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12/30/1987 - City Council SpecialSPECIAL CITY COUNCIL MEETING WEDNESDAY DECEMBER 30, 1987 7:00 P.M. I. ROLL CALL II. REPORT ON NATIONAL LEAGUE OF CITIES CONFERENCE III. REVIEW CITY COUNCIL MINUTES IV. OTHER BUSINESS V. ADJOURNMENT MEMO TO: HONORABLE MAYOR AND CITY COUNCILMEMBERS FROM: CITY ADMINISTRATOR HEDGES DATE: DECEMBER 28, 1987 SUBJECT: SPECIAL CITY COUNCIL MEETING A Special City Council meeting was scheduled for Wednesday, December 30, 1987, at the December 17, 1987 regular City Council meeting. The purpose of the Special City Council meeting is to hear and receive a report from Mayor Blomquist and City Councilmember Smith on their recent attendance at the National League of Cities conference. I. ROLL CALL II. NATIONAL LEAGUE OF CITIES CONFERENCE Attached for Council review is a report prepared by Mayor Blomquist. III. REVIEW CITY COUNCIL MINUTES Mayor Blomquist requested that the City Council minutes for the December 17, 1987 City Council meeting be reviewed. A copy is attached for your information. IV. OTHER BUSINESS There are no items for Other Business at this time. V. ADJOURNMENT /S/ Thomas L. Hedges City Administrator SP- Com. OTA- KESF--w-V A yvk e � o s���� �►�� `-a cam.. �� _-�,��.�.�_ tz ®-�. 6 (w . 1)4,� A --5s, a c , tll� la� iso NotF- LIS al -P ci 12- V-7 4 Av\�vV R�co�S�D� 0-6 tet' P 1 At4EPRL� "ops too MEMO TO: CITY COUNCILMEMBERS EGAN, ELLSION, SMITH AND WACHTER FROM: MAYOR BEA BLOMQUIST DATE: DECEMBER 16, 1987 SUBJECT: AIRPORT N.O.I.S.E. MEETING AND NATIONAL LEAGUE OF CITIES CONFERENCE I attended meetings at the recent National League of Cities Conference on airport noise and the following is a brief outline of certain issues that were reviewed and discussed at those meetings. At the Transportation and Communications Policy Committee meeting that was held Sunday morning, December 13, a report was distributed to each and every member in attendance. I have copied pertinent pages of the report that I thought might be of interest to the City Council. Please refer to the attachment that includes the federal aiport programs, airport finance, airport noise and airport development. A copy of the full report is on file with the City Administrator's office. The task force report covered a number of items such as planning, Part 150 Study, advisory circular and a conference on airport trust funds. The planning portion of the report alarmed a number of cities that were in attendance by conveying that the federal government is planning to establish a commission that will designate land planning under the auspices of state government and take away that control around airports by local governments. The N.O.I.S.E. group has expressed concern about the implication that local control will be lessened by the FAA. There is a board meeting during March, 1988 in Washington, D.C. and it is strongly recommended by the group that members attend and work with their congressmen on this issue to prevent the federal and state governments from controlling land use decisions in municipalities adjoining airports. It was strongly suggested that the City register for the conference as soon as possible. Another issue discussed by the task force is the Part 150 Study. I learned that many cities have ignored the Part 150 Study, a task that our City has responded to in recent months. There is a question as to whether a committee should be established to work with the Part 150 Study in conjunction with our City's Planning Department. Apparently, the MAC Part 150 Study should be acted on in approximately six months. It was also learned, according to Tom Duffy, that N.O.I.S.E. will intercede on the Part 150 Study for all cities. He is planning to send out a letter to all member cities asking how they are responding to the study. Aiport Noise Meeting and National League of Cities Conference December 16, 1987 Page Two The task force and our committee reviewed a proposed advisory circular that was sent out by the U.S. Department of Transportation Federal Aviation Administration. The advisory circular (AC) has been developed to encourage and provide guidance on the establishment of airport action groups. I have given a document to our City Administrator, however, it should be noted that there was no support for the AC stated by our group. The N.O.I.S.E. Conference also addressed the Airport Trust Fund and I learned that $1.7 billion exists in that fund. Apparently, taxes will have to be raised to 8 - 10% for contribution to this fund. The airport Part 150 can still fund special improvements to schools and hospitals if an organization does not complete the 150. We should continue to monitor those funds and watch what they are used for. The remainder of my report will be verbal at the meeting on Thursday. cc: City Administrator Hedges Attachments TLH/BB/jeh II Ma or cc: City Administrator Hedges Attachments TLH/BB/jeh 2. Truck Routing The Department of Transportation should develop federal performance standards for the designation of routes along which longer, wider trucks may travel. States, in consultation with localities, should be allowed to designate Interstate highways and appropriate four -Lane primary highways which are consistent with the performance standards. State and local governments should retain authority over truck access to pick up and delivery points on roads which are not a part of the designated truck network. 3. Regulation of the Motor Carrier Industry The Department of Transportation, the interstate Commerce Commission and other appropriate federal agencies should encourage increased competition within the trucking industry by removing barriers to free entry into the industry and by increasing the flexibility of carriers to set rates and establish routes. No action should be taken to atter existing truck safety requirements in any way or to reduce existing levels of truck service to small communities. 4. National Commercial Truck Driver Standards To improve the safety of truck transportation, to eliminate the problem of multiple driver's licenses, and to ensure that qualified drivers operate commercial vehicles, the federal government should create national uniform standards for licensing interstate and intrastate drivers of commercial motor carriers, and the states should administer the standards. The states should develop a licensing program that is at least as stringent as the federal standards, establish procedures for evaluating the competence of drivers prior to granting them a license for operating large commercial vehicles (e.g., 26,000 lbs. and over), and administer the testing program. The states should also collect enough in licensing fees to cover administrative costs and enforce the federal licensing standards. The driver's state of residence should be solely responsible for issuing the driver's License and maintaining the driver's complete driving record. States should exchange License, accident and violations information 18 with each other to facilitate development of a commercial truck driver data base. 5. Enforcement of Motor Carrier Safety Regulations The Federal government should increase Highway Trust Fund funding for the Motor Carrier Safety Assistance Program (MCSAP). This program provides grants to states for development and implementation of program (including roadside vehicle inspection programs) with which to enforce federal and compatible state motor carrier safety regulations. 