Transcript Slide 1

Pulte: Housing market
A PERFECT STORM
wont' recover quickly
City Managers Seminar March 16, 2007 • The Detroit News
July 29, 2009
Oakland County, MI
Bloomfield Hills-based Pulte Homes Inc. said the
housing market is unlikely to have a quick recovery
as buyers wait out the drop in prices, Bloomberg
News reported today. "We're not projecting anything
to bounce off the bottom at this point," Chief
Financial Officer Roger Cregg said at a UBS
conference in London today. "There's been a lot of
buyers that have moved to the sidelines." Profit at
homebuilders has plunged
New home
permits
plummet in
region
April 18, 2007 • The Detroit News
In another ominous sign for
southeast Michigan's housing
market, permits for new home
construction fell sharply in the first
quarter of 2007, according to data
released Tuesday by Housing
Consultants Inc. Housing permits
fell 62 percent in Wayne County, 47
percent in Oakland and 35 percent
in Macomb. Total permits for the
nine-county southeast region fell to
1,271 in January through March, a
48 percent decline from the same
period a year ago, according to the
Clarkston-based
Thousands apply for jobs at
Wal-Mart in Livonia
August 6, 2007 • Detroit Free Press
More than 5,000 people applied for 300 new jobs at the Wal-Mart
Supercenter that opens Wednesday in Livonia. The 210,000-squarefoot store is the first Wal-Mart in metro Detroit to sell groceries. The
store will employ 530 workers, some of whom transferred from the
smaller Livonia store that closes tomorrow evening, said store
manager Rita Acosta. The old store sits at I-96 and Middlebelt, across
the street from competitors Costco and Meijer. The new Wal-Mart
Supercenter is the focal point of the new $80-million Wonderland
Village development at Middlebelt and Plymouth roads.
Presentation Overview – A Perfect Storm
• Financial Issues – State / Regional:
– Employment / Credit Crunch.
– Automobile Industry Implosion.
– State Finances / Budget Issues.
– Regional Financial Issues.
– Foreclosures / Real Estate Market.
• Recommendations to help resolve
Michigan’s business issues.
OVERVIEW – CAVEATS / ASSUMPTIONS
• Presentation generally does NOT include the impact of the GM,
Chrysler and other supplier bankruptcy filings for future lost jobs,
economic development stagnation, and property value declines that
will be felt over from 2010 to 2012. As a practical matter, it will take
roughly two years before the 2009 job losses work their way through
the real estate market.
• Absent a new infusion of federal stimulus funds, the State would
have a $2B to $3B operating shortfall for the 2011 fiscal year on
General Fund revenues of roughly $7B to $8B. FY-2010 State
budget targets have not been agreed to in mid-July. Revenues
continue to decline.
• The State’s operating shortfalls are not sustainable – there is no
equity to draw from. Local units of government will be adversely
impacted absent more federal funds. 58% of all State revenue
collected is redistributed to local units of government. The largest
dollar distributions are to school districts.
State Economy – Employment
• Michigan in 2003 - 7.1%; June 2009 – 15.2% (higher than the
11.3% U of M predicted on January 9, 2009; 7.0% higher than
a year ago). In the May 2009 revenue estimation committee meeting,
the Senate Fiscal Agency predicted 16.9% unemployment for 2010.
Three recent monthly increases in unemployment have been greater
than 1% – hasn’t ever happened before.
• National unemployment in June 2009 – 9.6% and growing.
• Social program needs are growing as governmental revenues are
declining.
• Revenue estimation committee (statutory body - State Treasurer and
House and Senate Fiscal Agencies set revenue targets for current and
next fiscal years) held on Jan. 9, 2009. U of M economists projected
increases in unemployment by 193K jobs in 2009 and another 80K in
2010 – at the 11.3% level. Unemployment stands at 740,000
unemployed in Michigan in June 2009.
State Economy – Employment (Cont.)
•
The State’s Unemployment Trust Fund (UTF) has limited resources. Sept.
30, 2001, the UTF had $3.0 billion in equity (assets in excess of liabilities).
As of September 30, 2008, it has a $90.4 million deficit (liabilities over
assets). The UTF outstanding borrowing from the federal government at
September 30, 2008 was $362.4 million.
•
In spring 2009, Gongwers reported that the State has borrowed $2.2 billion
under FUTA (e.g. federal government). Since September 30, 2008, the
State is borrowing at a pace of $200 million monthly – which will require
repayment to the federal government through increased payroll taxes.
