Impact of Current Economy on Local Governments

1. Impact of Current Economy on Local Governments • October 13, 2010 Association of Government Accountants

2. Economic Outlook • Economy has begun to show signs of improvement • Persistent unemployment and low assessed value will continue to put pressure on local government revenues • Economic recovery will be more gradual than decline • Recovery remains fragile as hiring is dormant • Residential investment bottomed out in the 2009Q2 but has a long way to recover Source: (1) The UCLA Anderson Forecast For the Nation and California (2) Key Developments from Moody’s Economy.com Association of Government Accountants

3. Local Government Perspective • To maximize future financial flexibility and sustainability, local governments are addressing managing liabilities with a long term perspective • Pension and OPEB • Multi-year Planning • Outsourcing / Public Private Partnerships Association of Government Accountants

4. Pension and OPEB Liabilities Association of Government Accountants

5. Fundamental Demographic and Economic Trends Municipalities will be paying OPEBs to more people for a longer period of time • Pending retirement of baby boomer generation • Number of people 65 years of age or older will increase by 86% from 2010 to 2030 • Increased lifespan of retirees (people living longer) • High inflation rate for medical costs • Health care cost for retirees are higher (implicit subsidy) Association of Government Accountants

6. Pension and OPEB Liabilities • The liability of every OPEB fund is different in its construction • Different benefits (health, dental, life, etc.); • Inconsistent vesting and retirement ages; and • Employer payment structures (explicit/implicit). • Medical inflation has far outstripped CPI • National healthcare (as currently constructed) will not relieve employers of their liabilities • Bonds have not been widely used to fund liabilities, except where taxing authority has been expanded Association of Government Accountants

7. Addressing Pension and OPEB Liabilities • Identify potential benefit program changes • Discretionary and Non-discretionary Solutions Benefit Program Funding Strategies • Define multiple funding strategies: • No funding • ARC funding • Pre-funding • Combinations Investment Management OPEB Management Program Funding Methods Account Structure • Budget implication analysis of funding strategies and methods: • PAYGO • Cash Flow • Windfall • OPEB Obligation Bonds • Analysis of alternatives: • PAYGO • Segregated Operating Account • Irrevocable Trusts Association of Government Accountants

8. Long-Term Planning Association of Government Accountants

9. Why Invest in Long-Term Planning? • Helps distressed municipalities regain fiscal health • Enables fiscally healthy localities remain so, and help prevent fiscal problems from turning into crises • Options for addressing structural imbalance are much better before cash and current-year budgetary shortfalls arrive • Creates framework for wiser policy decisions • Promotes proactive resource allocation for community investment goals (e.g. capital improvements) • Positive credit rating factor and recognized best practice Association of Government Accountants

10. Structure of a Long-Term Plan • Analysis focuses on structural budget balance • Degree to which recurring revenues are sufficient to cover recurring expenditures over time • Approaches vary depending on community size and circumstances • Choose an appropriate time horizon for specific needs 5-20 years • How often will the plan be updated? • Three-phase approach is common: • Baseline Assessment • Initiatives Development • Managing and Monitoring (i.e., Implementation) Association of Government Accountants

11. Baseline Assessment Basics • Analyze structural budget balance over a multi-year period assuming continuation of current trends before any corrective action is taken • Recurring revenues • Recurring expenditures • Sound forecasts • Derive “the number” Budget Gap FY2004-FY2009 Association of Government Accountants

12. Initiative Development • Approaches typically would involve some (or all) of the following: • Overall emphasis for expenditures: Containing/slowing growth in expenditures versus cuts • Workforce strategy • Management and productivity initiatives • Program prioritization • Debt structure • Reserves and fund balance: How much? Is it raining yet? • Revenue initiatives (tax and non-tax; sources, rates, and collections) • Balancing risks; Balance sheet flexibility • Investment: Pay-as-you-go; additional borrowing; economic development; innovative solutions (e.g., Productivity Bank) Association of Government Accountants

13. Outsourcing / Public Private Partnerships Association of Government Accountants

14. PPP Overview • Grim budgetary circumstances have elevated the importance of P3 as a means of providing capital to shore up budgets • Character of P3 projects has changed, given the more urgent needs of municipalities Source: Loop Capital Markets Analytical Services Division Update: Public Private Partnerships Association of Government Accountants

15. PPP Evaluation Framework • Does private sector competition already exist? • Is there a policy reason that requires the City to own the asset or provide the specific service? • What is the impact on stakeholders (including labor)? • Does the asset have significant untapped market value? • Is the private sector able to provide improved service delivery than the City? • Does the asset require significant capital investment? • Is there any operational expertise or new technology from which the City can derive benefit? • Might the private sector be in a better position than the City to manage the risks? • Are there already portions of the asset or service contracted? • Is the project implementable sooner with a private partner? • Does a partnership have the potential to lead to further economic development? Association of Government Accountants

16. PPP Analysis • Evaluation procedure • Determine free cash flows or net revenues • Compare theoretical asset sale price to monetized income • PPP pro-forma analysis • Market comparable (recent sales, construction costs) • Tax-exempt monetization • Sale price should exceed $30 million • Key considerations • What is the true value of the asset? • Both from quantitative and qualitative perspectives • Control issues • Public safety, access, noise/environmental concerns • Opportunity cost • Potential for revenue enhancement less cost of ownership Public Financial Management, Inc.

17. Managed Competition • Primary benefits of managed competition: • Establishes benchmark for performance • Promotes improvement in efficiency • Enables phased implementation/pilot program • Retains majority of workforce • Reduce costs by introducing private sector competition for targeted services as part of a managed competition strategy • Implemented through RFP process that includes the local government entityas a bidder against private contractors • Retain ability to manage the process by developing a detailed scope of work, setting cost and performance standards thus ensuring that contractors meet service standards • Competition serves as catalyst: • Streamlining of processes and workforce allocation • Reduced costs and increased efficiency Public Financial Management, Inc.

18. Managed Competition Example – Waste Management • Waste management is an ideal sector for managed competition given large number of private sector providers • Solid waste collection is among most commonly privatized services • Many local governments outsource certain sectors of waste management (e.g. apartments) • Expanded implementation can target Industrial/Commercial waste management to maximize benefit Case Study: City of Indianapolis • Indianapolis Department of Public Works (DPW) bid against private contractors for household waste collections • Increased work per day and cut management jobs • Estimated savings of $5.1 million in the first year Case Study: City of Phoenix • Introduced managed competition in 70’s – across several departments, including waste management • Cut expenses, reduced overtime, more efficient routes, automated collection • Cut service delivery costs by 38% (est. savings of $39 million) Source: The City of Los Angeles Office of the Controller Special Study to Assess Opportunities to Develop Public-Private Partnerships (The PFM Group) Public Financial Management, Inc.