Fitch Rates Detroit/Wayne County Stadium Auth, MI LTGOs 'BBB+'; Outlook Revised to Negative

Fitch Ratings has assigned a 'BBB+' rating to the following Detroit/Wayne County Stadium Authority, Michigan bonds:

--Approximately $61.6 million building authority (stadium) refunding bonds, series 2012 (Wayne County limited tax general obligation).

Bond proceeds will be used to refund outstanding maturities of the series 1997 building authority (stadium) bonds. The bonds are expected to price the week of Aug. 27.

In addition, Fitch affirms the following ratings:

--$64.9 million building authority (stadium) bonds, series 1997 at 'BBB+' issued by Detroit/Wayne County Stadium Authority;
--$234.3 million building authority bonds issued by Wayne County building authority at 'BBB+';
--$425.9 million limited tax general obligation (LTGO) bonds issued by Wayne County at 'BBB+';
--Wayne County unlimited tax general obligation (ULTGO) (implied) at 'A-'.

The Rating Outlook is revised to Negative from Stable.

SECURITY

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, set-off or abatement for any cause, and carries the county's limited tax general obligation pledge.

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.

KEY RATING DRIVERS

OUTLOOK REVISION: The Outlook revision to Negative from Stable reflects Fitch's concerns regarding prospects for deficit reduction in the near-to-medium term, given the extension of the deficit elimination plan by another year, and the inclusion of atypical revenue sources that will require state approval.

LARGE FUND DEFICIT POSITIONS: The 'BBB+' rating reflects the continued financial stress imposed by the accumulated unrestricted general fund deficit. Fitch believes prospects for rebuilding reserves in the near term are remote.

ECONOMY SHOWING RECESSIONARY STRESS: The local area economy has weakened considerably during the recent economic downturn, as evidenced by elevated unemployment rates, a contracting tax base, population losses, and below-average income levels, but recently has shown signs of incremental stabilization.

LIMITED TAX PLEDGE CONSTRAINED: Fitch notes the increased constraint of the limited GO pledge of the county, given that taxable values and the property tax levy available for both operations and debt service are expected to continue to decline.

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.

WHAT COULD TRIGGER A RATING ACTION

INABILITY 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.

CREDIT PROFILE

GENERAL FUND FINANCIAL STRESS STEMS FROM OVERSPENDING IN OTHER FUNDS

Wayne County's efforts to reduce its sizeable deficit fund balance positions are hindered by persistent economic pressure and a limited revenue environment. The large -$125 million unrestricted general fund balance (representing -21.6% of general fund spending) is largely the result of accumulated deficits in funds outside of the general fund.

Favorably, the county reached an agreement with the circuit court last year, giving the county greater control over court spending, a major component of the accumulated deficit.
The general fund recorded a $33.9 million operating deficit (after transfers) in fiscal 2011. The effect on total general fund balance was exacerbated by the restatement of the ending fiscal 2010/beginning fiscal 2011 total general fund balance, from -$26.5 million to -$47.9 million. The restatement was attributed to multiple items, including issuance of property tax refunds, the recording of a liability for estimated future appeal exposure and GASB 54-related fund consolidations. While the decline in unrestricted general fund balance was more moderate at $9 million, bringing it to -$125 million or -21.6% of spending), this was contrary to Fitch's expectation of overall deficit improvement.

Second quarter fiscal 2012 projections show the county is expecting a $26 million general fund operating deficit (after transfers). A significant portion of general fund spending is attributable to deficit reduction in other funds, which results in a corresponding release of restricted general fund balance. Therefore, it is possible for the general fund to experience an operating deficit (after transfers), and a deepening of the total accumulated general fund deficit, and still record an improvement in the unrestricted general fund balance.

Fitch will continue to monitor the county's efforts toward deficit elimination, as measured by the unrestricted general fund balance/deficit. Lack of deficit reduction progress, as evidenced by a material improvement in the unrestricted general fund balance/deficit, in the near term would be inconsistent with the 'BBB+' rating.

The recommended fiscal 2013 budget includes a decline in general fund operating spending of $8 million from the fiscal 2012 budgeted amount; however, it is subject to change as it goes through the political process. Final adoption is expected in September, in time for the October 1 start of the fiscal year.

REVENUE SOURCES FOR DEFICIT ELIMINATION UNCERTAIN

The county's latest deficit elimination plan calls for the elimination of deficits across all funds by the end of fiscal 2016 (a year later than the previous plan) and assumes the state will grant permission for the county to retain $58 million of unspent grant money and apply it to deficit reduction in fiscal 2012 and 2013, rather than return it to the state.

Should the state not approve this use of grant funds, the county would need to identify a new source of revenue or make additional cuts of approximately $12 million per year to make up the difference. Fitch is concerned about the reliance on this so far unapproved revenue item in the deficit elimination plan and believes it is unlikely that reserve levels will be restored in the intermediate term.

BUDGET BALANCING MEASURES RELY ON SPENDING CONTROLS

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. Fitch remains concerned that these steps may not be sufficient to counteract the spending pressures and allow the restoration of reserves.

The county faces a class-action 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.

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 to lose $150 million of property tax revenues between fiscal 2007 and fiscal 2011. The county is levying at its maximum millage as limited by the Headlee Amendment, and taxable values continue to drop. The county projects that values are not realistically expected to return to pre-recession levels for another 10 years, which will constrain property tax revenue growth.

Other revenue-raising options are limited. The county is studying its user-fee structure which may generate modest increases. As a practical matter, significant revenue raising efforts would likely require voter support. The county has not taken any steps to request such a vote, preferring instead to focus on expenditure measures. Fitch notes the recent voter approvals, by wide margins, of a 10-year renewal millage as well as a new millage for museum support.

The county has the ability to implement a judgment funding levy with a supermajority approval of the county commissioners. Such a levy would provide a recurring source of revenue available to support operations, but there are currently no plans to implement it.

ECONOMY SHOWS PERSISTENT RECESSIONARY STRESS

The Detroit area economy remains pressured after severe weakening during the recent recession. Despite the loss of thousands of automotive jobs, the economy remains heavily dependent on 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 county unemployment rate remained above the state and U.S. levels throughout the recession, but is showing signs of improvement. The seasonally unadjusted May 2012 rate of 11.0% is lower than the 12.3% recorded in May 2011 and well below the peak of 17.9% recorded in July 2009; however, much of this improvement is attributable to the contracting labor force.

ABOVE-AVERAGE DEBT BURDEN

Direct debt levels are modest, at 0.7% of market value, but the overall debt burden of 6.3% is above average, reflecting considerable overlapping borrowing. Payout is average, with 62% of long-term debt to be retired within 10 years. Debt service costs are affordable at 7.0% of spending. Future new money borrowing plans are moderate, including $100 million for the jail, and $30 million for the sewage system. The county does not anticipate having to borrow to fund its obligation to provide a consolidated courthouse under the terms of the legal settlement with the circuit court.

The county maintains two single-employer pension plans, the smaller of which is fully funded. The larger plan reported a 49.8% funding ratio at the end of Fiscal 2011, which equates to a weak 46.0% funding ratio when adjusted by Fitch to reflect a 7% discount rate. 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.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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

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