CHICAGO — Wayne County, Mich.’s recent disclosure that the IRS is conducting a targeted audit of $200 million of bonds is a credit negative, because the cash-strapped county could have a hard time covering the costs of the federal interest subsidy if is lost, Moody’s Investors Service said Friday.
The county, which Moody’s assigns the junk-rating of Ba3, floated $200 million of recovery zone economy development bonds in 2010 to finance construction of a jail in downtown Detroit that has since been halted amid cost overruns.
The county disclosed on Sept. 9 that the IRS is examining the bonds.
Wayne currently receives a federal subsidy equal to 45% of annual interest payments on the bonds.
“The examination is credit negative because it raises the possibility that the county will have to repay $37 million of previously received subsidies and lose $41 million of subsidies over the next five years,” Moody’s analyst Matthew Butler said in a comment as part of the firm’s weekly public finance credit outlook. “Such a loss would further strain the county’s weak but improving fiscal condition.”
The bonds, issued by the Wayne County Building Authority, are backed by a limited-tax general obligation pledge of the county. Due to statutory limitations on revenue raising, the county would not be able to raise revenue for the increased interest cost, Butler wrote.
Also, if the county loses the subsidy, the building authority would have a hard time refinancing the debt, according to Butler. Bonds maturing after 2021 — which is the bulk of the debt — are not subject to optional redemption until the end of 2020.
The subsidy in fiscal 2016 totals just under $8 million. That’s only 1.4% of general fund revenue, Moody’s said.
But “management would be challenged in offsetting the loss by implementing further cuts beyond the significant operating cuts already made,” Butler warned.
Following a request from County Executive Warren Evans, Gov. Rick Snyder declared the county to be in a financial emergency on July 22. The county now operates under a consent agreement with the state that is part of a larger restructuring aimed at eliminating a $52 billion structural deficit and whittling down its unfunded retirement obligations.
The jail project was launched by former county Executive Robert Ficano, and led to the indictment of the county’s former chief financial officer and two others connected to the project for misconduct and willful neglect of duty tied to the jail financing.
Evans, who took office in January, has said dealing with the failed project is his top priority after eliminating the structural deficit.