A Dead Man Walking: Wayne County

Your Least Loss is Your First Loss

Bankrupcy WC 2Wayne County Executive Warren Evans told the assembled self very important persons at the Mackinac Policy Conference last Friday that he now believes that his county government can avoid bankruptcy. “He is now comfortable with the options” was the report. Little did he know that, on the very same day, Wayne County Circuit Court Judge Lita Popke gave the County 48 hours to pay its retirees $ 49 million dollars to restore their 2010 ’13th check’ retirement benefit. Wayne County told the court flat out that it doesn’t have the money.

The Wayne County Commission voted yesterday to tap most of the last remaining funds in the County’s much abused Delinquent Tax Revolving Fund, however Warren Evan’s subsequent veto threat all but assures that this summer’s county property taxes will increase 1.23 mils to pay this judgement. This property tax increase will not even require a vote of affirmation under the Headlee Amendments to the Michigan Constitution, because it is pursuant to a court order.

’13th checks’ are a devious method of looting pension funds which began in the 1980’s, in Michigan. When some Michigan public pension funds earned more than their targeted rate of return in a year, say 8%, the ‘surplus’ earnings got doled out to retirees in the form of a 13th check.  These 13th checks could amount to far more than the pension fund’s actually surplus.  Retirees never had to give back their prior 13th check payments when the pension funds dialed up a big loss, so the 13th check was an opportunistic form of looting – not an equitable form of risk & gain sharing. This practice has occurred in state pension plans, county pension plans, and city pension plans across Michigan. The particular problem in Wayne County is that Robert Ficano stripped his pension funds of the 13th check payment funds in 2010 to make his books look better. Worst of all, Wayne County’s pension funds are only about 44% funded and their OPEB’s (retiree medical care, etc.) are essentially unfunded.

Wayne County’s accounting is nebulous, to be charitable. A read of their 2014 CAFR (22 MB document, it took a lot of lipstick to make this dead pig look good!) shows that the County is carrying forward an unassigned deficit of $ 82.8 million, and only got it down to this awful level by diverting $ 91.7 million from their dwindling Delinquent Tax Revolving Fund to their General Fund in 2014. Then, depending upon whom in Wayne County government you are talking to, Wayne County is still losing another $ 4 – $ 5 million each month.

This amounts to something over $ 50 million per year.

Bankruptcy 2In the past, Wayne County would paper over their deficits using short term borrowing called ‘Tax Anticipation Notes’ or TANs, later converted to longer term borrowing. But that option diminished in February when the three major bond rating agencies reduced Wayne County’s bond ratings to junk status, with a negative outlook. This means that a lot of bond buyers operating under investment grade fiduciary covenants (e.g. mutual funds) can no longer purchase Wayne County financial paper, and many who held Wayne County paper had to disgorge their holdings. Even bond buyers without those covenants will steer clear of Wayne County paper after the abusive, unlawful haircut (more like a beheading) bond holders suffered in the recent Detroit bankruptcy. Why the Detroit bankruptcy was just a bit too clever. Wayne County might be able to borrow this $ 49 million from some of the local banks in a private placement, but it will come at an outrageous interest rate. If you ever wondered what a ‘junk bond’ was, now you know.

Can Wayne County rescue itself? Wayne County Executive Evans says he has cut $ 5 million in annual expenditures so far. His veto threat yesterday suggests that his putative deficit reduction was actually diverting the remaining balance in Delinquent Tax Revolving Fund to preexisting deficit spending, rather than Judge Popke’s order.  Regardless, their deficit reduction so far is just a little bit more than the $ 4.2 million that Wayne County diverted from road funding in 2014 (go to page 46 in in the 2014 CAFR and look at the ‘Transfers out’ line item]. But the Wayne County Circuit Court just increased annual expenditures by $ 32 million every time a 13th check is issued to retirees. [The $ 49 million order included interest]. The 13th check is now constitutionally protected and Wayne County has to pay it. Wayne County is actually seeing its deficits increase, not decrease, despite Warren Evan’s efforts so far.

