NEW YORK--(BUSINESS WIRE)--This is a correction of a release originally issued August 12, 2013. The headline incorrectly stated the Outlook for Wayne County, MI LTGOs is Negative. Instead, it should read the ratings were placed on Negative Watch.
Fitch Ratings has downgraded the following Wayne County, Michigan bond ratings:
--$195.5 million limited tax general obligation (LTGO) bonds issued by Wayne County to 'BB-' from 'BBB+';
--$58.2 million building authority (stadium) refunding bonds, series 2012 (Wayne County limited tax general obligation) issued by Detroit/Wayne County Stadium Authority to 'BB-' from 'BBB+';
--$210.6 million building authority bonds issued by Wayne County Building Authority to 'BB-' from 'BBB+'.
--Wayne County unlimited tax general obligation (ULTGO) (implied) to 'BB' from 'A-';
The ratings are placed on Negative Watch.
Limited tax general obligation bonds issued by the county carry the county's general obligation ad valorem tax pledge, subject to applicable charter, statutory and constitutional limitations.
Stadium authority and building authority bonds are secured by lease payments from the county to the respective authority. The obligation to make the rental payments is not subject to appropriation, setoff or abatement for any cause, and carries the county's limited tax general obligation pledge.
KEY RATING DRIVERS
DOWNGRADE REFLECTS RAPID FINANCIAL DETERIORATION: The downgrade stems from the county's considerably narrowed liquidity position, the deepening of the general fund accumulated deficit and Fitch's concern regarding the limited options for elimination of the negative position. Contrary to Fitch's expectation, the unrestricted accumulated deficit grew in fiscal 2012 and is expected to deepen yet again in fiscal 2013, despite significant expenditure cuts. Fitch is concerned that the even deeper cuts planned for fiscal 2014 may not be enough for meaningful deficit reduction given other budgetary pressures.
NEGATIVE WATCH REFLECTS MARKET ACCESS UNCERTAINTY: The county anticipates it will need to issue $100 million in TANs in the fall to meet day-to-day cash flow requirements. Inability to access the market in an economically-feasible manner, given recent challenges experienced by other Michigan issuers, could negatively affect liquidity and would likely result in a downgrade.
NEAR-TERM LIQUIDITY CHALLENGES: The county's general fund is illiquid and highly dependent upon both inter-fund and external short-term borrowing for cash flow; total pooled liquidity is still quite narrow, even considering those other sources. Conversion of the cash-rich mental health fund to an independent authority in October 2013 will decrease the pool of internal borrowable resources, further pressuring liquidity.
STRESSED ECONOMY SLOW TO RECOVER: The weak local area economy features elevated unemployment rates, tax base contraction, population loss, and below-average income levels, although the rate of tax base decline has recently slowed.
REVENUE INFLEXIBILITY LIMITS OPTIONS: Steep tax base declines over the course of the recession caused property tax receipts to plummet, from $383 million in fiscal 2008 to $280 million in fiscal 2013. Strict tax rate limits and statutorily imposed controls on growth in assessments will slow revenue recovery even as housing values increase.
LIMITED EXPENDITURE FLEXIBILITY: Deep across the board spending cuts have not been sufficient to restore structural balance. Carrying costs for debt, pension and other post-employment benefits (OPEB) are currently moderate but expected to rise sharply in the near-term, further pressuring operations.
LEASES CARRY GO PLEDGE: Stadium Authority and Building Authority bonds are payable from lease rental payments of the county. The obligation to make rental payments is not subject to abatement or appropriation and carries the county's limited tax general obligation pledge.
INABILITY TO ACCESS MARKET FOR CASH FLOW: Inability to access the market in an economically feasible manner for cash flow borrowing would severely constrain the county's liquidity position and could trigger a downgrade.
FURTHER DETERIORATION OF LIQUIDITY: Deterioration of the county's already precarious liquidity position could result in a downgrade.
