Potential Fallout of

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• Potential Fall-out of
• State Economic Woes
• Robert Daddow
• Deputy County Executive

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TAKE AWAYS

• The take away question is - how does it impact
  my local unit of government?
• Often referenced as economic environment one
  of four major criteria used in the evaluation of
  bond ratings. Much of the matters herein are not
  controllable by your actions.
• The revenues used to address the substantial
  fiscal needs at the State, other local units of
  government and / or other projects will compete
  with the ability of local units to provide core
  services (police, fire, EMS, education, etc.).
• Revenue resources are limited given the economy
  in general at the same time the needs to support
  individuals affected by the economy has never
  been greater.
• Federal government 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 leadership has not addressed the States
  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.

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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
  10B expansion for rail.
• Road maintenance, bridges, highways, etc
  several billion per year requested.
• Water / drain projects compliance with federal
  regulations.
• Fiscally faltering school system.
• Public safety declines with reduction of State
  revenue sharing and at a time that felons are
  being released from prison.
• Numerous local units of government failing.
• Increasing social needs.
• One success Cobo Hall. However, Oakland is
  contributing roughly 600M over the next 30 years
  that could have been used to solve several of the
  above issues.

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OVERVIEW CAVEATS / ASSUMPTIONS

• Impacts on government revenues (in this power
  point) generally do NOT include of GM, Chrysler
  and other supplier bankruptcies for recent lost
  jobs, economic stagnation, and property value
  declines. Employment declines will take roughly
  2 years before the recent job losses work their
  way through the real estate market.
• Absent a second round of federal stimulus funds,
  the State General / School Aid Funds have a 1.2B
  to 1.6B unresolved operating shortfall for the
  2011 fiscal year on General Fund revenues of
  roughly 7.0B.
• 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.

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State Economy Employment

• It all starts with a job. No job. No mortgage
  payment. Foreclosures. Glut of homes.
  Economics 101 increasing inventory, declining
  demand prices fall.
• October 2009 15.1 (U of M predicted 11.3 on
  January 9, 2009 7.0 higher than a year ago). U
  of M predicted by end of 2010, the unemployment
  will remain at 15.8, with modest declines
  thereafter. Sales, Michigan Business and income
  tax revenues for State adversely impacted now
  and into the future.
• National unemployment October 2009 10.2 (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).
• Oakland County unemployment in Oct. 2009 15.6.
  County is now above the State unemployment for
  the first time.
• Detroit unemployment 28.9. New Orleans (post
  Katrina) 11.

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State Economy Employment / Other

• States 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 4M employees 33 years to resolve.
  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.
• 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.
• GAO report fall 2009. By 2019, 92 of federal
  revenues will be spent on major entitlement
  programs and interest costs before federal
  healthcare now being considered. Tax increases
  are inevitable and / or program reductions.

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Auto Industry - Barriers

• Operations / Restructuring cash declines
  caused by operating losses weakened Detroit 3 and
  suppliers, even as vehicles were selling at over
  16M pace now at 10M pace. GM / Chrysler
  lowered fixed, capacity and legacy costs.
  Old-companies remain unresolved. As legacy
  costs are shed, however, more unemployed and
  impacts on employees, and retirees.
• Legacy Costs (Pension / Retirees Healthcare)
  unfunded retirees healthcare of Detroit 3 at
  December 31, 2005 - 113B. Current unfunded
  pensions, as estimated by PBGC, is 77B. 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 wont 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.

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Michigan Fiscal and Budget Issues

• Summary of Michigans 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.
• Above hidden with infusion of federal stimulus
  funds. State has Delayed reforms. State
  structural operating shortfalls for 2011 when
  stimulus funds depleted. AFTER resolving FY-10
  budget, State has another 1.2B to 1.6B to go
  for fiscal 2011. 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.

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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 States operations. Area where
  the principal focus of attention for local units
  of governments occurs.
• Balance sheets importance can be summed up by
  the statement Miami, Florida is just 20 miles
  away. Absolutely true. Who disagrees show of
  hands?

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Michigan Fiscal and Budget Issues (Cont.)

• Notable balance sheet problems - prior schedule
• 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
  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 of 980.2
  million - with the SAF in a 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 even collectible from the SAF?
  General Fund receivable from the SAF of 980.2
  million is 76 of General Fund equity!
• 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!

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Michigan Fiscal and Budget Issues (Cont.)

