CHICAGO — Fitch Ratings dropped Wayne County, Mich., two notches into the high BBB category and warned of further negative action due to the mounting strain of both the recession and the wilting of the domestic automobile industry.
“The combination makes Fitch believe that the county’s economy no longer supports an A-level rating,” said analyst Melanie Shaker. “While we are seeing an impact of the auto industry’s woes on other credits, Wayne County’s problems are particularly acute.”
Fitch downgraded its rating on the county’s limited-tax general obligation rating to BBB-plus from A and assigned a negative outlook in a move that affects $578 million of debt. Another downgrade could come if the county is not successful at addressing as planned its accumulated general fund deficits or the local economy worsens.
Standard & Poor’s rates the county A but earlier this year assigned a negative outlook. Moody’s Investors Service rates the credit A3 with a stable outlook. Michigan’s largest county, which includes a portion of Detroit, is grappling with dramatically rising unemployment due to the auto industry’s contraction that has grown more pronounced by the bankruptcies of Chrysler Corp. and General Motors Inc. At the same time, Wayne faces population losses, below-average income levels and poor housing construction trends.
At the root of a good share of its fiscal pains is the auto industry turmoil. Detroit’s Big Three — Chrysler, GM and Ford Motor Co. — provide more than 40,000 jobs in the county and recent job cuts at GM are expected to drive up its already high jobless rate of 14.9%.
The strain is pressuring its ability to meet significant human services and public safety responsibilities and faces tax raising constraints amid declining property tax values. “The financial picture is expected to remain severely stressed through at least 2010, and human services fund deficits are expected to continue through 2014,” Shaker said.
Wayne County’s fiscal 2008 unreserved general fund balance fell to a negative $10.6 million or 1.7% of spending compared to a positive 3.1% just a year earlier. An accumulated deficit could grow to up to $40 million without action.
While Fitch believes fiscal 2010 will be a difficult year, the county does benefit from a $50 million non-general fund balance and is seeking to rein in costs. Officials want to hold wages steady in collective bargaining agreements, cut positions through attrition and early retirement, and cut spending. The county cut 10% in departmental spending in fiscal 2008 and 2009 and has proposed in its fiscal 2010 budget cutting up to 20% with the goal of fully erasing its red ink by 2014.
The credit benefits from a moderate debt burden with rapid debt amortization, analysts said. Pensions were adequately funded at 81% in 2007 although that figure is expected to have fallen due to recent investment losses. The county has an $800 million other post-employment benefit liability and is considering issuing debt to cover it.
Wayne County chief executive officer Robert Ficano has proposed several economic initiatives aimed at jump-starting the local economy. Among them are two biotechnology projects, including construction of a new stem cell commercialization center. Also on the horizon is the development of an “aerotopolis,” or aviation-centered economic development corridor centered around the county’s two airports and a regional mass transit project.
The larger economy statewide has been hard hit due to the prominence of the auto industry there. Half of the 14 GM facilities slated to close are in Michigan. The state will lose 8,900 jobs of the total 21,000 expected to be slashed.
GM is the largest employer in Oakland County and Macomb County and Chrysler is second in Macomb and third in Oakland. GM is expected to keep its headquarters in Detroit, providing one bit of salve for Wayne County, although it’s not yet clear how many of the 4,400 employees that work there will remain.
Credit analysts have warned that local governments in Michigan, Ohio and Indiana will be among the hardest hit by the auto industry’s problems. Future credit action will depend on the final restructuring plans of Chrysler and GM and Ford’s efforts to compete and the impact of those decisions on plant operations, dealerships, jobs and suppliers.
In Indiana, the state treasurer’s office today will argue against the proposed sale of most of Chrysler’s assets to Fiat as part of Chrysler’s federal government supported reorganization. The arguments take place before the 2nd U.S. Circuit Court of Appeals.
Treasurer Richard Mourdock oversees three public investment funds that hold $42.5 million of Chrysler corporate bonds. Under the company’s reorganization, the bonds stand to lose the majority of their value. Mourdock is arguing that the federal government overstepped its authority in orchestrating the deal for Fiat to buy Chrysler’s assets and that the Treasury Department lacks authority under the Emergency Economic Stablization Act or Troubled Asset Relief Program to financially assist in Chrysler’s restructuring.
