DALLAS -- Wayne, Michigan lost its investment grade rating amid struggles to erase red ink.
Moody's Investors Service downgraded Wayne's issuer rating two notches to Ba1 from Baa2 and its general obligation limited tax rating fell to Ba2 from Baa3.
Moody's also placed the ratings under review for a further downgrade pending developments related to the city's request for a financial review by the state.
The city has $28.1 million of rated GOLT bonds outstanding.
"The downgrade of the city's issuer rating to Ba1 reflects a very stressed financial position given an ongoing structural imbalance with few remaining options for increasing revenues or cutting expenditures," Moody's wrote in the report published Thursday.
The city's request for financial review follows the Aug. 2 rejection of the city's proposal to join a suburban authority and levy a tax to fund fire and rescue services.
Wayne voters rejected the proposal to join the South Macomb Oakland Regional Services Authority, which was created by the cities of Eastpointe and Hazel Park in 2015. They likewise turned down a millage proposal that would have raised approximately $5 million to help the city's strained liquidity. The additional revenue would have enabled the city to stabilize its general fund balance to $2.9 million, according to Moody's.
"Our residents do not want to give us the revenue we requested. Now, this is the avenue we have to take," Wayne Mayor Susan Rowe told the Detroit News.
The city of about 17,000 people is in Wayne County, about 20 miles west of the county seat of Detroit.
If the state declares a fiscal emergency, the city will have four options: a consent agreement with the state, appointment of an emergency manager by the state, request for approval to file Chapter 9 bankruptcy, or mediated negotiation among creditors. Rowe has indicated that that city will likely opt for appointment of an emergency manager.
The review for a further downgrade is tied to the decision to seek a state review. "A declaration of fiscal emergency would give the city greater power to cut expenditures, it also increases the risk that the city may seek to restructure its debt," said Moody's.
Michigan's emergency manager program, in which the state governor appoints a manager with extensive powers over a troubled municipality or school district that meets certain criteria, was launched in 1990.
It's the state's go-to method for dealing with local government financial trouble. So far, 11 Michigan municipalities and three school districts have had EMs appointed.
The intervention program has been a longtime target for critics who complain that it usurps local democracy. It's future is now in play amid scrutiny triggered by the public health crisis in Flint. Many municipal market participants see room for improvement.
Wayne has struggled to reign in expenses. Expenditures have exceeded revenue by roughly $2 million over the past few years. The city balanced its books for the new current fiscal year which started July 1 by draining other funds, including its internal service fund and a retiree healthcare trust.
Officials report closing fiscal 2016 on June 30 with near depletion of the OPEB trust and a $400,000 draw on general operating reserves. The city expects to draw another $1.6 million of general fund balance in fiscal 2017 and estimates likely depletion of fund balance by December 2017.
Aside from property taxes, Michigan cities are largely dependent on a state revenue sharing system that has consistently declined since 1998. Since 2002 the state has led the nation in cuts to municipalities. According to the US Census Bureau, from 2002 to 2012, municipal revenue from state sources increased in 45 states and the average increase was 48.1%. In Michigan, municipal revenue from state sources declined 56.9% from 2002 to 2012, according to a Michigan Municipal League report.
