Understanding Local Government’s Financial and Operational Issues -- Tools Needed to Address the ‘New Reality’ --

1. 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

2. Presentation Overview Mike Oliver Municipal Resource Group

3. 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

4. Financial Factors Driving the Economic Distress -- Economics 101 -- Tom Sinclair Municipal Resource Group

5. 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

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

7. 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)

8. 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

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

10. Revenue sources that depend on growth have all but disappeared Source: California Department of Finance, Financial Research Unit (2010 - estimate for new housing starts)

11. 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”

12. 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

13. 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

14. 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

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

16. 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

17. 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.

18. 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;

19. 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.

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

21. Subjective Threats: • 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 $754.00 per capita to $1,184.00; • Percentage of General Fund Committed to public safety ranges from 44.3% to 64.4%;

22. Subjective Threats: • 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%.

23. City of Pleasanton PERS Contributions

24. Campbell, Belmont & San Bruno PERS Contributions

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

26. Introspection & Reflection -- Novel Concepts For Local Government Financing INTROSPECTION 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 To be truly free, it takes more determination, courage, introspection and restraint than to be in shackles. -Pietro Bellusch

27. Introspection & Reflection -- Novel Concepts For Local Government Financing REFLECTION ‘Serious thought or consideration’ “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 (EnglishbornAmericanWriterand political pamphleteer, whose 'Common Sense' and 'Crisis' papers were important influences on the American Revolution. (1737-1809)

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

29. 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

30. 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

31. Take Away – Products of Introspection & Reflection 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;

32. 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!

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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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

42. 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

43. 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

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

45. 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

46. 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

47. 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.

48. 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

49. 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.

50. 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.