6. Motor Carrier Substance Abuse Assistance Program A new federal incentive grant program should be established for states which wish to conduct random roadside inspections for driver alcohol abuse. The federal incentive grant program should be expanded to include inspections for drug abuse, when and if reliable methods of drug testing are developed. 7. Motor Carrier Data Collection The federal government should assist the states in collecting and exchanging comprehensive truck accident and violations date and in maintaining truck driver and inspection records. Over the long term, the federal government should develop a centralized system for collecting and disseminating information on motor carrier drivers and vehicles. To this end, the federal government should expedite the development of the National Driver Register (MDR), insure that commercial truck driver records are included in the Register, and adequately fund the program. D. Air Transportation 1. Federal Airport Programs Congress should (immediateky) reauthorize the Airport and Airway Imorovement (Devekopment) Act, for a five-year period (including -tfie Airport - Development- -kit} -Program- ) and should authorize a sufficient level of federal funding for this program. Without a national airport program and without adequate, predictable and long-term funding, it will be 14 difficult to plan airport development projects and finance airport construction activities in a manner which ensures the safety of airline passengers. (Any - reductions-in--f*deret- airport deveEopment-assistance--shouEd-be--accompanied by- the--eFimination -,of- -federal- - red- *tape-,- -the re "xat ion - of - federal- -airport -regu C &tions; - and the - streemii ni ng- -of -the- -ADAP - grant- -approve l process.) The federal (airport -- assistance --- program) Airport Improvement Program - (AIP) should continue to be disbursed to air carrier airport sponsors through a formula grant program, supported by a sizeable discretionary grant program to further assist high priority projects and airports with limited fiscal resources. Any eligible airport should be allowed to compete for discretionary ADAP funds. No more than 50 percent of the AIP funds should be allocated to Drimar air oris. The minimum and maximum allocation toeach airport should be increased but no other changes should be made to the 2rimary air ort entitlement Portion of the AIP. Groundside improvement projects should be eligible for AIP funding under the formula rant Program if HighwaX Trust Fund funding 2. for such pro-ects is inadequate. Terminal development projects should also be eli ible for funding if the air ort sponsor certifies that the terminal improvement is for safety and security reasons Advanced funding of aviation projects should be allowed for work undertaken before an AIP grant is made if the Federal Aviation Administrator issues a letter of intent to fund the project and if the rolect is AIP-eligible. (Existing--categoricaE--programs--for--airport master -planning; - system• fslerKriYtg,- -ai-r -carrier; generaE -- aviat-ion,- -- commuter--- and --- reliever airports -should- be- combined- into- -tom -or -three formuEa-grant-programs: E E ig ib Fe - reliever -airports- -94roul-d -receive- -a Earge r - shere- -of - -federal- - airport- -deve kopment funds - in- -order - to- -accommodate - the- growth- -in reliever -airport- traffic- over -the -past- several years:) The nation's largest airports should not be mandatorily or voluntarily removed or "defederalized" from the national airport program. NLC believes that defederalization is blatantly inequitable since the smallest airports, which generate only a small share of revenues, would receive 100 percent of federal airport funds, while the largest airports, which contribute nearly 70 percent of the passenger ticket tax revenues, would receive no funds. Users of defederalized airports would be required to pay a double tax (a ticket tax and a passenger tax) without receiving any additional benefits in terms of Level of service. NLC strongly opposes proposals to restructure the airport grant program for small and medium-sized airports into a state block grant program. Such a block grant program would impose an unnecessary layer of bureaucracy between federal and local governments and would enable states to establish their own airport project priorities without considering locally perceived priorities. Such an approach would (faciFitste) foster state -by -state development of airport safety and operational standards, severely undermining the effectiveness of national airport standards. Local governments and airports sponsors, therefore, must continue to be directly responsible for airport planning and development. Airport Finance The user -generated Airport and Airway (DeveFopment) Trust Fund should continue to be used as the mechanism for financing airport development and improvements. (Any -reduction in -,the- -ticket - tax- -stroul-d -be - considered- -on Fy after - the- federal- VOvernme" *&a- -investigated the - -long-term - -funding - -requirements - -of - -the nation's -airport -system:) In order to ensure that aviation user -fee revenues do not accumulate uns ent in the Trust Fund and that aviation users benefit from the aviation - related taxes they, pay, the National League of Cities urges the federal overnment to: remove- the emovethe Airport and Airway Trust Fund from the unified federal budget: spend any exjstin uncommitted sur lus hV increasin the authorization levels for each categorical program under the Airport and Airway Improvement Act- and establish trigger mechanisms which would automatically reduce spending or reduce the level of the aviation user fees if one or more categorical Program falls below authorized levels. ( Fn -order- -to- -&H-ovate -the- -costs - of- -airport construction -mere - equitebly--aiK - users -and -to 3. raise -- enough --- revermes-- to - - finence- - -needed airport -improvements; - NiC- recommends- that- same of -the- existing- user- fees shou•lcf -be -increased and -new - f ees- i mposed- upon- the- tmetrsr -wttk r -are contributing -an-inequitebiy-sma•l-L--strare: -Each class --- of --- users ... wouEd ... then ... contribute use r -gene rated - revenues- -rn-propo rtion-tv -the costs - i t - i mposes- ort -the - a i rport- -arx} -the- ai rway system -and- the- benefits- it- -receiveer -frac -that system:) Airport Noise An increased (A) portion of discretionary AIP (ADAP) funds should be set aside to fund (the deveFopment -- end --- impbementation - - of) noise abatement 12rofects. (eompatibiEity- piens- -and programs.) This would facilitate the purchase of land parcels around airports to serve as buffers against airport noise and the implementation of other noise mitigation measures. The development and implementation of noise compatibility plans and programs should continue to be funded under the formula program. The federal government must intensify its efforts to provide prompt relief to residents of cities located close to airports from unacceptable levels of aircraft noise and aircraft pollution. Additional (8peeific airport) noise policies are contained in Section 2.06 of the Energy, Environment and Natural Resources chapter. 