Fitch Ratings assigns an 'A-' rating to the following Wayne County, Michigan (the County) general obligation limited tax (GOLT) bonds:
--$200 million Wayne County Building Authority bonds (Jail Facilities), series 2010 (GOLT) (Federally Taxable - Recovery Zone Economic Development Bonds).
The bonds are expected to sell via negotiation on or after Dec. 14, 2010.
In addition, Fitch downgrades the following ratings to 'A-' from 'A':
--$44.7 million Building Authority bonds (GOLT) issued by the Wayne County Building Authority;
--$70.25 million Stadium Authority bonds (GOLT) issued by the Detroit-Wayne County Stadium Authority;
--$446.1 million outstanding GOLT bonds issued by Wayne County.
The Rating Outlook is Negative.
RATING RATIONALE:
--The downgrade to 'A-' from 'A' reflects the escalating financial stress imposed by accumulated deficits in the Circuit Court and Juvenile Justice Funds. Large General Fund transfers to reduce deficits in these funds have eliminated General Fund reserves. Despite management's efforts to cut expenditures by reducing salary and benefit costs, it is unlikely that reserve levels will be restored in the near term.
--The Negative Outlook reflects Fitch's concern that ongoing pressure from the Circuit Court and Juvenile Justice Funds will impede management's ability to eliminate the deficits in those funds, which would result in the continued drain of General Fund resources.
--Building Authority bonds are payable from lease rental payments of the County. The obligation to make the rental payments is not subject to abatement or appropriation and carries the County's general obligation, limited tax pledge.
--The local area economy has weakened considerably during the recent economic downturn, as evidenced by high unemployment rates, a contracting tax base, population losses, and below-average income levels, but recently shows signs of stabilization. Although the automotive industry has cut jobs and taxable value for automotive facilities has declined in recent years, automotive tax base concentration has become more pronounced.
--Fitch also notes the increased constraint of the limited GO pledge of the county given that taxable values, and thus the property tax levy available for both operations and debt service, are expected to continue to decline.
WHAT COULD TRIGGER A DOWNGRADE:
--Lack of significant progress in eliminating chronic deficits, particularly those in the Court and Juvenile Justice funds;
--Inability to restore General Fund reserves in the near to medium term;
--Audited FY2010 deficits materially weaker than currently anticipated.
SECURITY:
The bonds are secured by lease rental payments from County to the Building Authority. The obligation to make the rental payments is not subject to appropriation, setoff or abatement for any cause, and carries the County's general obligation limited tax pledge.
CREDIT SUMMARY:
Wayne County's financial flexibility has been severely reduced in recent years and it continues to face ongoing challenges to fund chronic deficits in funds outside of the General Fund, particularly those in the Juvenile Justice and Circuit Court funds. While the County has made progress in reducing the deficit in the Juvenile Justice Fund, the deficit in the Circuit Court Fund has proven more difficult to contain. Management's attempts to rein in Circuit Court costs are further hindered by a recent adverse court decision mandating the hiring of 110 additional Circuit Court employees, estimated to cost an additional $10 million per year, and obligating the county to fund capital improvements to Court facilities. The county has appealed the decision, but has included funding for 102 new Circuit Court positions in the FY2011 budget; it is unclear if the final judgment will require additional supplemental county funding for the court.
A $18.6 million general fund net deficit at the close of FY 2009 reduced the total General Fund balance to $6.9 million. The Circuit Court fund recorded total net assets of negative $58 million. Unaudited FY 2010 results show the General Fund deficit of $33.1 million, and the Circuit Court fund with net assets of negative $48.8 million. The county plans to eliminate the existing Circuit Court fund deficit by transferring an additional $30 million, from the General Fund, equal to 5.1% of total general fund spending in FY 2009, each year through 2013, and have earmarked state revenue sharing payments for that purpose. However, Fitch believes meaningful progress towards eliminating the deficit will be difficult until escalating costs are brought under control and there is more certainty with respect to required levels of Circuit Court.
While reining in Court costs has proven difficult, county officials have taken substantive steps to curtail overall spending, including negotiating or imposing 10% compensation decreases for all employees and implementing health care plan design changes for current employees and retirees, which has reduced overall health care expenditures. Fitch remains concerned that these may not be sufficient to counteract the spending pressures and allow the restoration of reserves. The county faces a lawsuit from retirees challenging the implementation of cost-sharing; while management is confident it will be allowed to maintain the changes, the litigation introduces vulnerability to the substantial cost savings generated by the move.
In addition to the considerable expenditure pressures the county faces, options for raising revenue are limited. The county is levying at its maximum millage as limited by the Headlee Amendment, and taxable values continue to drop. Officials expect values to bottom out in 2012, with growth projected for 2013; however, values are not realistically expected to return to pre-recession levels for another 10 years, which will constrain property tax growth. The county is able to implement a judgment funding levy with a supermajority approval of the county commissioners which would provide a recurring source of revenue available to support operations.
The local area economy has weakened during the recent recession. Despite the loss of thousands of automotive jobs, the economy remains heavily dependent upon the auto industry. 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 unemployment rate has remained above the state and U.S. levels throughout the recession, but is showing signs of improvement. The seasonally unadjusted September 2010 rate of 14.4% is 2.5 points lower than the 16.9% recorded in September 2009, and the labor force is expanding. Employment growth has been recorded in the manufacturing and durable goods sectors, reflecting higher wage job additions, but also, to a lesser extent, in the lower wage leisure and hospitality sector.
Direct debt levels are modest, at 0.8% of market value, but the overall debt burden of 6.1% is above average, reflecting considerable overlapping borrowing. Payout is above average, with 62% of long-term debt retired within 10 years. Future borrowing plans are modest, including $21 million for the sewage system, $5 million for drainage district purposes, and a $7 million installment purchase contract. While the county currently funds its other post employment benefits (OPEB) on a pay as you go basis, the county is considering issuing OPEB funding bonds to prefund its projected large unfunded actuarially accrued liability (UAAL) of $838 million. In addition, the outcome of the current lawsuit by the court could require the county to issue additional bonds to fund court related capital infrastructure which would increase overall debt levels.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc., IHS Global Insight, Financial Advisor.
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated Aug. 16, 2010.
'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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