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Action Matters

Government Leadership in Challenging Times: May 2011

Welcome to the inaugural issue of the Government Leadership in Challenging Times newsletter. Since 2003, government leaders have come to Alvarez & Marsal (A&M) for insight on how to solve their most vexing problem: how to improve public sector performance while cutting costs. Too often, senior public sector executives lack actionable, real world advice. We hope to share with you, on a regular basis, our take on policy debates, best practices developed through client engagements around the world, and interviews with public sector thought leaders. We hope you enjoy the newsletter and encourage you to send us your feedback. —Bill Roberti

In This Issue:

• Bryan Marsal on Government Transformation
• Upcoming Industry Events
• Delivering Results for a Large Federal Agency
• Agency Planning for the Battle of the Budget

Bryan Marsal on Government Transformation

At a recent summit in the nation's capital, A&M's co-CEO, Bryan Marsal, shared his perspectives on working with organizations in critical periods of change, stressing the importance of leadership and how to drive operational performance improvement. After being introduced by Don Powell, former head of the Gulf Coast recovery effort and ex-chairman of the FDIC, Bryan presented how A&M works with CFOs and CIOs in government and industry to help solve their most pressing issues and address important questions, such as:

• Are you seeking lower-cost ways to deliver services while retaining your most valued workers?
• Have you fully assessed contracts and managed services commitments to minimize costs and maximize operational efficiency?
• What core business processes should be improved to better serve your key constituents?

The A&M approach to solving mission-critical turnaround and operational challenges is the key reason why we have been repeatedly selected to address the most complex and difficult restructuring jobs, including engagements with public sector organizations at federal, state and local levels.

During the question-and-answer session with audience members, Bryan discussed how the public and private sectors are dealing with a 20-year pattern of promising pensions and other benefits instead of pay. This was done for two reasons: one, it put off costs until some future date and, two, costs could just be passed along to the customer or taxpayer. This is coming to an end.

Questions were also asked about Governmental Sponsored Enterprises (GSEs including Fannie Mae and Freddie Mac) and the problem of mixing of political and economic factors. The general consensus was that the GSEs do have a purpose, but should be gradually weaned off being a federal agency. The problem with Freddie and Fannie is that they were used as political tools, but they cannot be abandoned—they are too important. The government needs a transition plan to a private sector end state, with some public support.

To continue the dialogue on government-related restructuring and performance improvement initiatives, including a review of recent success stories, please contact A&M Public Sector Services.

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Upcoming Industry Events

Professionals dedicated to growth and excellence require an ecosystem of associations, think tanks and non-profits to support them. For government professionals, there are many organizations for networking, professional development and sharing best practices. Alvarez & Marsal Public Sector Services supports these organizations by getting involved individually and on a corporate level.

Here are a few events A&M PSS will be participating in over the next few weeks:

John Cox, Senior Director, is co-chairing the annual Federal Performance Conference scheduled for May 3-4, 2011. This event, which convenes the top authorities on government performance and efficiency, showcases experts in the GPRA Modernization Act and agency leaders who have improved performance using data analytics and data mining. The two-day seminar includes sessions on:

• "GPRA Modernization Act—An Overview of its Mandates and Why"
• "Performance-Budget Integration: From Start to Finish"
• "Social Media & Communicating Agency Performance to the Public"
• "Getting the Most Out of your Financial Statements, Budgets and Performance"

For more information and to register, visit AGA's website.

The Milken Institute has asked Bill Roberti, Head of A&M PSS, to participate in a global conference on municipal finance in Los Angeles on May 3, 2011. The event will explore the trends and events that led America's cities, counties and states to take on unsustainable levels of debt. By examining the issue from political, financial and legal viewpoints, the Institute hopes to better understand the size and complexity of the problem, outline workable solutions and develop a path forward.

Speakers include:

Orin Kramer, General Partner, Boston Provident LP
Marc Levinson, Partner, Orrick, Herrington & Sutcliffe LLP
Bill Lockyer, Treasurer, State of California (D)
Bill Roberti, Managing Director and Head of A&M Public Sector Services
Mark Ryan, Managing Director, Municipal Securities Division, Citigroup

Moderator:
Jeffrey Werbalowsky, Co-CEO, Houlihan Lokey

For more information, visit the Milken Institute's website.

Bill Roberti has also been selected to moderate a panel discussion at the prestigious 2011 Kellogg School of Management's Turnaround Management Conference in Chicago on May 6, 2011. The session, entitled "Turnarounds in the Public Sector" will examine best practices in government restructuring at all levels.

William Foote, CEO of USG, and Jim Wilson, CEO of Atari SA, will serve as keynote speakers.

