Your Least Loss is Your First Loss
Wayne 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.
In 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.
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.