• October 2009, S P reaffirmed the States bond
  rating at an AA- (same rating as 4 other states).
  In mid-July, Fitch dropped its Michigan rating
  to A. Only states with lower rating than
  Michigan - California at BBB and Louisiana (A).
• Gross State pooled cash balances as of September
  30 trend should be obvious (2008 amounts not
  known)
• 2000 - 4.9 billion. -
  2004 - 1.2 billion.
• 2001 - 3.9 billion. -
  2005 - 1.0 billion.
• 2002 2.8 billion. - 2006
  - 860 million.
• 2003 - 1.4 billion. -
  2007 Unknown.
• Despite the State having a balanced budget on
  paper, the States actual performance failed to
  balance the budget in 6 of the past 8 fiscal
  years (e.g., they used equity to balance
  operations). Equity is now depleted forcing
  the State into the massive cuts for 2010 or would
  have been significant fee / tax increases.
  Reforms not an option takes too long to realize
  benefits.

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Michigan Fiscal and Budget Issues (Cont.)

• Other issues with 2008 balance sheet / 2009
  operations
• Schools - 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 (123K students x 7,316
  900M. Had the pupil counts not been declining,
  the rate per student would have had to decline as
  the State simply did not have this level of
  funds.
• MBT revenues (new in 2008) - 341 million
  included in School Aid Fund (SBT was not
  included). MBT reimburses lost personal property
  tax revenues of the School Aid Fund. In 2009,
  729M in MBT support is budgeted for School Aid
  Fund. Makes elimination of the MBT surcharge
  very difficult will pit new constituency group
  (schools and MEA) against businesses.
  Replacement revenue needed.
• Deficits in other State funds IT Fund (89M and
  increasing) Unemployment Trust Fund (90M) and
  Michigan Education Trust (97.5M) - serves to
  increase the General Fund cash stress.

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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.

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Oakland Countys 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
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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.

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Regional Fiscal Issues Impacting State

• The fiscal issues of some of the local units
  cited in this section will have to be resolved
  against a limited revenue source not all of
  which may be able to be addressed within the
  confines of the local units (meaning the State
  may have to fiscally assist providing less
  resources to other entities).
• Detroit and Detroit Public Schools (DPS) fiscal
  problems so large could jeopardize States fiscal
  status and all units that rely on State
  distributions (including hospitals). States
  General and School Aid Funds have no resources.
• Debt issues - declining taxable value could
  jeopardize the fiscal solvency of TIFAs / DDAs.
  Schools use unlimited G.O. debt. Declines in
  taxable value mean millage rates for school debt
  issues may increase to cover fixed debt service
  costs. These millage increases could pressure
  other unrelated millage requests for cities,
  villages, townships and counties.
• Pressures will build in calendar 2010 to solve
  the operating shortfalls via millage increases
  tax fatigue could easily set in with rejections
  by voters.

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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.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.

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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.

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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, 2007 CAFR (last one issued) reflects a
  General Fund deficit (liabilities over assets) of
  155.6 million and an entity-wide deficit of
  602.5 million about the same as 2006.
• Unresolved 9 billion plus in retirees
  healthcare obligations in 2004 CAFR likely has
  grown since then to maybe 12 billion.
• 300M deficit (e.g. operating shortfall) on
  roughly 1.3B in General Fund revenues for 2009.
  Deficit resolved by sale of lighting and
  parking facilities and securitization of tunnel
  receipts (however, securitization used to balance
  budgets is no longer permitted under GASB rules).
• The City could be at a deficit of over 400
  million by the end of the June 30, 2009 fiscal
  year. By 2012, it rise to 750M cash would be
  depleted before then.
• Mayor indicated that the City could run out of
  cash in October and would have to consider going
  into receivership (Chapter 9).

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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
• 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 1.2B to 1.6B in unresolved 2011
  operating shortfalls meaning further reductions
  are likely.

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Regional Issues - Healthcare

• Hospital costs (just like schools) are comprised
  of real property, equipment and personnel fixed
  and very difficult to reduce in the short-term.
• As auto-related employees lose their jobs, their
  premium healthcare is also lost. Few
  unemployed can afford elective procedures where
  hospital profit margins are strong. Number of
  patients presenting to the hospitals and lower
  insurance coverage creating substantial fiscal
  pressures.
• Unemployed individuals use Medicaid (requiring an
  increasing State grant match) or no medical
  coverage at all. State stressed to secure
  matching funds for Medicaid.
• Hospital and other healthcare providers will be
  fiscally stressed in the next several years with
  fewer admissions.
• These costs will be passed back through BC/BS and
  other insurance providers to employers look for
  increases in healthcare rates and / or
  financially struggling hospitals / clinics.
  BC/BS financial health evaluated by regulator
  now on negative financial outlook (meaning
  likely downgrade shortly).
• The above may be solved through a federal
  healthcare actions being considered this summer
  and fall.

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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.

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• Robert Daddow
• Deputy County Executive
• Oakland County, Michigan
• daddowr_at_oakgov.com