FAILURE TO REDUCE DEFICIT: Lack of significant progress toward accumulated deficit reduction within the next fiscal year, as evidenced by improvement in the unrestricted general fund balance/deficit, would place negative pressure on the rating.
IMPROVED REVENUE PROFILE: The county is considering requesting a new millage, which would generate up to $75 million annually, on the November ballot. Political support for the measure is uncertain, but if the millage passed, it could improve the county's credit profile.
NEAR-TERM LIQUIDITY PRESSURE
Stressed financial operations have led to sharp declines in liquidity. The county relies upon a pooled cash model, supplemented by external cash flow borrowing to meet its day-to-day cash flow needs. Cash flow projections show these measures will no longer be sufficient to provide adequate liquidity going forward, leading to higher projected amounts of external borrowing earlier in the fiscal year. The expected transfer of the county's Mental Health Fund, which contained $81 million unrestricted cash and investments at the close of fiscal 2012, will decrease the amount of internal borrowable resources. The transfer of the fund from the county to an independent authority is expected to occur October 1, 2013, although management plans a phased withdrawal of the mental health cash over the course of several years to blunt the impact on the county's liquidity.
LARGE FUND DEFICIT POSITIONS
The county's efforts to reduce its sizeable deficit fund balance positions are hindered by persistent economic pressure and a limited revenue environment. The large -$145.9 million unrestricted general fund balance (representing a very high -25.5% of general fund spending) is largely the result of steep revenue declines and overspending in funds outside of the general fund.
The general fund recorded a $53.2 million net operating deficit (after transfers) in fiscal 2012. Approximately $30.4 million of this was due to absorption of the equipment leasing fund deficit, which was previously reserved for in the general fund. Accordingly, the decline in unrestricted general fund balance was more moderate at $20 million, although still a departure from Fitch's expectation of overall deficit improvement.
The county's somewhat dated deficit elimination plan was filed with the state over a year ago and has not yet been approved. The plan optimistically includes a new revenue stream whose approval from the state is uncertain. Fitch is concerned about the reliance on this so far unapproved revenue item in the plan and believes it is unlikely that reserve levels will be restored in the intermediate term.
Second quarter fiscal 2013 projections show the county is expecting a $30 million general fund net operating deficit (after transfers). Fitch will continue to monitor the county's efforts toward deficit elimination, as measured by the unrestricted general fund balance/deficit.
The recommended fiscal 2014 budget features a slight increase in spending and forecasts balanced operations, including a $16 million appropriation for deficit reduction. Final adoption is expected in September, in time for the October 1 start of the fiscal year. Fitch notes that final audited results have materially deviated from original budget expectations in recent years.
CONSTRAINED REVENUE-RAISING ABILITY
In addition to the considerable expenditure pressures the county faces, its revenue structure is relatively inflexible. Assessed valuation declines caused the general fund annual property tax revenues to decline sharply from $383.5 million in fiscal 2008 to $286.2 million in fiscal 2012. Further declines are projected; the county anticipates general fund property taxes of $266 million in fiscal 2014. The county is levying at its maximum millage as limited by the Headlee Amendment, and taxable values continue to drop. Statutory restrictions on growth in the levy and in assessments will constrain future revenue growth, severely limiting the ability of the county to benefit should housing values recover.
Other revenue-raising options are limited. As a practical matter, significant revenue raising efforts would likely require voter support. Management is exploring the idea of requesting an additional 1 or 2 mills on the fall ballot. The county is subject to a requirement that a supermajority of the county commission approve any ballot proposal to increase taxes; additionally, such a proposal would require a 60% approval of the voters. Fitch notes recent public statements by various county commissioners citing insufficient political support for a millage increase.
