CHICAGO — Michigan Gov. Jennifer Granholm Wednesday unveiled a deficit-elimination plan that features cuts and a handful of one-time revenue measures, including restructuring a chunk of the state's outstanding general obligation debt.
The plan aims to eliminate shortfalls in the current year and fiscal 2011 that add up to roughly $800 million.
Granholm's recommendations rely on federal aid, 3% across-the-board cuts, and a number of revenue measures, such as increasing liquor sales hours.
On the debt side, the state plans to push off $117.2 million of debt-service payments scheduled for next year. The state's 2011 debt-service payments would drop to $62.8 million from $180 million under the plan, according to the House Fiscal Agency.
More governments are turning to debt restructuring to achieve budget relief amid dwindling tax revenues. Ohio's current two-year budget, for example, relies on roughly $740 million in savings generated by pushing off debt payments over the short term.
"These kinds of borrowings are typical of the economic times," said Moody's Investors Service analyst Edward Hampton. "States are looking at their debt portfolios as a way to get fiscal relief. It's a sign of weakness and budgetary pressure, but it's not unexpected, especially for a state like Michigan, which has been under a lot of economic and revenue pressure in recent years."
Analysts often frown upon heavy reliance of one-time revenue measures to balance budgets, but a modest debt restructuring is not likely to have immediate negative credit implications, analysts said.
"Some limited use of restructuring we do see from time to time," said Standard & Poor's analyst Jane Ridley, who is the credit analyst for Michigan. "When considering the bigger picture, it doesn't always have a negative impact on the rating. We look at it in context."
Of the $117.2 million in budget relief, $77 million would come from debt service on environmental bonds payable from the general fund, and $40 million from debt service on school loan bonds payable from the school aid fund.
"It's a short-term restructuring to take advantage of the current low interest rates," said Ben Gielczyk, House Fiscal Agency fiscal analyst.
Granholm's plan would push up debt service in future years. In addition to regularly scheduled debt service, the state would pay an additional $3.5 million in 2012, and $32.6 million in 2013 through 2016, for a total increase of $135.7 million over the next five years.
The Democratic governor revealed her plan just seven weeks before the state's fiscal year begins and amid a tough election season that will see the turnover of nearly every legislative seat. In an address to lawmakers late Wednesday, the outgoing governor told lawmakers her plan includes no new taxes or layoffs.
Granholm said her recommendations would allow the state to set aside $100 million in its budget stabilization fund for the next administration.
Michigan faces an $800 million deficit in the current year and next fiscal year — despite an expected $700 million in recently announced federal aid.
"We must continue to make the tough decisions necessary to reduce spending," Granholm said in a statement released after her General Assembly address. "The cuts I've proposed help our state live within its means while continuing to provide critical services."
Her plan erases the current-year $303 million shortfall by shifting community college money into the school aid fund and by relying on an additional $94 million in federal aid tied to changes in the Medicaid and Medicare prescription drug plans.
For fiscal 2011, the governor recommended several measures to eliminate an estimated $480 million deficit. Measures include increasing liquor sales hours 3% across-the-board cuts to state agencies, and an additional $50 million cut to the corrections department.
Standard & Poor's rates Michigan's general obligation debt AA-minus. Fitch Ratings assigns an A-plus rating to the state and Moody's rates it Aa2.
