Art-Deco Gem for Sale as Detroit’s Home County Fights InsolvencyElizabeth Campbell
Detroit’s home county plans to sell the landmark downtown Art Deco building that serves as its headquarters as it moves to plug a crippling deficit and fend off insolvency.
The struggles of Wayne County, Michigan, underscore the region’s lingering stress even after Detroit emerged from a record $18 billion bankruptcy in December. Last week, Governor Rick Snyder announced a review of the county’s finances, a step toward possible state intervention after the municipality asked Michigan for help in tackling its fiscal woes.
“The trend is not getting better,” said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management, which oversees about $127 billion in Kansas City, Missouri. “It’s actually getting worse, and you have a number of municipalities, unfortunately, in Michigan that are kind of under severe financial strain, and Wayne is certainly one of those.”
The junk-rated county of 1.8 million residents has seen property-tax revenue drop by more than $156 million since 2007, while spending has climbed by more than $50 million. As a result, Wayne faces a $52 million deficit and may run out of cash by August 2016.
Adding to the challenges, a stalled jail project eats up $14 million a year in debt service. The county sold $200 million of securities in 2010 to build the facility in downtown Detroit, only to halt construction in 2013 amid cost overruns.
Yields on the debt, among Wayne’s most-traded bonds, started soaring in early February. That’s when Moody’s Investors Service and Standard & Poor’s dropped Wayne to junk after County Executive Warren Evans warned of possible “financial Armageddon.”
On June 17, Evans asked the state to declare a financial emergency, which would give it state help in solving its fiscal crisis.
Michigan’s initial review found “probable financial stress,” and the governor will decide on declaring a financial emergency in coming weeks. With that status, Wayne officials could choose among an emergency manager, a consent agreement, mediation or bankruptcy. Evans has said he wants a consent pact, which offers a path for negotiating with unions.
Three Michigan municipalities and two school districts operate under a consent agreement, according to the state Department of Treasury.
Federally taxable Wayne County securities that were sold for the jail and mature in December 2040 traded at an average of 89.5 cents on the dollar Thursday, down from about $1.10 in January, according to data compiled by Bloomberg. The bonds, which carry a 10 percent coupon, yielded an average of 11.3 percent, after touching 11.98 percent June 18.
Last month, in a borrowing that was delayed because of the financial-emergency request, Wayne County sold $188 million of federally taxable notes due in December 2017 to yield 6 percent. That was about 5.1 percentage points above similar-maturity Treasuries.
The county is working to reduce health-care costs, fund pensions and make its operations more efficient, said Richard Kaufman, its deputy chief executive.
“I am hopeful and optimistic that in six to nine months those things will be improved enough that we can consider going back into the market to borrow money to solve our partially built jail problem,” Kaufman said.
Bond proceeds could help finish the jail or renovate one of three aging facilities, he said. It’s more likely that the county would complete the jail rather than unload it, Kaufman said.
The county has three other properties it does plan to sell, including the Guardian Building, its headquarters, which houses departments including management and budget, human resources and technology, according to Ryan Bridges, a Wayne spokesman.
The 40-story structure, built by a bank and completed in 1929 when the city was booming, was designated a National Historic Landmark in 1989. The county bought it in 2008 for $14.5 million, issuing debt to finance the purchase and the acquisition of the two other properties it’s putting on the block, according to Bridges. Kaufman didn’t have an estimate for how much the building would fetch.
For all Wayne’s challenges, they’re not as vast as those that plagued Detroit, and its willingness to deal with them aggressively is positive, said Paul Mansour, head of municipal research in Hartford, Connecticut, at Conning, which oversees $11 billion in munis for insurance companies.
“I’m guardedly optimistic that this process will work out,” said Mansour, whose firm doesn’t own Wayne bonds because of the rating. “It’s not the time for panic selling.”
That doesn’t mean investors should leap in either, said Michael Johnson, managing partner at Gurtin Fixed Income Management, which oversees $9 billion of munis in Solana Beach, California. His firm is also avoiding Wayne debt.
“It’s hard to know which direction this breaks,” Johnson said. “I don’t think a high-quality municipal-bond portfolio should have bonds in it that have this level of uncertainty.”
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