EXPENDITURE CONTROLS INSUFFICIENT TO RESTORE BALANCE
County officials have taken substantive steps to curtail overall spending, including negotiating or imposing 10% compensation decreases for most employees and implementing health care plan design changes for current employees and retirees, which reduced overall health care expenditures. Measures to date have not been sufficient to restore balance, in part due to lack of expenditure control over certain departments with separately elected leadership. Favorably, the county reached an agreement with one such department, the circuit court, giving the county greater control over court spending. The proposed fiscal 2014 budget imposes an additional deep 20% across the board departmental spending cut. Fitch remains concerned that these steps, while significant, may not be sufficient to counteract the spending pressures and allow for elimination of the deficit.
The county faces a variety of legal actions stemming from its cost cutting measures. Management is confident it will be allowed to maintain the changes; however, the litigation introduces vulnerability to the substantial cost savings generated thus far.
ECONOMY SHOWS PERSISTENT STRESS
The Detroit area economy remains pressured after severe weakening during the recent recession. Socioeconomic indices for county residents are below average overall, as the effect of impoverished city residents outweighs that of the relatively wealthier suburban residents. Median household income was 84% of the state and 79% of the nation. The poverty rate of 22.7% is well above the state and national averages of 15.7% and 14.3%, respectively. Market value per capita is also well below average at $48,000, reflecting the weakened housing market.
The economy remains heavily dependent on the auto industry, despite having lost thousands of manufacturing jobs over the past decade. Several auto manufacturers have announced plans to add jobs within the county, although auto-related employment is not expected to recover to pre-recession levels. The county takes an aggressive stance with economic development and reports success in drawing in new high-tech and engineering jobs, particularly in the 'Aerotropolis,' which surrounds the airport.
The county unemployment rate remained above the state and US levels throughout the recession, but is showing signs of improvement. The seasonally unadjusted May 2013 rate of 10.1% is lower than the 11.2% recorded in May 2012 and well below the peak of 17.9% recorded in July 2009. Total employment and the labor force have both contracted severely over the last decade. Recent trends are more favorable, showing employment expanded by 1.3%, outpacing labor force growth of 0.1% over the past year.
ABOVE AVERAGE DEBT BURDEN AND RISING LEGACY COSTS
The high debt burden of 7.0% is largely attributable to considerable borrowing by overlapping governments, but nevertheless presents a practical limitation on future debt issuance flexibility. The county's net direct debt accounts for very little of the overall debt burden, measuring a modest 0.7% of market value. Payout is average, with 62% of long term debt to be retired within 10 years. Future new money borrowing plans are uncertain, as plans for the jail construction are in flux. The county recently halted the jail project, for which it borrowed $200 million in 2010, when cost projections rose from $300 million to $390 million. Management is evaluating its options for the site, and may sell it outright and renovate a vacant state facility instead. Fitch will continue to monitor developments and evaluate the potential impact on operating and capital costs.
The county maintains two single-employer pension plans, the smaller of which is fully funded from state contributions. The larger plan reported a 45.9% funding ratio at the end of FY12, or an estimated weak 42.4% funding ratio when adjusted by Fitch to reflect a 7% discount rate. The pension actuarial required contribution (ARC) has more than tripled in recent years, from $18.4 million in 2008 to $51.7 million in fiscal 2012. The county contributed less than the ARC in fiscals 2011 and 2012, relying upon transfers from the pension fund's inflation equity reserve to make up the difference. This strategy resulted in technical meeting of the ARC, but not an overall increase in pension assets.
The county currently funds its other post-employment benefits (OPEB) on a pay as you go basis. The unfunded actuarially accrued liability is large at $1.5 billion. County management has at times discussed the idea of issuing $600 million of OPEB funding bonds, but no firm plans are in place.
Carrying costs for debt service, pension ARC and OPEB pay-go are currently moderate at 16.4% of governmental spending (net of capital projects and mental health funds); however, Fitch expects carrying costs to rise significantly in the near term, given the trajectory of the pension ARC, and the county's recent history of underfunding it.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, Underwriter, Bond Counsel, and Financial Advisor.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria