Thousands apply for jobs at Wal-Mart in Livonia August 6, 2007 • Detroit Free Press

1. Pulte: Housing market wont' recover quicklyMarch 16, 2007 • The Detroit NewsBloomfield Hills-based Pulte Homes Inc. said the housing market is unlikely to have a quick recovery as buyers wait out the drop in prices, Bloomberg News reported today. "We're not projecting anything to bounce off the bottom at this point," Chief Financial Officer Roger Cregg said at a UBS conference in London today. "There's been a lot of buyers that have moved to the sidelines." Profit at homebuilders has plunged A PERFECT STORM Keego Harbor January 27, 2010 Oakland County, MI Metro home foreclosures surge in MayJune 13, 2007 • The Detroit NewsSignificantly more Metro Detroit homeowners faced foreclosures on their homes in May than a year ago, an indication the region's housing market woes are far from over. According to data released Tuesday… 5,500 Michigan jobs to be lostFebruary 15, 2007 • The Detroit NewsAUBURN HILLS -- Metro Detroit dodged a major plant closure in the Chrysler Group's massive restructuring, but the area will still bear the brunt of the automaker's job cuts. Chrysler will slash more than 3,600 factory jobs in the… Downsizing Pfizer begins summer of layoffsMay 30, 2007 • The Detroit NewsThe largest waves of layoffs so far have begun at Pfizer Inc.'s research and development facility in Ann Arbor, which the pharmaceutical giant is shutting by the end of next year. Pfizer laid off 50 employees earlier this month, and is cutting between 50 and 150 people in two-week cycles through the rest of the summer. The company anticipates that by the end of this year, the number of employees in Ann Arbor will be down to 400, spokesman Rick Chambers said. Pfizer announced its COMERICA WITHDRAWSMarch 7, 2007 • Detroit Free PressFirst Pfizer, now Comerica. For the second time this year, Michiganders bracing for automotive layoffs have instead been dealt an economic blow from an unexpected source. Comerica Inc.'s decision to move its headquarters to Dallas severs a 158-year hometown relationship with Detroit, and raises anew the scary question about Michigan's economy: What next? Just six weeks ago, pharmaceutical giant Pfizer Inc. stunned Michigan with its decision to close research New home permits plummet in regionApril 18, 2007 • The Detroit NewsIn another ominous sign for southeast Michigan's housing market, permits for new home construction fell sharply in the first quarter of 2007, according to data released Tuesday by Housing Consultants Inc. Housing permits fell 62 percent in Wayne County, 47 percent in Oakland and 35 percent in Macomb. Total permits for the nine-county southeast region fell to 1,271 in January through March, a 48 percent decline from the same period a year ago, according to the Clarkston-based Thousands apply for jobs at Wal-Mart in Livonia August 6, 2007 • Detroit Free Press More than 5,000 people applied for 300 new jobs at the Wal-Mart Supercenter that opens Wednesday in Livonia. The 210,000-square-foot store is the first Wal-Mart in metro Detroit to sell groceries. The store will employ 530 workers, some of whom transferred from the smaller Livonia store that closes tomorrow evening, said store manager Rita Acosta. The old store sits at I-96 and Middlebelt, across the street from competitors Costco and Meijer. The new Wal-Mart Supercenter is the focal point of the new $80-million Wonderland Village development at Middlebelt and Plymouth roads. Farmer Jack jobs are at riskApril 28, 2007 • The Detroit NewsThe Great Atlantic & Pacific Tea Co. has notified the union that represents 5,000 Farmer Jack workers that the company expects to comply with a Michigan law that requires at least 60 days notice before workplace closings or mass layoffs

2. Presentation Overview – A Perfect Storm Take Aways. Financial Issues – State / Regional: Employment / Credit Crunch. Automobile Industry Implosion. State Finances / Budget Issues. Foreclosures / Real Estate Market. Regional Financial Issues. Summary.

