NEW YORK--(BUSINESS WIRE)--Fitch Ratings maintains the Negative Rating Watch for the following Wayne County, Michigan bond ratings:
--$195.5 million limited tax general obligation (LTGO) bonds issued by Wayne County currently rated 'BB-';
--$58.2 million building authority (stadium) refunding bonds, series 2012 (Wayne County limited tax general obligation) issued by Detroit/Wayne County Stadium Authority currently rated 'BB-';
--$210.6 million building authority bonds issued by Wayne County Building Authority currently rated 'BB-';
--Wayne County unlimited tax general obligation (ULTGO) (implied) currently rated 'BB'.
The Negative Rating Watch is maintained.
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
RAPID FINANCIAL DETERIORATION: The speculative grade ratings stem 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.
NEAR-TERM LIQUIDITY CHALLENGES; MARKET ACCESS UNCERTAINTY: The Negative Watch reflects the county's highly illiquid general fund, dependent upon both inter-fund and external short-term borrowing for cash flow. The county anticipates issuing $100 million in tax anticipation notes (TANs) in the spring to meet day-to-day cash flow requirements. Inability to access the market in an economically feasible manner, given the recent uncertainty in the market for Michigan issuers, could negatively affect liquidity and would likely result in a downgrade.
STRESSED ECONOMY SLOW TO RECOVER: The weak local area economy is reflected in elevated unemployment rates, population loss, and below-average income levels. The tax base suffered significant declines during the last recession but the rate of decline has recently slowed.
REVENUE INFLEXIBILITY LIMITS OPTIONS: Steep tax base declines over the course of the recession caused property tax receipts to plummet 25% between fiscals 2008 and 2013. Strict tax rate limits and statutorily imposed controls on growth in assessments will constrain 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: The parity ratings on stadium authority and Building Authority bonds reflect the fact that county lease rental payments are not subject to abatement or appropriation and carry 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 would trigger a downgrade.
FURTHER DETERIORATION OF LIQUIDITY: Deterioration of the county's already precarious liquidity position would likely result in a downgrade.
FAILURE TO REDUCE DEFICIT: Fitch believes the county remains severely challenged to stem the decline in its financial position and show material improvement in the near term. Lack of significant progress toward accumulated deficit reduction within the current fiscal year, as evidenced by improvement in its liquidity position and unrestricted general fund balance/deficit, would place negative pressure on the rating.
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 not be sufficient to provide adequate liquidity going forward, leading to higher projected amounts of external borrowing.
Careful management of pooled cash resources allowed a delay in the expected December TAN issuance. The county now expects to issue $100 million of TANs in March, prior to a low cash flow point projected for June.
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 took place on Oct. 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 August 2013 ratings downgrade reflected weaker than projected financial performance. 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.
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) in fiscal 2012 is primarily 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 several years ago and has not yet been approved. The county is in the process of developing a new deficit elimination plan later this fiscal year which would rely on different revenue sources.
Audited fiscal 2013 results are not yet available, delayed just one month to the end of February, which Fitch still considers timely following the Sept. 30 fiscal year end. County projections show a $30 million general fund operating deficit (after transfers), which could bring the cumulative deficit position to roughly 30% of spending but may be slightly offset by transfers from the delinquent tax revolving fund. Fitch will continue to monitor the county's efforts toward deficit elimination, as measured by the unrestricted general fund balance/deficit.
The fiscal 2014 budget features a slight increase in spending and forecasts balanced operations, including a $16 million appropriation for deficit reduction. Fitch notes that final audited results have materially deviated from original budget expectations in recent years. Lack of significant progress toward accumulated deficit reduction within the current fiscal year, as evidenced by improvement in the county's liquidity position and unrestricted general fund balance/deficit, would place negative pressure on the rating.
CONSTRAINED REVENUE-RAISING ABILITY
The county's inflexible revenue structure exacerbates the budget effects of its considerable expenditure pressures. 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, resulting in a cumulative 31% decline over the last six years.
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, most significant revenue-raising efforts require voter or state support. Management is exploring the idea of requesting voter approval for an additional 1 or 2 mills. 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 is not optimistic given 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 but measures have not been sufficient to restore balance. Major initiatives include negotiating, or imposing where able, 10% compensation decreases for most employees and implementing health care plan design changes for current employees and retirees, reducing overall health care expenditures.
The county's expenditure framework, like revenues, suffers in part from a lack of independent control. The county is responsible for funding certain departments with separately elected leadership. Favorably, the county reached an agreement with one such department, the circuit court. The county now has greater control over court spending which totaled approximately 7% of fiscal 2012 governmental fund expenditures. The 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 U.S. levels throughout the recession, but is showing signs of improvement. The seasonally unadjusted November 2013 rate of 9.3% is lower than the 10.9% recorded in November 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 1.7%, outpacing slight contraction in the labor force growth of 0.1% over the past year.
ABOVE-AVERAGE DEBT BURDEN
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 is 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 recently signed a memorandum of understanding to sell it to Rock Ventures for $50 million. The county continues to study the alternative of moving jail operations to a vacant state facility which would require significant renovations. Fitch will continue to monitor developments and evaluate the potential impact on operating and capital costs.
RISING LEGACY COSTS
The county maintains two single-employer pension plans, the smaller of which is currently fully funded from state contributions. The larger plan reported a 45.9% funding ratio at the end of FY2012 using the county's 7.75% return assumption, 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 or 0.9% of market value. 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 Considerations for 2010
U.S. Local Government Tax-Supported Rating Criteria