Understanding Local Government’s Financial and Operational Issues
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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.

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Understanding local government

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

Presentation Overview

Mike Oliver Municipal Resource Group


Presentation overview1

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

Financial Factors Driving the Economic Distress -- Economics 101 --

Tom Sinclair

Municipal Resource Group


California has declined from the 5 th to the 8 th largest economy in the world

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


Understanding local government

New business starts have been declining since 2006

Source: California Department of Finance, Financial Research Unit

  • Impacts economic development, jobs, unemployment and spending


Understanding local government

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)


Understanding local government

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


Understanding local government

Property assessed valuation increases have declined to 4% year over year

Source: State of California Controller’s Office


Understanding local government

Revenue sources that depend on growth have all but disappeared

Source: California Department of Finance, Financial Research Unit

(2010 - estimate for new housing starts)


Understanding local government

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”


Understanding local government

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


Understanding local government

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


Understanding local government

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

The Future of Local Government Finance

Trying to drive while blindfolded

Mike Oliver


Understanding local government

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


Understanding local government

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.


Understanding local government

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;


Understanding local government

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.


Understanding local government

Household Net Worth

Household Net Worth: The assets of households minus their liabilities.

Ratio to Disposable Personal Income


Understanding local government

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%;


Understanding local government

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%.


Understanding local government

City of Pleasanton PERS Contributions


Understanding local government

Campbell, Belmont & San Bruno PERS Contributions


Understanding local government

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


Understanding local government

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


Understanding local government

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)


Understanding local government

A Private Sector Model:

Alan Mulally -- CEO Ford Motor Company


Understanding local government

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


Understanding local government

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


Understanding local government

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;


Understanding local government

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!


Effective consolidation of public safety services

Effective Consolidation of Public Safety Services

The Path to Success

Bill Mc Cammon


Understanding local government

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


Understanding local government

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


Understanding local government

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


Understanding local government

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


Understanding local government

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


Understanding local government

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


Understanding local government

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


Understanding local government

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


Understanding local government

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


Understanding local government

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 bankruptcy

Municipal and Public Agency Bankruptcy

Chapter 9 of the Bankruptcy Code

Daniel Egan


To be eligible for chapter 9 bankruptcy relief the debtor must

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

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

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

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 (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

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”

  • 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”

  • 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

Comparison of Bankruptcy & Disincorporation/Dissolution

Daniel Egan


Comparison of bankruptcy and disincorporation dissolution

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 dissolution1

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

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

Discussion


Contact information

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 information1

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]


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