3. TAKE AWAYS The ‘take away’ question in this presentation is - how does it impact my local governmental units: • Often referenced as ‘economic environment’ or the ability to operate – one of four major criteria used in the evaluation of bond ratings. Competition for scarce resources will be fierce – and the use of the resources reviewed at levels yet to be seen by bond rating agencies. • Federal government – substantial uncertainty as to whether the federal government can afford to solve states’ fiscal problems as they are structural in nature – with their own looming deficits. State used $3.8 billion of federal stimulus funds for FY- 2009, 2010 and 2011 to balance budget. Only $393 million left for 2011. • State leadership has not addressed the State’s fiscal issues and provided the fiscal stability for subordinate governmental units. They have no long-term fiscal plan – the Governor continues to work on the 2010 educational shortfalls. No fund equity remaining. Cash flow needs substantial. Unfunded retirees’ healthcare obligations well over $40B.

4. TAKE AWAYS – (Cont.) • Substantial operating needs in region – running many tens of billions with substantial difficulties in funding these ‘new’ programs against a public with high unemployment, losing their homes, etc.: • Regional transit – retention of SMART millage; $10 billion in capital expansion for rail system proposed with no capital and operating funding yet identified. • Road maintenance, bridges, highways, etc – several billion per year requested ($.09 per gallon) • Water / drain projects – compliance with federal and State regulations. • Fiscally faltering school system / structure under Proposal A. • Public safety reductions from State revenue sharing. Felons being released from prison. • Many government fiscally failing (e.g., going into deficit; struggling with cash flow issues; etc.). • Many tax questions on August ballot already (extensions for SMART, OCC, and County Parks). • Many fiscally-troubled local governments trying to borrow with low credit ratings and a banking industry still reeling. Can the banking industry tolerate this much debt? • Increasing social needs.

5. TAKE AWAYS – (Cont.) • Impacts on government revenues (in this power point) do NOT generally include of GM, Chrysler and 54 supplier bankruptcies for recent lost jobs, economic stagnation, and property value declines. Unemployment will take over 2 years before the recent job losses work their way through the real estate market. The auto companies are far from secure. • Since last summer, the Perfect Storm presentation projected that the State General / School Aid Funds have $1.2B to $1.6B in unresolved operating shortfalls for FY-2011. Senate Fiscal Agency projected $1.85 billion in operating shortfalls for 2011 in Dec. 22, 2009 report. • Governor rescinded the school proration cuts as November 2009 revenues are up .8% over November 2008 revenues – wanted to wait until revenue estimation conference. Presently not resolving 2011 shortfall. Cost on $1.85B per minute = $3,520 / minute. • Local governmental units impacted - 58% of State revenues are redistributed to local governments to provide programs directly to the public. Largest State distributions to school districts / ISDs.

6. State Economy – Employment • No job. No mortgage payment. Foreclosures. Glut of homes. Economics 101 – increasing inventory, declining demand – prices fall. • December 2009 – 14.6%. U of M predicts 2010 – 15.7% and 2011 – 15.3%. Slow recovery begins in winter 2011. Sales, Michigan Business and income tax revenues for State adversely impacted – now and into the future. • National unemployment December 2009 – 10.0% (16M unemployed), increasing. Excludes 1.4M unemployed no longer seeking work and 9M who are under-employed. 2nd Quarter – 9.4% productivity gains – likely jobless recovery (no reason to hire if productivity is improving without employees). • Since 2000, Michigan lost 50% of the private sector jobs in the nation. Michigan was last in GDP growth and not be a small margin. • Oakland County unemployment in Oct. 2009 – 15.6%. County is now above the State unemployment for the first time. • Detroit unemployment – 28.9%. Pontiac unemployment at 33%. New Orleans (post Katrina) – 11%.

7. State Economy – Employment / Other • State’s Unemployment Trust Fund (UTF) has used up its resources. Sept. 30, 2001, UTF had $3.0 billion in equity (assets in excess of liabilities). Sept. 30, 2008, $90.4M deficit (liabilities over assets, or insolvent). UTF outstanding borrowing from the federal government at September 30, 2008 - $362.4 million. • Fall 2009, Gongwers reported State borrowed $2.8B from federal government under FUTA. Since September 30, 2008, State borrowing at a pace $200M monthly. • New payroll tax calculated - $21 / employee. $2.8B / $21 x 3.85M employees = 35 years to resolve (before considering interest costs). Obviously, the calculation does not make sense – the tax imposed in the fall of 2009 is too low and future tax increases will be substantial as a resolution in 35 years unlikely. • Payroll tax is a barrier to employment growth. Payroll taxes will grow as the UTF borrowings increase – borrowing at a pace of $200 million per month.

8. Auto Industry - Barriers • Operations / Restructuring – cash declines relating to operating losses weakened Detroit 3 and suppliers. $100 billion in operating losses since 2000. GM / Chrysler lowered fixed, capacity and legacy costs. “Old-companies” (aka, ‘bad’) remain unresolved and are still in existence. • Legacy Costs (Pension / Retirees’ Healthcare) – unfunded retirees’ healthcare of Detroit 3 at December 31, 2005 - $113 billion. Current unfunded pensions, as estimated by PBGC, is $77 billion. Some retirees’ paid dearly in bankruptcy; some impacts still coming. Retirees’ healthcare liabilities are now in equity for new GM / Chrysler. How does equity pay medical bills? New company value needs to grow and then stock needs to be sold for cash to pay benefits – not assured. • Mileage (Emission) Standards – tens of billions in research and development over the next decade. Operating losses do not provide sufficient cash for R & D – which investments won’t be recovered then for years thereafter. Funding source – likely will have to be from the federal government in form of grants – little national appetite for more investments in auto industry.

9. Michigan Fiscal and Budget Issues • Summary of Michigan’s critical fiscal issues: • Weak balance sheet for General and School Aid Funds (half of State operations). • Deficits (liabilities over assets) in several funds. • Unemployment borrowing from federal government. • Weak / inaccurate budget projections. • Accounting system fails to quickly identify adverse operating trends. • Management that cannot agree on fiscal policy direction with the result being delayed discussions in the resolution of significant future operating losses. • Above ‘hidden’ with infusion of federal stimulus funds. State has Delayed reforms. State structural operating shortfalls for 2011 when stimulus funds depleted. Political capital already expended with the public – this next round will be very difficult – in an election year. • SB 276 reported out of State Senate committee mid October – with bi-partisan support. Critical legislation impacting whole State.

10. Michigan Fiscal and Budget Issues (Cont.) • Some accounting – beginning equity, plus revenues, less expenditures equals ending equity. Equity key to Wall Street in the balance sheets. • Equity (or net worth) is the difference between assets (what the State owns) and liabilities (what the State owes to vendors, employees, etc.). More assets than liabilities = surplus; more liabilities than assets = deficit. • Balance sheets as of September 30, 2008 for the General, Budget Stabilization and School Aid Funds – half the State’s operations. Area where the principal focus of attention for local units of governments occurs. • Balance sheet’s importance can be summed up by the statement – “Miami, Florida is just 20 miles away.” Absolutely true. Who disagrees – show of hands?

13. Michigan Fiscal and Budget Issues (Cont.) • Notable balance sheet fiscal problems (see prior slide): • General Fund cash at September 30, 2008 - $7.1 MILLION; vendor payables $1.8 BILLION due to be paid from the $7.1 million in cash – how do you pay $1.8 BILLION in vendor payables with $7.1 MILLION in cash? • School Aid Fund (SAF) ‘borrowing’ of other State funds’ cash based on a study by the Citizens Research Council – roughly $1.3 billion to $1.5 billion ‘borrowed’ from other State funds for 2006. State Treasury report indicates SAF used $1.6 billion of other funds’ cash at Sept. 30, 2007 principally General and Transportation Funds. • General Fund receivable from SAF = $980.2 million. SAF has $1.3 billion cash deficit and the General Fund providing operating subsidies to the SAF – how does the SAF ever repay General Fund? Is the $980.2 million receivable collectible from the SAF? General Fund receivable from the SAF of $980.2 million is 76% of General Fund equity!

14. Michigan Fiscal and Budget Issues (Cont.) • Fiscal problems (continued): • Receivable increased from $503 million at Sept. 30, 2006 (47% of General Fund equity) to $980.2 million at Sept. 30, 2008 (76% of General Fund equity) – in two years! • Jan. 2010 revenue estimation conference has pegged General Fund and SAF unreserved equity at $406M at Sept. 30, 2009 – down from $715M at Sept. 30, 2008. If true, then the outstanding borrowing by the SAF is now 95% of the equity in the General Fund. • Even as the equity is disappearing, the State is projecting a 3% increase in salaries as of October 1, 2010. • Despite the State having a ‘balanced budget’ on paper, the State’s actual performance failed to balance the budget in 6 of the past 8 fiscal years (e.g., they used equity to balance operations).

