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PAUL R. GLASSMAN (State Bar No. 76536) LAURA L. BUCHANAN (State Bar No. 156261) KATHLEEN D. DeVANEY (State Bar No. 156444) STRADLING YOCCA CARLSON & RAUTH A Professional Corporation 100 Wilshire Blvd., Suite 440 Santa Monica, CA 90401 Telephone: (424) 214-7000 Facsimile: (424) 214-7010 E-mail: pglassman@sycr.com lbuchanan@sycr.com kdevaney@sycr.com JAMES F. PENMAN (State BarNo. 91761) CITY ATTORNEY 300 North "D" STREET, Sixth Floor San Bernardino, CA 92418 Telephone: (909) 384-5355 Facsimile: (909) 384-5238 E-mail: Penman_J a@sbcity.org Attorneys for Debtor City of San Bernardino

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UNITED STATES BANKRUPTCY COURT

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CENTRAL DISTRICT OF CALIFORNIA

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RIVERSIDE DIVISION
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In re: CITY OF SAN BERNARDINO, CALIFORNIA, Debtor.

Case No. 6: 12-BK-28006-MJ Chapter 9

DECLARATION OF MICHAEL BUSCH IN SUPPORT OF CITY OF SAN BERNARDINO'S MEMORANDUM OF FACTS AND LAW IN SUPPORT OF THE STATEMENT OF QUALIFICATIONS UNDER SECTION 109(C) OF THE BANKRUPTCY CODE

DECLARATION OF MICHAEL BUSCH

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DECLARATION OF MICHAEL BUSCH

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I, Michael Busch, declare: 1. My name is Michael Busch. I am over 18 years of age. I am authorized to and do

make this declaration in support of the City Of San Bernardino's Memorandum Of Facts And Law In Support OfThe Statement Of Qualifications Under Section 109(C) OfThe Bankruptcy Code. I have personal knowledge of the matters set forth in this declaration, and if called upon to testify, I could and would competently testify thereto. 2. I am the President ofUrban Futures, Inc. ("UFI"). UFI is a is a full service

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municipal consulting firm serving cities, counties, school districts, housing entities and special districts in the State of California since 1972. Its consulting practice includes strategic planning, financial analysis, management consulting, economic development, housing consulting and special study services. Since its founding, UFI has served over 200 governmental entities in various capacities including, financial and management advisor, redevelopment consultant and interim staffing. As President I manage the day-to-day operations and perform a variety of financial, management, and organization consulting services to public agencies throughout the State of California. 3. My background consists primarily of experience in the positions of

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Assistant/Deputy City Manager, Finance Director, and Project Manager. I have extensive experience in strategic planning, municipal finance, economic development and redevelopment, and project implementation. I also have served as a Finance Director, City Treasurer, Deputy City Manager and Assistant City Manager where I have worked in capital improvement plan development, capital project implementation, budgeting and financial analysis. I have a Bachelor of Arts degree in Urban and Regional Planning from California State Polytechnic University, Pomona and a Masters of Public Administration with an emphasis in Finance and Public Works from California State University, Long Beach. I am also an Adjunct Faculty member at the University of Southern California and teach graduate level courses in Public Financial Management and Budgeting and Finance of the Public Sector.

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4.

In early June 2012, UFI was engaged by the City of San Bernardino, California

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(the "City" or "San Bernardino") to provide financial advisory services to the City in all areas of the City's operation including finance, planning, redevelopment, real estate, project management and development review functions. As part of those services, UFI performed a fiscal review of the City which includes an analysis of revenue and expenditure forecasts, local economic forecasts, financial and investment policies and practices, and debt service analysis. This declaration is based on matters of my own personal knowledge or knowledge I have gained from the business records of the City provided to me, which I believe have been maintained in the ordinary course of the City's business and which were made at or near the time of the acts or events recorded therein by, or from information transmitted by, a person with knowledge of the acts or events who had personal knowledge of the event and had or has a business duty to record such event accurately. 5. UFI assisted the City's Finance Department and Director of Finance, Jason

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Simpson, as well as the Interim City Manager, Andrea Travis-Miller, in preparing the report entitled "San Bernardino Budgetary Analysis and Recommendations for Budget Stabilization" dated July 9, 2012 (the "Budget Report") and the Staff Report dated July 18, 2012 ("Staff Report"). UFI also assisted in preparing the report entitled "Fiscal Emergency Operating PlanJuly 2012 to September 2012" (the "Fiscal Emergency Plan") and a report entitled "City of San Bernardino Selected Monthly Cash Flow Analysis" ("Cash Flow Analysis"). UFI is currently assisting the City in developing its Pendency Plan.

