CHICAGO — Washtenaw County was forced to cover a May 1 debt-service payment for a small Michigan township that doesn’t have enough money to meet its obligation on a failed special-assessment development.

It’s a problem that could plague other counties in Michigan, many of which, like Washtenaw, attached their general obligation pledge to bonds issued on behalf of municipalities to finance developments.

The recession hit many of the projects hard, and they failed to generate projected revenue, leaving the local governments  — and ultimately the counties — to pay off the debt. In 2001, then-triple-A rated Washtenaw County issued $12.5 million of bonds and loaned the proceeds to Sylvan Township to finance construction of a water and sewer system to support a new residential and commercial development.

The debt was expected to be paid by a special assessment generated by the district’s revenues, but features the county’s GO limited-tax pledge.

The county, now rated Aa1 by Moody’s Investors Service, refinanced $9.77 million of the debt in April 2010, delaying principal payments until 2014, pushing out the final maturity to 2026 from 2022, and making the bonds noncallable.

Sylvan was under contract with Washtenaw to make the debt payments, but was unable to cover its May 1 interest-only payment of $175,000. The next payment, also $175,000, is due in November.

Starting in 2014, the payments climb to $965,000.

Washtenaw should have no financial problem covering the near-term debt payments, Moody’s said in a comment last week. But the move is still a negative for the credit, as the payment is a contingent liability the county did not expect to have to honor, Moody’s analyst Matthew Butler said in the May 8 comment.

“While the amounts in play represent a modest and manageable 1% of Washtenaw County’s fiscal 2011 general fund budget, the current case is indicative of the types of risk counties may experience when guaranteeing debt on behalf of underlying governments, especially in difficult economic times,” Butler wrote.

Of the 36 counties Moody’s rates in Michigan, 32 have issued debt on behalf of its local governments, usually to provide market access to credits that otherwise have a difficult time borrowing money.

Sylvan officials plan to either put a tax increase on the August 7 ballot or sign a consent agreement with the county that works out a payment schedule. Township officials have warned for years that they would not be able to make the debt payments, and tried but failed to raise taxes on last November’s ballot.

If voters again defeat the ballot item or the consent agreement falls through, a judge would likely order a property tax hike. “The advantage of a ballot or a consent agreement rather than just a judicial order is you can involve your FA and figure out how many mills you need to pay over 20 years, so it’s not a big hit,” Washtenaw County Treasurer Catherine McClary said.

Whether by ballot, consent decree,or a judicial order, the problem will be resolved, according to the treasurer.

“The county has a capital projects fund that pays debt service that is well-funded and has a strong balance,” she said. “I don’t perceive it as a financial negative, but it is a financial item that must be dealt with and that is being dealt with.”

McClary said other counties across Michigan face similar problems, though it is a challenge that will likely be cured by an economy that she predicted is on the mend. “People are becoming more and more cognizant of it and are dealing with it,” she said.

This year for the first time in years delinquent taxes are down in every unit of local government, according to McClary.

“This is a very positive sign, because delinquent taxes are a leading economic indicator, and they’ll tell you what will happen four or five years down the road.”

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