Working with Financially
Distressed Cities and Special
Districts
Presented by:
Introduction
Economic & Fiscal Perspective
Walter Kieser
Economic & Fiscal Perspective
Walter Kieser
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Fiscal Stress and it’s Causes
Impact of the Great Recession
Prospect of Continued Stress
Economic & Fiscal Perspective – Fiscal
Stress and its Causes
Walter Kieser
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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 – Municipal Revenue and
Economic Indicators
Walter Kieser
Economic Indicator
Municipal Revenue
Source
Construction
Activity
Real Estate
Sales
Property Tax
X
X
Property Transfer
Tax
X
X
Sales Tax
X
X
Retail
Sales
Transient
Population
X
Utility Taxes and
Fees
X
Transient
Occupancy Tax
Developmentrelated service
charges and fees
Utility
Consumption
X
X
X
Economic & Fiscal Perspective – Recession Will Continue to Affect
Local Government--Walter Kieser
It’s not over yet (despite what the Fed says!)
Slow economic recovery and weak job growth expected even as the recession
ends
Protracted 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 – Prospect for Continued Fiscal Stress
Walter Kieser
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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 – Total Property Tax Revenue
1993 - 2008
Walter Kieser
$60.0
$50.0
Percent Change
20.0%
$40.0
15.0%
$30.0
10.0%
$20.0
5.0%
$10.0
0.0%
$0.0
1988- 1989- 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 200889 90 91 92 93 94 95 96 97 98 99 2000 01 2002 03 04 05 06 07 08 09 [1]
Year-to-Year Percent Change
Total Property Tax Revenue (in billions)
[1] Estimate.
Sources: California State Controller; Economic and Planning Systems, Inc.
Property Tax Revenue (in billions)
25.0%
Economic & Fiscal Perspective – Sales Tax Revenue 1989 - 2008
Walter Kieser
14.0%
$6.0
$5.0
10.0%
Percent Change
8.0%
$4.0
6.0%
4.0%
$3.0
2.0%
$2.0
0.0%
-2.0%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
[1]
$1.0
-4.0%
-6.0%
$0.0
Year-to-Year Percent Change
Sales Tax Revenue (in billions)
[1] Estimate.
Sources: California State Board of Equalization; Department of Finance; Economic and Planning Systems, Inc.
Sales Tax Revenue (in billions)
12.0%
Economic & Fiscal Perspective – Public Safety Salaries 1997 - 2008
Walter Kieser
16.0%
$80,000
% Change
Firefighter Salaries
12.0%
$70,000
Patrol Salaries
$60,000
10.0%
Firefighter Salaries
$50,000
8.0%
$40,000
% Change
Patrol Salaries
6.0%
$30,000
4.0%
CPI
$20,000
2.0%
$10,000
0.0%
-2.0%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Sources: California Employment Development Department; Bureau of Labor Statistics; Economic and Planning Systems, Inc.
2007
2008
$0
Average Salary
Year-to-Year Percent Change
14.0%
Fiscal Health & Solvency
Tom Sinclair
Fiscal Health & Solvency
Tom Sinclair
Levels
of Fiscal Solvency
Cash 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 & Solvency
Tom Sinclair
What should you be asking yourself or your agency staff
about the financial health of your agency?
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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?
Fiscal Health & Solvency
Tom Sinclair
Long range planning is an essential ingredient for fiscal
sustainability.
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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?
Fiscal Health & Solvency
Tom Sinclair
Strong fiscal management begins at the top.
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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?
Fiscal Health & Solvency
Tom Sinclair
Recommendations
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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
Municipal & Public Agency Bankruptcy
Daniel Egan
To Be Eligible for Chapter 9 Bankruptcy
Relief, the Debtor Must:
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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 Bankruptcy
Daniel Egan
The two most difficult elements to prove
for eligibility are:
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That the Debtor is insolvent; and
That the Debtor desires to effect a plan of
adjustment
Municipal & Public Agency Bankruptcy
Daniel Egan
During the Chapter 9 Case the Debtor
can:
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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
Municipal & Public Agency Bankruptcy
Daniel Egan
During the Chapter 9 case, the Debtor
must:
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Continue to pay postpetition debts and liabilities
(like payroll and benefits); and
Honor prepetition pledges of, or liens on, special
revenues
Municipal & Public Agency Bankruptcy
Daniel Egan
The Goal (and Goal Line)– Confirmation
of a Plan of Adjustment
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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.
Municipal & Public Agency Bankruptcy
Daniel Egan
How much does the Debtor have to pay?
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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
District “Dissolutions” and City “Disincorporations”
Mike Oliver
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District Dissolutions
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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.
District “Dissolutions” and City “Disincorporations”
Mike Oliver
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City Disincorporation
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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
Threats to Local Governments’ Solvency
Mike Oliver
1. Excessive Employee Costs
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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
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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
Threats to Local Governments’ Solvency
Mike Oliver
3. Unfunded Liabilities
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Unsustainable retirement costs
Operations & maintenance costs which are unand under funded
Bonded indebtedness which is no longer
revenue supported—redevelopment
Contact Information
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Municipal Resource Group - Mike Oliver
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675 Hartz Avenue, Suite 300 , Danville, CA 94526
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(510) 915-4376
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moliver@municipalresourcegroup.com
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Tom Sinclair (530) 878-9100
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tsinclair@municipalresourcegroup.com
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Wilke, Fleury, Hoffelt, Gould, & Birney, LLP - Daniel L. Egan, Esq.
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400 Capitol Mall, 22nd Floor, Sacramento, CA 95814
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(916) 441-2430
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degan@wilkefleury.com
Economic & Planning Systems, Inc. - Walter Kieser
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2501 Ninth Street, Suite 200, Berkeley, CA 94710
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(510) 841-9190
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wkieser@epsys.com
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