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The Great Recession and housing bubble burst adversely affected San Bernardino

just like other cities in California and across the nation. Since 2007, housing prices plummeted and the foreclosure rate increased resulting in significantly lower property tax revenues. The housing construction boom of the early 2000's led to speculation in the housing market and an influx of people moving to San Bernardino to seek more affordable housing than that available in Los Angeles, Orange and San Diego Counties. Speculation in San Bernardino's housing market made it particularly vulnerable when the housing bubble burst, and the Riverside-San Bernardino-Ontario metro area has one of the nation's highest foreclosure rates. The median -2DECLARATION OF MICHAEL BUSCH
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single family home price peaked in 2007, and was over 40% below that peak in June of2012. San Bernardino's foreclosure rate is 3.5 times greater than the national average. In addition to declines in residential real estate prices, commercial properties have dropped in value and continue to search for a bottom. Given continued housing market weakness and the constraints imposed by Proposition 13 on property tax increases, property tax revenues likely will remain flat for years to come.
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The Great Recession also caused job losses for many of San Bernardino's

residents. Since June of 2008, the City has suffered from double digit unemployment. The City's unemployment rate was 16.9% as of June 2012, which is notably higher than the State of California's and more than double the June 2012 national rate of8.2%. By 2010, roughly 34.6% of the City's population was classified as poor. In 2011, the U.S. Census Bureau ranked the City as the second poorest in the nation behind only Detroit. While sales tax revenues have increased modestly since the 2009-10 low, sales tax revenues are not projected to return to peak levels in the near term. 8. Governmental service delivery is labor-intensive and relies on City employees to

patrol streets, respond to emergencies, provide services at libraries and community centers, and deliver the other direct and supporting services to operate the City. The population growth and increase in residential housing units during the housing boom resulted in a higher demand for City services and added to the City's obligation to provide infrastructure support and essential public services in a City that now sprawls over roughly 59.3 square miles.
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The City participates in The California Public Employee Retirement System

("CalPERS"). CalPERS is a state agency that manages retirement benefits for public employees, retirees and their families. City employees participate in CalPERS, and the City has little control over increasing CalPERS pension costs. CalPERS pension costs are a combination of an "employer" and "employee" share. CalPERS sets the employer share depending on actuarial assumptions. 10. CalPERS has set the City's employer share as 30% of compensation for public

safety employees and 17% for non-safety employees, and the employee share at 9% for public -3-

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safety and 8% for non-safety workers in the current fiscal year. Historically, the City paid both the employer and employee shares. Based on these numbers, the City's contribution retirement rates as a percentage of payroll will be 3 9% for public safety employees, and 25% for miscellaneous workers this fiscal year. Through recent negotiations, the City reached an agreement with its labor groups for new hires after October 2011 to pay the full employee share, but this does not affect the City's obligation to pay the employee's share of the CalPERS contribution for employees hired before October 2011. 11. The City's employee retirement costs have more than tripled since 2000-01 for

miscellaneous employees and almost tripled for public safety works. Retirement costs are projected to be $19 million this fiscal year. In addition to the pension plans, retirees receive an annual 2% cost of living adjustment (COLA) regardless of the Consumer Price Index or the state of the retirement funds and other enhanced pension formula benefits that increase the City's pension costs. The City's book value and market value of its unfunded CalPERS liability is $143.3 million and $319.5 million, respectively, as of June 30, 2010. The City's current fiscal year budget does not include any amounts for its unfunded CalPERS liability. 12. The City's retirement plans also provide for other post-employment benefits

