Wayne County, Michigan, was handed more good news as its last junk bond rating was erased with an upgrade to investment grade.
Moody's Investors Service raised the county’s rating two notches to Baa2 from Ba1 Thursday. The outlook is stable. It follows last week's S&P Global Ratings upgrade of the county's rating to BBB-plus from BBB-minus.
Moody's said the county’s improved financial position means it can absorb the added costs of serving debt the county plans to issue to finance a new criminal justice center.
“The stable outlook reflects the expectation that the county will be able to afford moderate increases to fixed costs without material financial degradation,” Moody’s said. “However, near-term boosts in the credit profile may be unlikely given pent up expenditure demands that will limit continued growth in fund balance and liquidity.”
Fitch Ratings rates the county’s GOs BBB-minus.
“We have now gotten five rating upgrades in a couple of months which is unprecedented,” said Wayne County Chief Financial Officer Henry Dachowitz. “It just indicates that the ratings agencies are recognizing the changes that have been made over the past three years with County Executive Warren Evans' administration of reducing our expenses, reducing and eliminating our structural deficit, creating a rainy day fund of over $100 million, as well as our vision going forward of reinvesting in operations while maintaining financial discipline.”
The county this week sold $156.29 million of taxable limited tax general obligation revenue notes. Dachowitz said the county saw improved interest in the notes which he attributed to recent upgrades.
The county issued 15 different bidding options for the variable rate notes and selected two. The interest rate on the notes, according to Dachowitz, is 74 basis points over the one-month London Interbank Offered Rate which put the interest rate at 2.79%.
“Obviously we are getting tremendous demand and paying a lower interest rate because of the perception of our credit ratings improvements,” he said. The proceeds of the bond issue are used for the county’s delinquent tax revolving fund.
The county is hoping for improved investor interest that translates into lower costs for its upcoming sale of bonds to fund a $533 million jail project, even though the rating will be tied to the state's credit.
The county plans to begin marketing $315 million of bonds for the jail project in the next couple of weeks, Dachowitz said. The bonds will ultimately be secured by Michigan and will carry the state’s AA rating.
With a $52 million structural deficit and rising retirement costs, the county entered a consent agreement with the state in 2015 that paved the way for a fiscal restructuring. The county exited the consent agreement in 2016.
Dachowitz said the state’s intervention was critical in the county’s success. “The most difficult aspect of a transformation of finances is changing contracts, especially with unions,” he said. “The oversight by state and the real possibility that we might declare bankruptcy like Detroit forced all the parties to the table to work constructively together.”
The county has since posted three consecutive budget surpluses and cut $1 billion from its post-retirement health liability, $100 million in operating expenses annually and developed a more-than $100 million rainy day fund.
“The reduced obligations resulted in lower annual contribution requirements to the county's pension and post-retirement health care plans, which enabled the county to achieve structural surpluses that bolstered operational fund balance and liquidity,” Moody’s said.
Dachowitz said that the biggest problem the county faces going forward is with real estate taxes, which is Wayne's number one source of revenue. But a local tax limitation known as the Headlee Amendment and Proposal A limits the collection of taxes on existing properties, and Dachowitz said that as a result, the county has been unable to recapture the benefits of the economic vitality and turnaround of the community.
“Because of the combination of the Headlee amendment and Prop A, when real estate assessed values and taxable values go down it’s dollar for dollar and from 2008 through the recession our real estate value collapsed,” Dachowitz said. “On the upswing as we have the growth and reinvigoration of Detroit and Wayne County the assessed values are going up but are limited in the rate the taxable values can go up.”
