CHICAGO — Wayne County, Mich., home to Detroit, was hit Friday hit with a pair of negative rating actions — including the loss of its investment-grade rating — after officials warned the county could run out of cash by next summer.
Two of the three major ratings agencies now have junk-bond ratings on the county, the largest in Michigan and one of the most populous in the country.
Moody's Investors Service stripped the county of its investment-grade rating on Feb. 6, downgrading it three notches to Ba3 from Baa3. The outlook remains negative even at the lower rating, the firm said.
Fitch Ratings, meanwhile, put the county's already junk-bond ratings on negative watch.
Both rating agencies noted the county's stressed financial position, which became clearer on Feb. 5 when county Executive Warren Evans released an audit that showed the county's operational deficit was higher than expected and, with a chronic structural shortfall, was quickly burning through its remaining cash.
Evans said the county would be almost out of cash by June 2015 and could be in a negative liquidity position by August 2016.
A debt restructuring, state takeover and even Chapter 9 are all options on the table, Evans said, though he added he believes the county could stabilize its own finances.
In its downgrade report, Moody's said it expects Wayne to be able to meet all its obligations in the coming year. But analysts warned "failure to reach structural balance in the near term will further degrade available liquidity and could raise the probability of state intervention and increase the risk of the county seeking to restructure its debt and other obligations."
"The downgrade to Ba3 reflects a very stressed financial position tied to an underlying structural imbalance that county management has been unable to curtail given the steady loss of revenue," Moody's analyst Matthew Butler wrote. "The negative outlook reflects our expectation that the county faces hurdles in implementing significant cost reductions."
Moody's may downgrade the county again if it seeks to restructure its debt through a consent agreement with the state of Michigan or a bankruptcy, Moody's said.
Fitch rates the county's outstanding limited-tax general obligation bonds and building authority bonds BB-minus and has an implied unlimited-tax GO rating of BB.
In putting the ratings on negative watch, Fitch noted the county's larger-than-expected operating deficit as outlined in the new audit by Ernst & Young. The recent hire of a chief restructuring officer also "raises concerns" about timely debt payments in the future, Fitch said.
Wayne has just under $700 million of LTGO bonds and $302 million of LTGO notes.
Evans, who took office in January, held the Feb. 5 press conference to announce that the county's fiscal position is grimmer than previously thought.
Wayne for years has run a structural annual deficit, now estimated at $50 million. It has an accumulated deficit estimated at $161 million and a pension plan with a funded status that has dwindled to 45% from 95% 10 years ago. The county has shifted money from other funds into its general fund for years to cover chronic revenue shortfalls, according to Evans.
Wayne County needs to come up with roughly $70 million a year to cover the structural general fund shortfall and begin to shore up the pension fund, Evans said.
That includes $50 million to cover general fund expenses and $20 million for pensions that would come from the general fund.
The Ernst & Young report warns the county faces a "liquidity crisis" as soon as August, when its pooled cash is expected to dip to $35 million. It's expected to reach negative liquidity by June 2016, according to the report.
"The county's liquidity position will continue to deteriorate in the next 12 to 24 months without further action," the report said.
The auditing firm said current five-year projections show "significant cash burn absent drastic budget cuts or significant changes to legacy liabilities."
Without changes, Wayne's accumulated deficit is on track to reach $230 million in fiscal 2016 and $486 million by fiscal 2019.
The report blamed operating deficits on a 21% drop in property tax revenues since 2009; "significant legacy expenditures" of near $100 million annually driven by "unsustainable" pension and retiree health care costs; and budget overruns in the sheriff and prosecutor's office.