(OPEB) consisting of retiree medical care. Generally, City employees are eligible to receive a financial contribution towards retiree medical insurance coverage after retirement from public service. Because employees are eligible to retire at either age 50 (for police and fire) or 55 (for other employees) before such employees are eligible for Medicare, the City's costs for this benefit are significant. Unlike pension benefits which are traditionally funded through the working life of the employee, little money was set aside to fund these benefits even though an actuarial liability arose. The City's pay-go payment is over $600,000 annually, and is anticipated to double in the next 7 years. The City's Annual Retirement Contribution (ARC) for OPEB benefits is over $6 million. As of June 2011, the City's unfunded liability was estimated to be $61 million for promised OPEB benefits. 13. On July 10, 2012, the City Manager, Finance Director and I presented the Budget

Report to the Mayor and Common Council at the July 10, 2012 Common Council meeting. The -4DECLARATION OF MICHAEL BUSCH
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key points of this presentation as set forth in the Budget Report were that: ( 1) the City faced a budget deficit preliminarily estimated to be over $45.8 million in its current fiscal year which began on July 1, 2012; (2) the City had depleted all its General Fund reserves and reserves in other internal service accounts to cover substantial budget deficits in the last four consecutive fiscal years; (3) immediate and substantial action had to be taken to reduce spending and preserve cash for the City to continue providing essential services to the City's residents; (4) reviews of the City's General Fund revealed that the balances at the start of the 2010-11 and 2011-12 fiscal years had been erroneously reported by City staff and actually totaled over $4.5 million less than reported, and the beginning General Fund balance for the current fiscal year was estimated to be a cash deficit of over $18.2 million; and (5) the City did not have enough unrestricted cash available to pay its financial obligations as and when those obligations were due or to become due and owing in July of2012 and continuing throughout the current fiscal year and beyond. 14. The Budget Report also explained that the City faced a severe liquidity crisis, and

did not have enough cash to pay its ongoing financial obligations. I believed that this dire cash flow crunch presented a fiscal emergency that translated into a service emergency and would negatively affect the health, safety and well-being of its citizens if City employees, including police, fire and other essential workers, were not paid and did not report for work. 15. I also helped prepare a second report regarding the City's fiscal emergency (the

"Staff Report"). The StaffReport identified additional contributing factors to the City's liquidity crisis and unstable financial condition including, inter alia, (1) the City had no ability to access the short term credit market; (2) the City's credit line had been terminated; (3) the City's vendors and creditors were demanding cash up front before essential materials, goods or services would be provided; (4) an unusually large number of employees were retiring and leaving the City triggering immediate cash outs ofleave accruals above annual averages; (5) the City was in danger of defaulting on its Pension Obligation Bond payment and on leases for critical City assets; and (6) cash flow projections showed that the City had monthly General Fund cash deficits ranging between approximately $2 and $5.6 million from July through September. -5DECLARATION OF MICHAEL BUSCH
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16.

On July 24, 2012, the City Manager, the Finance Director and I presented a report

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entitled "Fiscal Emergency Operating Plan- July 2012 to September 2012" (the "Fiscal Emergency Plan") and a report entitled "City of San Bernardino Selected Monthly Cash Flow Analysis" ("Cash Flow Analysis") to the Common Council and Mayor. I believe that these two reports demonstrated that the City estimated it had net cash deficits of over $11.5 million and, as such, could not pay all of its obligations due and owing or becoming due from July through September of2012. 17. The City's General Fund preliminary financial projections for the current fiscal

year show that the General Fund will operate at a deficit of over $45.8 million. From the end of June 2012, the City will end each month with a negative cash balance of millions of dollars in the General Fund. I believe that these figures demonstrate that the City lacks enough money in fiscal year 2012-13 to permit the City to pay its General Fund obligations. 18. As the magnitude of the City's financial problems became clearer, I determined

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that the City could not borrow money from the private credit markets to meet its obligations because the City could not demonstrate the ability to pay back any such loan with revenues generated in the current fiscal year. The City had depleted all of its reserves and I believe that legal impediments to borrowing from restricted funds ruled out this as an option to solve the City's cash flow crisis. Given the City's preliminarily projected $45.8 million budget deficit for the current fiscal year and lack of General Fund reserves, a loan to the General Fund from another City fund or a private creditor would create a debt that exceeded the City's available revenue for the fiscal year. 19. Adverse economic conditions will continue to affect the City's primary revenue

