OREANDA-NEWS. Fitch Ratings maintains the Rating Watch Negative on the following Wayne County, Michigan bonds:

--\$186.3 million limited tax general obligation (LTGO) bonds issued by Wayne County 'B';
--\$51.3 million building authority (stadium) refunding bonds, series 2012 (Wayne County LTGO) issued by Detroit/Wayne County Stadium Authority 'B';
--\$203.5 million building authority bonds issued by Wayne County Building Authority 'B';
--Wayne County unlimited tax general obligation (ULTGO) (implied) 'B'.

SECURITY
LTGO bonds issued by the county carry the county's general obligation ad valorem tax pledge, subject to applicable charter, statutory and constitutional limitations.

Stadium authority and building authority bonds are secured by lease payments from the county to the respective authority. The obligation to make the rental payments is not subject to appropriation, setoff or abatement for any cause, and carries the county's LTGO pledge.

KEY RATING DRIVERS
SEVERE FINANCIAL DISTRESS: The 'B' rating reflects the county's substantial financial challenges which have resulted in persistent structural and accumulated deficits. Fitch believes state intervention is likely.

STATE INTERVENTION OPTIONS VARY: The Negative Watch reflects the uncertainty regarding potential state intervention. Options available to the county under the Local Financial Stability and Choice Act (Act 436) represent a range of possible outcomes for bondholders.

LACK OF BUDGETARY FLEXIBILITY: Recessionary property tax declines have left the county with little to no revenue raising flexibility; efforts to cut expenditures are hampered by the governance structure and have been insufficient to restore balance.

RECOVERY PLAN EXECUTION RISK: The administration has published a recovery plan to eliminate the structural deficit and restore reserves. Given recent discord between the commission and the county executive, Fitch has concerns about the ability to execute it.

STRESSED ECONOMY SLOW TO RECOVER: The weak local area economy is reflected in elevated unemployment rates, population loss and below-average income levels.

JAIL DEBT COULD BE PARTICULARLY VULNERABLE: Stadium authority and building authority debt service is not subject to abatement or appropriation. Debt service comprises a relatively small share of governmental spending, but Fitch believes the jail debt could be vulnerable given the failure to complete the project.

RATING SENSITIVITIES
LIQUIDITY DETERIORATION: Inability to maintain adequate liquidity, either internally or by external borrowing, would lead to a cash flow crisis and trigger a further downgrade.

DEMONSTRATED IMPROVEMENT: The rating could stabilize at the 'B' level if the county successfully implements a realistic plan that puts it on a path toward structural balance, with or without Act 436.

CREDIT PROFILE
FINANICIAL DETERIORATION, NARROW LIQUIDITY PROJECTED
The county has relied upon a pooled cash model, supplemented by external cash flow borrowing to meet its day-to-day needs. Updated county projections show adequate levels of pooled cash through September 2016 assuming no TAN borrowings--a marked improvement from earlier projections showing cash depletion as soon as June 2016.

REDUCED DEFICIT POSITION AIDED BY TRANSFERS
The county remains challenged to control spending in a restricted revenue environment where it lacks total expenditure control over several separately-elected department heads. The county expects to eliminate most of its unrestricted general fund deficit in fiscal 2015 by transfers of unrestricted DTRF balance.

The accumulated deficit is projected to fall to -\$4 million in fiscal 2015 from -\$82.8 million (unrestricted) at the end of fiscal 2014, before reversing course to a \$36 million deficit in fiscal 2016 (assuming modest annual DTRF transfers). The projections show that absent any achieved recovery plan savings, operating deficits will cause the accumulated deficit to continue to grow, reaching -\$200 million by the end of the projection period, in 2019. Fitch expects the DTRF will not be an ongoing source for major deficit elimination. After this year, Fitch expects the fund to generate a more moderate amount of cash of around \$30 million-\$40 million annually for operating transfers to the general fund, as delinquencies return to more of a steady state.

RECOVERY PLAN EXECUTION RISKS
The county presented a new recovery plan in late April, but previous plans have failed to produce enduring, structural progress. The plan relies upon restructuring of operations, employee and retiree health care, employee pension costs, and employee compensation, as well as more modest annual transfers from the DTRF to achieve structural balance over the five year projection period. Some of these changes will be more difficult to achieve than others. The county has announced retiree health care plan changes that will trim \$473 million from the \$1.4 billion other post-employment benefits (OPEB) liability and generate annual savings (\$16.8 million in 2015). The long history of the county's imbalance underscores the challenges it has faced in prior efforts to restore fiscal balance. Fitch believes that the plan's success will be difficult to achieve absent state intervention.

STATE INTERVENTION INCREASINGLY LIKELY
The county has long met the conditions for Act 436 involvement, but thus far, neither the county nor the state has initiated such action. Fitch believes the lack of available revenue-raising and expenditure-cutting flexibility, combined with the county's recent dire projections; make the prospect of state intervention under Act 436 increasingly likely. On the one hand, this could mean strengthened financial discipline, but on the other, could open a path to bankruptcy.

OPTIONS PRESENT VARYING RISKS
Should the state declare that a financial emergency exists under Act 436, the county would be faced with four options: consent agreement, emergency manager (EM), neutral evaluation (mediation), or bankruptcy. Each of these options may be chosen once and each presents a different risk profile to investors. The least favorable to bondholders would be the bankruptcy option, which requires the written approval of the governor and a majority vote of the county commission. Fitch believes it is unlikely the county would be permitted to declare bankruptcy without first exploring another of the options.

The EM option would place the county into receivership. The powers and functions of the elected and appointed county officials would be assumed by an EM, who would have broad powers including approval/rejection of contracts, including collective bargaining agreements. Outcomes under the EM option may be favorable or unfavorable for bondholders, depending upon the EM's approach. Some Michigan EMs have prioritized repayment of bonded debt, but in the Detroit case, the EM chose to have the city file for bankruptcy and default on its general government debt.

Neutral evaluation would involve a mediated approach reliant upon cooperation of various stakeholders. Fitch believes this option would be neutral for bondholders, but likely not be successful in producing the changes necessary for restoration of structural balance. The county has successfully reached agreements in the past, including one for 10% reduction in employee wages, and one to rein in court costs; while the cost savings involved were arguably substantive, they were not sufficient to eliminate the structural imbalance. Given this history, Fitch believes it is unlikely that mediated agreements could achieve savings on a scale necessary to reverse the county's fiscal decline.

The risk to bondholders under the consent agreement option is similar to the risk presented by the EM option. Under Act 436, the county and state can enter into a tailored consent agreement which could provide the county with some or all of the powers granted to an emergency manager, including rejecting contracts, but with the exception of abrogating collective bargaining agreements. Since all of the county's collective bargaining agreements are expired, the county may not feel that particular power is essential to their recovery plan.

Choosing the consent agreement option could present both opportunities and risks. A carefully crafted consent agreement that includes the granting by the state to the county of broad powers under Act 436 could assist the county in material and permanent alteration of its cost structure, but would have little impact on revenues. It is also possible that, with a consent agreement in place, the state could choose to borrow on behalf of the county. Previous financially distressed municipalities in Michigan have benefitted from the state undertaking cash flow borrowing on their behalf, with proceeds disbursed upon achievement of milestones contained within the agreement. Conversely, in the case of Detroit, lack of achievement of the agreed-upon milestones resulted in the state withholding the borrowed cash, which precipitated the liquidity crisis and receivership.