Wayne County Exec. Warns of State Takeover, Bankruptcy

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CHICAGO - Wayne County, Michigan's newly elected executive, Warren Evans, Thursday delivered a grim picture of the county's fiscal position, warning that a state takeover and bankruptcy are both on the table without major structural fixes.

The county, home to Detroit, is on track to run out of cash by August 2016, a date that Evans called "financial Armageddon."

Wayne also faces what auditing firm Ernst & Young called a "liquidity crisis" within the next six months, by August 2015.

"Even with all of the funds pooled together, we're going to get to the area where we just don't have enough to pay the bills," said Evans at a press conference Thursday where he presented the Ernst & Young report outlining the county's financial picture.

"It's a bad cash picture. One of the big requirements for bankruptcy, and that's an ugly word, is your cash position; if you don't have the cash it's one of the triggers."

Wayne County 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 down to 45% from 95% ten years ago.

Evans, a former Detroit police chief and Wayne County sheriff who became county executive in January, said that the county's cash position and structural deficit are far worse than he'd originally thought.

"The bottom line is everything is on the table, there's no sacred cows," said Evans. "The governor has said he would like to sit back and see Wayne County take care of it," he added. "But if we don't do what we need to do, he will come."

The county has shifted money from other funds into its general fund for years to cover chronic revenue shortfalls, he said.

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.

Evans said he is not ready to unveil solutions and has spent the last few weeks meeting with unions and other "stakeholders."

The executive said restructuring debt for savings is one possibility, but added that the county's main problem isn't bond debt but its lack of general fund revenue.

"There was a big creditor argument," he said, referring to Detroit's bondholders, who took losses in Chapter 9, "but in Wayne County that's not really the problem. We borrow from ourselves: the general fund takes money from the road fund or the treasurer."

Debt service is expected to total roughly $20 million annually through 2019, according to the Ernst & Young report. That's compared to $42 million for pension costs and $33 million for retiree health care benefits.

In order to boost its pension fund to a 70% funded status, the county would need to contribute an additional $40 million over the next 10 years, assuming a 6.75% rate of return, the report said.

Ernst & Young also weighed in on a controversial $200 million bond-funded jail project in downtown Detroit that the county abandoned half-built last year amid cost overruns. Evans is deciding whether to restart the project, and the auditors say the county would have to issue another $170 million of bonds to deal with the rising budget.

But the county simply can't afford the alternative, which is repairing the existing jail, the report said.

Evans said he will meet with unions and employees throughout February in an effort to craft a workable deficit elimination plan as quickly as possible. Without a plan, it's likely that the state will step in and take over the county, as it did with Detroit in the months before the city declared bankruptcy, he said.

"All things being equal, I think it could [lead to bankruptcy] but I don't think it will because we're not going to let that happen," said Evans. "Whether we fix it or someone else fixes it; it's going to get fixed."

As for emergency managers like Kevyn Orr eyeing the county, Evans said: "I don't think they're circling overhead but they can all smell the blood on the water."

Wayne has roughly $730 million of limited-tax general obligation bonds and $340 million of limited-tax GO notes.

The county is clinging to its investment-grade ratings from Standard & Poor's and Moody's Investors Service, which rate it BBB-minus and Baa3, respectively. That's one notch above speculative grade. Fitch Ratings rates the county speculative BB-minus.

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