What s Happening in the World of Finance?

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What s Happening in the World of Finance? Airports Council International Webinar Lois Scott, President Phoebe Selden, Senior Vice President Scott Balice Strategies June 21, 2010

Agenda Global Market Update Lois Scott, President, Scott Balice Strategies Phoebe Selden, Scott Balice Strategies Bond Compliance, the MSRB, the SEC and the IRS David Goodman, Squire Sanders & Dempsey LLP Due Diligence Requirements in a Changing World Jennifer Pflug Murphy, Gonzalez Saggio & Harlan LLP 2

World Economic Backdrop: Is the World Recovering? IMF s World Economic Outlook forecasts 4.2% global growth for 2010 vs -.6% in 2009 China to grow at 10% India to grow at 8.8% U.S. growth at 3.1% implies continued unemployment rate of 10% or more Europe and Japan are lagging Growth is less than population growth Economists still worry about double dip recession PIGS credit crisis still threatens global economy Sovereign risk could prolong the credit crisis State and local government contraction will fuel further run up in U.S. unemployment Source: New York Times 3

Is U.S. Economy Recovering? Mixed Signals So Far 8.0 6.0 4.0 2.0 0.0 2.0 Real GDP Growth (% change, Quarter on Quarter) 2004 2005 2006 2007 2008 2009 2010 12.0 10.0 8.0 6.0 4.0 Unemployment Rate 4.0 2.0 6.0 8.0 0.0 2004 2005 2006 2007 2008 2009 2010 Inflation (% change, Month on Month) 1.50% 1.00% 0.50% 0.00% 2004 0.50% 2005 2006 2007 2008 2009 2010 1.00% 1.50% 2.00% 2.50% Source: Bloomberg, U.S. Department of Labor, Citibank, 4

Recent Fiscal Climate Highlights Distress State and Local Government Sponsors Continue to Struggle As of March 2010, over 80% of cities are financially distressed, and this number continues to grow As of May 2010, 75% say economic conditions are worse than last year Over 90% of cities are having trouble meeting needs and are looking at: Hiring freezes and layoffs (71%) Increasing charges for services (50%) Adding various fees (28%) Delaying or canceling capital projects (68%) Increasing property taxes (14%) Raising sales taxes (6%) Service cuts (52%) Public safety (22%) Health care (24%) Union benefits (22%) National League of Cities: Survey on Jobs and the Economy May 2010 Same Better Airports experiencing increasingly burdensome indirect cost allocation plans from sponsors Worse 5

The Need for Funding Continues to Grow $ Value of Gap 140 120 100 80 60 40 20 Largest Projected FY2011 Budget Gaps in Billions of Dollars Largest Projected FY 2011 Budget Gaps in Billions of Dollars 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% Gap as a % of FY 10 Budget 0 0.0% IL CA NJ NY CT FL NC PA MN GA WI OH MA AZ WA MD MI NV CO Greece* Portugal* Spain* Ireland* Budget Shortfall % of FY10 Budget *FY2009 6

How Wall Street Views Default Likelihood: States 7

How Wall Street Views Default Likelihood: Sovereigns 8

State Unemployment Borrowings Highlight Stress 32 States Have Run Out of Unemployment Funds Federal government has stepped in Pay as you go funding for state payments to the unemployed must be paid back As of May 20, the total balance outstanding by 32 states (and the Virgin Islands) is $37.8 billion California has borrowed $6.9 billion Michigan has borrowed $3.9 billion Illinois $2.2 billion. States Borrowed Federal Money to Make Unemployment Payments as of May 2010 8000 7000 6000 $ Millions 5000 4000 3000 2000 1000 0 California Michigan New York Penn. Ohio Illinois N.C. Indiana New Jersey Florida Wisconsin Texas S.C. Kentucky Missouri Connecticut Minnesota Georgia 9 States Nevada Mass. Virginia Arkansas Alabama Colorado R.I. Idaho Maryland Kansas Vermont S.D. Tenn. Virgin Islands Delaware

Pension Time Bomb Keeps Ticking Airport Liabilities: Need to be Paid, but Timing Not Always Clear Pew Center on States report as of February 2010 estimates that this is a $1 trillion gap between the pension, health care and other retirement benefits states have promised as of 2008 compared with funds available for paying those benefits As of November 2009, the pension problem for the 39 largest city governments had liabilities exceeding $530 billion (Forbes) New York City: $59.5 billion Los Angeles: $2.3 billion Chicago: $1.8 billion Philadelphia: $1.2 billion San Diego: $1.2 billion Dallas: $688 million San Antonio: $670 million Phoenix: $346 million San Jose: $345 million Houston: $270 million These estimates may understate the problem significantly Most recent studies do not yet reflect the investment returns for second half of 2008 which devastated pension fund investments Most municipalities allow for smoothing of gains and losses over 5 year time period Long term reduction in expected yield could result in incremental deficits of over 20-40% Rates and charges timing is a topic of continuing debate 10

The B Word: Bankruptcy in the Muni Space Municipal Bankruptcy a legal declaration of an inability and/or impairment of a municipality to pay its creditors Chapter 9.11 U.S.C. 109(c): Provides financially distressed municipality protection against creditors in order to give the municipality the opportunity to develop and negotiate a plan to adjust its debts Reorganization of municipality debt is typically accomplished by either extending debt maturities, reducing the amount of principal or interest, or refinancing by obtaining a new loan Ability to reject contracts and leases Unlike filing other Chapters, Chapter 9 does not have provisions for liquidation of assets or distribution of proceeds to creditors Who is eligible? Political subdivisions or public agencies or instrumentalities of state About 500 municipal bankruptcies have been filed States cannot enter Chapter 9 bankruptcy 26 states prohibit municipalities from filing for bankruptcy. In these states a municipality must seek specific authorization for filing *U.S. Bankruptcy Courts: http://www.uscourts.gov/index.html 11

Credit Spreads Stabilizing Risk Assessments Have Calmed Down Since Early 2009 Source: Thomson Municipals and Citi 12

U.S. Muni Transportation Curves Spread Analysis in Today s Market US Muni Transportation Curves 6/21/10 6 US Muni Transportation AA+ Curve US Muni Transportation A+ Curve US Muni Transportation AA Curve US Muni Transportation A Curve 5 4 Percent % 3 2 1 0 13 13

Historical Yield Curve Comparison U.S. Muni Transportation A+ Yield Curves, 2008-2010 US Muni Transportation A+ Yield Curves US Muni Transportation A+ Curve 6/20/08 US Muni Transportation A+ Curve 6/19/09 US Muni Transportation A+ Curve 6/21/10 6 5 4 Yield 3 2 1 0 14 14

Trends We re Spotting Parking P3 s in process throughout the U.S., including on airport FAA Pilot Program is almost saturated Airports may look to do P3 s for elements of their capital programs RAC s market is now tolerating stand alone issuance with proper structure Ratings Recalibrations preceded or followed by sudden and superficial actions Energy Tax Credits Solar VALE (Voluntary Airport Low Emissions) Program Future Trends ESCO (Energy Service Corporation) financing Recovery Zone Bonds Facility Bonds to stimulate investment Hangers Cargo facilities Other on and off airport development Non-GARB financial toolkit continues to develop in airport sector, although the future remains unclear. 15