Wayne County is trying to dump Robert Ficano’s ill-conceived real estate empire, but this effort will now be more of a fire sale than an orderly disposal. And the aborted jail project is almost certainly a total loss with some very serious grant and tax fallout which cannot be analyzed at this time. Still, consolidating employees in fewer facilities would reduce their annual deficits a bit. Maybe another $ 5 million a year, but nothing close to the $ 4 million a month plus they need to balance their cash flows. Do you think there is any chance that Wayne County’s employees will swallow an 18.5% wage and benefit cut? That bitter pill is what would be necessary to save Wayne County $ 4 million a month. 52% of Wayne County’s revenues are derived from property taxes.  Most of their other revenues are dedicated grants and constitutionally defined transfers from the Federal and State governments. While property values are increasing in some of the tonier outer suburbs, this is offset by continuing property value declines in the inner ring suburbs. And the City of Detroit is planning a major reassessment of its properties which are over assessed by a factor of three or more. Detroit is 18% of Wayne County’s property tax base, so this will really hurt: something on the order of $ 18 million a year, or $ 1.5 million a month less in gross property tax revenues.

Can an Emergency Manager fix Wayne County? Not unless the EM has a lot more authority than the current players in Wayne County government. Wayne County’s Democratic mandarins fervently want the County to survive in its current form, but haven’t made any real headway. After downsizing their real estate empire, just about all the County’s expenditures are mandated by laws or contracts. Would an EM survive imposing an 18.5% wage cut? Increasing Wayne County’s revenues under an EM would require Headlee votes since the tax rates that can be hiked locally are mostly property taxes. Increased general revenues are thus unlikely. It is just not conceivable that an Emergency Manager could balance the County’s cash flows. Proposal 1’s demise in Wayne County suggests that taxpayers in Wayne County are no more enthusiastic than their fellow Michiganders about throwing their money down black holes. An EM could file the County under Chapter 9 at the U.S. Bankruptcy Court, however.

Chapter 9 bankruptcy now appears to be Wayne County’s last, best option. Unlike Detroit, Wayne County owns no Institute of Pretty Pictures to motivate charities and foundations to bail in. This bankruptcy is going to be an ugly affair with a lot of losers. Wayne County had $ 862.1 million in directly attributable debt at the end of 2014.  Total debt associated with Wayne County is something greater than $ 6 billion.  $ 417.9 million of of the $ 862.1 million directly attributable was backed by the ‘full faith and credit’ of the County. The remaining $ 444.2 million directly attributable was secured by various County revenue streams. Wipe out all this debt and the elimination of interest payments amounts to only 80% of Wayne County’s current ‘structural deficit’: something on the order of $ 40 million per annum. This leaves another $ 10 million to be cut from suppliers, employee pay, and employee benefits at their current cash burn rate.  Possibly as much as $ 50 million more when the effects of court judgements, the Detroit reassessment, and settlements with bondholders are factored in. Can a U.S. Bankruptcy Court Judge jack up tax rates on Wayne County residents? Yes, and without regard for Headlee or any of the other niceties of state law. Even though tax increases did not happen in the Detroit bankruptcy (thank you pretty pictures), they will happen here. A Wayne County Circuit Judge just raised Wayne County property taxes 1.23 mils, so the sky is the limit for a U.S. Bankruptcy Judge.

Wayne County is Michigan’s most populous county with an estimated 1.76 million residents. The Detroit bankruptcy was generally viewed across the State of Michigan as a filmed train wreck, something awful but unlikely to result in any personal injury to viewers. The impending bankruptcy of Wayne County will be a far different proposition. Detroit had long since become economically irrelevant when it filed for bankruptcy. The 1.76 million residents of Wayne County are two and a half times the number affected by Detroit’s bankruptcy, and by no means an economic irrelevancy. Financial turmoil in Wayne County will reverberate through the entire metropolitan Detroit area, which has 4 – 5 million residents depending upon how far afield you define this area. Close to half of Michigan’s total population.