•
When the UTF is depleted the borrowings from the federal government
results in a new payroll tax (adversely impact new hires). SBT problems all
over again - a payroll tax is a barrier to employment growth. Payroll taxes
started in October 2008 based on the modest borrowings at that time. The
payroll taxes will grow as the borrowings increase.
•
Unemployment bubble – over 100K unemployed will lose unemployment
benefits by late summer / early fall 2009.
Auto Industry - Barriers
• Operations / Restructuring – cash declines relating to substantial
operating losses over the last half dozen years – when vehicles were
selling at over 16+M pace; now at 9M to 10M pace. GM / Chrysler
bankruptcies should lower fixed, capacity and legacy costs. “Oldcompanies” (aka, ‘bad’) remain unresolved. As legacy costs are shed,
however, they represent lifelines for the unemployed, employees, and
retirees.
• Legacy Costs (Pension / OPEB) – the unfunded portion of
retirees’ healthcare at December 31, 2005 - $113 billion for Detroit
3. Current unfunded pensions, as estimated by PBGC, is $77 billion.
Much will be addressed in bankruptcy – but at what cost to the
retirees / employees? Retirees’ healthcare, now in the form of equity
for new GM / Chrysler – how will equity pay the bills of hospital stays
when presented? New company value needs to grow and 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.
Auto Industry – Mileage Emission Standards
• Mileage (Emission) Standards – the impacts on the
ability to sell cars the public will purchase remains a
significant open question:
– Federal government has recently adopted stringent emission
standards for mileage by 2016.
– Sizable investments (beyond the ability of the auto companies) will
have to be made potentially through federal and local grants to
achieve the imposed standards.
– 138M vehicles owned in U.S.; 15M replaced annually – will take a
generation to replace the ‘gas guzzler’ vehicles in the U.S. Presently,
only 2% of vehicles sold are considered ‘green vehicles’. All while
China and India will be putting more vehicles on their roads below
U.S. environmental standards – increasing world pollution while USA
tries to compensate. Do polar bears really care who pollutes?
Auto Industry – Other Barriers
• Vehicle Production – U.S. economy slowed in 2008 and credit
remains tight, despite stimulus efforts. Expected to continue to be
slow for some time – total units and Detroit’s market share of
vehicles sold are declining to historical lows, a ‘two-fer’):
– Calendar 2007, 16.1M light vehicles sold (8.1M by Detroit 3). Calendar
2008, projection is 13.1M vehicles sold (6.1M by Detroit 3).
– Calendar 2009, U of M projects 10.9M vehicles (Detroit 3 – 4.6M).
12.3M vehicles for 2010 (Detroit 3 - 5.1M vehicles). Recent sales
levels are under a 10M vehicle pace for 2009.
– Recently, lowest number of Detroit 3 vehicles previously sold was in
1981/82 – 7.6M vehicles. 2009 is projected to be at 4.6M vehicles –
3M less than previous lows.
– Detroit 3 production will adversely impact personal income taxes;
MBT; and sales taxes – sales taxes are a key component to local
government revenue sharing and school distributions.
Auto Industry – Other Barriers
• Fuel Issues – remain volatile:
– Fuel demand increasing in Russia, India and China. Tata’s $2,500
car will put millions of new vehicles on the road using gas with
environmental standards unacceptable in USA.
– Summer 2008, $4 per gallon ($140 per barrel range) radically
changed marketing for cars to smaller, ‘green’ cars with less gross
margin in roughly a 120-day period of time (including focus by the
federal government). With the price dropping what will the market
desire? Auto companies cannot move swiftly in plant change-over
(not to mention the dollars involved). All are gearing up for ‘green
car’ launches in 2010. Will the U.S. consumer buy cars with
limited cruising ranges?
– Consumers Report article - of top 31 compact and sub-compact
cars ranked for fuel efficiency in 2008, 28 were manufactured by
foreign companies. Of the 3 cars produced by the Detroit 3, all
ranked in the lower half of the study.
Auto Industry – Other Barriers (Cont.)
•
Competition:
– Market share of Detroit 3 dropped from 72.6% in 1995 to 46.5% at end
of 2008 – almost 2% per year for the past 13 years.
– By 2010, U of M projects market share at 40.3% for Detroit 3 (U of M
projections before GM and Chrysler bankruptcies).
– China and India intend on entering the USA market that is already
saturated. Tata now owns Jaguar / Land Rover. VW announced plans to
expand their sales from 90K to 200K vehicles. Chrysler / Nissan deal for
small car by 2010. Fiat will introduce their line circa 2010. The
introduction of the SMART car at $11K to $15K cannot contain much profit
margin and will displace vehicles otherwise purchased at a higher value.
China will have first production ‘plug-in’ vehicle – ahead of the GM Volt
(which launch has been delayed again; Malibu hybrid dropped).
– Jan. 2009, China sold more cars in China than were sold in the USA – first
time.
Auto Industry – Other Barriers (Cont.)
• Federal Loans / Ownership:
– Federal government has invested heavily in GM and Chrysler and
provided some loans to the parts suppliers. Majority ownership will be –
federal government and UAW for both entities.
– Regulation by federal government (such as emissions standards) that
cost UAW jobs could be interesting. Regulation versus jobs.
– Federal House passed legislation to reinstate dealerships. Rep. Barney
Frank – closing of GM distribution center rescinded.
– UAW’s goal is to protect jobs and compensation.
– Look for subsidies and continued federal loans to new GM / Chrysler –
privately provided loans may be difficult to obtain given the recent
reductions taken by secured creditors while unsecured creditors (UAW
OPEB obligations) received a higher priority in the bankruptcy actions.
MARKET CAPITALIZATION AUTO AND RELATED COMPANIES
COMPANY
REFERENCE
General Motors
Ford
ONE YEAR AGO
MARCH 10, 2009
$14,749
$1,150
21,048
4,430
Chrysler
A
7,200
500
Delphi
B
--
--
Visteon
C
624
--
Lear
2,659
30
American Axle
1,288
17
$47,568
$6,127
TOTAL
Chrysler value estimated based on declines in other auto companies.
Delphi has been in Chapter 11 bankruptcy for several years.
Visteon was delisted by the SEC when the stock price hit 2 cents.
Toyota's profit for the year ended March 31, 2008, was $13.9 billion -twice the current value of the above seven companies.
Note E - Anheuser-Busch sold for $50 billion; Yahoo rejected Microsoft's offer
of $47.5 billion.
Note
Note
Note
Note
A
B
C
D
-
Auto Industry – Other Barriers (Cont.)
• Market Capitalization:
– Wall Street deals can be larger than combined market
capitalization of the above five companies. Microsoft
offer to buy Yahoo was for $47.5 billion; Yahoo
rejected. Anheiser Busch’s deal was roughly $50
billion – almost 5 times the five companies’
market value.
– Toyota – market capitalization July 20, 2009 $119.5 billion. Year ended March 31, 2008 profit
was $13.9 billion – could buy these car companies
with the income generated in fiscal 2008.
(Toyota is expected to have an operating loss in 2009
– for the first time ever).
National Fiscal and Budget Issues
• California downgraded from AA- to BBB in early July 2009 – failure to
balance budget and using IOUs to “pay” debts. Downgrade could cost
$7.5B over 30 years.
• California Treasurer denied a fiscal emergency just two days before
IOUs were used to “pay” debts.
• 48 of 50 states (including Michigan) have operating shortfalls in 2010
budgets totaling $166B. The Center on Budget and Policy Priorities
projects the shortfalls for 2011 to grow to $350B.
• ALL governmental units’ in the nation will be affected by the fall-out of
California not being able to pay its debts. Will manifest itself in the
concerns of Wall Street that municipal debt isn’t as secure as it once
was. The threats of the financial manager locally concerning the
Detroit Public School potential bankruptcy isn’t helping either.
Michigan Fiscal and Budget Issues
• Summary of Michigan’s critical fiscal issues:
– Weak balance sheet for General and School Aid Funds (half of
State operations).
– Deficits (liabilities over assets) in several funds.
– Borrowing from FUTA – unemployment.
– Weak / inaccurate budget projections.
– Accounting system that continually fails to identify adverse
operating trends quickly.
• All of these issues are being partially ‘hidden’ now with
the infusion of federal stimulus funds. Delaying
necessary reforms. State still has structural operating
shortfalls that will surface in 2010 and 2011 when
stimulus funds are depleted.
Michigan Fiscal and Budget Issues
• Michigan released its audit report (CAFR) in March 2009
for the year ended Sept. 30, 2008. Revenue estimation
committee (Treasury / House and Senate Fiscal
Agencies) met in Jan. and May 2009.
• These reports / documents reflect a very stressed
financial situation over the next several years. The
structural shortfall will return with a vengeance in 2011
– expected operating shortfalls at between $2B to $2.5B
for General and School Aid Funds.
• Roughly 58% of the State revenues collected are redistributed to programs operated by local governmental
units – revenue sharing; roads; schools; grant programs;
and similar support.
Michigan Fiscal and Budget Issues (Cont.)
• A little accounting – beginning balance sheet equity, plus revenues,
less expenditures equals ending equity. Equity is a key indicator that
Wall Street watches in the balance sheets.
• Equity (or net worth) is the difference between assets (what the
State owns) and liabilities (what they owe to vendors, employees,
etc.). More assets than liabilities = surplus; more liabilities than
assets = deficit.
• Let’s start with the balance sheet as of September 30, 2008 for the
General, Budget Stabilization and School Aid Funds – roughly half the
State’s operations and the area where the principal focus of attention
for local units of governments occurs.
• Balance sheet’s importance can be summed up by the statement –
“Miami, Florida is just 20 miles away.” Absolutely true. Who
disagrees – show of hands?
SUMMARIZED BALANCE SHEET - GENERAL, BUDGET STABILIZATION AND SCHOOL AID FUNDS (In Millions)
STATE OF MICHIGAN
As of September 30, 2008
General
Fund
ASSETS
Equity in cash pool
Due from other State funds:
School Aid Fund
Other Funds
Other receivables
Other assets
LIABILITIES / EQUITY
Liabilities:
Accounts payable
Due to other State funds:
General Fund
Other Funds
Deferred revenue
Long-term advance (MMBA)
Other liabilities
$
As of September 30, 2008
Budget
School
Stab.
Aid
Fund
Fund
7.1 $
2.2 $
-
Total
$
9.3
980.2
11.4
4,887.2
314.2
-
11.7
2,381.6
-
980.2
23.1
7,268.8
314.2
$
6,200.1 $
2.2 $
2,393.3 $
8,595.6
$
1,820.1 $
-
156.6 $
1,976.7
1,883.5
474.2
731.3
-
980.2
464.4
537.5
-
980.2
464.4
2,421.0
474.2
731.3
4,909.1
-
2,138.7
7,047.8
Total Liabilities
Fund Equity:
Reserved - unavailable
Unreserved - available
Total Equity
$
$
833.1
457.9
2.2
254.6
-
1,087.7
460.1
1,291.0
2.2
254.6
1,547.8
6,200.1 $
2.2 $
2,393.3 $
8,595.6
Note - Summarized from the State of Michigan's Comprehensive Annual Financial Reports the year ended September 30, 2008.
SUMMARIZED BALANCE SHEET - GENERAL, BUDGET STABILIZATION AND SCHOOL AID FUNDS (In Millions)
STATE OF MICHIGAN
As of September 30, 2007 and 2006
General
Fund
ASSETS
Equity in cash pool
Due from other funds:
School Aid Fund
Other Funds
Other receivables
Other assets
LIABILITIES / EQUITY
Liabilities:
Accounts payable
Due to other funds:
General Fund
Other Funds
Deferred revenue
Other liabilities
$
As of September 30, 2007
Budget
School
Stab.
Aid
Fund
Fund
11.6 $
2.1 $
-
Total
$
13.7
681.1
80.6
4,177.5
327.9
-
10.9
2,298.3
-
681.1
91.5
6,475.8
327.9
$
5,278.7 $
2.1 $
2,309.2 $
7,590.0
$
1,599.3 $
-
143.9 $
1,743.2
1,999.0
698.4
-
681.1
964.5
425.7
-
4,296.7
-
Total Liabilities
Fund Equity:
Reserved - unavailable
Unreserved - available
Total Equity
$
$
General
Fund
$
As of September 30, 2006
Budget
School
Stab.
Aid
Fund
Fund
6.9 $
2.0 $
-
Total
$
8.9
503.0
30.3
4,498.2
377.1
-
18.0
2,241.0
-
503.0
48.3
6,739.2
377.1
$
5,415.5 $
2.0 $
2,259.0 $
7,676.5
$
1,697.0 $
-
140.0 $
1,837.0
681.1
964.5
2,424.7
698.4
1,926.0
723.3
-
503.0
1,235.0
373.6
-
503.0
1,235.0
2,299.6
723.3
2,215.2
6,511.9
4,346.3
-
2,251.6
6,597.9
$
722.9
259.1
2.1
94.0
722.9
355.2
1,066.7
2.5
2.0
7.4
1,066.7
11.9
982.0
2.1
94.0
1,078.1
1,069.2
2.0
7.4
1,078.6
2,309.2 $
7,590.0
5,415.5 $
2.0 $
2,259.0 $
7,676.5
5,278.7 $
2.1 $
$
Note - Summarized from the State of Michigan's Comprehensive Annual Financial Reports for the applicable year.
