understanding local government’s financial and operational issues -- tools needed to address the...
TRANSCRIPT
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 101 -- Tom Sinclair
Municipal Resource Group
California has declined from the 5th to the 8th 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 3rd 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 Q1 2010
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
(2010 - 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 TheoryNassim 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.
2010200019901980197019601950
6.5
6.0
5.5
5.0
4.5
4.0
0
Ratio to Disposable Personal Income
Subjective Threats:
1. Operating costs growing at excessive rates: salaries, benefits & staffingdisproportionate costs for Public Safety eliminate flexibility --
• Four comparably sized cities of 65,000 to 75,000 Population • General Fund Expenditures range from $754.00 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 & staffingdisproportionate 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 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; reflectionen.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. (1737-1809)
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 -- 37 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 20
•25 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
BankruptcyChapter 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
94526 (510) 915-4376 [email protected] Tom Sinclair (530) 878-9100 [email protected] Bill Mc Cammon [email protected]
Contact Information Wilke, Fleury, Hoffelt, Gould, &
Birney, LLP - Daniel L. Egan, Esq. 400 Capitol Mall, 22nd Floor,
Sacramento, CA 95814 (916) 441-2430 [email protected]