sources: property taxes, sales taxes, utility user taxes, franchise taxes, and business license taxes, which combined account for most of General Fund revenue. A major factor that continues to depress property tax revenue is the structure of California's property tax system. 20. I also analyzed other possible methods to raise revenues for the City to close

revenue shortfalls on an expedited basis. Proposition 13 limits property tax rates to 1% of fair market value exclusive of voter-approved bonded indebtedness. Proposition 218 limits the -6DECLARATION OF MICHAEL BUSCH
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City's ability to raise any other taxes by requiring that a majority of voters approve any new or increased general tax (one the proceeds of which can be used for any purpose) and that a twothirds majority approve any new or increased special tax (one expressly limited to a specific purpose). Locally, voters' enactment of Measure Z (a .25 cent sales tax for 15 years enacted in 2006) to be used only to fund more police officers and support personnel and anti-gang and anticrime operations, left the City with limited opportunities to create new general purpose revenue sources on its citizens with limited incomes, a significant percentage of which live at the poverty level. I believe that the immediate severity of the City's cash flow problems and time required to enact a ballot measure ruled out a tax increase as an expedient option to solve the City's financial and liquidity crisis. In addition, the cash flow crisis did not allow the City sufficient time to analyze whether any City owned nonessential real property could be sold to raise one-time revenues, let alone complete the process of liquidating these assets.

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I declare under penalty of pe1jury that the foregoing is

August:2{)2012 at Orange, California.

on

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PROOF OF SERVICE OF DOCUMENT

I am over the age of 18 and not a party to this bankruptcy case or adversary proceeding. My business address is: 100 Wilshire Blvd., Suite 440, Santa Monica, CA 90401. A true and correct copy of the foregoing document entitled: DECLARATION OF MICHAEL BUSCH IN SUPPORT OF CITY OF SAN BERNARDINO'S MEMORANDUM OF FACTS AND LAW IN SUPPORT OF THE STATEMENT OF QUALIFICATIONS UNDER SECTION 109(C) OF THE BANKRUPTCY CODE will be served or was served (a) on the judge in chambers in the form and manner required by LBR 5005-2(d); and (b) in the manner stated below: 1. TO BE SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (NEF): Pursuant to controlling General Orders and LBR, the foregoing document will be served by the court via NEF and hyperlink to the document. On August 31, 2012, I checked the CM/ECF docket for this bankruptcy case or adversary proceeding and determined that the following persons are on the Electronic Mail Notice List to receive NEF transmission at the email addresses stated below: Jerrold Abeles abeles.jerry@arentfox.com Joseph M Adams jadams@lawjma.com Andrew K Alper aalper@frandzel.com, efiling@frandzel.com;ekidder@frandzel.com Thomas V Askounis taskounis@askounisdarcy.com Anthony Bisconti tbisconti@bmkattorneys.com Jeffrey E Bjork jbjork@sidley.com Sarah C Boone sboone@marshackhays.com, ecfmarshackhays@gmail.com J Scott Bovitz bovitz@bovitz-spitzer.com Jeffrey W Broker jbroker@brokerlaw.biz Deana M Brown dbrown@milbank.com Michael J Bujold Michael.J.Bujold@usdoj.gov Christina M Craige ccraige@sidley.com Alex Darcy adarcy@askounisdarcy.com Susan S Davis sdavis@coxcastle.com Robert H Dewberry robert.dewberry@dewlaw.net Todd J Dressel dressel@chapman.com, lubecki@chapman.com Chrysta L Elliott elliottc@ballardspahr.com, manthiek@ballardspahr.com Scott Ewing contact@omnimgt.com, sewing@omnimgt.com Paul R. Glassman pglassman@sycr.com Everett L Green everett.l.green@usdoj.gov Chad V Haes chaes@marshackhays.com, ecfmarshackhays@gmail.com James A Hayes jhayes@cwlawyers.com M Jonathan Hayes jhayes@hayesbklaw.com, roksana@hayesbklaw.com;carolyn@hayesbklaw.com;elizabeth@hayesbklaw.com D Edward Hays ehays@marshackhays.com, ecfmarshackhays@gmail.com Eric M Heller eric.m.heller@irscounsel.treas.gov Bonnie M Holcomb bonnie.holcomb@doj.ca.gov Whitman L Holt wholt@ktbslaw.com Michelle C Hribar mch@sdlaborlaw.com Steven J Katzman SKatzman@bmkattorneys.com Jane Kespradit jane.kespradit@limruger.com, amy.lee@limruger.com Mette H Kurth kurth.mette@arentfox.com Richard A Marshack rmarshack@marshackhays.com, lbergini@marshackhays.com;ecfmarshackhays@gmail.com Gregory A Martin gmartin@winston.com David J Mccarty dmccarty@sheppardmullin.com, pibsen@sheppardmullin.com
This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California. June 2012

