fundamentally different rules and regulations, and the political and communication imperatives associated with any difficult change.

About Us

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