4. Airport Development In order to protect the public health and safety of surrounding communities, to enforce airport uses that are appropriate to the airport's capacity and to ensure that local transportation, environmental (including noise control)) and economic needs are met, local airport operators must have the authority to regulate airport use, and local governments must be involved in decisions relating to airport use and development.(airport operators -must- have- the- -authari-ty -to -regu Fate focab-airport- development- and -use:) Therefore, the National league of Cities opposes attempts by the federal government to mandate expansion of federally aided airport facilities, or to otherwise limit the ability of local governments (airport -operators) to continue to determine, with appropriate community involvement, the scope and type of airport facilities needed, or the type of airport use restrictions ___(including airport noise or 20 airport access restrictions) imposed, in their (any) particular location. 5. Federal Role in Air Transportation The federal government should continue to provide, operate, and maintain aLL air navigation facilities required for safe aircraft operation. 6. Helicopter Transportation Despite the mandate to plan for and promote a comprehensive multimodal transportation system, the federal government has all but ignored the helicopter as a mode of urban transport. The Department of Transportation should study helicopters as a mode of transport in the urban environment. 7. (AirEine-Deregulation The - - deregulation- - -of --- &iit " - - should--- be promoted- i n- order• -to- make- -eir - t ravel - e- -more viabFe -and- affordeble- option -for -the -traveling pubEic:- - in --- order - - to- - -ensure -- that---smaH communities - vi -L-1- - be- -served - by - major--andfor third - level - eir{ines,--C#rese -communities- shouid be -guaranteed- a- minimum -FeveF -of -air, -service:) Essential Air Service Program A balanced national air transportation policy must address the needs of all tXM of cities including small cities. In order to ensure that small communities receive reliable, reauLarLY scheduled air service the federal government should rreauthorize and extend the Essential Air Service EA grogram. However, the grogram should be improved 'by restructuring it so that it provides a higher basic level of service to small communities. more flexible exit and entry from the program, more targeted subsidies to communities who are not otherwise close to an existing hub, protection from service interruptions, and incentives for the development of self- sufficient air traffic markets. Further, to ensure that the EAS program is funded from a stable and reliable source of revenue the ProlAram should be funded out of the Airport and Airway Trust Fund rather than general funds. 8. Public Aircraft Public aircraft --those used exclusively in the service of any federal, state and local INSURANCE HISTORY --There have never been a large number of companies in municipal insurance and those that are, have almost never been large, well-known firms. There are three main reasons for this: the perception of bidding wars, the lack of risk management -and the fear of political patronage. In addition, 2 to 3 years ago two additional things happened: insurance company losses in general increased sharply and the courts broadened coverages. When these two things converged, it effectively dried up what had been available. California has only one company writing this insurance today. The courts changed the Doctrine of Comparative Negligence. This allowed the injured to collect even if they were more than 50% at fault. If we wish to have accident victims collect regardless of fault, we should create such a system. Liability insurance should not be used to provide it. This change can only come about through legislation. PRESENT SOLUTION --Mr. Enfield of March and McClennon, San Francisco, has been involved in insurance pooling since 1978. Most municipal liability insurance is now financed through pools of cities. For the most part, this has been working okay --so far. Mr. Enfield predicts a major pool failure within the next 36 months. Pools have the same problems that insurance companies have: risk selection, loss management and capital for losses. If firms in business for over 100 years can't make it, why do we expect pools to prosper. By the very nature of pools, risks cannot be selected as a pool must basically take all applicants with good and bad liability records. Only loss management (prevention) can be used -to hold down costs. POSSIBLE LONG-RANGE SOLUTION --One possible long-range solution might be to insure only unexpected (either very large or very frequent number of claims) losses and budget for normal claims each year. This would work if excess coverage is available. If it is not available or it is too expensive, shock losses could be funded through debt either by issuing debt after a loss or carrying enough debt to cover several years risk which is kept in a pool for reserve. Tillinght — UNITED STATES • UNITED KINGDOM • CANADA • BERMUDA • AUSTRALIA • FRANCE • SWEDEN TILLINGHAST, NELSON & WARREN, INC. Consultants • Actuaries CAPITAL MARKETS_RISK FINANCING Presented by Gregory H. Berg at the National League of Cities 64th Annual Congress of Cities December 14, 1987 One Mill Pond Lane Simsbury, Connecticut 06070-2486 (203) 651-3761 FAX: (203) 651-9140 RISK RETENTION Tillinghast Tillinghast Tilinghast F Tillinghast Tillinghast Tillinghast CAPITAL MARKET RISK FINANCING DEALS 1986 and 1987 Compton,CA Arlington, CA Santa Clara, CA Cities $11 Million $9 Million $2o Million Tillinghast CAPITAL MARKET RISK FINANCING DEAL 1956 and 1987 Interlocal Risk Pools Louisiana Public Facilities Authority -$280 Million 8/86 Montana Municipal Insurance Authority $8 Million 8/86 Regional Transportation Authority (IL) $40 Million 12/86 Ventura County Sch. Self -Funding Auth. (CA) $10 Million 12/86 CSAC Excess Insurance Authority (CA) Indep. Cities Risk Mgt. Auth. (CA) Wisconsin Municipal Insurance Commission Kentucky Association of Counties Tillinghast $34 Million 6/87 $30 -.Million 1/87 $29 Million 10/87 $25 Million 11/87 Tillinghast Til lin3hast Pro Forma Fi na nata I Statements Balance Sheet 0 Income Statement * Sources and Uses of Cash * Surplus Reconciliation Tillin3hast Page 1. Printed on 27 -Apr -87 ASSETS: Cash CAPITAL MAMMTS LASS FUMING $24,993,716 $31,118,195 $37,688,742 $44,357,544 $40,348,933 $36,875,131 HEAVY LOSSES SCENARIO $31,557,596 L.IABILIM SS: 8,301,563 8,858,541 9,425,677 9,994,337 IKCCME STAT34Wr 1987 ---- 1968 ---- 1989 ---- 1990 ---- 1991 ---- 1992 ---- 1993 ---- 1994 ---- 1995 ---- REVENUES: invest Bw me $587,576 $922,775 $1,174,687 $1,452,135 $1,747,124 $2,066,012 $1,883,514 $1,726,460 $1,596,764 Premium 6,805,074 8,451,902 10,128,759 11,810,135 13,268,686 0 0 0 0 --------------------------------------------------------'--------------------------------------------------------------- Total