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 $1.8B with $7.1M 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!
Michigan Fiscal and Budget Issues (Cont.)
• In April 2008, Standard and Poors rated the State’s bonds at an AA(same rating as 4 other states). In mid-July, Fitch dropped its
Michigan rating to A+. Only states with lower ratings were California
at BBB and Louisiana (A).
• Gross State pooled cash balances as of September 30 – trend should
be obvious (2008 amounts not known):
–
–
–
–
2000
2001
2002
2003
- $4.9 billion.
- $3.9 billion.
– $2.8 billion.
- $1.4 billion.
- 2004 - $1.2 billion.
- 2005 - $1.0 billion.
- 2006 - $860 million.
- 2007 – Unknown.
• Despite the State having a ‘balanced budget’ on paper, the State’s
actual performance failed to balance the budget in 6 of the past 8
fiscal years (e.g., they used equity to balance operations).
ANALYSIS OF STATE EQUITY (In Thousands)
STATE OF MICHIGAN
FY 2000 Through 2008
Fund Level - Total Equity
General
Fund
Equity at September 30, 2000
Increase / (decrease)
$
Budget
Stabilization
Fund
2,101,333 $
(192,808)
Unrestricted -
School
Aid
Fund
1,264,434 $
(270,247)
EntityWide
Equity
Total
985,632 $
(281,519)
4,351,399
(744,574)
N/A
Equity at September 30, 2001
Increase / (decrease)
1,908,525
(131,446)
994,187
(849,043)
704,113
(462,179)
Equity at September 30, 2002
Increase / (decrease)
1,777,079
(466,321)
145,150
(145,150)
241,934
(126,793)
2,164,163
(738,264)
338,600
(991,500)
Equity at September 30, 2003
Increase / (decrease)
1,310,758
(140,939)
81,258
115,141
(41,071)
1,425,899
(100,752)
(652,900)
(283,500)
Equity at September 30, 2004
Increase / (decrease)
1,169,819
283,574
81,258
(79,305)
74,070
23,898
1,325,147
228,167
(936,400)
4,200
Equity at September 30, 2005
Increase / (decrease)
1,453,393
(384,153)
1,953
64
97,968
(90,618)
1,553,314
(474,707)
(932,200)
(792,600)
Equity at September 30, 2006
Increase / (decrease)
1,069,240
(87,212)
2,017
73
7,350
86,646
1,078,607
(493)
(1,724,800)
(502,900)
2,090
66
93,996
160,599
1,078,114
469,611
(2,227,700)
(560,700)
Equity at September 30, 2007
Increase / (decrease)
Equity (deficit) at September 30, 2008
982,028
308,946
$
1,290,974
$
2,156
$
254,595
3,606,825 $
(1,442,668)
$
1,547,725
NOTE - Ending equity amounts have been extracted from the State of Michigan Comprehensive
Annual Financial reports for the applicable year. The entity-wide equity is presented on an accrual basis and
consolidates the activities of all governmental fund operations and balance sheets. The entity-wide financial
statements eliminate the activities associated with certain one-time budget transactions and provide an
excellent trend analysis for the fiscal strength on an accrual basis.
$
1,404,800
(1,066,200)
(2,788,400)
Michigan Fiscal and Budget Issues (Cont.)
• Entity-wide statements (accrual / all funds) – expenditures grew:
• 2002 - $38,401 million in expenditures.
• 2008 - $43,170 million in expenditures.
• General Fund alone – expenditures grew:
• 2002 - $23,048 million in expenditures.
• 2008 - $25,767 million in expenditures.
• School Aid Fund – expenditures grew:
• 2002 - $11,373 million in expenditures.
• 2008 - $12,790 million in expenditures.
• 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. Census declines allowed the ‘growth’ in base
foundation allowance rates. Base foundation allowance may be
reduced for 2010 and 2011 absent more federal grant awards.
Michigan Fiscal and Budget Issues (Cont.)
• General, Budget Stabilization and School Aid Funds’ projections – Jan.
2009 revenue estimation committee:
– Fiscal 2009 – revenue estimates of $917.2 million short of 2009
adopted budget.
– Fiscal 2010 – revenue estimates of $1,362.7 million short of 2008
budget levels.
– Revenues fell from projections all winter long (and are continually
missing budgeted projections even recently).
• Revenue estimation committee – May 2009 projections revised: $1.3B
short for FY-2009 and in 2010 - $1.7B short. Exec. Order for 2009 $300M with $1B in stimulus funds would be expected to “solve”
2009’s budget.
Michigan Fiscal and Budget Issues (Cont.)
– For 2010, because revenues continue to decline, the $1.3B in
remaining stimulus funds are being pulled into 2009, opening
wider and wider holes in the 2010 operating budget. It remains
unresolved even as to the amount of the hole in mid-July.
• Other known issues with the 2008 balance sheet and
2009 operations:
– 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. Will make the
elimination of the MBT surcharge very difficult – will pit new
constituency group (schools and MEA) against businesses.
– The increases in personal income taxes and MBT in 2008 is
needed to get to the overall declines in projected revenues in
2009. Reduction of MBT surcharge opens budgetary holes for
2009 and beyond.
Michigan Fiscal and Budget Issues (Cont.)
• Other known issues (cont.):
– 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.
– State normally obtains a $1.4B short-term loan in
early October to pay vendor payables as of
September 30. Eventually able to secure a shortterm loan in November and December for cash flow
purposes. Will cost the State $45M in interest
expense in 2009 and again in 2010 – at $75K per job,
this cost represents nearly 600 jobs.
Michigan Pensions / OPEB
• Pensions:
– For the period 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 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 Sept. 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 (manageable in normal times).
– Recent substantial market declines in 2008 and 2009, however,
will increase pension contributions for 2011 and beyond –
particularly if the market does not recover to the prior levels.
Oakland County’s Timeline of Retiree Healthcare
Changes and Annual Cost of ARC
Planned full funding of UAL with COPS
2008
Plan closed to new hires
2007
Cost differentiation by age
2006
Prescription co-pay increased
2004
VEBA Trust Created
2000
Vesting schedule lengthened
1995
Actuarial ARC payment begins
1987
1985
Vesting schedule lengthened
1967
Increase to 100% of premium
1965
Benefit Begins, 50% of Premium
$0
$10,000,000
$20,000,000
$30,000,000
$40,000,000
$50,000,000
$60,000,000
$70,000,000
State Budget Problems – Pensions / OPEB (Cont.)
• Retirees’ healthcare (OPEB):
– $39.9 billion in unfunded liabilities at
September 30, 2007 and growing.
– 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).
Regional Fiscal Issues Impacting State
• Size of Detroit and Detroit Public Schools fiscal problems
are so large they could jeopardize the State’s fiscal status.
General and School Aid Funds do not have resources that
can assist. In the past, long-term debt issued to “resolve”
the governmental deficits. Off the table given these
entities have poor credit ratings, the municipal bond
insurance market has collapsed, and the banks are not
lending. California is not helping with the IOUs.
• Cities / schools in general have a major issue – decline in
taxable value could jeopardize the fiscal solvency of TIFAs
/ DDAs. Schools often use unlimited G.O. debt. Declines
in taxable value mean millage rates will increase to cover
fixed debt service costs. Increases in millage will put
pressure on other unrelated millage requests.
Regional Fiscal Issues Impacting State (Cont.)
• City of Detroit:
– 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.
– $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).
– With the $155.6 million General Fund deficit at June 30, 2007,
add in FY-2008 and 2009 announced operating shortfalls and the
City could be at a deficit of over $400 million by the end of the
June 30, 2009 fiscal year.
– 2008 CAFR is now roughly 7 months delinquent. State is
withholding revenue sharing payments.
Regional Issues Impacting 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 rest of year (short $76M). Owes State $42M for
unpaid pension contributions. State advanced funds for DPS
payrolls for FY-2009.
– Sept. 2008 program audit – 228 pages of issues and proposed
recommendations, including fiscal problems.
– Financial manager is considering putting DPS into Chapter 9
bankruptcy; such action would be viewed negatively for regional
debt issues other than DPS as well.
Regional Issues Impacting State Finances (Cont.)
•
Pontiac – in Act 72. Police reduced from 170 FTEs to 65 FTEs.
•
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; $32M shortfall for 2010 and 2011.
•
SMART (bus services) has an unresolved 2011 operating shortfall of $11.7M;
2012 - $17.8M and increasing thereafter – assuming that the extension of a
millage to be voted upon in August 2010 is passed. SMART is out of business
if the millage fails.
•
Schools have had to reduce operations. Will continue to be a problem as
base foundation allowances are squeezed. Schools ‘fiscal canaries in coal
mine’ – they will fail first.