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Reed M Mercado rmercado@sheppardmullin.com Aron M Oliner roliner@duanemorris.com Scott H Olson solson@seyfarth.com Dean G Rallis drallis@sulmeyerlaw.com Christopher O Rivas crivas@reedsmith.com Kenneth N Russak krussak@frandzel.com, efiling@frandzel.com;dmoore@frandzel.com Gregory M Salvato gsalvato@salvatolawoffices.com, calendar@salvatolawoffices.com Mark C Schnitzer mschnitzer@rhlaw.com, mschnitzer@verizon.net Benjamin Seigel bseigel@buchalter.com, IFS_filing@buchalter.com Diane S Shaw diane.shaw@doj.ca.gov Jason D Strabo jstrabo@mwe.com, losangelestrialdocket@mwe.com Matthew J Troy matthew.troy@usdoj.gov United States Trustee (RS) ustpregion16.rs.ecf@usdoj.gov Anne A Uyeda auyeda@bmkattorneys.com Annie Verdries verdries@lbbslaw.com Brian D Wesley brian.wesley@doj.ca.gov Service information continued on attached page

2. SERVED BY UNITED STATES MAIL: On _____________, I served the following persons and/or entities at the last known addresses in this bankruptcy case or adversary proceeding by placing a true and correct copy thereof in a sealed envelope in the United States mail, first class, postage prepaid, and addressed as follows. Listing the judge here constitutes a declaration that mailing to the judge will be completed no later than 24 hours after the document is filed. Service information continued on attached page 3. SERVED BY PERSONAL DELIVERY, OVERNIGHT MAIL, FACSIMILE TRANSMISSION OR EMAIL (state method for each person or entity served): Pursuant to F.R.Civ.P. 5 and/or controlling LBR, on August 31, 2012, I served the following persons and/or entities by personal delivery, overnight mail service, or (for those who consented in writing to such service method), by facsimile transmission and/or email as follows. Listing the judge here constitutes a declaration that personal delivery on, or overnight mail to, the judge will be completed no later than 24 hours after the document is filed. Honorable Meredith A. Jury (Personal Delivery) U.S. Bankruptcy Court 3420 Twelfth Street, Suite 325 / Courtroom 301 Riverside, CA 92501-3819 Everett L Green (Personal Delivery) Office of the US Trustee 3685 Main St Ste 300 Riverside, CA 92501 Twenty Largest Creditors: Served on counsel via NEF: 2006 City of San Bernardino Taxable Pension Obligation Bonds, 2005, Series A Wells Fargo Bank, N.A. Corporate Trust Services Special Accounts Group Jerrold Abeles abeles.jerry@arentfox.com Mette H Kurth kurth.mette@arentfox.com

This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California. June 2012

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Kohl's Corporate Offices N56 W17000 Ridgewood Drive Menomonee Falls, Wisconsin 53051 Scott H Olson solson@seyfarth.com

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US Bank, N.A., Trustee 633 West 5th Street, 24th Floor, Los Angeles, California 90071 Jason D Strabo jstrabo@mwe.com, losangelestrialdocket@mwe.com California Infrastructure Bank and Economic Development Bank 980 9th Street, Suite 900 Sacramento, California 95814 Diane Shaw diane.shaw@doj.ca.gov Marquette Bank, 10000 W 151ST ST, Orland Park, Illinois 60462 Thomas V Askounis taskounis@askounisdarcy.com [The remainder of the List of 20 Largest Creditors are being served by the official claims agent; a separate proof of service will be filed] Service information continued on attached page I declare under penalty of perjury under the laws of the United States that the foregoing is true and correct.

August 31, 2012

Date

Christine Pesis
Printed Name

/s/ Christine Pesis

Signature

This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California. June 2012

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