REVENUES $7,392,650 $9,374,677 $11,303,446 $13,262,270 $15,015,810 $2,066,012 $1,883,514 $1,726,460 $1,596,764 EXPENSES: Claims Paymerns $496,963 $2,036,409 $2,999,962 $4,151,003 $5,492,511 $6,074,622 $5,357,316 $4,691,850 $3,948,911 Admin En:mises 1,463,978 1,818,261 2,179,004 2,540,719 2,854,498 0 0 0 0 Change in Reserves 13,145,696 4,597,232 4,949,793 5,118,413 4,921,677 (6,074,622) (5,357,316) (4,691,850) (3,948,911) Bond Issuance Eap 102,041 0 0 0 0 0 0 0 0 Hand Interest 357,143 321,429 285,714 2500000 214,286 178,571 142,857 107,143 71,429 Liquidity Fee 0 0 0 0 0 0 0 0 0 Total EXIMNSES $15,565,821 $8,773,331 $10,414,473 $12,060,135 $13,482,972 $178,571 $142,857 $107,143 $71,429 Net INOOHE ($8,173,171) $601,347 $888,972 $1,202,135 $1,532,839 $1,887,440 $1,740,657 $1,619,317 $1,525,336 ASSETS: Cash $17,431,709 $24,993,716 $31,118,195 $37,688,742 $44,357,544 $40,348,933 $36,875,131 $33,909,742 $31,557,596 L.IABILIM SS: 8,301,563 8,858,541 9,425,677 9,994,337 10,487,639 10,487,639 --- 10,487,639 ----- - 10,487,639 10,487,639 Cam/nM Reserves $13,145,696 $17,742,928 $22,692,720 $27,811,133 $32,732,810 $26,658,188 $21,300,872 $16,609,022 $12,660,112 Hands 4,591,837 4,081,633 3,571,429 3,061,224 2,551,020 2,040,816 1,530,6L2 1,620,408 510,204 Total LIA3na= N$17,737,533 $21,824,560$26,264,149 888,972 $30,872,357 $35,283,830 $28,699,004 $22,831,484 $17,629,430 $13,170,316 SURPLUS: Paid -in + Assess $7,000,000 $9,042,000 $9,042,000 $9,042,000 $9,042,000 $9,042,000 $9,042,000 $9,042,000 $9,042,000 Debt Service 867,347 1,696,980 2,494,898 3,255,102 3,979,592 4,668,367 5,321,429 5,938,776 6,520,408 Earned Surplus (8,173,171) (7,571,824) (6,682,852) (5,480,717) (3,947,878) (2,060,438) (319,782) ----------------------------- 1,299,536 2,824,872 Total SURPLUS ($305,824) $3,169,155 $4,854,046M $6,816,385 $9,073,713 $11,649,929 $14,043,647 $16,280,311 $18,387,280 Total LIABS+SURP $17,431,709 $24,993,716 $31,118,195 $37,688,742 $44,357,544 $40,348,933 $36,875,131 $33,909,742 $31,557,596 SURPLT)S RE02KM IATICN: Hegirnzing Surplus $0 ($305,824) $3,169,155 $4,854,046 $6,816,385 $9,073,713 $11,649,929 $14,043,647 $16,280,311 Add: 8,301,563 8,858,541 9,425,677 9,994,337 10,487,639 10,487,639 --- 10,487,639 ----- - 10,487,639 10,487,639 Paid -its + Asses! 7,000,000 2,042,000 0 0 0 0 0 0 0 Debt Sere. Cant. 867,347 831,633 795,918 760,204 724,490 688,776 653,061 617,347 581,633 Net Ino® (8,173,171) 601,347 888,972 1,202,135 1,532,839 1,887,440 1,740,657 1,619,317 1,525,336 Finding Surplus ------($305,824) $3,169,M $4,854,046 $6,816,385 $9,073,713 $11,649,929 $14,043,647 $16,280,311 $18,387,280 Target Surplus 8,301,563 8,858,541 9,425,677 9,994,337 10,487,639 10,487,639 --- 10,487,639 ----- - 10,487,639 10,487,639 ------ E:rass (Deficit) ($8,607,387) ($5,689,386) ------------------------------------ ($4,571,631) ($3,177,952) ($1,413,926) $1,162,290 $3,556,008 $5,792,672 $7,899,641 AMUR 3.0. Copyright (C') 1986. Tillinghast, Nelson G Warren, Inc. All rights reserved. Tillinghast 10 Non Economic Factors 1. Independence from commercial reinsurance markets (se If - suff itiency) 2. Stability in excess Loss funding costs 3. Legal complexity 4. Time to implement 5. Share in benefits of good loss experience in excess layer 6. Risk of member assessments 7. Financial security B. Scope of excess coverage Tillinghast NOVEMBER/DECEMBER 1986 PUBLISHED BY PUBLIC RISK & INSURANCE MANAGEMENT ASSOCIATION THE ISSUE OF BONDS aapital markets risk financing adds a new, exciting concept to the government risk manager's world. Each public entity or interlocal risk pool will have to decide whether capital markets risk financing has a place in its overall risk financing program. "Bond Overview," Page 10 �r. n ,r6, . ith this type of capitalization, counties which are members of a pool have a constant source of coverage and stabilized costs. "Point, " Page 20 ��1211� here is nothing wrong with bor- rowing capital when it is needed. There is everything wrong with making it sound simple, inexpensive and without risk. "Counterpoint, " Page 20 EI tial Markets Risk Financing How does the capital markets approach—issuing long-term debt to create a pool of proceeds to finance ` loss—fit into the public entity or interlocal risk pool program? BY GREGORY BERG apital markets risk financing is using debt proceeds t:x for loss funding. Generally, this means issuing long-term debt instruments to create a pool of pro- ceeds which will be available to finance losses. These emerging risk financing techniques stem from several broad trends in the insurance industry. The first is the continuing convergence of financial services. Anticipating the increased deregulation of the banking industry, many large commercial banks have been engaged in strategic planning, product development and marketing insurance - related products. Some large banks already have in- surance divisions. @1 The second trend that will have an impact on new risk financing techniques for governments is more aggressive risk retention by large public entities. As public officials become more sophis- ticated in managing risk they also become more aggressive in retaining risk (both on a per -occur- rence and an aggregate basis). When consider- ing these two trends, it is natural to see the emergence of tax-exempt debt for loss funding. Related to these trends is the recent imple- mentation of pooled lease financing programs for capital expenditures by many state municipal leagues. Under these pooled programs, the league, acting on behalf of its member cities, arranges for the issuance of tax-exempt securities. The pro- ceeds are then made available to participating cities through leases that are used to finance capital expenditures. Some investment banks are modeling their new risk financing products after the state municipal league pooled lease financing programs. BLENDING OF DISCIPLINES Professionals who have never worked together before are developing these capital markets prod- ucts. On one side are the investment bankers, bond counsel, rating agencies and credit enhan- cers; and on the other side, public risk managers, risk management consultants, casualty actuaries and insurance brokers. Working groups have been established and new concepts, terminology and financial modeling techniques have been de- veloped. One of the earliest partnerships was formed by Johnson & Higgins, an insurance brok- er, and Paine Webber, an investment bank. This combination of talents resulted in the 8280 mil- lion financing by the Louisiana Public Facilities Authority (see related story on page 18). The re- gional investment bank of Kelling, Northcross & Nobriga has teamed up with Marsh & McLen- nan in California on several projects. Tillinghast, Nelson & Warren has been providing actuarial and risk management consulting assistance to Shearson Lehman Brothers, Citicorp investment Bank, First Boston Corporation and E.F. Hut- ton. Alexander & Alexander has been working with Citicorp on the development of a line -of - credit product for public entities. Most recent - Gregory Berg is a consultant with the Tillinghast division of TPF&C. He specializes in risk financ-, ing consulting to local governments. ment announced a partnership in a series of trade RESTRICTED VS. journal advertisements. UNRESTRICTED YIELD INTERLOCAL RISK POOLS Capital markets risk financing is more applic- able to the capitalization and loss funding of interlocal risk pools. Municipal pools have had difficulty obtaining reinsurance. At the same time, these newly -emerging pools want to avoid assessments and large initial capital contribu- tions from their members. Pre -funding several years of projected losses using bond proceeds may allow the pool managers to spread out the capitalization burden while maintaining suffi- cient cash on hand in case of poor loss experience in the early years of the pool. EVALUATING LOSS FUNDING ALTERNATIVES Several pool managers use a dual approach for evaluating loss funding alternatives. They ask their insurance brokers to secure quotes for rein- surance and, concurrently, select an investment bank to prepare a capital markets loss funding proposal. They compare the costs of the two ap- proaches and select the most cost-effective. To make this comparison, sophisticated computer modeling techniques are required for factoring in multiple years of projected losses (under va- rious scenarios) as well as claims payment pat- terns, investment yields, debt service schedules, etc. In the final analysis, comparing the net pres- ent value of the cash flows will give a strong indi- cation which approach is most cost-effective. The products developed by investment banks fall into two broad categories. The first and more conservative products do not rely on positive ar- bitrage gains. The bond proceeds are assumed to be reinvested at a rate no greater than the in- terest rate being paid to the bond holder. Thus, interest income is based on a restricted yield. More aggressive products are designed to earn investment income at an unrestricted yield. Usually, these unrestricted yield products require two entities to be involved in the transaction. One entity (not the insurance pool) issues the bonds. Individual municipalities draw down loans from the issuing entity. The municipalities then use the proceeds to pay premiums to the insurance pool (the second entity) for multiple years of in- surance coverage. According to some bond coun- sel, because the bond proceeds have been "spent," they can be invested at an unrestricted yield by the pool. In this case, each municipality would make debt service payments to the issuing entity rather than making premium payments to the pool. CAPITAL MARKETS APPROACH When pool managers and investment bankers evaluate the feasibility of using the capital mar- kets approach for loss funding, they are faced with several important questions: • Is there a legal issuer of debt in the state in question? Will state legislation be required to permit issuing debt for this purpose? PUSUC RISK NOV;DEC 11 la • Which layers of loss will be funded using the bond proceeds? Should proceeds be used for funding only the excess losses and/or capitali- zation, or all layers of loss? • How many years of incurred losses will be fund- ed using the capital markets approach? • What is the maturity of the bonds? Is the ma- turity tied to the number of years of incurred losses to be funded, or will debt service have to be paid for several years after the insurance benefits have been received? • Must the bonds be insured? If so, will the in- surer (credit enhancer) have the final say over which public entities can participate in this fi- nancing alternative? • Will changes in the pool's organizational design be required to satisfy the bond counsel? • Will the program be structured as an unre- stricted or restricted yield model? Clearly, answering all of these questions re- quires considerable lead time. E specially impor- tant is the bond counsel's opinion at each step in the process. THE FUTURE Capital markets risk financing is a natural out- growth of recent trends in the industry. As prod- ucts continue to emerge and become more sophis- ticated, the government risk manager will have new options for financing exposures to municipal loss, along with other more traditional risk fi- nancing techniques. In the next six to 12 months, new hybrid prod- ucts will emerge that combine capital markets approaches with more traditional approaches us- ing primary and excess insurance. Short-term borrowing tools such as letters of credit and chronological stabilization plans will also be woven into these new risk financing techniques. Public risk managers should keep a very open mind in the next few years. They should be will- ing to listen to presentations by aggressive in- vestment bankers and insurance brokers. And they will have to become increasingly sophisti- cated in the use of actuarial projections of losses and claims payment patterns. They must develop the tools necessary to make meaningful compari- 12 sons of various risk financing alternatives, which in most cases will require computer modeling. Capital markets risk financing adds a new, ex- citing concept to the government risk manager's world. Each public entity or interlocal risk pool will have to decide whether capital markets risk financing has a place in its overall risk financing program. PROS AND CONS OF THE CAPITAL MARKETS APPROACH Because of its somewhat radical approach, capital markets risk financing has generated con- siderable controversy among government risk managers. Listed arethe advantages—and potential disadvantages—of using the capital markets approach. In the final analysis, each pool manager must evaluate the merits of capital markets risk financ- ing for his/her particular situation. This evaluation will require relatively sophisticated financial analysis supported by good actuarial and legal advice. ADVANTAGES • The pool has larger reserves up front. In tra- ditional arrangements, the pool must charge its members additional premiums to fund its capital reserves, and thus can build the reserves only gradually over a period of time. Under the capital markets approach, the bond proceeds create an immediate large cap- ital reserve. • Much greater investment income is available under the capital markets approach. Because of the large amount of funds up front, invest- ment earning potential increases significantly. • Pool members' annual contributions may be lower on a net present value basis. • Pool members' annual contributions may be more stable over a longer period of time be- cause predictable and stable debt service pay- ments are replacing somewhat unpredictable and unstable premium payments. • The pool may be able to provide higher limits and a broader scope of coverage under the capital markets approach because a large ini- tial capital reserve can support higher limits of coverage and funding for troublesome ex- posures, • The pool may gain new access to reinsurance markets since the pool can take a much higher self-insured retention and demonstrate that this retention is fullv funded. POTENTIAL DISADVANTAGES • The technique is relatively new and untested. Many of the legal, tax and financial considera- tions have not been fully explored. • I t requires a longer-term commitment by pool members. In some cases, the members will be locked into multiple years of debt