Working with Financially Distressed Cities and Special Districts Presented by:

Working with Financially Distressed Cities and Special Districts

Presented by:

Introduction

Economic & Fiscal Perspective Walter Kieser

Economic & Fiscal Perspective Walter Kieser

Fiscal Stress and it’s Causes Impact of the Great Recession Prospect of Continued Stress

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

Economic & Fiscal Perspective – Fiscal Stress and its Causes

Walter Kieser

Construction Activity

Real Estate Sales

Retail Sales

Utility Consumption

Transient Population

Property Tax X X

Property Transfer Tax X X

Sales Tax X X X

Utility Taxes and Fees X

Transient Occupancy Tax X X

Development-related service charges and fees

X

Economic Indicator

Municipal Revenue Source

Economic & Fiscal Perspective – Municipal Revenue and Economic Indicators

Walter Kieser

It’s not over yet (despite what the Fed says!)

Slow economic recovery and weak job growth expected even as the recession endsProtracted 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

Economic & Fiscal Perspective – Recession Will Continue to Affect Local Government--Walter 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

Economic & Fiscal Perspective – Prospect for Continued Fiscal StressWalter Kieser

Economic & Fiscal Perspective – Total Property Tax Revenue 1993 - 2008

Walter Kieser

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

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

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

Yea

r-to

-Yea

r P

erce

nt

Ch

ang

e

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

Ave

rag

e S

alar

y

Sources: California Employment Development Department; Bureau of Labor Statistics; Economic and Planning Systems, Inc.

Patrol Salaries

Firef ighter Salaries

% Change Firef ighter Salaries

% ChangePatrol Salaries

CPI

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

Fiscal Health & Solvency

Tom Sinclair

Levels of Fiscal SolvencyCash 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.

Fiscal Health & SolvencyTom 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?


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?


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?


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.


Municipal and Public Agency Bankruptcy

Chapter 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 case Be insolvent Desire to effect a plan of adjustment Have previously negotiated with creditors,

unless negotiation is impracticable

Municipal & Public Agency BankruptcyDaniel Egan

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.

This latter right gives the municipality leverage in renegotiating labor contracts


During the Chapter 9 case, the Debtor must:

Continue to pay postpetition debts and liabilities (like payroll and benefits); 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” and City “Disincorporations”

Mike Oliver


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.


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

Threats to Local Government Solvency

Mike Oliver

1. Excessive Employee Costs 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

Threats to Local Governments’ Solvency Mike Oliver

2. Unsustainable Service Levels 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


3. Unfunded Liabilities

Unsustainable retirement costs Operations & maintenance costs which are un-

and under funded Bonded indebtedness which is no longer

revenue supported—redevelopment


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]

Wilke, Fleury, Hoffelt, Gould, & Birney, LLP - Daniel L. Egan, Esq. 400 Capitol Mall, 22nd Floor, Sacramento, CA 95814 (916) 441-2430 [email protected]

Economic & Planning Systems, Inc. - Walter Kieser 2501 Ninth Street, Suite 200, Berkeley, CA 94710 (510) 841-9190 [email protected]

Documents

Working with Financially Distressed Cities and Special Districts Presented by: