Wayne County, Michigan, Eyes $500M OPEB Deal in 2010

CHICAGO - Wayne County, Mich., officials said they plan to issue up to $500 million in taxable bonds in fiscal 2010 to cover about half of its roughly $888 million unfunded liability for its accrued retiree health-care costs.

Whether the county will issue general obligation bonds or certificates of participation depends on a bill pending in the Michigan Legislature that would allow local governments to bond for their unfunded other-post employment benefits. Passed earlier this year by the Democratic-controlled House, the bill is currently before the Senate Appropriations Committee.

Wayne County's OPEB bond proposal is part of its proposed 2010 budget, said chief financial officer Carla Sledge.

In its current pay-as-you-go mode, the county pays around $55 million annually to cover its retiree health care costs. Officials settled on a $500 million bond issuance in order to keep debt service at the same level, according to Sledge.

"It makes sense to start prefunding that liability," she said.

While officials will consider issuing certificates of participation, like Oakland County did in 2006, they would prefer to issue GO or revenue bonds to cover the liability, Sledge said.

"We'd rather go with that if there's going to be a law [allowing it]," she said. "The problem is that with Oakland County, it was more expensive [to sell COPs] and though we would not like to go the expensive route, we may have to consider it."

The state Senate is expected to pass its own version of the bill and the two chambers will pass a compromise version by the end of the session.

Gov. Jennifer Granholm in 2006 vetoed a similar measure that would have allowed Oakland County to issue bonds to pay for its OPEB liability because it only applied to that county, according to one state legislator. The current bill is expected to have a better chance of being signed into law by the governor, proponents said.

A fiscal analysis of the House bill shows that issuing tax-exempt revenue or GO bonds would likely cost less for borrowers than issuing COPs - and that both are cheaper than making annual pay-as-you-go contributions.

For example, in 2008 debt service on Oakland County's COPs totaled about $46.4 million compared to an actuarially determined annual required contribution of $60.2 million to put the county on track to ultimately fully fund its OPEB liability, according to the House Fiscal Agency.

Governments are required under Governmental Accounting Standards Board rules to now disclose an actuarial accrued accounting of their OPEB liabilites and the annual required contribution needed to work towards full funding.

The county has not selected a finance team for the deal, and expects to enter the market in late spring or summer of 2010. "We're waiting to see what's going on in Lansing before we decide on the vehicle," said Sledge, referring to the Legislature.

After the sale, officials said they would consider putting bond proceeds into a so-called 115 trust - based on Section 115 of the Internal Revenue Code. The tax-exempt trust would allow the government to use the funds for other health-care related costs if, for example, universal health care becomes law and the county's benefit requirements changes, according to Sledge. The county has already applied to the IRS for permission to set up the trust, she said.

The bond proposal comes as Wayne County - the largest in the state and including part of Detroit - struggles with rising deficits and a weak economy. Fiscal officials are in the midst of debating how to close an estimated $105 million shortfall in the 2010 budget as well as a current-year $30 million deficit.

Located in the epicenter of the failing domestic automobile industry, the county is suffering from a "severely weakened econonomic position and tax-based contraction," said Fitch Ratings analyst Melanie Shaker.

Fitch dropped Wayne's rating two notches in June, putting the limited-tax GO debt at BBB-plus from A with a negative outlook, and warning that further action is possible.

"2010 is going to be very difficult for them," Shaker said. "If they can't do something, they're going to have years of accumulated deficits."

The 2010 budget gap of around $105 million stems largely from falling property tax revenue in the county, which is suffering from a large number of foreclosures, Sledge said. After enjoying an annual property tax revenue growth of roughly 6% from 1994 through 2007, the county is now faced with a 3.75% decline in 2010, she added.

Other pieces of the 2010 gap come from declines in state revenue sharing and rising health care and pension costs. Officials have managed to close some of the gap by amending union contracts, and have proposed consolidating departments and administrative functions and asking all employees to take a 10% pay cut, said Sledge.

A final budget must be adopted by Oct. 1. Standard & Poor's rates the Wayne County A with a negative outlook and Moody's Investors Service rates the credit A3 with a stable outlook.

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