Additional speakers include:

Robert Bobb, Emergency Financial Manager, Detroit Public Schools
Lois Scott, President, Scott Balice Strategies
Vincent Schoemehl Jr., Former Mayor of St. Louis and CEO of Grand Center Inc.
Rich Levin, Partner and Head of Restructuring, Cravath, Swaine & Moore LLP
Marti Kopacz, Managing Principal, Grant Thornton
Bill Roberti, Managing Director and Head of Public Sector Services, Alvarez & Marsal

For more information, visit Kellogg's website.

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Public Sector Success Story: Delivering Results for a Large Federal Agency

With over 15 percent in budget cuts and nearly one-third of its workforce eligible for retirement in the next few years, the administrative organization of a major cabinet-level department faced a seemingly overwhelming set of complex operational issues. The client engaged Alvarez & Marsal Public Sector Services (A&M) at the beginning of 2011 to conduct an organizational assessment of the administrative operations within the Department.

Led by John Cox, the A&M team reviewed the client's functions and structure to understand their current operational status. The team developed performance metrics to benchmark the organizations within the agency. Those metrics were then compared with standards at other administrative organizations in similar government departments. By conducting the benchmark study and establishing a fact base, the team was able to identify possible organizational changes to increase efficiencies and reduce costs. Using the knowledge gained from on-site visits, benchmarking the organizations, and analyzing the costs of the Agency's administrative organizations, the team developed a projection model illustrating multiple cost-reduction scenarios. These scenarios, which varied by degree of organizational change, as well as other factors, were presented to the client. The boldest option would generate more than $2 million in projected annual savings.

Based on the positive reaction from the client, John Cox and the A&M team were asked to conduct a workforce assessment of the administrative functions. The second phase of the project, which recently kicked off, is tasked with analyzing processes and procedures currently used to complete functions that are critical to the mission of the organization. Going forward, the team will identify technological and procedural best practices that could be implemented to increase efficiencies, as well as reduce costs. The assessment will also allow the team to identify redundancies within functional areas that will contribute to increases in operational efficiencies, recognize possible areas of consolidation, and pinpoint significant savings opportunities.

Using the results of the workforce assessment, the A&M team will validate the options projected in the first phase of the project. The team is excited to have the opportunity to assist the Agency with formulating a plan to not only overcome its current fiscal challenges, but also strengthen its financial and organizational structures to achieve long-term success.

Are you experiencing similar challenges in cutting costs while making efforts to improve performance? Contact A&M Public Sector Services to arrange a private consultation.

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Agency Planning for the Battle of the Budget

Congress and the White House have just concluded negotiations over the budget for the continuing resolution (CR) for the rest of the fiscal year. These talks took place against the backdrop of proposed spending reductions in the president's fiscal year 2012 budget and, more importantly, the agreement Congress will need to reach to increase the debt ceiling. All of this adds a great deal of uncertainty for agency program officials and financial leaders.

Career budget officers and Chief Financial Officers tend to be conservative by nature. So, uncertainty over the exact spending levels for fiscal 2012 will inevitably cause agencies to slow or stop spending decisions. CR rules generally do not allow for spending on "new" projects. But we have been in CR mode for a number of years. Why is the current situation so different?

Federal budget officers and program officials recently told A&M that the biggest challenge is the uncertainty over the final budget. In years past, agencies had a solid indication of the direction in which their final budgets were headed: a House or Senate markup, perhaps a full committee vote or even one chamber that had passed a bill. And, to a great extent, those program and administrative budgets were flat or included slight increases. Today's environment is one in which agency budgets are being cut, but there is little agreement on exactly where to make those cuts. Is my agency subject to 2008 spending levels? 2006? Flat for a number of years? Are some or all programs are subject to spending reductions?

Agencies must now execute fiscal 2011 spending levels when more than half of the fiscal year is completed. This difficult task is now make harder by the fact that agencies know the president's budget for fiscal 2012 includes spending reductions, no raises for federal employees for two years, debate over the debt ceiling, and a recently passed House leadership fiscal 2012 spending plan. It's easy to see why agencies have frozen spending decisions.

So what should financial leaders do? First and foremost, adhere to spending limitations and do not spend more than is available. Second, agencies should consider issuing notices of funds availability, providing language that final grants decisions will be made once funding levels are known. This ensures that grantees are ready to receive funds immediately as appropriations are finalized. Third, it is highly likely that we will enter fiscal 2012 in a continuing resolution mode. Agency financial management must maximize the resources in the current period, especially related to personnel. The federal hiring process is notoriously slow. Financial leadership must work with agency leadership to estimate future personnel and financial resources, and then develop a plan for executing offers that can be made contingent on funding. In this way, agencies can be best prepared to maximize mission operations once final budget negotiations are concluded.

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