16. Michigan Fiscal and Budget Issues (Cont.) • Even with the reductions of the equity from the audited financial statements (CAFR), the Senate Fiscal Agency anticipates that the equity will decline $641 million from September 30, 2008 to 2010. Ending projected General Fund / SAF equity represents roughly 37 hours of operations. • Pupil counts have declined from 1,714,705 in 2003 to 1,591,100 in 2010 – 123,605 decline. Base foundation allowance is currently $7,316 per student. Census declines allowed the ‘growth’ in base foundation allowance rates. Base foundation allowance may be reduced for 2010 and 2011 absent more federal grant awards or new tax revenues. Even pupil count reductions cannot compensate for recent revenue declines and the 2011 operating shortfall.

17. Michigan Pensions / OPEB • Pensions: • From FY-2002 through FY-2008, full pension contributions were not made for State and school pension plans in accordance with the actuaries’ recommendations in all but one year. Cumulative contributions shorted (to be funded by future generations) for State and school pension plans were $536 million and $797 million, respectively – total of $1.3 billion (if paid, the General Fund would have been in a deficit at September 30, 2008). • The September 30, 2007 school and state pension reports an unfunded actuarial accrued liability of $7.8 billion as reported in 2008 CAFR. Should not adversely impact retirement benefits currently paid. • Recent substantial market declines in 2008 and 2009, however, will significantly increase pension contributions for 2011 and beyond – particularly if the market does not recover to the prior levels.

18. Oakland County’s Timeline of Retiree Healthcare Changes and Annual Cost of ARC Planned full funding of UAL with COPS Plan closed to new hires Cost differentiation by age Prescription co-pay increased VEBA Trust Created Vesting schedule lengthened Actuarial ARC payment begins Vesting schedule lengthened Increase to 100% of premium Benefit Begins, 50% of Premium

19. State Budget Problems – Pensions / OPEB (Cont.) • Retirees’ healthcare (OPEB): • $39.9 billion in unfunded liabilities at September 30, 2007 and growing at a pace of roughly $2 billion annually as State is only funding medical bills when presented (e.g. “pay-as-you-go”). • State does not pre-fund retirees’ healthcare – if they did, they would have to find another $1.7 billion to $2.0 billion in new revenues (or reduced expenditures) annually for each of the next 30 years from existing revenues (General Fund revenues may be $7B / School Aid - $12B) – OVER the shortfall presently being debated in Lansing.

20. Market analysis: Sheriff Deeds 1-4-09 Oakland County - Real Properties 1 in 51 1 in 56 1,192% Increase in the number of Sheriff Deeds from 1998 to 2008. 1 in 62 8.2% Decrease in the number of Sheriff Deeds from 2008 to 2009. 1 in 97 1 in 174 1 in 212 1 in 225 1 in 253 1 in 377 1 in 532 1 in 539 1 in 597 Sheriff Deed totals retrieved from the Oakland County Register of Deeds office.

21. Property Value Changes * * • 2001-2009 information from annual Equalization Reports. • 2010-2011 are estimates.

22. Real Estate Issues - Factoids • Oakland hosts centralized land records system for local governments enabling the identification of local real estate trends and issues. Oakland County represents 17.7% of the taxable value of the entire State. Oakland’s values track consistent with region’s declines. Regionally, the taxable value is roughly 65% of the State values. • Aug. 2009, Deutsche Bank reported that by 2011, 48% of home mortgages nationally would be ‘under water’ (e.g. mortgage > value of home). Nationally, mortgage investments by banks expected to continue. • Business Week – between now and 2012, $1.4 TRILLION in commercial real estate loans coming due. With property as collateral and dropping, many businesses will not be able to rollover these loans. Banks having been burned earlier on real estate deals are ‘gun shy.’

23. Real Estate Issues – Factoids (Cont.) • From 2006 to present, homeowners nationally lost $6.9 trillion in home equity – likely the largest asset of homeowner’s net worth. • Urban Land Institute ranked Detroit area 50th of 50 top cities nationally as to commercial multi-family development market. • RealComp reported that sale prices of residences has declined from $85,000 in Sept. 2008 to $65,000 at Sept. 2009 – a 22.9% decline. Foreclosure sales went from $38,700 to $34,000 during same time. • Oakland has $3.5 billion in real property value challenges in front of Michigan Tax Tribunal, most are commercial / industrial.