service j payments rather than being able to make a yearly decision whether to participate in the pool. • There are significant costs associated with issuing long-term debt. These costs must be clearly identified and factored into any eco- I nomic analysis. • Under some models, members will be paying debt service for several years longer than the number of years being funded. For example, the proceeds may be used to pre -fund five years of incurred losses and the debt service payments may be for 10 years. This means that beginning in year six, the members will still be making payments for prior years while continuing to finance the pool program for the sixth and subsequent years. This analysis requires a net present value computation. • Preliminary indications by bond counsel indi- cate that some pools will have to restructure their organizations in order to issue tax- exempt debt. Under some proposed models, non -pool members would make up the major- ity of the pool's board of directors to show that issuers of the bonds are not controlling the investment of the proceeds. • Under some scenarios, the individual pool member will be incurring a portion of the debt which may restrict that entity's ability to take out long-term loans for other purposes. REPORT ON ALTERNATIVE TRANSIT Mayor Lois Anderson, who is from a town in Sawnomish County north of Seattle, Washington, said that their town had been served by the Seattle Metro System and had been paying a lot for commuter service only. In one year, the county formed and had in operation their own system, which was funded by rebates from the state of a percentage of car registration fees. A private firm operates the system, using GM buses which are financed by GMAC with a GM dealer handling the maintenance. The county system purchased 52 coach buses, partly financed by $9.4 million of federal funds. The county system will own the buses outright in five years. The buses have an expected seventeen-year life span. The county system saves $250,000.00 to $500,000.00 per year. In five years, the system will have ninety buses in service. This system provides commuter service, service to college students within the area, local trips during the day and service to rural areas of the county. The fare box covers an average of thirty percent, more on heavy -use commuter runs, less on the other uses. Mayor Anderson advised the following steps: 1. Gather information, define problems, form a plan. 2. Enter into real partnership with private firm; be flexible, realize the company must make a profit and that government has the social responsibility. Establish methods to deal with conflicts early - 3. In an RFP, try and think of all that needs to be covered - labor, insurance, level of service, line extension, etc. 4. Do what has to be done first; do what can wait later. 5. Priorities are to get people where they want to go, on time and comfortably. 6. Both government and provider must promote the service. Mayor Lindren, of Fargo, North Dakota, said that his city had owned fifteen buses and contracted with a company for drivers. They went out for bids. The new company pays the drivers less money and saves the city approximately $100,000.00 per year. The total budget is $700,000.00. The fare box covers twenty-five percent of the costs. A Mr. Ringo of A.T.E., a firm that operates ninety systems including the one near Seattle, reported that they have twenty- five "turnkey systems", fifty-five management and maintenance to fourteen. The companies can react quickly in Hickory Hill. They were operational thirty days after the contract was awarded. He advises that the RFP be flexible, you should bid a level of service and allow the provider to meet it. If a contractor goes under, you can get another firm to take over. His company operates several systems on this basis. He stressed partnership which acknowledged both public service and profit concerns. He advised that systems go easy on penalties to the private companies and provide incentives for the company instead. He said that the system will still need subsidies and a method of settling disputes early. Mr. Reyser, a staff member for the Conference of Mayors, has a book available on the subject. He reminded officials to be realistic. A thirty to fifty percent savings is probably not possible; ten to twenty percent is possible. Elected officials must be committed to make it work. Information regarding this subject is available from the Urban Mass Transit Association Private Sector Office and from the American Public Transit Association. Submitted by James Smith. - PUBLIC PRIVATE �T TRANSPORTATION P1V NETWORK COMSIS CORPORATION 2000 15th STREET NORTH, SUITE 507 ARLINGTON, VIRGINIA 22201 (703) 525-PPTN (800) 522-PPTN EXECUTIVE SUMMARY AN ANALYSIS OF LABOR ISSUES RAISED BY THE SUBCONTRACTING OF PUBLIC TRANSIT OPERATIONS G. Kent Woodman, Attorney at Law Eckert, Seamans, Cherin & Mellott September 17, 1987 This publication was written for the Public Private Transportation Network (PPTN), an Urban Mass Transportation Administration (UMTA) technical assistance program. The opinions, findings, and conclusions expressed in this publication are those of the author and not necessarily those of the PPTN, COMSIS Corporation (administrator of the PPTN program), the United States Department of Transportation, UMTA, or Office of the Secretary. The author has provided services of a technical and advisory nature under contract to the PPTN and is considered an expert in his field. For further information contact PPTN. EXECUTIVE SUMMARY OF AN ANALYSIS OF LABOR ISSUES RAISED BY THE SUBCONTRACTING OF PUBLIC TRANSIT OPERATIONS As cities seek to achieve greater cost savings in transit services through the subcontracting of work, an issue that consistently arises is the impact of subcontracting on existing labor and management relationships. There are two basic issues that often present obstacles to the ability to subcontract - collective bargaining and section 13(c) labor protection. The analysis explores these issues as part of an effort to aid transit agencies in the effective design and implementation of services to be subcontracted and in dealing with labor concerns. Collective Bargaining In considering the issue of subcontracting as it relates to the collective bargaining process, it is helpful to initially examine subcontracting in the private sector. In that context, under the National Labor Relations Act (which governs most private sector labor-management issues), the ability to subcontract is contingent on whether the issue is a mandatory subject of collective bargaining between the parties or whether it is an issue reserved for management discretion. In making this determination, the majority of Federal court and agency decisions appear to follow an initial presumption that subcontracting is a bargainable issue, particularly if it simply involves the replacement of existing employees. However, most decisions rely on a type of "balancing test" under which that presumption may be overcome if it appears that the interests of management in the subcontracting outweigh the employees' interests in a particular case. Subcontracting disputes in the public sector are resolved by