NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed and removed from Negative Rating Watch ratings for the following Wayne County, Michigan bonds:
--$190.9 million limited tax general obligation (LTGO) bonds issued by Wayne County at 'BB-';
--$54.9 million building authority (stadium) refunding bonds, series 2012 (Wayne County LTGO) issued by Detroit/Wayne County Stadium Authority at 'BB-';
--$207.2 million building authority bonds issued by Wayne County Building Authority at 'BB-';
--Wayne County unlimited tax general obligation (ULTGO) (implied) at 'BB'.
The Rating Outlook is Negative.
SECURITY
LTGO 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 LTGO pledge.
KEY RATING DRIVERS
EXPECTATION OF PROGRESS: The 'BB/BB-' ratings reflect Fitch's expectation that the county's reported progress toward fiscal balance will materialize in the current fiscal year, indicating a possible change in momentum, although significant challenges remain.
OUTLOOK REFLECTS EXECUTION RISK: The Negative Outlook reflects the county's lack of independent control in eliminating the accumulated deficit and restoring structural balance. Successful implementation of the majority of the deficit elimination plan (DEP) requires labor and other stakeholder approval.
TANS, TRANSFERS BOLSTER LIQUIDITY: The removal from Negative Watch reflects improved liquidity due to increased transfers from the delinquent tax revolving fund (DTRF) as well as the county's recent tax anticipation note (TAN) borrowing. The general fund remains reliant on both internal and external borrowing for cash-flow with the next note sale budgeted for December 2014.
EXTREMELY WEAK FINANCIAL POSITION: The speculative-grade ratings stem from the county's very large accumulated general fund deficit. The lack of revenue flexibility combined with a high degree of mandated service costs makes elimination of the accumulated deficit unlikely without use of one-time sources.
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 has been suffering significant declines since the last recession but the rate of decline has recently slowed.
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 (GO) pledge.
RATING SENSITIVITIES
FAILURE TO REDUCE DEFICIT: Lack of significant progress toward accumulated deficit reduction, evidenced by improvement in its liquidity position and unrestricted general fund deficit, would place negative pressure on the rating.
DEMONSTRATED FINANCIAL IMPROVEMENT: The rating could stabilize at the 'BB/BB-' level if the county's audited financial statements show material improvement, as projected, from its currently weak position and if continued progress toward deficit elimination appears likely.
CREDIT PROFILE
TANS, TRANSFERS BOLSTER LIQUIDITY
The county relies upon a pooled cash model, supplemented by external cash flow borrowing to meet its day-to-day needs. The issuance of $75 million in TANs, along with larger than typical transfers from the DTRF, has restored general fund liquidity, although longer term concerns remain.
The DTRF transferred $82 million of cash to the general fund for deficit reduction in fiscal 2014, as was called for in the county's DEP. An additional $68 million was also transferred, including $24 million for deficit reduction. Cash-flow projections show the county is successfully managing its phased withdrawal of mental health fund cash from its pooled cash, with a $16.4 million withdrawal projected in October 2014. The transfer of the fund from the county to an independent authority took place on Oct. 1, 2013.
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 general fund recorded a $10.3 million net operating deficit (after transfers) in fiscal 2013. The large $159.5 million unrestricted general fund deficit (representing a very high -26.8% of general fund spending) in fiscal 2013 is primarily the cumulative result of steep revenue declines and overspending primarily for mandated services.
The county's recently approved DEP relies on an $82 million transfer from the DTRF and $120 million in proceeds from sale of a sewer asset to eliminate the accumulated general fund deficit. The county completed the $82 million DTRF transfer, but Fitch believes the sewer asset sale is unlikely within the 14-month remaining timeframe of the DEP. The additional, unplanned transfer of $24 million from the DTRF should bring the unrestricted general fund deficit to approximately $68 million at the end of fiscal 2014, assuming the county records an $18 million net operating deficit, as projected. While still very weak, this would represent a major step forward, more than halving the accumulated general fund deficit.
The county expects to apply $32 million of DTRF balance for deficit reduction in fiscal 2015, which would bring the unrestricted general fund deficit to $67.4 million, assuming the operating deficit is $21 million, as per the DEP.
The DEP identifies several recurring expenditure savings to eliminate the fiscal 2015 $21 million structural imbalance. The county reports that items representing $11.5 million of annual savings have been achieved. Another $14.5 million of savings is subject to labor cooperation, although this would be netted against the lifting of a $4 million existing imposed wage concession. Fitch will continue to monitor the county's efforts toward deficit elimination, as measured by the unrestricted general fund balance/deficit.
CONSTRAINED REVENUE-RAISING ABILITY
The county's inflexible revenue structure exacerbates the budget effects of its considerable expenditure pressures. Assessed valuation declines caused annual general fund property tax revenues to decline sharply from $383.5 million in fiscal 2008 to $271 million in fiscal 2013. 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 most significant revenue-raising efforts require voter or state support. 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.
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 thus far. 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 faces a variety of legal actions stemming from its cost-cutting measures, introducing vulnerability to the substantial cost savings generated thus far.
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.
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 May 2014 rate of 9.0% is lower than the 10.1% recorded a year prior 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 although recent trends point toward stabilization.
ABOVE-AVERAGE DEBT BURDEN
The high debt burden of 8.2% of market value is largely attributable to considerable borrowing by overlapping governments, but nevertheless presents a practical limitation on future debt issuance flexibility. This figure does not include any reductions in bonded debt due to the Detroit bankruptcy. The county's net direct debt is a modest 0.5% of market value. Future new money borrowing plans are uncertain, as plans for the jail construction are not yet settled.
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. The county continues to study the alternative of moving jail operations to a vacant state facility which would require significant renovations. Fitch will 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 low 45.9% funding ratio at the end of fiscal 2012 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 $1.6 billion unfunded actuarial accrued liability (2012) was a moderate 1.8% of market value.
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 only 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. Litigation that may require the county to repay these amounts is pending at the state supreme court level.
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.
Carrying costs for debt service, pension ARC and OPEB pay-go are currently moderate at 10.8% of governmental spending; however, Fitch expects carrying costs to rise in the near term, given the trajectory of the pension ARC.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=841100
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