Biggest Michigan County Suffering Detroit Contagion: Muni Credit
Wayne County, home of Detroit, has seen the extra yield investors demand to own its debt soar to a record, showing the price Michigan localities are paying after the Motor City filed for bankruptcy.
Like in Detroit, Wayne’s tax revenue has dropped along with property values, while employee pension costs have climbed. The state’s largest county, with 1.8 million people, Wayne has a $160 million accumulated deficit. It’s poised to lose more money on an unfinished jail near downtown Detroit that’s already increased the county’s debt by $200 million.
Moody’s Investors Service dropped Wayne’s grade to Baa3 last week, one step above junk, with a negative outlook. The county is being penalized in the $3.7 trillion municipal-debt market. The additional interest rate investors demand to own bonds maturing in 2040 rather than Treasuries has reached the highest in at least 17 months, data compiled by Bloomberg show.
“For a while there’s been a Detroit penalty for bonds in the Detroit area, but now it’s really pronounced,” said Clark Wagner, who oversees $1.5 billion of munis as director of fixed income at First Investors Management Co. in New York. That includes a $22 million Michigan fund.
Wayne County “is hard to separate from Detroit,” Wagner said. While he owns some Wayne County Airport Authority securities, he said he wouldn’t buy county general obligations.
The higher yields are the latest example of investors penalizing Michigan localities. Buyers have speculated that Detroit’s treatment of general obligations could set a precedent, especially within the state. The June plan from state-appointed Emergency Manager Kevyn Orr to avoid bankruptcy proposed imposing losses on holders of some Detroit general obligations.
Michigan’s Saginaw County delayed a $61 million bond sale planned for today, joining Genesee County and Battle Creek in postponing borrowings after Detroit sought court protection July 18. Issuers in the eighth-most-populous state sold $22 million of long-term munis in the two weeks through Aug. 2, the slowest stretch since January 2012, Bloomberg data show.
Wayne in 2010 backed a $200 million sale of taxable bonds for a 2,000-bed jail on a 14-acre site that holds the current county jail, a courthouse and a juvenile detention center.
The county had approved selling as much as $300 million in bonds for the plan. After the project manager revised the cost estimate to $391 million, the municipality suspended construction June 6, according to June West, spokeswoman for County Executive Robert Ficano. Construction is 25 percent complete and has already cost about $120 million.
The jurisdiction, whose population has decreased by 13 percent since 2000, has five proposals to develop the new jail site and surrounding property.
It would still be responsible for repaying the debt.
“We’re going to take a bath on this, no question about it,” said County Commissioner Timothy Killeen. The county may not be able to find buyers for more bonds to build a jail at another location, he said.
Trading in some Wayne bonds shows the price the county would have to pay.
A portion of the bonds issued for the jail maturing in December 2040 traded this week at an average yield of 8.86 percent, the highest since November 2011, data compiled by Bloomberg show. The extra yield investors demanded for the debt rather than Treasuries rose to 6.76 percentage points Aug. 5, the most since at least May 2012 and up from 5.6 percentage points when Detroit filed for bankruptcy, Bloomberg Valuation data show.
Among proposals to develop the jail location is Rock Ventures, which owns the Greektown Casino-Hotel near the site and whose founder, Dan Gilbert, chairman of Quicken Loans Inc., has bought more than 30 downtown properties.
Rock Ventures would redevelop the site, said a spokesman, Eric Larson, managing partner of Bedrock Real Estate Services. He said the development may be as large as $500 million, create 5,500 jobs and add $20 million to the city and county tax base.
Larson said the county could save $100 million over five years by combining jail and court functions at a closed state prison in the city. The state is willing to lease the property for $1 a year, said Russ Marlan, spokesman for the Michigan Department of Corrections.
Ficano, the county executive, has proposed a property-tax increase to generate an additional $35 million to $70 million a year to reduce deficits.
That’s “not going to happen,” Gary Woronchak, county commission chairman, said in a statement Aug. 5, citing lack of support among the panel to put a tax increase before voters. Taxpayers blame mismanagement for the county’s fiscal woes, Woronchak said.
Woronchak said the county is headed to a $200 million accumulated deficit, caused in large part by plummeting property values. Property values fell by 33.8 percent from 2008 to 2012, according to Michigan’s treasury department. Meanwhile, the county’s required pension payment grew to $51.7 million in 2012 from $39.7 million in 2011, Moody’s said.
“What’s going on in Detroit certainly does not help Wayne County, but they need to focus on financial management,” said Judith Ewald, a senior credit analyst in New York at Western Asset Management Co., which oversees about $30 billion in munis. “From what I can gather, it has not improved.”
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