similar considerations. The majority of state court decisions treat subcontracting as a mandatory subject of bargaining, if it is shown to affect existing employees. The analysis often used by State courts, referred to as the "primary relationship" test, focuses on whether the subcontracting decision relates primarily to the terms and conditions of employment or primarily to the formulation of public policy. while there is little State case law on subcontracting in the public transit area, it is reasonable to expect that transit subcontracting disputes would be resolved in State court under a similar type of "primary relationship" or "balancing" analysis. Disputes which arise over transit subcontracting are typically resolved through the use of arbitration, as.is generally specified in collective bargaining agreements. The legal authority of a transit agency to subcontract is determined in arbitration by examining the terms of the collective bargaining agreement involved. If the agreement contains specific language on the authority to subcontract, the analysis does not go beyond consideration of the agreement's terms. These terms may range from those which definitively prohibit subcontracting to more flexible arrangements which require management to notify the union of an intention to subcontract and afford an opportunity to negotiate the issue. - 2 - i Arbitration If no specific contractual provisions exists on subcontracting, arbitrators will look to a set of general factors to determine whether the subcontracting action was permissible. While arbitrators are not bound by the reasoning of State court decisions on the propriety of subcontracting, the factors used by arbitrators reflect the same interest in balancing the interests of labor and management. Arbitration decisions regarding the subcontracting of paratransit services and of fixed route services are fully reviewed in the analysis. In decisions involving transit agencies in Columbus, Ohio and Chattanooga, Tennessee, the subcontracting of paratransit services was found to be a permissible action by management. In these decisions, the arbitrators considered several factors, including the terms of the collective bargaining agreement, the effect on the bargaining unit and on the job security of its members, the reasonableness of the efficiency and cost decision of the employer, and the employer's past practice. Since the subcontracting involved in both cases was small in scope and temporary in nature, the arbitrators found it did not endanger the job security of employees or result in the permanent removal of work. In contrast, another decision found the subcontracting of paratransit services in Boston to violate the terms of the particular collective bargaining agreement which protected bargaining unit work and gave the union rights with respect to new work. This decision specifically declined to give deference - 3 - to the cost effectiveness of subcontracting, on the grounds that that factor, if considered alone, would threaten the job security of bargaining unit employees. In a similar case arising in Portland, Maine, considerable significance was attached to the recognition clause of the collective bargaining agreement, which "recognized" the union as exclusive bargaining agent for the employees. The subcontracting was found to have been contrary to that clause because, in the arbitrator's view, it amounted to an avoidance of the union and adversely affected the job security and integrity of the bargaining unit. Arbitration decisions involving the subcontracting by a transit agency of portions of its fixed route system rely on a similar analysis as the paratransit cases. In the fixed route cases, arbitrators focus on the impact of the subcontracting on the bargaining unit, the affect on employees, the reasonableness and good faith decision of management, and past practice. Again, if the scope of operations is limited and no employees are displaced, it is difficult to support a finding that the subcontracting undermines the bargaining unit. of course, whether the subcontracting involves a new or existing route will be of considerable importance in making such findings. In a case arising in River City, Kentucky the absence of language in the collective bargaining agreement lead to a hesitancy on the part of the arbitrator to imply a prohibition on subcontracting. In this decision, the specific language of a 13(c) agreement providing that the employees have exclusive rights to the provision of services was found not to preclude - 4 - a subcontracting since the collective bargaining agreement did not include such a restriction. In a decision in Lexington, Kentucky, the subcontracting of financially troubled routes, in jeopardy of being curtailed, was found to be justified by economic considerations in the absence of any adverse affect on employees and of any intent to subvert the bargaining unit. While the emphasis may vary in arbitration decisions involving subcontracting, several factors consistently predominate the inquiry. The subcontracting of new services or routes, not traditionally within the bargaining unit's work, appears to be justified, as long as there is no significant adverse affect on the employees or on the integrity of the bargaining unit, and the subcontracting is not inconsistent with the past practices of the transit agency. The subcontracting of existing fixed route service is more difficult to sustain, unless there is a distinct absence of adverse affect on employees and the business motivation is a reasonable one, based on objective economic criteria. Finally, the specific collective bargaining language on subcontracting has a controlling influence on the determination of the ability to subcontract and cannot be overlooked as a pivotal factor in arbitration. An attachment to the analysis is included setting forth specific provisions that can be included in collective bargaining agreements to provide greater flexibility in subcontracting. Section 13(c) Acreements As a condition of Federal assistance under the Urban Mass Transportation Act of 1964, section 13(c) requires the - 5 - protection of employees against a worsening of their employment position and preserves and continues existing collective bargaining rights and benefits. The legislative history of this provision reflects a desire on the part of Congress to maintain the collective bargaining rights of employees as funding was used to assist States in purchasing troubled private transportation companies, and an intent to protect employees who may be adversely affected through automation and acquisitions supported by Federal funding. Section 13(c) was modeled after labor protection in the railroad industry, where employees are provided protection from the harmful affects of mergers or other transactions. A distinction exists however, in that protection in the rail industry is viewed as a cost of a proposed consolidation or transaction, in terms of the compensation that must be paid to employees. However, in the transit area, 13(c) protection has evolved From its rail origins to a type of protection which enables labor organizations to effect whether a transaction can be consummated. Rarely is 13(c) compensation actually paid to transit employees. Instead, the Department of Labor (DOL) seems to interpret 13(c) as requiring management to structure transactions so as to minimize adverse impacts. As 13(c) agreements are typically the product of labor and' management negotiations and not imposed by DOL, projects are often delayed pending agreement by the parties or, in some cases, lengthy litigation. The ability of labor unions to affect the release of the Federal grant gives them considerable leverage in labor-management relations. 