24. Real Estate Factoids (Cont.) • Why December 31, 2009 values were adversely impacted – Oakland data: • Residential properties. SEV = TV (42% as of Dec. 31, 2007); 65% as of Dec. 31, 2008; over 85% plus as of Dec. 31, 2009. • Unlimited value declines on the SEV = TV properties calculated on a parcel by parcel basis and growing. • For SEV >TV properties limited growth (lesser of 5% or CPI) in revenues - CPI will be a negative .30% for 2009 (further reducing taxable value for these homes – and governmental revenues) . • No new construction - for 33 communities where Equalization does assessing, in 2005 there were 2,408 permits pulled. For first 11 months in 2009, just 122. No significant new value being added to the properties in the past year and none expected in the foreseeable future.

25. Real Estate Issues – State Impacts • Impact on the State budget could be hundreds of millions for: • State Education Tax (SET – 6.0 mils) – the taxable value declines projected by Oakland County, which will mirror other counties, will directly impact the SET for schools. State gets $1.8 billion in revenues for the SAF. • Schools’ Base Foundation Allowance – declining local property taxes for schools will increase the State’s obligation to cover the difference (or, reduce the base foundation allowance). Formula uses data of a year ago for school property taxes meaning impact will be delayed one year from losses cited herein. Losses likely “funded” in part from the student census declines discussed earlier. • State transfer tax revenue – fee based on values; given fewer properties being sold has declined significantly in the recent year. • Oakland Schools (ISD) is adversely impacted in three millages (General, Special and Vocation Education millages of 3.3690 mils in total) as it is fixed against declining taxable value. Their Special Education fund is largest and hardest hit, negatively impacting flow-through to local districts. Without relief in Special Education mandates, the local school districts’ general funds will have to cover the shortfall.

26. Real Estate Issues – Regional • Oakland County anticipated taxable value declines in its budgeting process as of the following Dec. 31 assessment date: • 2008 – 4.5% (actual). In 2009 budget, including MTT losses. • 2009 – 13.0%. Amount firming up (final to be reported in Feb. 2010). • 2010 – was 12.0% in budget. Now up to 12.5% based on two months sales study (Oct. / Nov. 2009). • 2011 – 5.0%. The 2011 amount is likely low depending upon how the present auto companies’ restructurings / lay-offs impact future revenues – will take two years to work through the system.

27. Future Regional Real Estate Issues • Macomb / Wayne Counties – Macomb is projecting 10%, 13%, and 10% declines for December 31, 2009, 2010 and 2011 assessment rolls. Wayne County is mirroring both Macomb and Oakland Counties. • Property Tax Revenues / Labor Agreements – past property tax revenue increases generally covered economic increases in compensation. Labor negotiations will be critical as the property tax declines will result in long-term losses of revenues – a clash of declining revenues and increasing labor costs are already occurring – resulting in headcount reductions. • DTRF distributions – delinquent receivables are purchased by counties from CVTs / schools with ‘recourse.’ If uncollectible by counties, they are paid by the original government which had the delinquency - adequacy of reserves (few governmental units provide reserves for this loss). Vandalized properties are a problem.

28. Future Regional Real Estate Issues • Detroit DTRF distributions – Detroit’s 2008 CAFR had a $57.6 million loss arising from the return to Wayne County Treasurer on a levy of $220 million as taxes were not paid by the homeowner or bank or purchased in the May tax sale. Property wasn’t worth the outstanding tax amount – banks walked. • School Districts - school districts are stressed due to the fiscal structure / relationship between the State and schools (pension / retirees’ healthcare issues). The funding structure is very troubling, particularly with recent reductions in the base foundation allowances and 20j veto by Governor.

29. Future Real Estate Issues (Cont.) • Unlikely that taxable value at December 31, 2007 will return to similar levels (unadjusted for inflation and millage increases) until circa 2020 – 2025. Construction will be minimal until at least mid-2015 or so. Pop-ups (increases from taxable value to SEV when property sold) won’t occur for the decade. • Governments will have to do without increases in property tax revenues for a half-generation – while expenditures have no limitations on increases. • Above assertions affirmed in Pew Report (Sept. 2009), Land Institute Report prepared by PriceWaterhouseCoopers (Oct. 2009) and Blue Canyon Partners Report (Aug. 2009).