When will Wayne County go bankrupt? Wayne County’s official response to Judge Popke’s judgement tacitly admitted a state of bankruptcy exists in Wayne County, according to the definitions in 11 USC 101(32)(C).  The only question now is when someone in authority files Wayne County under Chapter 9. Each month that passes without a bankruptcy filing, Wayne County goes $ 4 to $ 7.5 million deeper into the hole, depending upon how the impending adverse events play out. It takes ratings agencies a while to digest bad news like the 13th check court order, but they will probably further downgrade Wayne County before the end of this year. At that point Wayne County will no longer be able to place TANs and other financial paper, even in private placements, even at outrageous interest rates. Vendors will not be paid and will in turn withhold their products and services. Payless paydays will follow. Wayne County will collapse under a blizzard of court orders as the County’s Democratic mandarins seek to protect and secure their fiefdoms. Wayne County Prosecutor Kym Worthy has already filed one such court action.Dead Man Walking JPEG

What can be done to stop this train wreck? Frankly, nothing at this late date beyond some long overdue prosecutions. About the best that can be achieved is to get Wayne County filed under Chapter 9 as quickly as possible. This would minimize tax increases for Wayne County property owners. Your least loss is your first loss. Then the State of Michigan should empower and staff the Michigan Office of the Auditor General to conduct ongoing financial viability analyses of all its subordinate units of government. No more dead men walking in Michigan.

You Betcha! (19)Nuh Uh.(1)

  13 comments for “A Dead Man Walking: Wayne County

  1. June 5, 2015 at 8:15 am

    Yikes.

    Great points and compelling analysis. I wonder if Bill will try to prevent a bankruptcy from touching pensions again.

    You Betcha! (5)Nuh Uh.(0)
    • Corinthian Scales
      June 5, 2015 at 11:30 am

      That ploy feigned, again? You mean like when Bill didn't challenge the Republican plundering of taxing pensions in 2011?

      "shall be a contractual obligation thereof which shall not be diminished or impaired thereby."

      It all "shall" be not "diminished" or, it all "shall" be just a bunch of meaningless words scrawled out on useless paper for the shyster class to charge by the hour rustling up archaic footnotes of legalese to joust with while screwing everyone else.

      Bill "Fairness Doctrine" Schuette needs to forget about running in 2018. So does Calley, Ruth, and the Oinker.

      You Betcha! (5)Nuh Uh.(0)
  2. KG One
    June 5, 2015 at 3:25 pm

    Here are a few more nails in the coffin:

    The City of Inkster just slapped a 6.45 mill "special assessment" on resident's tax bills in order to pay for a settlement which resulted in local officers going all MMA on a motorist they recently pulled over.

    Inkster does have insurance for legal matters like this, but the agreed settlement just fell below the threshold for payout.

    And let's not forget the Snyder-approved extortion of Tri-County Residents via the Great Lakes Water Authority.

    No, I'm not talking about the language inserted into the authority (page 6) to collect $50-million/year from each county for the next 40 years. I'm talking about the issue with Highland Park after they didn't bother sending out water bills to its residents for several months, and then hit them with one huge bill after Detroit finally threaten to cut them off.

    That money is got to come from somewhere.

    You Betcha! (5)Nuh Uh.(0)
    • 10x25MM
      June 5, 2015 at 4:09 pm

      Fox 2 Detroit reported on 29 May that the city of Highland Park has filed suit against the Michigan Department of Transportation and Wayne County, claiming they collectively owe Highland Park $ 26 million for unbilled stormwater sewage service provided since 1986. These stormwater fees are actually concealed taxes which were ruled unconstitutional without a Headlee affirmation vote by the Michigan Supreme Court in Bolt v. Lansing (221 Mich App 79) in 1998, but that never stopped Detroit from collecting precisely identical taxes fees. Highland Park is just emulating Detroit's illegal behavior. Communities which have maxed out their taxing authority are using stormwater taxes fees to illegally extract ever more revenues from their residents. A major reason for commercial blight in Detroit, where these stormwater fees are higher than property taxes on most commercial properties.

