Five years ago, when the Administration of Edward McNamara took the wheel of Wayne County, Michigan, it became the proud owner of a dangerous jalopy. The county was in bad need of fiscal repair and speeding towards bankruptcy.
But now a new-model Wayne County, which encompasses Detroit, is rolling off the line. Bond ratings have climbed into investment-grade territory, confidence is starting to build, and most of all, state-mandated costs are being fastened down.
Much of the county's financial woes stemmed from the county's state-mandated responsibility for indigent medical care. Costs associated with medical, mental health, and child-care programs helped more than quadruple the county's cumulative deficit.
In 1983, the gap stood at $32.2 million; by the end of fiscal 1987, it had ballooned to $134.3 million.
"If you had a $134 million deficit in your fund balance - and at that time revenues were only $200 million to $225 million - you're teetering pretty close," recalled Jack Dodge, the county's chief financial officer.
But those days seem long ago. The county has had four straight years of balanced budgets and anticipates a fifth when this fiscal year ends Nov. 30.
During that time the county's debt ratings have inched up to investment-grade level. Wayne County's unenhanced outstanding limited tax debt now merits a Baa rating from Moody's Investors Service, a BBB rating from Fitch Investors Service, and last February Standard & Poor's boosted the debt to BBB-minus from BB-plus.
Wayne County has approximately $420 million of tax supported debt outstanding.
County officials attribute much of the turnaround to gaining local control of the state-mandated programs that drove finances into the red during the 1980s.
As Michigan's largest county, Wayne had a disproportionate share of services to provide, and the demand for those services steadily grew through the 1980s. At one point, the outlays contributed to a deficit that equaled 65% of the county's general fund.
Finances were so tight that the county had to issue $60 million of tax and revenue anticipation notes in 1987 to make payroll, Mr. Dodge said.
Something had to be done. So Mr. McNamara, the new County Executive, joined forces with then-Gov.
Jim Blanchard, and officials from both administrations began to hash out a plan to save the beleaguered county.
"The state really did mandate a lot of expenses at the local level, and it did not provide sufficient funding to cover even the minimum levels," explained J. Chester Johnson, president of Government Finance Associates, the county's financial adviser. "Only in that 1987-88 period did the Blanchard Administration really recognize in a fundamental way the need to participate in the correction of this historical deficit."
The state passed emergency legislation to help the county reduce its deficit in several ways:
* About $104 million of fiscal stabilization bonds were issued in July 1988 through the Michigan Municipal Bond Authority.
* The state extended a long-term loan of up to $120 million.
* New state tax revenues were steered to the county.
* And the county's indigent medical care program was revamped to limit its exposure and increase its operational control.
The new taxes included a new airport-parking levy and a statewide, 4-cent-per-pack cigarette tax, of which the county was guaranteed the first $16 million in annual revenues to pay debt service on the bonds. If any revenue were left over, it would help pay off the emergency state loan, Mr. Dodge said.
The county still owes $71 million on the loan, which remains interest free as long as the county meets certain criteria, including keeping a balanced budget. Tom Naughton, the county's deputy chief financial officer, said the loan should be paid off within five years.
Finding the Handle
About $98 million is outstanding on the 20-year fiscal stabilization bonds, Mr. Naughton said.
A condition of the $120 minion state loan called for the county to get a better handle on its financial operations and an accounting firm was called in to audit the county.
"The biggest concern of the auditors was the county did not have timely interim financial information," Mr. Naughton said, "and county management did not really know the position of the general fund.
"And in some years, [county management] did not even know the cash position of the general fund until well after year end," he added, "which was a little late to react ... to budgetary problems."
Mr. McNamara's administration enacted a plan to instill budgetary controls and raise fees to cover costs. But the biggest change came in the area that helped push Wayne County to the brink of insolvency.
"We got a break in the patient-care management system, which I think really turned the county around," Mr. Dodge said. "In 1988, [the state] allowed us to have full management responsibilities for medical help for the indigent, which had been costing the county $25 million to $30 million a year over what had been budgeted."
The county began by identifying all the people that qualified for the program, issuing them cards, and essentially setting up the equivalent of a healthcare maintenance organization. Then an auction process was set up where private-sector firms submitted bids to provide in- and out-patient care for this qualified population.
Medical services, in addition, were dispersed throughout the county by zone or by zip code, so recipients would not have far to travel.
"The idea was these people can come in and get preventive medicine, before it turned into a heart operation or some big expense," Mr. Dodge said. "We were able to cut expenses down both for the state and for us."
The county's share was reduced to $15.5 million from the $25 million to $30 million it had been paying annually, he said. The result was a $12.7 million fund balance in 1988 that grew by $375,000 in 1989, $100.000 in 1990, and $121,000 in 1991.
"There is an underlying theme in all of this and it goes to local control," Mr. Naughton said. "Under the old indigent health-care program, the state really ran the program and the county [had] to pay the bills. And the county had very little say in how the money was expended.
"Through the negotiations in 1988," he continued, "the county was able to establish the patient-care management system and control the contracts, control the eligibility, control the standards for service. "
Moody's rewarded the county for its improving performance by upgrading Wayne to investment grade in July 1990, advancing the debt to Baa from Bal. In November of that year, the county sought a rating from Fitch and got its second investment grade rating of BBB. Standard & Poor's held out until earlier this year, when it raised the county's debt to BBB-minus.
Mr. Johnson of Government Finance Associates said the rating agency was looking for three things: renewal of a millage increase that needed voter approval, a longer bistory of balanced operations, and improvement in the way the county handled the child-care portion of its state mandate, which had been running over budget.
Gaining a Say
Voters renewed the millage increase, and by 1992, the county had two more years of balanced operations under its belt. The county also shared with Standard & Poor's its plan to revamp the child-care program that deals with juvenile delinquency, abuse, and neglect issues.
"What we're trying to do in discussing these issues with the state is trying to get more control," Mr. Naughton said. "Since the county is paying for a portion of the bill, we probably should have something to say about how the money is allocated or spent. Child care is a significant issue for the state right now, and we found sitting down talking with the state we have a lot of common interests."
The Standard & Poor's upgrade applied to $33.6 million of tax-exempt and taxable lease bonds sold last February through the Wayne County Building Authority. The county pledged its limited tax obligation to secure the deal. The bond sale, for new or renovated county facilities, marked the first time since 1971 that the county sold bonds supported solely by its own obligation.
And two days ago, Standard & Poor's affirmed the county's BBB-minus rating, citing the fact the county has contained costs associated with indigent healthcare and childcare.
The rating agency, however, pointed out several maintenance problems. The rating reflects a moderate debt burden a durable-goods economy that has done poorly in the recession, and an improved "but still thin and potentially vulnerable financial position," a Standard & Poor's report says.
"The position we've taken is that the county has improved substantially, but it has to have tight budget control given its limited revenue-raising ability and its exposure to social services," said Steve Murphy, vice president at the agency.
Wayne County is not out of the woods yet. Its economy still rides with the currently sinking fortunes of the automobile industry. And this spring, Michigan's $34 million share of the county's indigent care program got bogged down in legislative politics, causing some people in the county to worry about the future funding for the program.
Mr. Dodge said the state will continue to pay its $34 million share, partly out of Medicaid funds, leaving the county to pay its $15.5 million cap for the medical services.
Charles Kishpaugh, an assistant vice president at Moody's, pointed out that Wayne County faces constraints on its property taxes due to a one-year state freeze on 1992 assessments at the 1991 level.
"The assessment cap is one more iron in the fire, one more thing for the county to deal with," he said.