CHICAGO – Wayne County, Michigan won back one of its investment grade ratings, positive news the county hopes to parlay into reduced costs to complete its jail project.
The county’s next steps on the jail project hinge in part on a pending Internal Revenue Service decision on the use of about $46 million of unused bond proceeds.
Fitch Ratings Friday raised the county’s issuer default rating by one notch to BBB-minus, a move that reflects “the continued progress that the county has made in rebuilding its financial resilience and gap-closing capacity to adequate levels, consistent with an investment grade rating.”
Wayne County executive Wayne Evans asked the state to declare a financial emergency in mid-2015 paving the way for a consent agreement that allowed it to chip away at its red ink. The state approved its exit last October.
If improvements continue, the county could be on its way to lifting its other ratings out of junk. Moody’s Investors Service affirmed the county’s Ba1 limited tax general obligation rating last week while revising its outlook to positive from stable. S&P Global Ratings in early May affirmed the county’s LTGO rating of BB-plus and positive outlook.
“Achieving investment grade status means Wayne County has more credibility in the marketplace as we look to long-term projects like improving facilities and infrastructure,” said Evans.
The county anticipates borrowing at least $200 million to complete the jail.
The county is still weighing where to complete the project -- at the abandoned, half-finished jail site on Gratiot Avenue in downtown Detroit or a less central location proposed by Rock Ventures LLC, which wants to use the Gratiot site for a professional soccer stadium.
While the county weighs which site is best, officials are awaiting word from the Internal Revenue Service over what penalties it would face should it go with the alternative site, said deputy county executive Richard Kaufman. Miller Canfield is working with the county on the IRS review.
The IRS in July 2015 began conducting a targeted audit of the Wayne County Building Authority's taxable, direct-pay $200 million recovery zone economic development bond issue in 2010 due to concerns over tax code violations. Jail construction began in 2011 but was halted in 2013 due to rising costs.
If the IRS had found violations, the federal subsidy payments would have been at risk. The authority receives subsidy payments equal to 45% of the interest costs, minus reductions due to sequestration.
The IRS notified the county about six months ago that the audit was resolved without any adverse action and no penalties would be imposed as long as about $50 million of remaining proceeds were used to complete the project on the current site which is in a qualified recovery zone.
With a proposal under consideration to move the site, the county proactively approached the IRS about the site issue but initial indications suggested that a formal request would be futile, Kaufman said.
The county opted to participate in the IRS’ voluntary closing agreement program to determine the penalties should it go with the alternative site. While the formal process could take a few months, the county hopes for an initial indication in the coming weeks.
“This could be a showstopper,” Kaufman said. At risk, is a total of about $170 million in credits, including more than $50 million the county has so far received.
Kaufman described it as "a necessary problem to resolve," but far from the only factor in the county’s location decision, expected by the end of June.
On May 18, the county granted its top qualified bidder Walsh Construction a six-week extension to June 28 to submit its response to a request for proposal. The county also continues to vet the proposal from Rock Ventures to build a criminal justice complex on the alternative site with the county covering the first $300 million and an undetermined amount for operational savings.
Rock has estimated the project’s price tag at $420 million and promised to cover cost overruns. The county is concerned over the costs, construction timeline, and whether the proposal would meet its needs. Any contract with Walsh or Rock would need approval of the Wayne County Commission and the Wayne County Building Authority.
Moody's affirmation impacts about $500 million of general obligation limited tax debt and lease supported bonds issued by county, the Wayne County Building Authority and Detroit-Wayne County Stadium Authority.
Fitch’s upgrade boosted $78.8 million of LTGO county GOs, $43.3 million of LTGOs issued through the building authority and $188.6 million of building authority bonds issued by Wayne County Building Authority.
The country’s recovery plan – aided by flexibility afforded by the state agreement – allowed it to cut labor and retirement costs and reduce healthcare costs. That allowed the county to better align its revenues with expenses, eliminate its accumulated deficit, and post a $53 million operating surplus in fiscal 2016.