      Water has become the basis of criminal extortion by failing units of government in Southeastern Michigan. The subject is so complex that it doesn't lend itself to web posts, or newspaper articles. The creation of the GLWA is simply a new frontier for extortion by Detroit. Long since time that our intrepid Attorney General step in and enforce our constitution.

      You Betcha! (5)Nuh Uh.(0)
      • Corinthian Scales
        June 5, 2015 at 11:16 pm

        Right back to f***ing lawyers, which most are politicians carrying a J.D.

        You Betcha! (5)Nuh Uh.(0)
    • Jason
      June 5, 2015 at 9:52 pm

      A post all its own perhaps?

      You Betcha! (2)Nuh Uh.(0)
      • KG One
        June 5, 2015 at 11:21 pm

        What 10x25MM wrote, is very correct.

        The topic of the DWSD is a little too nebulous to do a full-blown post on, but I did touch upon it on some of the material I put up on Detroit's bankruptcy.

        To make matters worse, presuming that they do get all of the rate hikes Detroit is pursuing (LBP is essentially in anyway), the system can still go tango uniform due to the lack of maintenance on much of the system. The board is essentially a sham created to allow Detroit to maintain control while they enjoying a steady flow of new cash from the surrounding cities which they could never have gotten otherwise.

        I also wouldn't hold my breath waiting for AG Schuette to do his job.

        With his sights set on the Governor's race in '18, he won't be doing anything to rock the boat in this corner of the state.

        B.O.H.I.C.A.

        You Betcha! (5)Nuh Uh.(0)
  3. Kevin Rex Heine
    June 5, 2015 at 8:40 pm

    And this is what happens when citizen vigilance goes into "bread and circuses" mode for three consecutive generations. The inertia of decline is something of a bugger, eh?

    You Betcha! (3)Nuh Uh.(0)
  4. 10x25MM
    June 6, 2015 at 5:55 am

    Yesterday afternoon Warren Evans vetoed the Commission's action to tap the Delinquent Tax Revolving Fund for the Popke judgement. Despite a small fiddle in the amount of the summer property tax levy which will result, he is conceding that Wayne County is bankrupt under 11 USC 101 (32)(C) - unless his veto is overridden.

    You Betcha! (3)Nuh Uh.(0)
  5. 10x25MM
    June 11, 2015 at 3:58 pm

    Karma?

    Even the grimmest situations can offer some gallows humor. M.L. Elrick, one of the few real journalists in Michigan, just reported on Fox 2 Detroit that Warren Evans is one of the Wayne County pension chiselers responsible for Wayne County's current financial collapse which the same Warren Evans is trying to fix:

    Eighteen years ago, several years before Ficano was in charge, Evans himself got a pretty sweet retirement deal.

    "If the question is did I take an option to get out two years earlier than i would have, absolutely I did," Evans said. "Would I fault anybody for having an opportunity to do that today or tomorrow. Absolutely I would not fault them."

    "It was a deal Elrick's friend and former colleague Chris Christoff first revealed in the Detroit Free Press 10 years ago.

    Evans was 48 when he decided to retire in 1997, after working in the Wayne County Sheriff's Department, he had become an assistant to Wayne County Executive Ed McNamara.

    The only way Evans could retire before age 50 was to return to the sheriff's department, which he did, for one day.

    Elrick: "What did you do on the one day with the sheriff's department? Did you actually put on a uniform and report for duty?"

    Evans: "I don't even remember. But obviously it was done for the purpose of getting status in a position that I already had status in for many years, for the ability to retire."

    You Betcha! (3)Nuh Uh.(0)
    • KG One
      June 11, 2015 at 7:10 pm

      "Evans was 48 when he decided to retire in 1997, after working in the Wayne County Sheriff's Department, he had become an assistant to Wayne County Executive Ed McNamara."

      Say no more.

      You Betcha! (1)Nuh Uh.(0)

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