'tom Any subcontracting of work that is contrary to the collective bargaining agreement may also be contrary to the terms of the section 13(c) agreement. Those terms require the preservation of rights, privileges and benefits under existing collective bargaining agreements and the continuation of collective bargaining rights. If subcontracting is found to be contrary to the rights of employees under a collective bargaining agreement, it would arguably violate the preservation of those rights and the ability to collectively bargain under 13(c). In addition, subcontracting may raise issues under the 13(c) provisions that protect against a "worsening" of an employees position. Protection may be triggered by subcontracting that has a demonstrable adverse impact, such as loss of employment, or reduction in compensation or hours worked by employees. Subcontracting of new work, however, where no employee is harmed is not restricted by the 13(c) "worsening" provision. Overtime work presents an arguable case, in which the transit agency's past practice would be a significant factor in determining if 13(c) were violated. The scope of the "worsening" concept under 13(c) has never been completely resolved. The most supportable position for management is to argue that 13(c) is not evoked except for situations involving displacement or direct economic harm to employees. Finally, the concept of worsening has an independent status apart from the collective bargaining agreement. As a result, subcontracting that results in a "worsening" may violate the 13(c) agreement even if that action is permissible under the - 7 - collective bargaining agreement. The obligations of 13(c) protection not only apply to the existing employees of a transit authority in instances of subcontracting, but also apply to the employees of a private entity providing the subcontracted services. Section 13(c) protection for the employees of a private contractor is either provided through a negotiated 13(c) agreement if the employees are unionized, or, if not, through a certification or warranty issued by the Department of Labor (DOL). An issue which has often arisen in this context is whether 13(c) protection covers any adverse affect on employees resulting from the expiration of a management contract, and the award of a new contract to a different operator with different employees. If 13(c) obligations do attach in these instances, requiring the successor to afford employees continued employment rights or to provide compensation, the enthusiasm for competitive bidding of contract services could be dampened. Two opinion letters issued by the DOL shed some light on this issue. The "Modesto letter" articulated what has become the standard rule - impacts which occur solely as a result of the expiration of the management contract do not trigger benefits to affected employees. Two exceptions to this principle are employees of a contractor under a "Memphis plan" and employees who are otherwise covered by 13(c) as a result of arrangements which provide for continued employment to minimize 13(c) liabilities. The "Snohomish letter" reiterated the basic principle of the Modesto letter, but in that letter DOL - 8 - determined that the inclusion of a specific provision in a 13(c) agreement, providing that the protections afforded employees would expire at the time the contract terminated, was not permissible under 13(c). Specifically, DOL found that 13(c) protections were intended to cover adverse effects related to events which occur in anticipation of, during, and subsequent to the receipt of Federal funds and that employees may have certain vested rights that cannot be automatically terminated upon the expiration of a contract to provide services. The major exception referred to in both letters applies to employees of a contractor under a Memphis plan. The Memphis plan concept was originally developed to facilitate the receipt of Federal funds by a State agency which was precluded by State law from bargaining with its employees. To remedy this problem, a private managerial entity would be established to operate the public transit system under a contract with the State agency, and that private entity would enter into the collective bargaining agreement with the employees. Although this is still a developing area and there is an absence of definitive guidance from DOL on this issue, a Memphis plan is generally considered to exist in instances where a contract is either for an indefinite term or is continually renewed, and the employees of the contractor are quasi -governmental employees. Also considered is whether the particular employees have a reasonable expectation of continued employment beyond the contract term. The second exception refers to provisions in 13(c) agreements that specifically provide for continued employment. These "successor clauses" provide that employees shall continue to be employed and the successor employer shall assume the obligations of the predecessor on wages, hours and working conditions of the employees. The enforceability of these clauses as a contractual matter is subject to some question, however. State Statutory Law Finally, the analysis examines legislation of two States which enumerate specific management rights that cannot be the subject of collective bargaining. These statutes preclude bargaining over "inherent management rights", which are defined to include specific items, such as the right to assign overtime and to hire part-time employees. Litigation involving these statutes upheld the ability of States to adopt public sector bargaining laws, which are controlling if their terms are inconsistent with 13(c). However, to the extent a statute removes traditional subject areas from the realm of collective bargaining, a 13(c) certification may be difficult to obtain since a continuation of collective bargaining rights cannot be fully assured. Options The analysis concludes with an enumeration and discussion of options available to transit agencies that may endeavor to subcontract work. These options include: (1) utilization of the specific language of the collective bargaining agreement either as it exists or achieved through negotiation; (2) designing a subcontracting plan under the existing collective bargaining agreement with an awareness of the relevant standards articulated in arbitration and State court decisions; and (3) seeking State legislation which enhances management control over subcontracting decisions. The analysis provides guidance on each of these options and delineates the relevant factors to be considered in pursuing each, in order to best facilitate a successful subcontracting. ii -