•
Too few local units of government are looking long term – will be surprised
at the reductions in State revenue and property tax values. Leaving them
with few options. Some Act 72 filings by local units of government will
certainly be required.
Regional Issues - Healthcare
• Hospital costs are largely real property, equipment and personnel –
fixed in the short-term.
• As auto-related employees lose their jobs, their ‘premium’ healthcare
is also lost.
• Unemployed individuals use Medicaid (requiring an increasing State
grant match) or no medical coverage at all.
• Hospital and other healthcare providers will be fiscally stressed in the
next several years.
• 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.
• The above may be ‘solved’ through a federal healthcare actions being
considered this summer and fall.
Sheriff Deeds – Foreclosures
on Mortgages Countywide
7-8-09
1 in 47
2009 Estimate is generated using the first
6 months of Sheriff Deed information.
1 in 57
1 in 62
1 in 97
9,242
8,320
7,643
1 in 174
1 in 253
1 in 225
1 in 212
4,855
1 in 377
1 in 597
1 in 539
1 in 532
2,623
1,755
…
…
…
…
…
…
…
…
…
…
…
…
2,168
1,170
820
802
715
2,024
Property Value Changes
-5.00%
-14.83%
-12.00%
-16.50%
-13.00%
0.00%
-8.90%
-3.60%
-3.67%
0.04%
1.17%
4.16%
4.06%
5.56%
4.50%
5.14%
4.79%
5.28%
5.00%
6.77%
4.91%
10.00%
9.33%
6.36%
15.00%
9.60%
7.41%
Oakland County, MI
Percentage Change in Assessed and Taxable Values 2001 through 2011
* *
-10.00%
-15.00%
Change in Assessed Value
Change in Taxable Value
-20.00%
2001
2002
2003
2004
2005
2006
• 2001-2009 information from annual Equalization Reports.
• 2010-2011 are estimates.
2007
2008
2009
2010
2011
Real Estate Issues – Regional
• Oakland hosts a centralized land records system on behalf
of local governments enabling the identification of real
estate value trends and issues. Many governmental units
are now discovering the extent of the real estate impacts
on their operating budgets. Oakland County is in a unique
position to identify real estate trends as they unfold.
• Why December 31, 2009 values were adversely impacted –
Oakland:
– Residential properties. SEV = TV (42% as of Dec. 31,
2007); 65% as of Dec. 31, 2008; over 85% plus as of
Dec. 31, 2009.
– Unlimited value declines on the SEV = TV properties
calculated on a parcel by parcel basis and growing.
– For SEV >TV properties limited growth (lesser of 5% or
CPI) in revenues (may actually be negative for 2009) .
Real Estate Issues – Regional (Cont.)
• 9,242 foreclosures for 2008; 8,320 project for 2009. Economics 101
– supply high; demand low; prices fall. “Prices” – or value – is used
for property tax revenues (e.g. taxable value).
• Speculators – bulk property buyers looking for substantial discounts
– could be as high as 30% to 40% in value losses per transaction.
Speculators would exacerbate taxable value declines.
• Oakland County property values are roughly 17.7% of the State’s
value – as goes Oakland’s property values, so goes the State’s
values. Oakland’s losses are comparable with southeast Michigan
counties for the December 31, 2007 and 2008 assessment rolls.
• Legislature proposals to revise property tax laws could temporarily
exacerbate the decrease in property tax revenues, but would
mitigate amounts paid by taxpayers. Regardless of what Lansing
does, the market is going to achieve much the same efforts as would
be the case with the legislation / ballot initiatives.
Real Estate Issues – Regional (Cont.)
• Impact on the State budget could be hundreds of millions for:
– State Education Tax (SET) – taxable value times the SET rate of 6.0
mills. For 2009 (Dec. 31, 2008 assessment roll), the State projects a 1%
decline in taxable value; Oakland had a 4.5% decline. $100 million in a
School Aid Fund revenue problem alone. For 2010 revenues, Oakland at
a 13% decline; State at a 5.9% decline – roughly $140 million in the
budget and would exacerbate the revenue declines.
– Schools’ Base Foundation Allowance – declining local property
taxes for schools will increase the State’s obligation to cover the
difference (or, reduce the base foundation allowance). Formula uses
data of a year ago for school property taxes meaning impact will be
delayed one year from losses cited herein. Losses may have been
“funded” in part from the student census declines discussed earlier.
– State transfer tax revenue – fee based on values; given fewer
properties being sold has declined significantly in the recent year.
Real Estate Issues – Regional (Cont.)
• Oakland County anticipated taxable value declines in its budgeting
process as of the following Dec. 31 assessment date:
–
–
–
–
2008 – 4.5% (actual). In 2009 budget.
2009 – 13.0%.
2010 – 12.0%.
2011 – 5.0%. The 2011 amount is likely low depending upon how
the present auto companies’ restructurings / lay-offs impact future
revenues – will take two years to work through the system.
• Lest you think Oakland is alone, Money magazine just reported that
the median sales of a home in Wayne County is $16,000 – with
Cleveland being number two out of 25 cities at $70,000. St. Louis $101,000.
Future Regional Real Estate Issues – (Cont.)
• Property Tax Revenues / Labor agreements – property tax
revenue declines may be greater than governments expect. Labor
negotiations will be critical as the property tax declines will result in
long-term losses of revenues – a clash of declining revenues and
increasing labor costs expected circa 2009 / 2010-ish.
• DTRF distributions – delinquent receivables are purchased by
counties from CVTs / schools with ‘recourse.’ If uncollectible, they
may be coming back to the governmental units – adequacy of
reserves (few governmental units provide reserves for this loss).
• School Districts - school districts are stressed due to the fiscal
structure / relationship between the State and schools (pension /
retirees’ healthcare issues). The funding structure is very troubling.
• CVTs – as with the school districts, the CVTs and other counties are
stressed as well.
Future Real Estate Issues (Cont.)
• In Jan. 2009, U of M reported - national housing market would
improve in 2010. However, the nation never dipped below 1M
housing starts prior to 2008. In 2008, the national housing starts
are expected to be roughly 910K. U of M projects 2009 housing
starts of 760K and in 2010 at 900K – still well below prior levels. No
significant housing starts for Michigan.
• Unlikely that taxable value at December 31, 2007 will
return to similar levels (unadjusted for inflation) until circa
2020 – 2025. Governments will have to do without
increases in property tax revenues for a half-generation –
while expenditures have no limitations on increases.
• Michigan governments need to re-order their thinking to address
consolidations / sharing of services / other efficiencies. Many
governments will struggle financially in the coming few years – as
they are not preparing for the impacts cited in this presentation.
Need long-range planning to compensate.
Resolution of State Fiscal Issues
•
Balance sheets – GFOA standard is 5% to 15% of revenues (or, roughly
$1.8B for State). With $980.2M due from SAF by General Fund, it would
take at least 4 years of actual ‘profits’ at $400M annually to get to 10% assuming legislature doesn’t develop new programs for these ‘profits.’
•
Unfunded pensions / OPEB – not being addressed.
•
Operating shortfalls – use of stimulus funds delays the inevitable.
•
Local units – with 58% of State revenues being collected and redistributed
to local units of government, the sizable operating shortfalls could come out
of local budgets with schools having the most significant exposures.
•
Framework – raise revenues, reduce expenditures or reforms (takes a long
time to do). Governor proposing $500M to $1B in revenue increases –
eliminate ‘tax loopholes.’
Resolution of State Fiscal Issues (Cont.)
•
Long-range budgeting (no less than two years) with timely and accurate
accounting financial information provided on a quarterly basis, with
adjustments to the operating budgets when business issues are known.
•
Reduction of personnel – OPEB / pensions resolution. Privatizations –
MDOC, for example. And, move to health savings accounts for new hires.
•
MSP – revise program from patrols to support services (DNA, lab, homeland
security, training, centralized records management system, etc.). Contract
patrols with sheriffs.
•
Schools / MSP – defined benefit to defined contribution pension plans.
•
Act 312 – MML / MTA recommended in mandates commission efforts as one
of the most significant mandates.
•
Consolidations of services at local unit of government levels (counties / cities
/ townships / schools) and / or assisting in sharing of services. Support to
local units of government about to be reduced again – need to provide a
safety net and support to encourage consolidation / sharing of services.
Resolution of State Fiscal Issues (Cont.)
• Revise Act 72 (Emergency Fiscal Management Act) – numerous local
units of government will fail. A plan needs to be produced ASAP to
resolve this problem.
• Dillon’s healthcare plan – in theory could make sense if allowed not a mandate – for local units to join. Many barriers to resolve.
• Summary - there is no shortages of proposals in Lansing to solve
the fiscal issues, but there is a shortage of political will and
statesmanship and far too much partisanship in the development of
public policy. Unfortunately, it will continue. Politics is the art of
the possible.