CHICAGO — Fitch Ratings removed Wayne County, Michigan's speculative grade rating of B from its Rating Watch Negative in recognition of the city's improved prospects under a proposed state consent agreement.
The rating agency in a report Aug. 24 also affirmed the implied unlimited tax general obligation rating. The action also impacts $186 million of limited tax general obligation bonds, $51.3 million of building authority refunding bonds, and $200 million of building authority bonds. The outlook is stable.
"Removal of the Negative Watch reflects elimination of the immediate uncertainty of which path the county might choose under" under state rules governing distressed local governments, Fitch said. "The county recently entered into a consent agreement with the state that affords to the county's executive and legislative branches many, but not all, of the emergency manager powers and which may improve expenditure flexibility."
The junk rating reflects the severity of the county's fiscal challenges that have resulted in persistent structural and accumulated deficits with a previous lack of significant revenue or expenditure flexibility hampering efforts to address the imbalance, Fitch said.
The county has reported progress towards structural deficit elimination, with the remainder of its plan reliant on those consent agreement powers. "An inability to achieve the needed savings could lead to negative rating action," Fitch said.
The consent agreement affords the county tools that can improve its expenditure flexibility but only if the executive and legislative branches of government can cooperate on their execution, said Fitch noting such lack of cooperation hurt Detroit's consent agreement that preceded its Chapter 9 filing.
If the agreement fails, Fitch warned that the county could pursue other avenues under state law including a neutral evaluation, emergency manager, or Chapter 9 and those could set back the city. "Failure of the consent agreement would be a credit negative as neutral evaluation would likely be ineffective post-consent agreement, and emergency management and bankruptcy would likely be detrimental to bondholders," Fitch said.
Moody's Investors Service recently labeled the consent agreement a credit positive. "The consent agreement enables the county to implement key cost-cutting measures and increase the state's oversight role, which are both credit positive for Wayne County," Moody's wrote in a recent weekly outlook commentary.
Moody's rates the county, which includes Detroit, at the speculative grade level of Ba3 with a negative outlook.
The county board voted 14-1 on Aug. 12 to approve the agreement. Wayne County Executive Warren Evans and the state treasurer still need to approve the 12-page document. Once the consent decree takes effect, Evans will have 30 days to negotiate with county unions over new labor contracts and retirement costs. After 30 days, if there is no agreement, Evans can impose conditions on the contracts.
The decree requires Wayne to continue to make timely debt payments but also allows Wayne to enter into agreements with creditors or other persons or entities for the payment of existing debts, including the settlement of claims by the creditors.
The county has acted to cut employee benefits to help eliminate a general fund deficit of $88 million which without action is projected to hit $203 million in 2019.
The consent agreement eliminates the need for employee bargaining units to agree to any new terms because the majority of Wayne County's agreements expired 20 September 2014.
"The Fitch report this week, and the Moody's report last week, is added validation that our administration is making the right moves to improve the long-term financial health of Wayne County," county spokesman James Canning said in a statement. "There is still plenty left to be accomplished, but we are moving in the right direction, and others are taking notice."