30. Regional Fiscal Issues Impacting State • The fiscal issues of some local units will have to be resolved even as the State has limited resources. Some units’ deficits and operating shortfalls are so great as to potentially jeopardize the State’s rating. • Debt issues - declining taxable value could jeopardize the fiscal solvency of TIFAs / DDAs / LDFAs. • Schools use unlimited general obligation debt (voted by electorate). Declines in taxable value mean millage rates for school debt issues may increase to cover fixed debt service costs. • Pressures will build in calendar 2010 to solve the operating shortfalls via millage increases – tax fatigue could easily set in with rejections by voters.

31. Regional Issues - State Finances (Cont.) • Detroit Public Schools: • June 30, 2008 CAFR reflects a General Fund deficit of $142.3 million and an entity-wide deficit of $496 million (liabilities in excess of assets). • In June 2008, the DPS reported a $400 million deficit for 2008 – e.g. expenditures exceeding revenues. • Jan. 2009, Governor appoints an emergency financial manager in Jan. 2009, DPS announces it has insufficient cash flows to cover payrolls for school year (short $76M). Owes State $42M for unpaid pension contributions. State advanced funds for DPS payrolls for FY-2009. • Operating shortfall of up to $250M remains unresolved – how will they get through FY-10? • Financial manager considering Chapter 9 bankruptcy – would be viewed negatively by bond industry and impact all governments ability to borrow in region.

32. Regional Issues Impacting State Finances (Cont.) • Pontiac – in Act 72 with emergency financial manager. Police department reduced from 170 FTEs to 65 FTEs. School district struggling as well. • Wayne County - $105M operating shortfall for FY-2010 (500 non-union layoffs with potentially 440 union lay-offs). • Macomb County – recently ‘solved’ their 2009 operating shortfall with a tax increase to its authorized limit. • SMART (bus services) has an unresolved 2012 operating shortfall of $9.6M and increasing thereafter – assuming that the extension of a millage to be voted upon in August 2010 is passed. SMART operations would have to be substantially curtailed to very basic services if it fails.

33. Regional Fiscal Issues Impacting State (Cont.) • City of Detroit: • Detroit to sell $250M in deficit elimination bonds with junk bond as a credit rating. • June 30, 2008 CAFR - General Fund deficit (liabilities over assets) of $219.2 million and an entity-wide deficit of $687.5 million, up from last year. • Unfunded retirees’ healthcare obligations - $4.9 billion. Would require $114 million more than in the City’s 2008 operations. • City had an operating short-fall (expenditures over revenues) in the General Fund for 2008 of $53 million. • Mayor indicated that the City could run out of cash in October and would have to consider going into receivership (Chapter 9).

34. Regional Fiscal Issues – Schools • Schools are ‘fiscal canaries in coal mine.’ Fiscally, many schools will fail (payless paydays; debt issues potentially; vendor delays; and / or similar issues leading up to Act 72 – emergency financial manager). • Total cuts for 2010 of $515M – four months into the fiscal year – with schools having largely fixed costs (people / facilities / equipment): • 2010 budget cut $165 / pupil in continuation budget. Total $262.3M. • Executive order cut of $127 / pupil. State Treasurer announced sale tax revenues have declined. Total $201.6M. Now rescinded because fiscal situation improved per the Governor. • 20j veto – Total $51.5M to certain school districts. • Taxable value declines impact ISD special education millage revenues – dollar impact is not known, but will require declining base foundation allowance to supplant losses in special education programs. • Above BEFORE $1.8 billion in unresolved 2011 operating shortfalls – meaning further reductions are probable.

35. Summary • The solutions to resolve the budget beast facing State and local governmental units are many. There is no shortage of solutions – new taxes, service reductions and / or structural reforms – it seems a shortage of political will to undertake tough decisions before the crisis occurs. • Unfortunately, there will be numerous governmental units who will be unable to plan longer-term for the fiscal crisis ahead and likely will find themselves facing Act 72 – an emergency financial manager or worse. • Proper management principles, long-term planning, leadership and political will can solve the tough business issues facing Michigan governments.